News Analysis

News: Economics, Economy (Supplement)


US Economy: Outsource, Outsource, and Outsource Some More (National Review, 040503)

U.S., Europe, welfare state (Washington Times, 041102)

Cost-of-living for expatriates highest in Asian cities (970806)

More big declines for Indonesia’s currency, stocks (970818)

Hong Kong Dollar raid defeated: Yam (South China Morning Post, 970820)

Thailand’ central bank says currency defense cost $23.4 billion (970822)

Currency crisis roils Southeast Asian economies (970825)

A Monetary Phenomenon or Not? What the eurozone is telling us about inflation (National Review Online, 050616)

Global good news (Washington Times, 060210)

“Fueling our enemies’ engines” (, 060217)

Something for nothing (, 060228)

Something for nothing: Part 3 – The top 10%, again (, 060309)

Something for nothing: Part 3 (, 060302)

Biggest foreign aid recipient (Washington Times, 060510)

And now, the good news (, 060731)

A crisis for Japan’s welfare state (, 060907)

Time to Throw the Phillips Curve: A Nobel Prize for vanquishing a bad idea. (National Review Online, 061024)

Milton and Rose Friedman: Liberty’s Couple: On Free to Choose. (National Review Online, 070129)

Economist on a White Horse: How Milton Friedman saved the world. (National Review Online, 070129)

Milton, the Affable Tactician: He knew what to say, but he also knew how to say it. (National Review Online, 070129)

That “Top One Percent” (, 071127)

Survey: Wealthier Nations Less Religious (Christian Post, 071105)

Société Générale reveals more details of €4.9 billion fraud (Paris, International Herald, 080127)

World markets plunge on U.S. recession fears (National Post, 080121)

Brussels warns France on protecting Société Générale (Paris, International Herald, 080201)

Amid grain shortages, resistance relaxes to modified wheat (Paris, International Herald, 080421)

Food crisis adds to global security worries: UN (National Post, 080420)

Feed My people (World Magazine, 08003)

‘New hunger’ felt as food prices soar (National Post, 080401)

Food boom: Canada’s growing wealth (National Post, 080216)

Rising inflation in developing countries worsens problem in West (Paris, International Herald, 080407)

Asian food crisis has political and civil implications (Paris, International Herald, 080418)

Across globe, hunger brings rising anger (Paris, International Herald, 080418)

Skyrocketing Costs Threaten Food Aid for World’s Poorest Children (Foxnews, 080422)

World Vision Cuts Back Food Aid, Sounds Alarm (Christian Post, 080423)

Spiraling rice price feeding food fears (National Post, 080424)

U.N. Secretary-General Calls Rising Food Prices ‘Global Crisis’ (Foxnews, 080425)

UN leaders to tackle world food crisis (National Post, 080428)

Potash can help avert food crisis: CEO (National Post, 080425)

A squeeze on French aspirations (Paris, International Herald, 080429)

Frustration in Italy, and blame for the euro (Paris, International Herald, 080429)

Changes in China could mean more North American jobs, Home Depot chief says (Paris, International Herald, 080613)

Americans’ Charitable Giving Hits a Record (Wall Street Journal, 080624)

Somali Police Kill 2 as Tens of Thousands Riot in Capital Over Food Prices (Foxnews, 080505)

Food Fight (, 080508)

A Gulf in Giving: Oil-Rich States Starve the World Food Program (Foxnews, 080509)

Misers No More? Saudi Arabia Pledges $500 Million to World Food Program (Foxnews, 080523)

China: Inflation policy impact (Paris, International Herald, 080602)

UN official holds rich nations accountable for food shortages (Paris, International Herald, 080603)

India, China sees highest jump in millionaires: survey (National Post, 080625)

China’s financial industry recruits abroad (Paris, International Herald, 081226)

Asian Data Shows Severity of Slump (Paris, International Herald, 090331)

E.U. Says Europe Faces Deep Recession (Paris, International Herald, 090504)

European Economy Shrinks 2.5% in Quarter (Paris, International Herald, 090515)

Swings in Price of Oil Hobble Forecasting (Paris, International Herald, 090705)

In Europe, Economic Signs Point to a Recovery (Paris, International Herald, 090813)

World Bank says recession worse than thought (National Post, 090622)

U.S. loses equivalent of every job created in decade (National Post, 090702)

Retirement age needs to be 70: think-tank (National Post, 090703)

Swings in Price of Oil Hobble Forecasting (Paris, International Herald, 090705)

In Europe, Economic Signs Point to a Recovery (Paris, International Herald, 090813)

UAE to Back Banks Amid Dubai Meltdown (Foxnews, 091129)

Canada to lead G7 in 2010 recovery: RBC (National Post, 091214)

China’s Export of Labor Faces Growing Scorn (Paris International Herald, 091220)

Numbers on jobless benefits continue to decline in Canada (National Post, 091222)

Credit Agency Warns U.S. and Others of Risk to Top Rating (Paris, International Herald, 100315)

The Blog Prophet of Euro Zone Doom (Paris International Herald, 100608)

Employment for Minimum Wage Workers Falls by Over 10% after Hike (Employment Policies Institute, 100831)

The Money of Fools (, 100914)

Controversial study finds Boomers are over-saving by ‘hefty margin’ (National Post, 101002)

Geithner Calls for Global Cooperation on Currency (Paris International Herald, 101006)

IMF fails to strike deal over currency frictions (Daily Telegraph, 101009)

Currency wars are necessary if all else fails (Daily Telegraph, 101010)

Expect some currency battles but not a war (Daily Telegraph, 101010)

US Federal Reserve set on QE2 course as dissenter speaks out (Daily Telegraph, 101012)

China warns US against making yuan dispute a ‘scapegoat’ for a flagging economy (Daily Telegraph, 101015)

Raising the Barricades Against a Rush of Capital (Paris, International Herald, 101013)

G20 inks pact to avert trade war, seals IMF power shift (National Post, 101023)

China bull run or bubble? Six experts’ views on the biggest emerging market. (Daily Telegraph, 101106)

G20 tensions rise over the future of the global economy (Daily Telegraph, 101107)

America will survive the errors of Ben Bernanke’s trigger-happy Federal Reserve (Daily Telegraph, 101107)

Fed Counts on ‘Psychological Bump’ With Borrowing, but May Just Add to Debt, Inflation (Foxnews, 101109)

Europe Fears That Debt Crisis Is Ready to Spread (Paris International Herald, 101116)

Europe struggling to contain debt turmoil (AP News, 101126)

Bernanke’s QE3 faces stiff resistance (Daily Telegraph, 101205)

Hedge fund manager Mark Hart bets on China as the next ‘enormous credit bubble’ to burst (Daily Telegraph, 101129)

For Tottering States, Bankruptcy Could Be the Answer (, 101129)

China seen as the candidate for ‘next catastrophe’ (Daily Telegraph, 110524)

Chinese inflation eases off 32-month high (Daily Telegraph, 110511)

Chinese trade surplus widens to £7bn as officials hold economic talks in US (Daily Telegraph, 110510)

UN sees risk of crisis of confidence in U.S. dollar (National Post, 110525)

Nokia shares take ‘icy plunge’ after profit warning (Daily Telegraph, 110531)

US housing market in double dip as prices fall to fresh lows (Daily Telegraph, 110531)

A sudden rise in the yuan would solve nothing (Daily Telegraph, 110604)

Lessons of Argentina crisis ignored in handling of Greece (Daily Telegraph, 110704)

Robert Zoellick warns of new “danger zone” for global economy (Daily Telegraph, 110903)

FTSE 100 sees £49bn wiped off shares on euro fears and bank lawsuit (Daily Telegraph, 110905)

European banks face collapse under debts, warns Deutsche Bank chief Josef Ackermann (Daily Telegraph, 110905)

Why Capitalism Glorifies God (, 111017)

Brazil to overtake UK as sixth-largest economy (Daily Telegraph, 111031)





US Economy: Outsource, Outsource, and Outsource Some More (National Review, 040503)


A boon to the American economy


When President Bush’s chief economist, Gregory Mankiw, observed in February that foreign outsourcing “is probably a plus for the economy in the long run,” reaction was swift. In a press release the following day, John Kerry thundered: “Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas.” Hillary Rodham Clinton chimed in: “I don’t think losing American jobs is a good thing. The folks at the other end of Pennsylvania Avenue apparently do.” Even Republican House Speaker Dennis Hastert piled on, saying the ex-Harvard professor’s “theory fails a basic test of real economics. An economy suffers when jobs disappear.” In March, the Republican Senate overwhelmingly passed an amendment that would deny certain federal contracts to companies that outsource work abroad.


So is foreign outsourcing “just a new way of doing international trade,” as Mankiw and other free-traders argue, or is it a threat to American jobs foisted on us by corporate traitors trolling the globe for cheap labor?


An examination of one particular sector — the information-technology (IT) industry — proves that Mankiw is right: “Foreign outsourcing” is just a buzzword for international trade in services. Contracting for services abroad has become increasingly cost-effective owing to the personal computer, which has digitized much of our work, and the high-speed and deregulated transmission of that information through broadband and the Internet. IT companies are increasingly outsourcing thankless jobs — routine programming, data entry, and system monitoring — abroad.


Foreign outsourcing allows American IT companies to cut dramatically the cost of certain services; as a result, the companies become more competitive in what they do best, their “core competencies.” Better and more affordable services become available for consumers and taxpayers. According to a 2003 study by the McKinsey Global Institute, outsourcing delivers large and measurable benefits to the U.S. economy: It reduces costs for IT and other services by as much as 60%, keeping U.S. companies competitive in global markets, benefiting workers and shareholders alike. It stokes demand abroad for the export of U.S.-supplied computers, telecommunications hardware, software, and legal, financial, and marketing services. It returns profits to the United States from U.S.-owned affiliates abroad, and it allows U.S. companies to redeploy workers in more productive jobs here at home. McKinsey calculates that every dollar spent on foreign outsourcing creates $1.12 to $1.14 of additional economic activity in the U.S. economy.




One of the frustrations of the outsourcing debate is the lack of hard numbers. Nobody really knows how many jobs have been outsourced overseas. Unlike bushels of soybeans or slabs of steel, jobs are not counted at a dock and loaded on a ship for India or China. The best estimates from the IT industry are that perhaps 300,000 to 400,000 jobs previously performed in the U.S. are now done overseas through contractors. The much-cited Forrester Research report of November 2002 projected that 3.3 million jobs would be outsourced from 2000 through 2015, or about 220,000 a year. (More than half of those would be call-center type jobs, and only one out of six would be white-collar IT jobs.)


Even if accurate, those numbers are just drops in the huge bucket of an $11 trillion economy that employs 137 million people and creates and destroys millions of jobs every month. Even in times of healthy employment growth, 350,000 people file for unemployment insurance every week. The Labor Department figures that, during the past decade, our economy created an average of 32.8 million new jobs each year while eliminating 31.0 million, for a net annual gain of 1.8 million. Jobs lost to outsourcing are but a small channel in the torrential “job churn” normal for a dynamic market economy.


Indeed, far more Americans lose their jobs to technology or domestic competition than to foreign outsourcing or other forms of international competition. Think of all the former typists, telephone operators, and bank tellers whose work has been replaced by computers and other machines. Kodak announced earlier this year that it would lay off 15,000 workers, not because of foreign competition but because digital cameras have depressed the sale of film. Between 1988 and 2000, a net half-million jobs for typists and word processors were eliminated, not because they were outsourced but because they were made redundant by computers. Apparently job losses become news only if they can be blamed on a foreign bogeyman.


Even IT’s job losses since 2000 have not been driven by foreign outsourcing. Displaced high-tech workers should blame not Indian computer programmers but the bursting of the dot-com bubble, the market plunge, the 9/11 attacks, the corporate scandals, and slow growth abroad. A fundamental mistake made by outsourcing’s critics has been to confuse the passing pain of the IT recession with an alleged long-term decline in this sector. They compound their mistake by comparing current output and employment levels with those at the frenzied peak of the boom in 2000, rather than with more normal levels from the late 1990s. A more accurate and less alarming picture of the industry emerges if we compare the state of the industry a few years after the bubble burst with its state a few years before.




Beginning in the early 1990s, with the takeoff of Windows-based computing and the Internet, employment in the IT industry surged. Employment in software and related services grew by one million between 1993 and 2000, before dropping by 166,000 between 2000 and 2002. The story has been much the same across other IT sectors: stupendous growth throughout the 1990s, then a pullback in employment of 10 to 20% during the recession. In the IT industry as a whole, employment levels even after the recession are still no lower than in 1998. During the past decade, annual employment in the IT industry has still grown twice as fast as employment in private industry in general.


Despite the turbulence of the past four years, the U.S. IT-services sector remains a major force in the U.S. economy. Domestic software, computer, and communications services accounted for a combined $621 billion in 2003, up from $510 billion in 1999. IT services that are moving offshore are more than offset by increased output at home. Any sluggishness in employment growth has been because of rising productivity, not because of falling production.


The jobs that have been lost in the IT sector tend to be lower-skilled and lower-paid jobs. From 1999 through 2002, total employment in the IT industry did drop by more than a quarter of a million, from 6.24 million to 5.95 million. But declining employment was concentrated in those occupations requiring relatively low or moderate levels of training and education. In contrast, the number of IT jobs that require a relatively high level of training and education was actually higher in 2002 than it had been in 1999. In the year before the bubble burst, the industry employed 3.43 million workers whose jobs required at least an associate’s degree and work experience. After a surge of hiring in 2000, followed by a painful shakeout, the number of such skilled workers stood at 3.51 million in 2002, up 2.3% from 1999. Contrary to the popular fear that “our best jobs” are going overseas, the best jobs are staying here.


The recovery and expansion of job creation that has already begun in the IT sector should continue. According to the Labor Department’s biannual projections, the number of jobs in the computer and mathematical sciences is expected to increase from 3 million to 4 million in the next decade, a rate of growth twice as fast as employment in the rest of the private economy. Seven of the 30 fastest-growing occupations will be in the computer field. Despite the lingering slackness in IT employment, those jobs still pay an average of $67,000 a year.




Another reality lost in the outsourcing debate is the amount of outsourcing the rest of the world sends to the U.S.: We are far and away the world’s top destination of outsourcing of information-technology, financial, communications, and other business services. In 2002, U.S. companies exported $14.8 billion worth of computer, data-processing, research, development, construction, architectural, engineering, and other IT services. During that same year, Americans imported $3.9 billion of those same kinds of services. So for every dollar Americans sent abroad for IT outsourcing in 2002, the world sent more than three dollars to the U.S. for “insourcing.” If Congress launches a war against foreign outsourcing, American companies and workers will be among the first casualties.


Outsourcing, like trade in general, is reshaping for the better the world beyond our borders. In a classic win-win result from trade, outsourcing invigorates the U.S. economy at the same time it builds a pro-American middle class in India and other developing countries. The Indian high-tech sector is flourishing because they are following the U.S. model of zero tariffs on imported software and hardware, no restrictions on foreign investment, and an emphasis on post-secondary education. The Indian economy is now achieving Chinese levels of double-digit growth. So far the growth has been concentrated in the high-tech sector, but the effect there has been profound. Hundreds of thousands of young Indian college graduates are realizing the fruits of middle-class life that we all take for granted. Although the $8,000 paid to an Indian programmer sounds ridiculously low in American terms, it can buy about five times as much in India, enabling a worker to rent his own apartment, own a cell phone, make car payments, and travel abroad.


In February I spent a week in India talking with IT executives and touring the main facilities of some of India’s largest IT companies. Except for the cows at the gate, I could have been in Silicon Valley. All the equipment and facilities are state-of-the-art. At one call center, I looked out over a sea of cubicles, phones, PCs, and casually dressed college graduates in an air-conditioned office complex. Except for the Indian flags, I could have been anywhere in the U.S. If that was a sweatshop, so are most offices in America.


The Indian high-tech companies and workers who service the U.S. market have an obvious affinity for the American model. They consciously follow U.S. business practices. They have adopted our policies of deregulation and open markets. They buy American hardware. They work with and for American investors. They speak fluent English. Many have relatives who live and work in the U.S. In this time of rising anti-American feeling around the world, when we are desperately trying to win friends and influence events in South Asia and elsewhere, it would be hard to find a more naturally pro-American enclave than the Indian high-tech sector. What could be more short-sighted than to disrupt our growing, mutually beneficial trade with the world’s most populous democracy to save a sliver of jobs that are probably heading out the door anyway?


So far, the rhetoric against outsourcing has been worse than the legislative action. The main legislative vehicle against outsourcing has been restrictions on government contracts. Earlier this year, Congress enacted a temporary ban on certain contracts with companies that would outsource the work; about 20 states are considering similar language for state contracts. Those restrictions on government procurement would come at a high cost for the few jobs that would be saved: Taxpayers will pay more for existing services, or receive less service for the same price. Furthermore, these measures invite retaliation against the juicy target of U.S. service exporters — and make a mockery of the U.S. government’s calls for more opportunities for American companies to bid competitively for government contracts abroad.


More fundamentally, restrictions on outsourcing would slow the dynamic progress of the U.S. economy and the growth of more prosperous and pro-American middle classes abroad. Let’s hope the demagoguery against outsourcing wanes before the politicians can do real mischief.


Mr. Griswold is associate director of the Center for Trade Policy Studies at the Cato Institute.




U.S., Europe, welfare state (Washington Times, 041102)


Cowboy Capitalism: European Myths, American Reality

By Olaf Gersemann

Cato Institute, $22.95, 254 pages


Jacket blurbs by Goldman Sachs CEO Henry M. Paulson Jr., Nobel economists Milton Friedman and James Buchanan endorsing this book depict a trans-Atlantic welfare state match-up between Europe and America. Says Mr. Buchanan:


“Citizens in all Western democracies want to provide more publicly financed welfare than they are willing, privately, to finance by taxes. The result is sluggish economies. In Old Europe the crisis is more acute than in the United States. This book documents the dramatic differences and stresses the proclivity of Europeans to denigrate the American experience rather than acknowledge their own plight.”


In”Cowboy Capitalism,” Olaf Gersemann, Washington correspondentfor Wirtschaftswoche, Germany’s largest economicand business weekly, notes how European bad-mouthing our welfare capitalism has somehow become politically correct. He cites Gerhard Schroder, Germany’s Social Democratic chancellor for charging: “I do not want American conditions in our labor market. Social democrats are convinced that it has to be for people to live in decency and dignity without having to do three jobs a day and without any protection against dismissal.”


Overblown? Sure, but the charge apparently grabs the German and European imagination. No wonder then that the United States is the more dynamic and perhaps to many Europeans subconsciously the more enviable economy, however “cowboyish” it may be.


Mr. Gersemann charts a graph showing a curve for U.S. employment climbing sharply between 1970 and 2003, for a gain of 59.3 million jobs. That’s an equivalent of a 75% increase. But for Germany (after reuniting with East Germany), France and Italy, the combined job gain was but an increase of only 17.6 million, or by 26% — a gain, yes, but one virtually two-thirds under the U.S. percentage gain.


No wonder too that average annual hours worked per person in 2002 in the United States topped the 1,800 mark, while but topping the 1,400 mark in Germany and France and the 1,600 mark in Italy. Thus have European countries cut down their workweeks considerably. Workers in Germany and more so in France have “won” wide adoption of a 35-hour workweek and many employers face demands for a 30-hour workweek. Remarks Germany’s top trade union official Michael Sommer: “Workers who can afford to do so, should work less.”


The author cites Canada’s top think tank, the Fraser Institute of Vancouver, for noting the volume of labor market regulations. Germany ranks heaviest at 80th of 80 major nations covered, Italy comes in 76th and France 41st, whereas the United States is ahead at No. 3. I find similarly depressing the European nations’ ratings for relative size of government in 123 countries covered by the Fraser Institute. France tops the list at 123rd, Germany comes in at 107th, Italy at 96th — while America is low at 22nd.


All this bureaucracy and regulationism takes its toll on European labor productivity. The author well notes productivity is the key keeping wages overall rising in real terms without unit labor costs and inflation flying out of control and thus harming national competiveness. In the recent period between 1996 and 2003, average annual U.S. labor productivity grew by 3.09% while Germany had to make do at 1.60%.


To be sure, American job turnover is faster than in Germany, and the author half-jokinglyraisesthequestion whether it’s better to be securely unemployed than insecurely employed. He compares America’s “cowboy capitalism” with Europe’s “comfy capitalism.” He quotes Mr. Schroder defending his country’s tight job requirements against “unscrupulous hiring and firing” and succumbing to “the laws of the jungle” without naming America as the jungle culprit.


Still, I wonder if Mr. Schroder and, indeed, Mr. Gersemann himself are not short-sighted in limiting their concern over whose welfare state is the superior, the American or the European. Isn’t the welfare state increasingly out of touch with the upsurge of Asian economies from South Korea to Taiwan to Thailand and most especially to India and China — the latter two with dramatic gains in GDP growth rates and together having two-fifths of the world population?


Well, maybe, just maybe, the heyday of the welfare state, so costly in terms of taxes, capital formation, labor productivity, and real wage gains, will fade under rising Asian competiveness. To paraphrase Horace Greeley: Go east, young investor, go east.


William H. Peterson is an adjunct scholar at the Heritage Foundation and a contributing editor at the Foundation for Economic Education’s The Freeman: Ideas on Liberty.




Cost-of-living for expatriates highest in Asian cities (970806)


GENEVA (CNN) —Eight of the 10 most expensive cities for expatriates are in Asia, with Tokyo and Hong Kong topping the list. Meanwhile, the cities of North America are among the most affordable.


The new rankings were released Tuesday by the Swiss-based Corporate Resources Group, which based its cost-of-living survey on more than 200 products and services, including housing, food, alcohol, utilities, clothing, transport and entertainment.


Asia dominated the world’s 10 most expensive cities, with Hong Kong moving up from fifth place last year on a strong currency and high housing costs.


Housing was most expensive in Hong Kong, Tokyo, Beijing, Moscow and Shanghai.


Moscow, number three overall, kept its place as Europe’s most expensive city for the second year running.


The Swiss cities of Geneva and Zurich, Europe’s most expensive two years ago, fell to 22nd and 23rd in the world respectively.


Cairo ranked as the most expensive city in Africa, followed by the Congo capital Brazzaville and the Gabonese capital Libreville.


The highest climber was Nairobi, which leapt 40 places from last year’s survey to rank 75th on the list.


Africa’s cheapest major cities were Johannesburg, whose ranking was heavily influenced by the weak rand (currency), and Harare, Zimbabwe’s capital.


The survey said North American cities remained among the most affordable in the world. New York moved up to 31st place from 38th, but still ranked below Paris, Cairo, Rio de Janeiro, Buenos Aires, Hanoi, Tel Aviv and Kiev.


Tehran, the world’s second cheapest city two years ago, was now the world’s 35th most expensive and nearly 30% more costly than Montreal, the world’s eighth most affordable city.


Newcomers to the top 10 list were Guangzhou ( Canton) in China and St. Petersburg in Russia.


The survey said the rankings in Europe had been influenced by the strength of the U.S. dollar.


The survey used the city of New York as a starting point with an index of 100. Following are some of the rankings:


1. Tokyo, 170. 2. Hong Kong, 153. 3. Moscow, 153. 4. Osaka, Japan, 148. 5. Beijing, 141. 6. Shanghai, China, 136. 7. Seoul, South Korea, 133. 8. Singapore, 127. 9. Guangzhou, China, 120. 10. St. Petersburg, Russia, 118.


Ranked American cities: 31. New York, 100. 57. Miami 89. 59. Los Angeles, 88. —Chicago, 88. 67. Honolulu, 87. 71. San Francisco, 86. —White Plains, New York, 86. 77. Houston, 85. 83. Washington, 83. 90. Boston, 82. 97. Detroit, 81. 110. St. Louis, 79. 118. Minneapolis, 74. —Pittsburgh, 74. —Seattle, 74. 127. Atlanta, 72. 130. Lexington, Kentucky, 71. 132. Cleveland, 70. —Winston Salem, North Carolina, 70. 139. Portland, Oregon, 67.




More big declines for Indonesia’s currency, stocks (970818)


JAKARTA, Indonesia (AP) — Despite calls for calm from the government, Indonesian financial markets convulsed again Monday as the rupiah plunged to a record low and the main stock index had one of its worst days ever.


The rupiah hit an all-time low of 3,002 to the U.S. dollar shortly after noon. It stayed above a psychologically important 3,000 barrier for sometime before a rally later brought it back to 2,985.


The currency has now declined more than 13% since being floated five days ago.


The composite index on the Jakarta Stock Exchange tumbled 51 points, or 8.3%, to 566 during the morning — worse than the record one-day 32-point fall that followed political riots in Jakarta on July 27, 1996.


A big buying campaign by state-owned securities produced a partial recovery, allowing the market to close at 599 points, 18 points or 2.9% down from its Friday close.


Brokers said further falls on the stock market are likely.


Monday’s drastic stock plunge was triggered by the continued fall in the rupiah against the U.S. dollar as well as the 3.1% decline in the Dow Jones industrial average on Friday.


The rupiah began its dive on Thursday when the central bank floated it, hoping to stem speculative attacks that recently took their toll on other Southeast Asian currencies.


The tumble continued Friday, prompting President Suharto to try and calm markets during an independence anniversary speech over the weekend.


Suharto promised to maintain tough fiscal and monetary economic policies until currency equilibrium was restored.


He also directed companies and the government to show prudence in borrowing, reevaluate planned projects and reassess their dependence on foreign loans, which have escalated during recent boom years.




Hong Kong Dollar raid defeated: Yam (South China Morning Post, 970820)


ENOCH YIU, JAKE LLOYD-SMITH and Agencies Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong yesterday said the authority has defeated the speculators who sold down the Hong Kong dollar on Friday.


Addressing a hastily called press conference, he also attempted to allay concerns about the currency by repeating his confidence in the fundamental strength of the local economy.


However, he said the authority would continue to monitor the situation closely through offices in London and New York.


Referring to the surge of activity in the Hong Kong dollar on Friday, he said: “We have won the game so far with the help of the banks which pushed the interest rate up.”


Speculation mounted at the weekend that the Hong Kong dollar could this week be the target of a more concerted strike by international hedge funds which have created turmoil in other regional markets.


These markets tumbled again yesterday, dragged down by Friday’s slide on Wall Street and continued volatility in currency trading.


Stock markets in Japan, the Philippines, Malaysia, Singapore, Thailand, Indonesia, Australia and New Zealand slumped.


Last night, the Hang Seng London Reference Index plunged a further 236.54 points to close at 15,334.95, following on from its 525.39 point fall on Friday night.


In New York last night, the Dow Jones Industrial Average, which suffered its second biggest point loss ever last Friday with a three per cent drop, slid 76 points in early trade.


But a late rally boosted the blue-chip index to close 108.70 points up at 7,803.36.


In the currency markets, dealers said there were no signs of any central bank intervention to halt the general slide against the US dollar.


The Indonesian rupiah was the hardest hit although the Thai baht and the Malaysian dollar also came under sustained pressure.


Referring to the Hong Kong dollar, NatWest Markets’ head of Asian bond and currency research, Daniel Lian, said: “I have spoken to the hedge funds at the weekend, the same group that took the other regionals down, they are not uncomfortable shorting the local dollar, they see it as overvalued.”


While the Hong Kong Monetary Authority’s armoury was seen as near impregnable, one key area of weakness could be local confidence in the currency.


If this started to erode, the peg against the US dollar could be tested by a wwave of internal pressure as people converted their Hong Kong dollar savings.


Mr Yam said none of the bigger hedge funds was operating against the dollar on Friday and that the trades were in sums of less than US$50 million.


“Some people who sold the Hong Kong dollar on Friday have bought back yesterday in the London trades.”


The Hong Kong dollar strengthened as the potential speculators unwound their positions. The Hong Kong dollar last night stood at $7.737 to the US dollar, compared with $7.752 on Friday.


He declined to say whether the authority intervened in the market on Friday.


However, he said banks were told to be “prudent” in their lending, a possible warning about lending to speculators.


Mr Yam said that the people of Hong Kong and foreign investors have confidence in the local economy and that nothing has changed to weaken this reason for support.


He refused to forecast how the exchange rate would move this week.


He said Hong Kong would not lose its competitiveness even if other Asian ccurrencies were devalued.


“Hong Kong has become a service-oriented economy and is not so sensitive to the exchange rate changes. I don’t think our competitive power will be significantly affected,” he said.




Thailand’ central bank says currency defense cost $23.4 billion (970822)


BANGKOK, Thailand (AP) — Thailand’s central bank said Thursday it spent $23.4 billion in its losing bid to defend the value of its currency and will have to repay investors over the next 12 months.


It was the first time the Bank of Thailand revealed the full cost of defending the baht against speculators. The move proved too costly and forced the bank to effectively devalue the currency last month by letting its value be determined in the market.


When the baht was floated, it fell 20% in value against the dollar and triggered a wave of speculation against other Asian currencies.


The currency flotation was a low point of an economic slump that has gripped Thailand since 1996 and forced it to seek a $16.6 billion bailout organized by the International Monetary Fund, the fund’s second-largest ever.


Analysts have said the aid package will protect Thailand against a drain in foreign reserves.


Chaiyawat Wibulswasdi, the Bank of Thailand governor, acknowledged during a news conference that Thailand’s foreign reserves were likely to dwindle, but he did not say by how much. Reserves stood at $32.4 billion at the end of June.


The central bank was forced to dip into its reserves and borrow money to defend the baht from speculators in overseas markets.




Currency crisis roils Southeast Asian economies (970825)


MANILA, Philippines (AP) — Five years ago, Philippine officials hoped their country’s sagging economy someday could duplicate Thailand’s stunning growth.


No longer. In only a few months, a currency crisis has turned Thailand from a Southeast Asian economic success story into a case study of growth gone wrong. The Philippines and other regional countries are struggling to convince investors they have not made Thailand’s mistakes.


Thailand’s currency, the baht, was battered again last week, hitting a new low against the U.S. dollar Friday despite a $17 billion rescue package approved Wednesday by the International Monetary Fund.


Just as Thailand’s achievements once helped make investors bullish on Southeast Asia, its turmoil has dragged many of the region’s currencies sharply lower and brought a reappraisal of other Southeast Asian economies.


The region, which has benefited greatly from freer international trade boosting its exports, has learned that open markets also can be exceedingly painful.


Together, Southeast Asian countries have spent about $30 billion in scarce foreign reserves in recent unsuccessful attempts to prop up their currencies in the world’s freewheeling foreign exchange market.


In less than two months, the baht has fallen 23% against the dollar, the Philippine peso is down 14%, Indonesia’s rupiah had dropped 20%, and Malaysia’s ringgit is off 12%.


Jitters over the currency fluctuations have pushed most regional stock markets sharply lower, and higher interest rates — imposed by central banks in an attempt to make local currencies more attractive to investors — threaten to slow economic growth.


One benefit is that the devaluations should make the region’s exports cheaper and therefore more competitive. But weaker currencies also raise the costs of imported oil, factory equipment and components that many Southeast Asian nations rely on.


The crisis kicked into high gear on July 2, when Thailand’s government allowed the baht to float, yielding to heavy pressure from currency traders who felt the currency was highly overvalued.


The government has since lowered economic growth projections, while private companies are struggling with the increased interest costs in repaying an estimated $80 billion in foreign debt.


Indonesia’s rupiah also hit a record low last week, prompting Justice Minister Oetojo Oesman to warn that currency speculators could be arrested under an anti-subversion law that allows the death penalty.


The rupiah and several other currencies recovered some of their losses at the end of the week after Indonesia sharply raised short-term interest rates.


“The markets are still very nervous, and it will only take one piece of bad news to trigger a new sell off,” said Daragh Maher, economist at ING Barings in Singapore.


The plunge in the Southeast Asian currencies has destroyed a key ingredient of their economic success — the pegging of their currencies to the dollar.


Monetary officials used high interest rates to keep their currencies pegged artificially to the dollar — for 12 years in the case of Thailand. The close link made investments in Southeast Asia attractive, since foreign investors could take advantage of higher interest rates without worrying about the risks of currency fluctuations.


The large flows of easy foreign capital enabled rapid economic growth. But the debts of private companies piled up, and plentiful capital drove up prices for property and stocks. Banks in several countries became badly overexposed to real estate and stock loans.


When the region’s exports began slumping two years ago and economic growth slowed, many companies became unable to repay their debts.


Thailand’s government was forced to close 58 of the country’s 91 finance companies because of bad debts totaling $20 billion.


As Thailand’s economic troubles escalated, banks, speculators and others sold their baht holdings in expectation its value would drop.


After the baht was allowed to depreciate July 2, speculators turned to other Asian currencies also thought to be possible targets.


Some government officials and others have accused currency speculators of causing an artificial decline in currencies to reap huge profits.


Malaysian Prime Minister Mahathir Mohamad, for one, repeatedly has blamed American billionaire financier George Soros. Soros has denied the allegation. The two men will meet privately at a World Bank meeting in September, a World Bank official said Friday.


But many economists say Southeast Asian currencies long had been overvalued and the declines were inevitable.


“The consequence of monetary excess is that at some point the bubble has to ease,” said Daniel Lian, regional economist for NatWest Markets-Singapore.


“The currency speculators are correct in saying to the government that these exchange regimes need to be realigned by floating, or dramatic devaluations.”




A Monetary Phenomenon or Not? What the eurozone is telling us about inflation (National Review Online, 050616)


Even though inflation is undeniably a monetary phenomenon, a shocking number of policymakers at the Federal Reserve and other institutions ‘round the globe still cling to the view that “too much” economic activity is the culprit. For them, inflation’s akin to steam issuing from the radiator of an overheated engine. Thankfully, a test of the thesis is now readily available in the form of Nobel laureate economist Robert Mundell’s invention — the euro.


In sharing a common currency, the dozen member states of Europe’s Economic & Monetary Union (EMU) are governed by the same monetary policy (much like the 50 states of the U.S.), but this uniformity doesn’t stretch to all policy matters. The economic, regulatory, and fiscal regimes of EMU countries, while reflecting certain unifying directives from Brussels, don’t necessarily align, and the differences, particularly as regards taxation, often bear directly on economic growth. The eurozone thus can serve as a sort of proving ground of economic and monetary theory.


So what do the numbers reveal? The monetary-phenomenon naysayers are clearly wrong. The firm conclusion to be drawn from the euro’s record is that price inflation is, in truth, the result of too much money pursuing too few goods and isn’t controlled by the pace of economic growth.


In a two-step process, the euro started out in 1999 as merely a unit of account for settling various non-cash transactions such as stock purchases. It wasn’t until three years later that it became full-fledged legal tender, serving as both a unit of account and a means of exchange following the introduction of euro notes and coins into circulation on Jan 1, 2002 in a dozen countries — namely Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.


Monetary policymaking at the same time officially shifted from these nations’ respective central banks to the newly created European Central Bank (ECB).


As one would expect were inflation a monetary phenomenon, rates of consumer and producer price increases in the EMU are converging. Differences in inflation rates among euro countries actually started disappearing in the run-up to the single currency’s inception in 1999, when the euro exchange rates of the participating currencies were irrevocably set and EMU member states began implementing a common monetary policy.


Convergence can be gauged in a variety of ways. One of the simplest methods is to compare the difference between average and median rates of inflation. The greater variance in rates of inflation among EMU member states, the bigger the difference between the average and the median rates of inflation. Conversely, the less variance in inflation rates, the narrower the gap between the average and median inflation trendlines. This is because statistical or numerical extremes (i.e., outliers) have a disproportionately greater effect on data-set averages than on medians, or midpoints.


In the pre-euro period of 1991-96, the difference between average and median (year-on-year) consumer price inflation rates averaged 1.3%age points among the 12 countries that would eventually comprise the EMU. Then, as member states started unifying their monetary policies, the gap between average and median consumer price inflation closed substantially, averaging just 0.2%age points in the 1997-2001 period. Since the euro’s entrance into circulation in 2002, moreover, the EMU’s average-median inflation gap has been a remarkably small 0.1%age points.


EMU producer price inflation has converged as well. In the 1991-95 period, average PPI inflation exceeded the median rate by nearly 0.8%age points. In the 40 or so months since the euro entered into circulation, however, the EMU’s median rate of producer price inflation has surpassed its mean rate by an average of 0.2%age points, once more confirming that inflation is a monetary phenomenon.


Another means of gauging convergence is to measure the difference between the highest and lowest rates of inflation at any given time. Once again, the results show a distinct shift toward greater harmony in both consumer and producer price inflation.


The high-low range in consumer price inflation (as measured year-on-year) contracted from 10.2%age points in the pre-euro period of 1991-96 among the 12 participating EMU countries to 3.7%age points in the euro transition period of 1997-2001, and then to 3.3%age points in the post-euro period of 2002-05. The PPI’s high-low inflation range similarly narrowed, with the year-on-year percentage gap contracting from 12.7 points in pre-euro 1991-96 to 5.4 points in 1997-2001 and later to 4.1 points in post-euro 2002-05.


As for the influence of GDP on price inflation, the EMU data find no correlation. Economic growth in the eurozone has ebbed and flowed over the course of the past 15 years, alternatively converging and diverging without any determinable effect on inflation. In fact, during the period of the EMU’s boom of 1997-2000, when real GDP grew at an average rate of 4.4% year-on-year, consumer prices increased by a mere 2% year-on-year.


Robert Mundell was not only right about the euro’s ultimate success. He was also right in predicting that a prudently run ECB monetary policy would result in low eurozone-wide inflation. EMU consumer price inflation has, in fact, averaged just 2% since 1999 (on a 12-month basis). The EMU’s record in managing inflation indeed has been marginally better than that of either OECD countries as a whole, whose inflation rate was 3.1% over the same period, or the U.S., where consumer price inflation averaged 2.5%.


Where the U.S. still beats Europe (Old Europe, that is) is in tax policy. Old Europe, as largely represented by the EMU, has yet to see the pro-growth wisdom of low marginal tax rates on personal income, even though the emerging markets of New Europe are making low flat taxes the cornerstone of their economic revival.


Old Europe is paying a price for its recalcitrance. In the 1999-2005 period, GDP growth averaged a paltry 1.9% in the EMU (year-on-year) and 2.1% in the European Union as a whole, whereas U.S. GDP grew by 3% on average over the same period (which included the 2000-01 economic contraction and the post-9/11 jitters).


— William P. Kucewicz is editor of and a former editorial board member of the Wall Street Journal.




Global good news (Washington Times, 060210)


Humans as a species have just enjoyed their best year yet, 2005, on our little planet. By almost any measure, more people lived better lives last year than ever before. Global lifespans, literacy and real incomes all reached record highs, and more people lived in free or at least partially free countries than at anytime in human history.


The state of humankind from the dawn of civilization to roughly the year 1800 was correctly described both as one of war, pestilence and famine or nasty, brutish and short. Real income per person had only increased about 50% for the entire period from the year 1 to 1800. Two hundred years ago, the typical human had an income of about 7% of what he (or only 2% of what the typical American) enjoys today.


In the Year 1, when both the Roman and Chinese empires flourished, it is estimated the 230 million people then on the planet produced about $100 billion in goods and services.


Last year, the 6.5 billion of us produced an estimated $55 trillion (Gross World Product or GWP) in goods and services. Thus output has risen 20 times faster than population growth, and just about all that has occurred in the last two centuries.


Not only have per capita incomes been growing but, more encouraging, the rate of per capita income growth has been accelerating over the last two decades. For the last five years, growth in GWP has averaged more than 4% yearly (it was about 41/2% in 2005). The average citizen of the world now has a real income about threefold what he or she had only a half-century ago.


The share of world income has fluctuated greatly among the regions of the world. Back when most people lived close to subsistence, share of global product simply reflected shares of world population. For instance, China had about a 30% share of GWP in 1800 and about 35% of the world’s people. China’s share of GWP fell to a low of about 5% in 1975 at the time of the Cultural Revolution. With the shift in economic policies, it is now up to about 13%, but still well short of its population share. Africa has watched its share of the world’s economic pie decline for a thousand years to only 3% today, despite being home to 14% of the world’s people. The U.S. accounts for 21% of GWP, but only has 4.6% of the world’s population.


Western Europe, the home of the industrial revolution, presents an interesting case study in the rise and fall of economic power. By 1870, Europe accounted for a third of GWP; but as a result of wars, it had declined to 26% by 1950; and because of economic mismanagement during the last two decades, it is now down to only 20% of GWP, despite having a much larger population than the U.S.


Perhaps most remarkably, of the approximately 200 countries in the world, only two, Zimbabwe and the Ivory Coast, had negative growth rates in 2005. More than 99% of the world’s people lived in countries whose economies were growing, many of them rapidly. That is a world record in which all can take pride.


The lessons are clear: The pessimists have been wrong for 200 years. Malthus and Ricardo argued population would grow faster than food supplies and real wages would fall. Just the opposite has happened. The world is awash in food, and obesity is a greater global health problem than hunger. (This is not to lightly dismiss the real problem of pockets of hunger in Africa and elsewhere, but these are due to government mismanagement and distribution, not a global food shortage.)


Only three decades ago, “The Club of Rome” and other doomsayers claimed the world would run out of resources, and population growth would destroy us. Again, the facts are that productivity growth is accelerating, and that most goods in real terms have been getting less and less expensive. Population growth rates are sharply falling in almost every country. Many are more concerned about depopulation than population.


The “end of the world” crowd has always been with us and, perhaps, always will be. But I for one do not plan to give up my possessions or my freedom (either voluntarily or through increased taxation or regulation) because of “global warming,” or “bird flu,” or whatever the next great crisis is, because I trust my fellow man (but not my government) to be endlessly inventive in overcoming adversity.


Richard W. Rahn is director general of the Center for Global Economic Growth, a project of the FreedomWorks Foundation.




“Fueling our enemies’ engines” (, 060217)


by Oliver North


WASHINGTON, D.C. — In his State of the Union address, President George W. Bush aptly described America’s insatiable appetite for oil as an “addiction.” My old Webster’s Dictionary defines the word as an “obsessive dependence” and offers as examples: “drugs, alcohol and gambling.” Oil isn’t mentioned — but mine is an early 1970’s edition — printed before the 1973 Organization of Petroleum Exporting Countries oil-embargo, Jimmy Carter, and tax deductions for installing roof-top solar panels. Neither Webster nor Mr. Bush point out that in order to “feed their habit,” addicts must pay out mountains of cold hard cash to very unsavory characters who are often as deadly as the addiction itself. That’s always been the case with heroin or crack and today it’s increasingly true of petroleum.


The cold, hard cash outlay has become astronomical. Last week, the government announced that the U.S. trade deficit widened to a record $726 billion in 2005 — more than $251 billion of that in oil imports. According to the U.S. Department of Energy, the cost of petroleum imports climbed 39% — about the same rise we experienced in 2004.


But it’s not just a more costly product — demand has surged as well. In 1973, the United States imported 28% of its oil. A decade later that figure had jumped to 35%, and by 1993 we were bringing in 44%. Today, we import more than 58% of the oil we use. If demand continues to grow at current rates — and no significant domestic alternatives are found or developed — the United States will have to import an estimated 70% of its oil by 2025. And that is a national-security nightmare — for just as drug cartels use “coke cash” to kill, many of the recipients of our petro-dollars have taken aim at the heart of America.

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With the exception of Canada and Mexico, nearly all of the “oil exporters” have either unstable regimes, dictatorships, terror connections or governments that are outright hostile toward the United States Some, like Venezuela and Iran, could fit in the category: “all of the above.” Despite promises of “transparency” in Mid-East financial flows since Sept. 11, there is still no way to track how much oil money is being sent to Hamas, Hizbollah or al-Qaeda. In Venezuela, Hugo Chavez, awash in U.S. petro-dollars, is now able to fund a “Bolivarian Army” and spread Marxist ideology. The Iranians are employing their windfall “oil-Euros” to build nuclear weapons and the means of delivering them. Because we have developed so few alternatives to imported fuel, every time we flip on the lights, put gas in our tanks or touch a thermostat — we’re helping those who hate us.


Last August, when President Bush signed the Energy Policy Act, he said the goal was “strengthening America’s electrical infrastructure, reducing the country’s dependence on foreign sources of energy, increasing conservation and expanding the use of clean renewable energy.” And yet, despite his observation that, “when you’re dependent upon natural gas and/or hydrocarbons to fuel your economy and that supply gets disrupted, we need alternative sources of energy,” progress has been painfully slow in addressing what should be seen as a vital national-security concern.


Though federal funds have been made available for fuel-cell technology and Ethanol production research and development, little else is happening to reduce our dependence on foreign fuel. Exploration for new domestic sources of oil and gas are still met with lawsuits from radical environmental groups. No new refineries have been built in the United States for three decades. There are still no new orders for U.S. nuclear power plants — which produce zero harmful emissions — nor have there been since 1978. The last nuclear plant to go online, Watts Bar 1, in Tennessee, was completed in 1997.


France, China, Japan and Russia have no such reservations and continue building nuclear power plants to produce electricity. To our south, Brazil, a nation of 186 million and a land mass slightly less than the United States, already has two nuclear plants producing 4% of its energy needs, and a third plant is under construction.


U.S. politicians and media elites preoccupied with Vice President Cheney’s hunting skills may have failed to notice the announcement last week that Brazil will soon bring online the capability of producing enough enriched uranium to meet all of their own energy needs — and to export the material as well. Next-door neighbor Hugo Chavez, sporting his trademark red beret, applauded the announcement, noting that the nuclear fuel capability creates “further independence from the imperialists” — meaning, of course, the United States. Last month he advocated construction of a pipeline system to carry Venezuelan and Bolivian natural gas — not to the United States — but to the rest of the region.


The full measure of our strategic vulnerability isn’t just the price at the pump — sure to go up in the spring. We must invest not only in new technologies to power our vehicles — but new exploration for, and exploitation of, hydrocarbon fuels as well. Investment needs to be encouraged in economical processes for cleaning coal, our most abundant fossil fuel. And approval for new nuclear power plants is an absolute necessity. All of this needs to be part of a national energy independence policy — one that not only protects our environment — but stops us from fueling our enemies’ engines.




Something for nothing (, 060228)


by Thomas Sowell


Suppose someone left you an inheritance of a million dollars — with the proviso that every cent of it had to be spent on tickets for you to go watch professional wrestling matches. If you happened to be a professional wrestling fan, you would be in hog heaven.


But what if you were not? How much would that million dollars be worth to you? Certainly a lot less than a million dollars.


What if there was a clause in the will which said that you could forfeit the million dollars and instead receive a cash amount of $100,000 to spend as you pleased? Many of us would take the hundred grand without strings, even if that was only ten cents on the dollar compared to the million for watching wrestling.


In short, money with strings is worth less than money without strings — sometimes a lot less.


Many of us who receive money from Social Security or other government programs are learning the hard way the difference between money with strings and money without strings. For example, Social Security recipients have to be enrolled in Medicare, whether they want to be or not. “Universal” coverage means compulsory coverage, just with prettier political spin.


Those who are complaining about how hard it is to understand the new Medicare coverage seem not to realize that no government program voted into law by more than 500 members of Congress is going to be simple.


Everybody in Congress has his own pet notions or his own little claim to fame, and a lot of those pet notions and claims to fame have to go into the legislation, in order to get the votes needed to pass the law. The complications and restrictions are the strings attached to Medicare.


People who think that they are getting something for nothing, by having government provide what they would otherwise have to buy in the private market, are not only kidding themselves by ignoring the taxes that government has to take from them in order to give them the appearance of something for nothing. They are also ignoring the strings that are going to be attached to their own money when it comes back to them in government benefits.


That is not even counting the fact that government programs are usually less efficient than similar services provided by private enterprises.


Compare the service you get at the Department of Motor Vehicles with the service you get at Triple-A. No one who belongs to the American Automobile Association is likely to go to the DMV for a service that is also available through Triple-A.


Yet the illusion of something for nothing has kept the welfare state going — and expanding. If there is something for sale in the marketplace for ten dollars and you would not pay more than five dollars for it, some politician can always offer to get it for you free — as a newly discovered “basic right,” or at least at a “reasonable” or “affordable” price.


Suppose that the “reasonable” or “affordable” price is three dollars. How do you suppose the government can produce something for three dollars that private industry cannot produce for less than ten dollars? Greater efficiency in government? Give me a break!


The fact that you pay only three dollars at the cash register means nothing. If it costs the government twelve dollars to produce and distribute what you are getting for three dollars, then the government is going to have to get another nine dollars in taxes to cover the difference.


One way or another, you are going to end up paying twelve dollars for something you were unwilling to buy for ten dollars or even six dollars. But so long as you think you are getting something for nothing, the politicians’ shell game has worked and the welfare state can continue to expand.


The baby boomers, who are beginning to turn sixty, are unlikely to get back all the money they paid into Social Security, with or without strings. The illusion that Social Security can provide pensions more cheaply than a private annuity or other retirement plan is the grand something-for-nothing political triumph.


The baby boomers are going to pay the price big time.




Something for nothing: Part 3 – The top 10%, again (, 060309)


by Alan Reynolds


The concept of “income distribution” is fundamentally muddled. Aside from government subsidies and transfer payments, income is not “distributed” at all. Most income is either earned or stolen. If some group’s income was earned by legitimate means, then it is their income, not “ours.” To complain that 10% earned too large a percentage of our income is to forget that they actually earned 100% of their own income.


Unfortunately, the eternal ambition of Robin Hood economics is to steal money from those who earned it and “redistribute” it to those with more political clout. When in pursuit of such a worthy cause, it appears quite respectable to torture innocent statistics. Those deploying statistics in this campaign take special care to select their favorites.


Washington Post columnist Steven Pearlstein recently confessed: “My favorite statistic comes from a recent study of tax returns by the Internal Revenue Service. It shows that, in 1979, the top 10% of households earned 33% of all pretax income. By 2003, their share had climbed to 44%. The shares of everyone else declined.”


Where did those numbers come from? They certainly didn’t come from the Census Bureau, whose surveys show that the top 20% of households earned 49.8% of all pretax income in 2003.


The Census Bureau doesn’t add taxable capital gains to income, but the Congressional Budget Office does. Yet Pearlstein’s statistics obviously didn’t come from the CBO, either. The CBO estimates that in 1979 the top 10% of households earned 39.3% of all pretax income. By 2003, their share had dropped to 38.3% (or 33.7% after taxes). The shares of everyone else increased.


It is easy to see why the CBO is not Pearlstein’s favorite source of income statistics. It used to be Paul Krugman’s favorite in 1992, but he has since switched to a 2001 study by two French economists, Thomas Piketty and Emmanuel Saez. Yet Piketty and Saez cannot be Pearlstein’s favorite at the moment, because they showed that “the labor share (of national income) has always been around 70-75%, and the capital share has always been around 25-30%.”


Pearlstein, by contrast, wants us to believe “the share of the economic pie going to workers in the form of wages, salaries and benefits seems to have fallen, while the share going to holders of capital — in the form of interest, dividends and capital gains — has gone up.” His thesis is that globalization has made capitalists more effective at exploiting the proletariat.


As I explained in my last column, labor’s share always rises in recessions (it peaked in 2001) because recessions shrink profits and capital gains. That does not mean workers should welcome recessions just to get a larger share of a smaller pie.


Unlike Pearlstein’s untenable claim that “labor’s share of the economy is shrinking,” the source of his favorite statistic is not a mystery. It comes from a 10-page paper on “retrospective income” prepared for an academic conference by Michael Strudler and Tom Petska from the Statistics of Income division of the IRS, and Ryan Petska from Ernst and Young. But estimates are just estimates, and estimates derived from tax returns (including those from the CBO) are among the worst.


For anyone determined to show that the top 10% has a much larger share of total income than the CBO or Census Bureau could find, the trick is to stuff as much as possible into the incomes of the top 10% and then exclude as much as possible from everyone else’s income. Strudler, Petska and Petska know how to pad the numerator of this ratio, but also how to shrink the denominator.


They explain, for example, that “Social Security benefits were omitted because they were not reported on tax returns until 1984.” Those dependent on Social Security benefits may be surprised to find that they are counted as having no income at all. But the more income that can be excluded at the bottom, the larger the share left to be assigned to the top.


Piketty and Saez exclude all transfer payments, not just Social Security. Everyone excludes the Earned Income Tax Credit, the largest cash transfer to the poor, by pretending a Treasury check for a few thousand dollars only needs to be mentioned in after-tax income. In an online discussion, Pearlstein wrote, “Liberals like to decry ... the increasing inequality being generated in pre-tax earnings. So the government, at their urging, enacts policies that use the tax code to make things fairer in what really counts, after-tax earnings. But then the liberals keep using the data on pre-tax earnings, to suggest nothing has gotten better. That’s disingenuous.” That’s right. Yet his favorite statistic is for pre-tax earnings.


Strudler, Petska and Petska also add capital gains that are realized on tax returns to the incomes of the top 10%, and so does the CBO. But nobody counts capital gains on investments inside the IRA and 401(k) plans of Middle America because those gains do not show up on income tax returns until we’re very old. The amount of money going into these tax-deferred plans is vastly larger than the tiny amount being taken out.


The highest incomes are also boosted by adding “depreciation in excess of straight-line depreciation.” Since your neighbor is unlikely to be claiming accelerated depreciation on business equipment, this trick reveals that much of the “household” income among the top 10% is really business profit. Many businesses switched to filing under the individual income tax after those tax rates came down in 1987, so their incomes moved from corporate to individual tax returns. Most hedge funds are limited liability corporations, and many banks are now Subchapter S corporations and their profits are counted as “household” income.


Pearlstein will soon offer his favorite solutions to problems described by his favorite statistics. But picking favorite statistics to advance a policy agenda only works if nobody is paying attention to what those statistics really mean.




Something for nothing: Part 3 (, 060302)


by Thomas Sowell


The Economist magazine reports that the official unemployment rate in South Africa is 26% but that the real unemployment rate there may be even higher. The South African economy is growing. Why then this extremely high unemployment rate? What is going on?


What is going on in South Africa is what has been going on in other economies with huge problems. Somebody could not resist the lure of something for nothing.


Minimum wages in South Africa have been set higher than the productivity of many workers, so employers have no incentive to hire those workers, even though such workers are perfectly capable of producing much-needed goods and services.

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South African labor unions say that they are not going to let their workers become “the West’s sweatshop.” But the irony is that a South African firm which has been manufacturing aluminum wheels solely in South Africa for two decades has begun expanding its output by outsourcing the additional jobs to Poland.


Does that mean that Poland is becoming South Africa’s sweatshop? Or does it mean that there are economic consequences to setting wage levels in disregard of productivity levels?


The South African government refuses to admit that an unrealistically high minimum wage rate has anything to do with the high unemployment rate. In other words, they think that they can pass a law to give workers something for nothing.


That idea is not peculiar to South Africa. In many cities and towns across America, local politicians, activists, and even religious groups have been pushing for laws mandating “a living wage” higher than the federal minimum wage.


They too apparently think that there will be no dangers to the jobs of workers whose output is not worth what third parties choose to call a “living wage” — in other words, that the workers can get something for nothing.


South Africa’s problem is compounded by the fact that, in addition to minimum wages set above the level of many workers’ productivity, the government has passed laws making it very difficult to fire an employee.


That should reduce unemployment, right? Wrong. Countries like Germany with strong job protection laws have chronically much higher unemployment rates than countries like the United States, where the government does not impose such laws on private businesses.


Making it harder to fire workers makes it more risky to hire workers in the first place. It is easier to substitute capital for labor. South African companies “rely more on capital” than labor, according to The Economist magazine.


Even when times are booming and there is a demand for more output, employers may work their existing employees longer hours rather than hire new workers whom they will have a hard time letting go after the boom passes.


Nothing is easier for politicians than to think up benefits that they can confer on workers by imposing the costs on somebody else. It’s something-for-nothing time, and it pays off for politicians at election time.


Meanwhile, businesses can’t just pick up and leave the city or the state, much less the country, overnight. But, like the South African company that expanded its output and employment in Poland, businesses can do their expansion where costs imposed on them by politicians are not so high.


Some businesses are not expanding but are just trying to survive. Costs blithely loaded onto them by politicians can prevent some of these kinds of businesses from surviving — and their employees lose their jobs.


Over time, businesses can shift more and more of their operations out of places where extra costs are imposed politically and some just move their whole business elsewhere. That means taking their jobs, and the taxes they pay, elsewhere.


For politicians, however, killing the goose that lays the golden eggs is a viable strategy, provided that the goose doesn’t die before the next election. Provided also that people have short memories, don’t connect the dots, and don’t keep in mind that there is no such thing as something for nothing.




Biggest foreign aid recipient (Washington Times, 060510)


Which country receives the most in total foreign aid from all donors? The official numbers show Iraq at the top with $3 to $18 billion in aid (depending on how you define “aid”) and all the other recipient nations of the world at less than $3 billion per year. However, if you look at which nation benefits most from foreign subsidies, the U.S. would come out on top by a very wide margin.


Yes, I did just say that the U.S. is the world’s largest recipient of foreign assistance. Other countries are not sending official government “aid” dollars to help the U.S. but are doing things that have the same effect. For instance, China provides the biggest single subsidy to the U.S.


Many experts argue the Chinese currency is 10% to 20% undervalued, which means the U.S. consumer is able to purchase Chinese-made goods at a lower price than if the currency traded at its true market value to the U.S. dollar. If an American can buy a Chinese-made product at Wal-Mart for an artificially low price, it means the American consumer has an increase in real income (he or she can buy more with the same income).


In 2005, the U.S. bought (imported) $243 billion worth of goods from China. If these goods were only 10% underpriced because of the artificially low Chinese currency, U.S. consumers received a subsidy of about $24 billion.


Other countries’ consumers also received the Chinese subsidy to the extent they bought Chinese goods, but the U.S., as China’s biggest customer, received the greatest subsidy. The Chinese underprice their currency because they are trying to increase exports to obtain U.S. dollars and other foreign currencies. In turn, China’s government uses many of the dollars to buy U.S. government bonds to serve as the reserve for its banking system. If the Chinese had a more efficient banking and capital market structure, they would not need so many dollars.


For now, foreign ownership of U.S. government debt equals about 45% of that held by the public (not including U.S. government agencies). Of the little more than $2 trillion held by non-Americans, the Japanese hold about a third and the Chinese about 12%. If non-Americans did not buy much U.S. government debt, Americans would need to both save more and consume less to make up the deficit.


To the extent non-Americans are willing to invest in U.S. government debt and other U.S. financial instruments at less than normal market returns because they need a safe haven for their funds, they provide an implicit subsidy to American producers and consumers. Since it costs less for American businesses to borrow money because of the foreign investment, they can expand more rapidly and hire more workers. If American consumers can borrow at lower rates, they can buy bigger houses and more new cars.


There are various approaches to try measuring the size of the implicit foreign subsidy. At a minimum, it would be the difference between the normal rate of interest (approximately 3% plus inflation) and what foreign bond holders have been receiving in recent years, which is at least 1% to 2% below the expected normal rate.


Thus on the U.S. government debt alone, Americans have been receiving a subsidy from non-Americans in the range of $20 billion to $40 billion yearly. This does not count all the feedback effects from the higher investment in productive activities by foreigners in America because of currency flight.


Many commentators and politicians decry the size of the U.S. trade deficit and the level of foreign ownership of U.S. financial assets. Rather than bashing the Chinese, U.S. politicians should thank them for making Americans richer.


In fact, if the U.S. did not serve as safe haven for the world’s capital, the world would be far more unstable, and the total global capital stock would be lower. The correct way to look at the situation is that U.S. citizens are getting paid by the rest of the world for providing stronger, more secure, and more transparent capital markets.


The correct “solution” for the problem is for the other nations to strengthen protection of property rights, reduce corruption, stop punishing capital accumulation through excessive taxation and regulation and improve their own capital markets. If this is done, the U.S. trade and capital imbalances automatically will gradually decline.


The IMF has just been given the task to work on trade and capital imbalances. It will be interesting to see if it focuses its energy on helping the capital-flight countries improve their economic policies (by lowering taxes and regulations and improving property-rights protection) or if it tries to force lower tax jurisdictions to adopt capital-destroying tax and regulatory policies.


In the meantime, the lesson is clear: Any economic jurisdiction can obtain “foreign aid,” no matter how rich it is, just by providing the rule of law, secure property rights, low taxation and regulation of productive activities, and well-functioning capital markets.


Richard W. Rahn is director general of the Center for Global Economic Growth, a project of the FreedomWorks Foundation.




And now, the good news (, 060731)


By Michael Barone


The world seems aswirl. Where do we stand today?


Let’s use the analysis of bestselling author Thomas Barnett, who divides the world into a functioning “Core” (North America, Europe, East Asia, rising China and India) and a nonfunctional “Gap” (the Middle East, most of Africa, part of the Andean chain in South America). Barnett argues that our task is to expand the economically interconnected core and establish what he calls connectivity to shrink the gap.


How are we doing? Actually, not badly. Let’s look at the hot spots.


First, the Israeli campaign against Hezbollah in Lebanon. It looks as if the Israelis are encountering more military resistance than expected, and it’s not clear that they can wipe out Hezbollah as an effective force. Nor is it clear that the United States can install some combination of European and Lebanese military force to control southern Lebanon. But if — a big “if” — the Israelis succeed and Hezbollah is reduced to impotence, that would amount to a significant shrinking of the gap. If not, we’re back where we started.


Second, the collapse last week of the Doha round of trade negotiations. They might be revived later, but in the meantime we’ve missed a chance to open up North America and Europe to agricultural exports from Third World countries that desperately need dollars and euros. That’s a shame. But the zone of free trade continues to expand as the United States, during this administration, negotiates one free-trade agreement after another — Oman and Jordan, Central America and Australia, Peru and Colombia. All are increasing connectivity and shrinking the gap.


Third, immigration. The bill sponsored by Rep. Mike Pence and Sen. Kay Bailey Hutchison, with border security and free-market guest-worker provisions, has some small chance of passing the Senate and House. A law that regularizes illegal immigrants would close the internal gap we have with 12 million illegals.


Fourth, Latin America. Venezuela’s oil-rich demagogue Hugo Chavez continues to pal around with dictators and tries to stir up trouble. But Latin American voters have been rejecting Chavezism. The victories of anti-Chavez candidates in Peru, Colombia and Mexico in the past few months show that irresponsible demagogy is not popular in the region. Connectivity is increasing, not decreasing, to our south.


Fifth, China and India, with one third of the world’s population, continue to have scorching economic growth — 11% in China, 8% in India. And they’re growing increasingly interconnected with the thriving economies of the core. Hundreds of millions of people are rising out of poverty, and despite high oil prices, we have solid economic growth in North America and Latin America and even some growth in sclerotic Europe. The world economy has never been in better shape.


The cloud. Do we still face problems?


Sure. Iran, to name one — though its ally Hezbollah seems to have overreached. North Korea, to name another. Baghdad is a mess with sectarian violence. Islamist terrorists continue to plan mayhem against us, and in Europe, Muslim immigrants threaten to impose their values on free and liberal societies. But as we ponder these problems, we need to take a deep breath and reflect on the larger picture, as Thomas Barnett does in his blog (


“Plenty of people look at the world today and see only decline and violence and chaos since 9/11. I am amazed at how little the Functioning Core of globalization has suffered since that date: no real violence or threats of same amidst our ranks, slow but steady political integration that’s still not keeping up with the economic bonds that are booming, spotty but emerging sense of shared security values, and the usual pinpricks of harm inflicted by terror and God, but all in all, nothing really bad despite all this ‘tumult’ centered in the Middle East and the rising price of oil.”


Even so, most Americans continue to moan and groan about our situation, and to yearn for the holiday from history we seemed to be enjoying in the 1990s. As Barnett argues, “Time is on our side, as are all the major dynamics that count — energy, investments, demographics, sheer firepower, enduring ingenuity, strength of our societies, our enduring resilience.” With fits and starts, the core is expanding, connectivity is increasing, and the gap is closing.




A crisis for Japan’s welfare state (, 060907)


By George Will


TOKYO — Longevity is a blessing, but the Japanese live inconveniently long lives. Inconvenient, that is, for those who administer Japan’s welfare state.


Welfare states are made possible by the productivity of modern economies, which make possible living conditions — improved nutrition, hygiene, housing, medical care, education, environment — that increase life expectancy. That increase threatens the solvency of welfare states, because the elderly receive most government transfer payments — pensions and medical care.


The life expectancy of Japanese women (85.5) is the world’s highest and that of men (78.5) is behind only Hong Kong and Switzerland. The median age here is 41.2, compared to 36.5 in America, and is projected to be 49.5 in 2050, when 37% of the population — twice today’s rate — will be more than 65. And 41.7% will be more than 60, compared with 26.4% in America.


Japan, which has closed 4,000 schools in the last 20 years, has a fertility rate — the number of children per woman of childbearing age — of 1.32. The replacement rate, which keeps population from shrinking, is 2.1. Last year, deaths exceeded births by 21,408. The U.S. fertility rate is barely at replacement level, but immigration is one reason why demographer Nicholas Eberstadt expects America to be the “only industrialized country to hold its share of global population in the next half century.”


Japan has never been welcoming toward immigrants. Shinzo Abe, who almost certainly will become prime minister this month, says he wants a Japan where “people in other parts of the world would like to live” and “become citizens.” But other senior officials say the way to square a declining population and work force with the pension costs of long-lived retirees is to rethink retirement — to “work for life,” one official says.


Another says of immigration that it is wrong to import workers to do “hard, risky jobs. Hardships should be shouldered by the Japanese themselves.” And, he asks, “Why should we increase our population?” Leaving aside the welfare state’s grinding imperatives, that is not a foolish question. In 1920, Japan’s population was 56 million. Today it is 127.5 million on a landmass the size of California (population 36 million) that is three-quarters mountainous. A third official, noting that Japan imports 60% of its staple foods, says, “It might be good to have a declining population” of, say, 100 million by 2050.


But the welfare state’s imperatives cannot be ignored, and the Japanese will not dismantle that state. So the alternative is to pursue increased revenues from rapid economic growth achieved by sacrificing equity, understood as job security and other entitlements, in the interest of efficiency.


Japan cherishes what Prime Minister Junichiro Koizumi calls, disparagingly, a “sanctuary” economy. Also called a “convoy” economy, it is one in which many workers enjoy extraordinary job security and benefits. But today, almost one-third of all workers are “non-regular” (up from one-fifth in 1990) and have little security and few benefits.


Until the “lost decade” of 1990s deflation, Japan seemed to be a rarity, a command economy that worked. But the economy succumbed to the cumulative inefficiencies of government commands. It buckled beneath the “iron triangle” of favors-seeking big businesses, the favors-dispensing Liberal Democratic Party, and government bureaucracy. That system produced the ballooning of nonperforming financial assets.


Japan’s nominal GDP still is less than it was in 1997; America’s GDP has increased more than 50% since then. But Japan’s economy has been growing since 2002, even though Koizumi, who would be a better member of America’s Republican Party than most Republicans are, has cut public works spending — formerly one of the economy’s locomotives — from 8% of GDP to 4%.


The Japanese may now re-experience the 1980s — theirs and America’s. Theirs, in a humming economy. America’s, in an unpleasant byproduct of that humming — the super-rich (think of Gordon Gekko in the 1987 movie “Wall Street”) whose vulgarity and shady dealings shock Japanese sensibilities.


Because of those sensibilities, statements that strike Americans as banalities can startle the Japanese, as when Koizumi told parliament, “I don’t think it’s bad that there are social disparities.” When Abe said, “It is important to create a society in which losers don’t stay losers,” the news was that Japan, with its centuries of commitment to social harmony, must accept (BEG ITAL)temporary(END ITAL) losers.


About the simultaneous pursuit of equity and efficiency, one official acknowledges that something must give: “We are chasing two rabbits.” The rabbits do not run in tandem, so Japan, like other welfare states, must increasingly, if reluctantly, chose efficiency over sanctuary.




Time to Throw the Phillips Curve: A Nobel Prize for vanquishing a bad idea. (National Review Online, 061024)


Last week the Nobel committee announced that this year’s prize in economics would be going to Dr. Edmund Phelps of Columbia. This is good news indeed for advocates of supply-side economics. Phelp’s principal academic achievement is his successful rebuttal of one of the central tenets of modern Keynesianism: the Phillips curve.


Someone should alert the board of governors at the Federal Reserve of Phelps vindication, since the minutes released from the Fed’s most recent meeting still contain the same old Keynesian gobbledygook:


The staff forecast prepared for this meeting indicated that real GDP growth would continue to slow into the second half of 2006 before strengthening gradually thereafter. … In the Committee’s discussion of monetary policy for the intermeeting period, nearly all members favored keeping the target federal funds rate at 5-1/4% at this meeting. Members generally expected economic activity to expand at a pace below the rate of growth of potential output in the near term before strengthening some over time.


In English this means: “We had some inflation, but don’t worry, we’ve slowed the economy enough to stop it from getting out of hand.”


For decades policy makers hewed to the premise that the Phillips curve demonstrates inherent long-term trade-offs between growth and stable prices. This led an entire generation of planners to believe that if the economy is flagging, you should print more money; that if the economy is growing too fast, stop the presses, slow things down, and throw millions of people out of work.


The Phillips-curve perspective is flawed. Attempts to stimulate growth and employment by way of loose money inevitably fail. If anything, the above chart shows how periods of sound money and price stability coincide generally with lower unemployment.


This makes sense to anyone who has actually managed a business, since instability in pricing is not conducive to hiring. Imagine that you manage a factory and every night magic pixies sneak in and change the calibration of the machinery, switch the dials on the consoles, and shrink or lengthen all of the rulers depending on their whims. It would be almost impossible to operate that factory efficiently, while investment in the factory, and eventually employment, would cease. That’s just what happens when central planners toy with the value of currencies — planning becomes impossible, and businesses contract.


Phelps has disproved the Phillips curve, at least as a long-run economic planning tool. He argues persuasively that labor markets determine the unemployment rate over the long run. Variables such as levels of growth, capital accumulation, and flexibility in labor markets — and not artificial stimulation through the printing press — are what decide whether or not people are given an opportunity to work.


Eisenhower’s Fed chairman famously said that his job is to remove the punch bowl as soon as the party really starts to get going. That’s why the 1950s were referred to as the years of the “stop-go” economy. Kennedy, on the other hand, learned the basic power of markets from his supply-side stockbroker father. The dual effect of Kennedy’s tax cuts and that period’s sound money led to what was dubbed the “go-go-economy.” Nixon tried to inflate his way out of stagnation, and then use price controls to put the genie back in the bottle. Gerald Ford tried to use idiotic lapel pins to do the same. It wasn’t until Reagan and Fed chairman Paul Volcker put monetary and fiscal policy into separate categories that the U.S. really started to live up to its economic potential.


Alan Greenspan, despite his better training, basically governed the central bank as a Keynesian: Too loose in the late ‘80s; too tight in the early ‘90s (helping cost George H.W. Bush the election); too tight in the late ‘90s in the cause of stopping “irrational exuberance”; and too loose in 2003 because he didn’t believe in the efficacy of the Bush tax cuts.


One wonders what the world would look like now if not for the pernicious doctrine that growth causes inflation. What if planners a half-century ago never adopted the Phillips curve and the ‘50s became the go-go-economy? Imagine the ‘70s without stagflation? What if Greenspan hadn’t destroyed the telecomm sector in the late ‘90s with his tight-money policy? What would the cumulative effects have been of “letting the horses run”? Our thirteen trillion dollar economy would be what today — 15, 18, 20 trillion? How many people who are now poor would instead be middle class? How many people who are now middle class would be affluent? How much global poverty would have been alleviated if the U.S. economy had been even more powerful in recent decades, able to drag that much more of the globe out of the muck and into prosperity?


A Nobel Prize for Dr. Edmund Phelps is an opportunity for the Federal Reserve, Wall Street forecasters, and the financial press to bury forever the enormously destructive theoretical error that is the Phillips curve.


— Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom.




Milton and Rose Friedman: Liberty’s Couple: On Free to Choose. (National Review Online, 070129)


An NRO Flashback


Editor’s Note: In what we hope is the beginning of what will eventually become a national memorial, the Chicago City Council declared January 29, 2007, to be Milton Friedman Day. In honor of the economist who did so much to defend liberty, NRO is publishing a couple of articles from our archives. The following article, by Lawrence B. Lindsey, appeared in the December 19, 2005, issue of National Review.


In the company of history’s great revolutionaries, Rose and Milton Friedman stand out as clear anomalies. Diminutive in stature, modest in speech and manner, they cannot easily be imagined manning the barricades or hectoring the crowds from a soapbox. Most important, unlike other visionaries who sought to change the world, the Friedmans did not say, “Put us in charge of the government and we will make your life better.” Rather, they argued that governments then in charge should get out of the way so that individuals could get on with the job of making their own lives better.


Their 1980 book Free to Choose successfully instigated a revolution in public policy because it offered conservatives both a rhetorical weapon and a legislative program. Until then, the Left had a clear advantage on both scores. Rhetorically, the Left promised compassion and equality and packaged them with programmatic action in the form of ever more government power. Those opposed to an ever larger and more intrusive state were thus forced to defend hard-heartedness and inequality, and to oppose legislative change.


The Friedmans changed all this. First, they gave us the word “Choice,” the rhetorical power of which is enormous in our consumer-driven society. The Left suddenly became Anti-Choice, at least after the point at which a child is born. They are against parental choice in where the child is educated. They are for limiting choice in what medical care the child may receive when he is sick, and philosophically opposed to the idea that his parents should be able to spend some of their hard-earned dollars on better care. More broadly, they are against giving the individual a choice in how to spend a significant portion of his earnings, preferring that the state make those choices. They are against choice in how most individuals invest the major source of their retirement savings, again believing that the choice should be made by government. Rhetorically, the Left no longer has an emotive advantage: Thanks to the Friedmans, the rhetorical cleavage on most issues becomes one between “pro-choice” and “pro-government.”


But it is in the programmatic realm that Free to Choose is most empowering to those who support limited government. Conservatives in government had traditionally been the side opposing change. At a minimum this put us on the wrong side of the legislative ratchet. If we lost, individual freedom was further eroded by state power. If we won, all that happened was that things didn’t get any worse. After Free to Choose, the Right became the agent of legislative change. In the quarter-century since its publication, the posture of the Left has become so defensive that the phrase “reactionary liberalism” is now in vogue.


The publication of Free to Choose coincided with the high-water mark of government power. The Friedmans prophetically titled their final chapter “The Tide Is Turning.” In their modesty, Milton and Rose might say that all they were pointing out was that the Emperor — in this case the Welfare State — had no clothes. But it was they who pointed it out, and suffered widespread criticism from the intellectual establishment for doing so.


In 1980, the top marginal tax rate was 70%, and supposedly serious people were arguing that there would likely be little or no behavioral response if we let workers and entrepreneurs keep more than 30 cents of each dollar they earned. Free to Choose pointed to the experience of Sweden and the United Kingdom to show that these analyses were wrong.


Inflation was in double digits, and was believed to be caused not by excessive money creation by government, but by the greed of corporations for higher prices and workers for higher wages. The Left’s answer was a government-driven “incomes policy.” The 1980 Economic Report of the President even made a virtue of so-called bracket creep, arguing that the rise in the share of personal income taken in taxes would help control inflation — that putting more money into the hands of government would so increase our national frugality that inflation would fall!


The Friedmans’ alternatives — monetary restraint and lower marginal tax rates — became the macroeconomic-policy centerpieces of incoming President Ronald Reagan. The policies were an obvious success — the proof of which, as Reagan later noted, was that “they don’t call it Reaganomics any more.” As successful as this change in macroeconomic focus was, however, it was the Friedmans’ microeconomic agenda that would frame the long legislative battle of later years.


Free to Choose advocated a Negative Income Tax as an alternative to traditional welfare payments. This policy had been enacted in the Ford administration in the form of the Earned Income Tax Credit; Reagan expanded it significantly. Welfare reform, which sharply limited the programs the Friedmans criticized, was passed 16 years after their book was published; but the surest sign that the tide had really turned was the recent adoption of the concept of a Negative Income Tax by the British Labour party under Tony Blair and Gordon Brown.


On education, the Friedmans noted that the public-school monopoly was especially harmful to poor children in the inner cities, and advocated that school vouchers be given to parents. This was then considered a revolutionary concept; today, most observers would agree that the Friedmans’ position has won the intellectual debate. What prevents a full victory is exactly what Milton and Rose predicted would block reform: the entrenched interest of the education lobby.


Free to Choose also took on the inanity of price controls on oil and gas, pointing out the advantages of the price mechanism. While today some still wish for a return to the 1970s experience of a windfall-profit tax, it is a tribute to the acceptance of the price mechanism that we avoided long lines at gas stations during our recent experience with $3 gasoline.


There is still work to be done, on a variety of fronts. The Friedmans advocated a privatization of Social Security retirement accounts. In 2000 a believer in that cause touched the third rail of American politics and was elected president. George W. Bush again pushed for that cause after his reelection. Even though he has not succeeded to date, it is a testament to the Friedmans’ writing that the ideas in Free to Choose are being advocated by a president a quarter-century later.


In 1980, the ideas the Friedmans advocated were considered radical. Today they are in the mainstream of the conservative agenda and many on the left have taken ownership of them — failing, naturally, to give Milton and Rose Friedman the credit they deserve. In Free to Choose, they argued that the most successful political group of the 20th century was the Socialist party: Even though it never won a national election, its platform of 1928 became, largely, the law of the land. Although Milton and Rose Friedman have never been elected to any office, and would probably be horrified at the thought of even running, it was actually their platform, not that of the Socialists, that ended the 20th century triumphant.


Mr. Lindsey, a former assistant to President George W. Bush for economic policy, is a visiting scholar at the American Enterprise Institute.




Economist on a White Horse: How Milton Friedman saved the world. (National Review Online, 070129)


An NRO Flashback


Editor’s Note: In what we hope is the beginning of what will eventually become a national memorial, the Chicago City Council declared January 29, 2007, to be Milton Friedman Day. In honor of the economist who did so much to defend liberty, NRO is publishing a couple of articles from our archives. The following article, by National Review Editor-at-Large John O’Sullivan, appeared in National Review shortly after Friedman’s death in late 2006.


‘There is but one event, but that is an event for the world — Burke is dead!” wrote Canning, the Tory wit and future prime minister, to a diplomat friend who had asked for the latest news. “He is the man that will mark this age . . . to all time.”


It would be no exaggeration to say the same of Milton Friedman, who died this November. The Age of Friedman began approximately in 1979–80 when his disciples, Margaret Thatcher and Ronald Reagan, took power in Britain and America — the two great centers of world economic thinking — and began to apply his ideas. It was entrenched more widely following the discrediting of planned socialist economies in the late 1980s and the consequent spread of anti-inflationary and free-market solutions throughout the First, Second, and Third Worlds. And the Age of Friedman will continue until some new economic ills emerge that require a new diagnosis from a new theoretician.


By the time of his death Friedman’s victory was more or less complete, as the respectful obituaries even in staunchly liberal newspapers conceded. But the campaign to establish (or revive) his classical-liberal ideas had been hard and long, beginning in the late 1940s when he joined the economics faculty of the University of Chicago and not glimpsing success until the late 1970s. Indeed, in a development that would have delighted a Gibbon or an Evelyn Waugh, Richard Nixon declared that “we are all Keynesians now” at the very moment when the Age of Keynes, Friedman’s great theoretical antagonist, was drawing visibly to its close.


Friedman’s antagonism was entirely theoretical. Though he was to replace Keynes as the dominant influence on world economics, he admired the great English economist. He submitted his first theoretical paper to Keynes’s Economic Journal. (Keynes rejected it.) As late as 1974 he described Keynes’s General Theory as “a great book, at once more naive and profound than ‘Keynesian economics.’” William Coleman of the Australian National University rightly describes this remark as “marvelously apposite.” For the edifice of Keynesianism that Friedman eventually brought down was both massively imposing and crucially flawed. A caricature on the 1970 paperback cover of Keynes and After by Michael Stewart brilliantly captured the imposing nature of Keynesian orthodoxy at its summit. It showed the Sage relaxing in an armchair. Behind him was a graph showing high unemployment until it disappeared behind his right shoulder and then showing low unemployment as it emerged from behind his left thigh. Before Keynes, you see, we had suffered from joblessness and slumps; after him, we enjoyed prosperity and a low, stable rate of unemployment. Q.E.D.


This picture expressed more than an economic theory; it summed up an entire moral and political outlook called social democracy. For the economic theory underpinning this success presupposed that government had the principal role in running the economy through macroeconomic policy. When the economy was in danger of inflationary “overheating,” government would reduce spending and raise taxes; when it was moving into recession or deflation, government would pump money into the economy through tax cuts and spending programs. Deficits would stimulate us out of slumps; surpluses would cool down inflation. This administrative balancing act was the magic that would enable a modern economy to grow permanently without suffering the exaggerated slumps and inflationary fevers that had previously characterized capitalism.


To be fair, the theory was never actually applied as Keynes had prescribed. Postwar Britain, where Keynes was a secular saint, ran deficits consistently even though most of the time its economy was booming modestly. Keynesians were far more opposed to unemployment than to inflation and they had adopted Keynesian economics in part because it justified a dominant role for government. Keynes himself was well aware that this risked igniting inflation. At a meeting in Cambridge, he told his friend and critic Friedrich von Hayek that he intended to correct his followers’ errors when he had the time. He died shortly afterwards with the Keynesians still uncorrected.


For a time Keynesian economics worked as smoothly as the caricature suggested. But the fundamental flaw was lying in wait. Keynesians taught that inflation and unemployment were opposites: The more you had of one, the less you had of the other. Given this choice, they preferred to maintain full employment by running a continuing mild inflation through a lax monetary policy that accommodated wage and price hikes. Friedman challenged this view. He pointed out that a monetary stimulus could produce only a temporary rise in production (and so fall in unemployment). Once people realized that the value of their money was falling under even mild inflation, they would build expected future inflation into wage demands and price hikes. Inflation would then accelerate further, unemployment would rise too, and eventually the economy would be disrupted as the signaling effect of prices was destroyed in a hyper-inflationary crisis. He outlined this revolutionary analysis in his 1970 lecture “The Counter-Revolution in Monetary Theory.”


In the mid-1970s, Friedman was proved right. An “impossible” combination of inflation and unemployment — dubbed “stagflation” by liberal economist Paul Samuelson — spread throughout the industrial world. Among its victims were President Carter in the U.S. and Britain’s Labour prime minister, James Callaghan. An American “misery index” of 21% and Britain’s similar “winter of discontent” ensured that they were replaced by Ronald Reagan and Margaret Thatcher. Both were admirers and friends of Friedman. And these two leaders embarked on economic policies, broadly inspired by his theories, that have given their countries a quarter century of fast economic growth interrupted only by two short and shallow recessions in the U.S. and one deeper recession in the U.K.


Their success was achieved in part because they followed Friedman’s broad recipe for slaying the dragon. Not always precisely — Friedman once said that monetarism in Britain was “whatever Margaret Thatcher did.” But they got the essentials right: Restrain the rise in money and prices would stop rising. When that happened, the supply side of the economy — its manufacturers, service-providers, and other producers — would no longer be plagued by monetary instability. They would then be better able to plan and produce for the future. Friedman’s prescription for monetary policy proved to be as correct as his prediction of stagflation. Inflation fell steadily and stabilized at a low annual level in both countries and throughout the world. The period since 1980 has been the Age of Friedman economically as the period from 1945 to 1975 was the Age of Keynes.



How did Friedman do it? Naturally, we should not overlook the trivial fact that his economic ideas were correct. That is a great advantage if your aim is to increase human wealth and happiness. Usually, however, the mere correctness of policies is not sufficient for their adoption. Friedman’s ideas had to overcome a vast residue of intellectual and political hostility to classical liberalism on both left and right. His views were seen and scorned as “flat-earth economics” in the 1950s and 1960s. He overcame these obstacles for three reasons.


First, he was an accomplished statistician who got the technicalities right. Friedman had the skills — and, together with collaborators such as Anna Schwartz, he did the work — to overcome objections through sheer weight of evidence. Other able economists from the classical-liberal tradition — notably, Hayek, Lionel Robbins, and William Hutt — had developed early critiques of Keynes that in retrospect look powerful and prescient. But their arguments, unfashionable at the time, were simply ignored. Friedman escaped their fate by compelling agreement. If you were disagreeing with him, you were disagreeing with the facts he had assiduously and scrupulously assembled. And when the future facts of his stagflation prediction were confirmed, that settled the matter.


Second, as a debater he was brilliant, fearless, and charming. He won converts in the most surprising places. In a recent article on the late Ralph Harris, I cited the occasion in London when Milton was so fiercely cross-examined by Peter Jay of the London Times that Ralph felt obliged to apologize. Milton said that no apology was necessary since Jay had not been rude. Besides, he added, Peter is clever; he’ll come over to our side of the argument. Less than a decade later, Jay wrote the crucial paragraph in the annual Labour-conference speech of Prime Minister Callaghan. It shocked his Labour audience, abandoned 30 years of official British Keynesianism, and embraced Friedmanite monetarism three years before Mrs. Thatcher came to power. That’s winning the debate.


Third, along with Hayek and a handful of others, Friedman helped to found the Mont Pelerin Society in 1947 to keep alive the classical-liberal tradition when it seemed lost in the postwar atmosphere of socialist inevitability. Over the years the MPS grew into a large and influential intellectual network that both supported and spread the ideas of its leading members. Thus, Friedman’s monetarism could rely for support on what Hayek called “second-hand dealers in ideas” in Europe and Asia when he promulgated them in the 1960s. Ralph Harris, for instance, was secretary of the MPS for many years; other members included Keith Joseph and Geoffrey Howe, leading members in the Thatcher governments. The counterrevolution in monetary economics had counterrevolutionaries in waiting around the world. Milton was in a minority, but he was not a lonely voice.


Once Friedman received the Nobel Prize in 1976, he became the principal public spokesman for free-market ideas. Other Nobel laureates disappear into the obscurity of a learned institution; he went on, with his wife Rose (also an accomplished economist), to become a television star through the series Free to Choose. The series was translated into several languages and seems to be showing somewhere in the world at any given moment. When Friedman met Queen Elizabeth, she said: “I know you. Philip is always watching you on the telly.”


He used this unique status to advocate, popularize, and often get adopted a series of public-policy reforms. These ideas were not always conservative, but they reflected a faith in markets and human freedom that equaled the faith of Keynesians in government action. As Allan Meltzer, his friend and fellow monetarist, points out, they include: ending the military draft, floating currencies, earned income tax credits, education vouchers, and drug liberalization. The first three have been adopted — floating currencies because a Friedman prediction (that the fixed-exchange-rate system of Bretton Woods would break down) was once again confirmed by events. Education vouchers are slowly making headway against the opposition of the teachers’ unions. Drug liberalization remains controversial. But few economists have had such success in persuading government to adopt specific policies — let alone to surrender some of its power in doing so.


Milton Friedman was an agnostic, like many of the great liberal thinkers, but he did not exhibit a contemptuous dismissal of religious belief. As Peter Robinson has revealed on National Review Online, Milton thanked him for his promise of prayer for his recovery. He appreciated the sentiment even if he doubted its efficacy. That was a response very typical of Milton’s general outlook. There was a balance, a sanity, a reasonableness, and a decency in him that bore some similarity to the peace of mind offered by deep religious faith. He seemed to be a cheerfully good man who needed neither the consolations of religion nor its restraints on malice.


On the website of the London Social Affairs Unit, William Coleman casts an interesting light on his sunny character:


Friedman’s psychological profile in general was congruent with the free market. The free market is brash, impolitic, competitive, utilitarian, and innovative. Friedman was brash, impolitic, competitive, utilitarian, and innovative. Yet while the free market — like Friedman — is tearless, it should also be allowed that the market, like Friedman, is neither rancorous nor vengeful. For all his unvarnished speech and pungent judgments, Friedman seemed to be without enmity or resentment. He got “along well personally” with Joan Robinson [the Keynesian economist]. He found Andreas Papandreou [the Greek socialist] to be “very helpful.” [Swedish socialist] Gunnar Myrdal was “awfully charming and intelligent.”


One might make the same point in a slightly different way: Friedman was one of those rare souls who seem to be untouched by Original Sin or at least by its more vicious aspects. To be sure, he was not humble. He could hardly avoid knowing that he was far cleverer than almost anyone he met and had greatly benefited the world by his work. But he approached both a mass television audience and a single nervous student with the same democratic respect. He assumed that they were capable of understanding his arguments and that, if he proved his case, they would respond honestly to it. He never despised opponents nor tried to deceive listeners with deliberate obscurity. And he bore the slanders of the 1970s Left with fortitude and astonishing good humor.


His friends will miss a cheerful companion, economics a great explorer, and the world a liberator. Rest in Peace.


Mr. O’Sullivan, an NR editor-at-large, is the author of the newly published The President, the Pope, and the Prime Minister: Three Who Changed the World.




Milton, the Affable Tactician: He knew what to say, but he also knew how to say it. (National Review Online, 070129)


By Greg Kaza


Today, you may have heard, is Milton Friedman Day, a celebration of the late great monetary theorist and winner of the Nobel Prize in economics. In a proclamation, President Bush called Freidman “an extraordinary economist, a revolutionary thinker, and one of America’s greatest citizens.” On Friedman’s passing late last year, National Review founder William F. Buckley Jr. described him as the “dominant economic and libertarian voice of the 20th century.” All true, but Buckley also focused on the economist’s “capacity for friendship and fine company.” This, I believe, is critical. To all who knew him, Friedman was a genuine, sincere, affable, nice guy — a series of linked attributes that served this man, and the advancement of his theories, so very well.


It was in 1976 that Friedman received his award from the Nobel committee “for his achievements in the fields of consumption analysis, monetary policy and theory and for his demonstrations of the complexity of stabilization policy.” It’s easy to forget today just how revolutionary Friedman’s monetary ideas were when they emerged in the decades after World War II. In short, Freidman brought us to the elegant formulation that inflation is a monetary phenomenon, which among other restatements of the quantity theory of money was ignored or rejected by mainstream economists. Keynesianism, and its convoluted demand-side premises, was the consensus, and a stubborn one at that.


Yet Friedman’s ideas eventually, and decidedly, influenced policy at no less an institution then the Federal Reserve.


Prior to Friedman’s emergence on the monetary scene, there were few substantive policy debates among Federal Reserve member banks. In the mid-1960s, however, a battle royal erupted between Friedman sympathizers clustered at the St. Louis Fed and Keynesian skeptics writing missives at the New York Fed. This monetary clash was highly charged, and it continued into the late 1970s and early 1980s when then-Fed chair Paul Volcker at last tamed runaway inflation with an aggressive, hawkish program.


Friedman’s influence on Volcker is still debated a quarter-century later, testament to the high stakes involved. (Imagine Keynes and Friedman looking down at a tree full of popinjays and mockingbirds battling for ears.) But it’s funny how that oft-used term “runaway inflation” has no application to what is now the Fed’s Volcker-Greenspan-Bernanke era — a period known, despite some bumps here and there, for low and relatively stable inflation. Though debate on how to properly manage monetary policy has by no means ceased at the Fed in the last twenty-five years, the parameters of the conversation have: Inflation, in the realm of serious folk, is now a monetary phenomenon, and for this insight we have Friedman to thank.


But now to an important question for Milton Friedman Day: How’d he do it?


The quick answer is that Friedman, in addition to being a master theorist, was a master tactician — although his tactics were of the most affable sort.


To begin, Friedman did not make the tactical error of preaching to the choir. How easy it would have been for Friedman to follow his libertarian instincts and retreat to a safe perch where he could have spent a lazy career basking in the “hear, hear” applause of those demanding sermons. Instead, Friedman built support for his ideas by actively engaging the American people. The best examples were his Newsweek columns on monetary policy and the 10-part PBS television series, Free to Choose. By humanizing his premises, he won converts — and a few grudging critics.


Next, Friedman did not make the procedural mistake of insulting, or talking down to, elected officials. PhD status, whether earned or honorary, does not necessarily translate to the people skills and horse sense required to build the coalitions that result in new policies, laws, and successful litigation. As an advisor to presidents Nixon and Reagan on successful policy initiatives, Friedman succeeded by following the adage, “honey, not vinegar.”


Finally, Friedman and his colleagues identified the government institutions with the power to put their ideas into action. Is it more important to capture the ear of the Fed chair, or the intellectual curiosity of the rank-and-file economists at one of the Fed’s member banks? Well, hooking a curious few worked just fine for Friedman. The St. Louis Fed gave credence to Friedman’s ideas in the 1960s, and a decade later they were debated at the institution’s highest levels.


To be sure, if Friedman were peddling junk, Friedmanism would have stopped well short of a multi-decade march through the lofty halls of the U.S. central bank. But we also must tip our hats to this affable tactician. Milton Friedman knew what to say, but he also knew how to say it for the greatest effect.


— Greg Kaza is executive director of the Arkansas Policy Foundation.




That “Top One Percent” (, 071127)


By Thomas Sowell


People who are in the top one percent in income receive far more than one percent of the attention in the media. Even aside from miscellaneous celebrity bimbos, the top one percent attract all sorts of hand-wringing and finger-pointing.


A recent column by Anna Quindlen in Newsweek (or is that Newsweak?) laments that “the share of the nation’s income going to the top 1% is at its highest level since 1928.”


Who are those top one percent? For those who would like to join them, the question is: How can you do that?


The second question is easy to answer. Virtually anyone who owns a home in San Francisco, no matter how modest that person’s income may be, can join the top one percent instantly just by selling their house.


But that’s only good for one year, you may say. What if they don’t have another house to sell next year?


Well, they won’t be in the top one percent again next year, will they? But that’s not unusual.


Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.


At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.


Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.


These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.


These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas.


Some people’s income in a particular year may be several times what it has ever been before or will ever be again.


Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers — who are never accused of “greed,” by the way.


Just as there may be spikes in income in a given year, so there are troughs in income, which can be just as misleading in the hands of those who are ready to grab a statistic and run with it.


Many people who are genuinely affluent, or even rich, can have business losses or an off year in their profession, so that their income in a given year may be very low, or even negative, without their being poor in any meaningful sense.


This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.


There is no reason for people to give up such luxuries because of a bad year, when they have been making a lot more money in previous years and can expect to be making a lot more money in future years.


Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.


Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.


That especially includes the top one percent, who have become the focus of so much angst and so much rhetoric.




Survey: Wealthier Nations Less Religious (Christian Post, 071105)


“It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.” Results from a recent survey may agree with that familiar Scripture passage.


A Pew Research Center report recently showed that religion is less likely to be central to the lives of individuals in richer nations than poorer ones.


The survey found a strong relationship between a country’s religiosity and its economic status. According to the report, which released last month, African and some Asian countries – which are among the poorest in the world – scored highest on the religiosity scale. Meanwhile, rich Western European countries are among the most secular. Canada, Japan and Israel are also wealthy nations that have low levels of religiosity.


The United States, the wealthiest nation, was “most notably” an exception, scoring higher in religiosity than those in Europe. The level of religiosity in the United States was found to be similar to less economically developed countries such as Mexico. Americans tend to be more religious than the publics of other affluent nations, the survey stated.


Other exceptions include the oil-rich, predominantly Muslim kingdom of Kuwait which has a much higher level of religiosity than its economic situation would predict.


The Pew survey also measured the highly debated relationship between religion and morality. Results showed that in much of Africa, Asia, and the Middle East, there is a strong consensus that belief in God is necessary for morality and good values. In Japan and China, however, the majority does not agree that believing in God is required for morality.


Throughout much of Europe as well as Canada, majorities think morality is achievable without faith.


Opinions were more mixed in the United States. There, 57% say belief in God is necessary to have good values and to be moral while 41% disagree.


In many countries, younger people were significantly more likely to reject the notion that morality requires a belief in God.


Over the last five years, the percentage of people who think believing in God is necessary for good values has increased in nine countries, stayed about the same in 10, and declined in 13. Sharp decreases were found in Eastern Europe, India and Kenya.




Société Générale reveals more details of €4.9 billion fraud (Paris, International Herald, 080127)


PARIS: Société Générale, facing persistent questions over how a lone, junior trader could have set off €4.9 billion in losses, acknowledged that his activities prompted questions from risk managers several times last year, but that the bank never began a wider investigation because his explanations defused any suspicions.


The information came Sunday as the trader, Jérôme Kerviel, 31, spent a second day in police custody, facing questions about what Société Générale asserted was an elaborate, year-long ruse that involved betting billions of dollars of the bank’s money on European stock index futures.


Kerviel’s lawyers denounced Sunday the “media lynching” of their client in recent days and argued that Société Générale “brought the loss on themselves.”


In a five-page statement, the bank outlined how it believed Kerviel combined several different “fraudulent methods” to hide his activity - including using computer access codes of other employees and falsifying documents.


Briefing reporters separately by telephone, Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking arm, said that the discovery of the $7.2 billion fraud, on Jan. 18, and the unwinding last week of the roughly €50 billion worth of risk that was uncovered represented “one of the most difficult periods in the history of Société Générale.”


Mustier also repeated the bank’s assertion that Kerviel appeared to have acted alone.


“We have made extensive checks of his portfolio as well as the portfolios of others to see if there was anything like the types of transactions he was using,” Mustier said. “It seems extremely unlikely” that he had acted with the help of others, he said.


Still, he said, “I cannot guarantee to you 100% that there was no complicity.”


Mustier explained that Kerviel’s role on the trading desk was that of an arbitrageur, which meant that he was entrusted to purchase one portfolio of stock index futures and at the same time sell a similar mix of index futures, but with a slightly different value. The object of arbitrage is to try to make a profit from these differences in value. Because the value gaps between similar financial instruments are usually very small and temporary, this type of activity typically involves trading in very high total nominal amounts.


Kerviel’s fraud, according to the bank, consisted of placing sizeable, real purchases in one portfolio but creating fictitious sales transactions in the second, off-setting portfolio. This gave the impression to risk managers that the risks in the first portfolio were hedged, when in fact they were not. As a result, the bank wound up exposed to massive, one-way bets, or “long” positions. Instead of hedging, which was his job, Kerviel was effectively speculating with the bank’s money.


Mustier said a review of Kerviel’s trading records showed that he first began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size, during the course of the year, he said, but the largest fictitious trades - involving futures contracts on the Dow Jones Euro Stoxx 50, the DAX in Germany and the FTSE index in Britain - were entered in early January.


“Our controls identified from time to time problems with this trader’s portfolio,” Mustier said, although he declined to say when the first questions were raised by risk managers, saying that the bank’s auditors were still investigating.


Each time one of Kerviel’s trades was questioned, Mustier said, Kerviel would describe it as a “mistake” and cancel the trade.


“But in fact, he then replaced that trade with another transaction using a different instrument” to avoid detection, Mustier said.


Mustier also said that Kerviel’s fake trades did not fall into an identifiable pattern.


“He had a lot of various transactions that he would use,” Mustier said. “I don’t think there was ever an exact repeat” of a trade.


In its statement, Société Générale also sought to dismiss speculation that the unwinding of Kerviel’s trades exacerbated the sharp decline in global stock markets early last week.


The bank said it undid its position over the course of three days, from Jan. 21 through Jan. 23. On each of those days, Société Générale’s share of the total trading volume the contracts in question did not exceed around 8%.


Mustier said that that volume compared with Société Générale’s normal share of daily trading volume in those futures of 2% to 4%, though in the cash market, the bank’s trading frequently represented up to 10% of the daily volume.


“In other futures markets where we did not intervene, we have seen performance that was not very different from the performance we saw on the Euro Stoxx, DAX and FTSE,” Mustier said. “That shows that our market impact was limited.”


Kerviel turned himself in to the police Saturday afternoon. French investigators spent the weekend questioning him and poring over documents and computer files seized from Kerviel’s residence and from the bank offices where he had worked.


On Sunday, his lawyers, Elisabeth Meyer and Christian Charrière-Bournazel, accused the bank management of wanting to “raise a smokescreen to divert public attention from far more substantial losses in the last few months,” notably in the area of subprime U.S. mortgage investments.


The lawyers charged Bouton with having published a public letter, under the pretext of reassuring shareholders, that accused Kerviel of fraud. On the contrary, they argued Kerviel actually made the bank a profit of €1.5 billion as of Dec. 31.


Laura Schalk, a Société Générale spokeswoman, declined to comment on the lawyers’ claim.


On Sunday, the head of the financial section of the Paris prosecutor’s office, Jean-Michel Aldebert, said the questioning of Kerviel so far had been “extremely fruitful.”


He declined to give details of what Kerviel had revealed, other than to say that the trader had addressed “the operations that Société Générale described as fictitious.” He said Kerviel had been explaining “what had happened in very interesting ways.”


Aldebert added that Kerviel’s state of mind seemed stable. “According to what he told me, he’s doing fine,” he said.


Société Générale executives had previously described Kerviel as a “fragile being” who had recently faced “family problems.”


Aldebert said a decision had been made to hold Kerviel until Monday morning. He then is expected to be interviewed by a judge.


At the headquarters of the financial police, it was an unusual scene for a Sunday in a part of Paris surrounded by buildings from the 1970s. About 50 journalists with cameras surrounded the building and surged forward when Aldebert emerged to speak to the press. During the course of the day, police cars were seen going in and out of the side entrance with sirens blaring.


There are bars over the windows on the left-hand side of the fourth floor of the 10-story building where Kerviel was being interrogated.


Michel Histel, 62, a retiree who lives nearby and who, like many French people, has been avidly following the story, described the scene as “very exceptional.”


“What’s so surprising about this to me is that they brought this young man so quickly to the financial police headquarters,” Histel said.


“What is a little bit revolting to me is that people are attacking this young man. But this bank has been playing with fire for a long time,” Histel said, referring to Société Générale’s leadership in financial derivatives products.




World markets plunge on U.S. recession fears (National Post, 080121)


LONDON — World stocks tumbled on Monday as fears gripped investors that a sliding U.S. economy would drag others down with it.


Demand for safe-haven bonds and currencies soared.


MSCI’s main world stock index, a benchmark gauge of stock markets globally, was down 2.9%, falling below its 2007 low to levels last seen in December 2006.


“A mixture of weak global economic data, poor corporate data, increasing fears about the possibility of a recession ... have left investors drowning in a sea of red,” said Henk Potts, equity strategist at Barclays Stockbrokers.


Britain’s top share index dived more than 5%, on track for its biggest daily drop since the Sept. 11, 2001 attacks in the United States.


By 1214 GMT the FTSE 100 skidded 312 points or 5.3% to 5,589.7, hitting its lowest since June 2006. The index has shed more than 13% since the start of the year as mounting recession fears have pummelled financial markets around the globe.


The pan-European FTSEurofirst 300 was down 5.8%, taking its 2008 year-to-date losses to more than 15%.


Japan’s benchmark Nikkei average earlier lost 3.86% to close at a two-year low and MSCI’s main emerging market stocks benchmark was down 3.9%.


“Risk aversion is widespread as the market thinks (the economic downturn) is not just a U.S. centric story,” said Paul Robson, currency strategist at RBS Global Banking.


Indian shares tumbled almost 11% to a four-month intra-day low, suffering their biggest intra-day points fall ever on margin calls and foreign selling, before paring their losses to end down 7.4%.


The drop of more than 2,000 points triggered a brief halt in afternoon trading on the benchmark BSE 30-share index.


“It was panic,” said Nikhil Jain, an independent trader.


“You should have seen the faces of people playing in the futures and options market. People even said ‘I won’t play in the markets any more’.”


U.S. stock markets were closed on Monday for a holiday, but investors in Asia and Europe were carrying through from last week’s concern on Wall Street that a fiscal stimulus proposed by President George W. Bush would not be enough to stop the U.S. economy from falling into recession.


Mr. Bush called for a package worth up to US$150-billion in tax cuts and other measures.


Stock markets have been in full retreat this year over the economic fears. The broad U.S. S&P index had its biggest weekly fall since July 2002 last week.


Many indexes are now more than 20% below their recent cycle peaks, a traditional sign that what is going on is not just a correction but the start of a bear market.


Such falls sometimes signal to large investors that it is time to buy. But leading investment bank Morgan Stanley said on Monday that that was not the case now, at least as far as Europe was concerned.


“We are not compelled to buy yet despite bearish sentiment,” its European equity strategy team said in a note. “We continue to prefer cash over equities.”




The global equity market weakness prompted currency investors to liquidate risky positions, lifting the low-yielding Japanese yen while the dollar gained on the view no country will escape the economic downturn.


The yen rose to a 2-1/2 year high against the dollar and high-yielding currencies in general sold off.


The dollar was around 1% weaker against the yen at 105.72 yen. The euro was around 1.8% weaker against the yen, slipping below 154 yen for the first time since late August.


The euro was also 0.9% down on the day against the dollar at US$1.4485, slipping below US$1.45 for the first time in a month.


The Canadian dollar was at US97.01.


Demand rose for safe-haven government bonds.


The interest rate-sensitive two-year Schatz yield was at 3.355%, sinking 12.2 basis points. It’s down 65 basis points so far in January, well on track for its biggest monthly decline in over 10 years, according to Reuters charts.


The 10-year Bund yielded 3.911%, down 6.7 basis points.




Brussels warns France on protecting Société Générale (Paris, International Herald, 080201)


PARIS: As numerous European banks assess whether to make a bid for Société Générale, still reeling from a devastating €4.8 billion trading loss, regulators in Brussels issued a stark warning to the French government Thursday against any effort to thwart open competition to protect one of its corporate jewels.


“In previous banking cases, we made it quite clear that the government should not interfere by putting their national companies first,” Charlie McCreevy, the European Union’s internal markets commissioner, said Thursday through a spokesman. “The rules on free movement of capital and the legislation in place means that potential bidders must be treated in a nondiscriminatory way in the situation of cross-border takeovers.”


McCreevy was responding after several senior politicians hit the French airwaves Thursday to make clear that Paris would not stand by and watch Société Générale, weakened by the largest trading scandal in financial history, be wrested from French hands.


“The state will not remain just a bystander and leave Société Générale at the mercy of any predator,” Henri Guaino, a senior adviser to President Nicolas Sarkozy, told BFM television.


Jean-Pierre Jouyet, the country’s European affairs minister, said during an interview with LCI television that France considered banking to be a “sensitive” sector of the nation’s economy. “It’s normal that the public powers look at whose hands French money is in.”


France has a history of butting heads with European regulators when it has moved to shield national champions from takeovers and bankruptcy.


In 2004, Brussels threatened to take France to court when Sarkozy, then the finance minister, bailed out Alstom, one of France’s premier heavy engineering firms - a fight that ultimately ended when the two sides cut a deal to save the troubled company. Last year, European Union authorities assailed the French government for shielding Gaz de France, a giant natural gas company, from a foreign takeover. In 2004, Sarkozy engineered a merger of two French drug companies, Aventis and Sanofi, to stave off a bid by a Swiss rival, Novartis.


In the early 1990s Paris also swooped in to save the bank Crédit Lyonnais, at a cost of $20 billion to French taxpayers.


Société Générale’s huge losses, linked to the unwinding last week of tens of billions of dollars in unauthorized trades by a lone futures trader, Jérôme Kerviel, have damaged management’s credibility with shareholders and clients, stirring fears that a rival - French or foreign - could seize the moment to make a hostile bid for the bank.


Daniel Bouton, Société Générale’s embattled chief executive, has fiercely resisted the idea of a merger in the past. Instead, he has preferred to remain independent despite the fact that it meant increased pressure to turn to risker activities like derivatives trading to bolster revenue, while keeping a tight lid on operating costs, said Yves Laulan, a former Société Générale chief economist in charge of risk management.


“Bouton has become the victim of his own strategy,” Laulan said.


France’s largest bank by market value, BNP Paribas - which made a failed grab for Société Générale in 1999 - is seen by many analysts as a natural buyer. But several other European financial powerhouses, including BBVA and Banco Santander of Spain, UniCredit of Italy and HSBC Holdings of Britain, are also considered potential bidders.


BNP Paribas confirmed Thursday that it was considering another bid for its French rival, though a spokesman dismissed speculation that any offer was imminent. “Like everyone in Europe we are thinking about what this situation means for us,” he said.


BNP’s French pedigree gives it a political advantage in any bidding contest for Société Générale. Analysts say the parts of Société Générale’s business that BNP covets most are its French retail banking network as well as its position - the current trading scandal notwithstanding - as an innovator and global leader in asset management and derivatives trading.


But BNP and Société Générale both have sizeable investment banking businesses, and analysts said that a merger would likely result in significant - and politically unpopular - layoffs. The BNP chief executive, Baudouin Prot, has said repeatedly in recent years that the two banks’ overlap in investment banking was so large that combining with Société Générale would erode shareholder value.


That has prompted some observers to suggest that Société Générale could be broken up, with the investment banking arm possibly being sold to another, potentially foreign, group.


At current share prices, a combined BNP Paribas-Société Générale would have a market value of around $146 billion, which would easily make it the second-largest bank in Europe by market value after HSBC, which is worth around $177 billion.


Banco Santander of Spain is valued at $109 billion, followed by UniCredit of Italy at $96 billion.


EU legal experts say that a merger of Société Générale and BNP Paribas would most certainly receive close scrutiny from Brussels.


In many circumstances, the European Commission lets national competition authorities review mergers if merging companies do most of their business in a single country, like France.


But a merger involving Société Générale could be an exception because of the significant amount of business that banks of its size do overseas, and because of a danger of interference by the French government in such a sensitive case, said Sylvie Maudhuit, a partner with the law firm Howrey in Brussels.


“This could be a very politically charged merger and the European Commission probably would want to keep a close eye on it to make sure there is a fair review,” Maudhuit said.


Maudhuit added that the banking sector had become more concentrated in Europe over recent years and that regulators could demand the sale of certain businesses, particularly if there are major overlaps between Société Générale and a prospective merger partner.




Amid grain shortages, resistance relaxes to modified wheat (Paris, International Herald, 080421)


Soaring food prices and global grain shortages are bringing new pressures on governments, food companies and consumers to relax their longstanding resistance to genetically engineered crops.


In Japan and South Korea, some manufacturers for the first time have begun buying genetically engineered corn for use in soft drinks, snacks and other foods. Until now, to avoid consumer backlash, the companies have paid extra to buy conventionally grown corn. But with prices having tripled in two years, it has become too expensive to be so finicky.


“We cannot afford it,” said a corn buyer at Kato Kagaku, a Japanese maker of corn starch and corn syrup.


In the United States, wheat growers and marketers, once hesitant about adopting biotechnology because they feared losing export sales, are now warming to it as a way to bolster supplies. Genetically modified crops contain genes from other organisms to make the plants resistance to insects, herbicides or disease. Opponents continue to worry that such crops have not been studied enough and that they might pose risks to health and the environment.


“I think it’s pretty clear that price and supply concerns have people thinking a little bit differently today,” said Steve Mercer, a spokesman for U.S. Wheat Associates, a government supported cooperative that promotes American wheat abroad.


The group, which once cautioned farmers about growing biotech wheat, is working to get seed companies to restart development of genetically modified wheat and to get non-U.S. buyers to accept it.


Even in Europe, where opposition to what the Europeans call Frankenfoods has been fiercest, some prominent government officials and business executives are calling for faster approvals of imports of genetically modified crops. They are responding in part to complaints from livestock producers, who say they might suffer a critical shortage of feed if imports do not accelerate.


In Britain, the National Beef Association, which represents cattle farmers, issued a statement this month demanding that “all resistance” to such crops “be abandoned immediately in response to shifts in world demand for food, the growing danger of global food shortages and the prospect of declining domestic animal production.”


The chairman of the agriculture committee in the European Parliament, Neil Parish, said that as prices rise, Europeans “may be more realistic” about the issue of genetically modified crops.


“Their hearts may be on the left, but their pockets are on the right,” he said.


With food riots in some countries focusing attention on how the world will feed itself, biotechnology proponents see their chance. They argue that while genetic engineering might have been deemed unnecessary when food was abundant, it will be essential for helping the world cope with the demand for food and biofuels in the decades ahead.


Through gene splicing, the modified crops now grown - mainly corn, soybeans, canola and cotton - typically contain bacterial genes that help the plants resist insects or tolerate a herbicide that can be sprayed to kill weeds while leaving the crop unscathed. Biotechnology companies are also working on crops that might need less water or fertilizer, which could have a bigger impact on improving yield.


Certainly any new receptivity to genetically modified crops would be a boon to American exporters. The United States accounted for half the world’s acreage of biotech crops last year.


But substantial amounts of corn, soy or canola are grown in Argentina, Brazil and Canada. China has developed insect-resistant rice that is awaiting regulatory approval from Beijing.


The pressure to re-evaluate biotech comes as prices of some staples like rice and wheat have doubled in the last few months, provoking violent protests in several countries including Cameroon, Egypt, Haiti and Thailand. Factors behind the price spikes include the diversion of crops to make biofuel, rising energy prices, growing prosperity in India and China, and droughts in some regions - including Australia, a major grain producer.


Biotechnology still certainly faces obstacles. Polls in Europe do not yet show a decisive shift in consumer sentiment, and the industry has had some recent setbacks. Since the beginning of the year, France has banned the planting of genetically modified corn while Germany has enacted a law allowing for food to be labeled “GM free.”


A new international assessment of the future of agriculture, released last week, gave such tepid support to the role genetic engineering could play in easing hunger that biotechnology industry representatives withdrew from the project in protest. The report was a collaboration of more than 60 governments, with participation from companies and nonprofit groups, under the auspices of the World Bank and the United Nations.


Hans Herren, the co-chairman of the project, said that providing more fertilizer to Africa would improve output much more than genetic engineering could. “What farmers really are struggling with are water issues, soil fertility issues and market access for their products,” he said.


Opponents of biotechnology say that they see not so much an opportunity as opportunism by its proponents to exploit the food crisis. “Where politicians and technocrats have always wanted to push GMOs, they are jumping on this bandwagon and using this as an excuse,” said Helen Holder, who coordinates the campaign against biotech foods for Friends of the Earth Europe. GMO refers to genetically modified organism.


Even Michael Mack, the chief executive of the Swiss company Syngenta, an agricultural chemical and biotechnology giant, cautioned that the industry should not use the current crisis to push its agenda.


Whatever importance biotechnology can play in the long run, food shortages are making it harder for some food buyers to avoid engineered crops.


The main reason some Japanese and South Korean makers of corn starch and corn sweeteners are buying biotech corn is that they have dwindling alternatives. Their main supplier is the United States, where 75% of corn grown last year was genetically modified, up from 40% in 2003.


“We cannot get hold of non-GM corn nowadays,” said Yoon Chang-gyu, director of the Korean Corn Processing Industry Association.


But the tightening global supply has made it harder to get nonengineered corn from elsewhere. And as corn prices soar, millers and food companies are less able to pay the surcharge to keep nonengineered corn separate from biotech varieties. The surcharge itself has been rising.


Yoon said nonengineered corn cost Korean millers about $450 a ton, up from $143 in 2006. Genetically engineered corn costs about $350 a ton.


In Europe, livestock producers say that regulations on genetically modified crops could choke feed supplies at a time when they are already reeling from higher prices. Even after a new genetically engineered variety is approved for growing in the United States, it might take several years for Europe to approve it for import.


Moreover, European rules require a whole shipment of grain to be turned back if it contains even a trace of an unapproved variety. Such a problem last year disrupted exports of corn gluten, a feed product, from the United States to Europe.


Feed makers and livestock producers want faster approvals and a relaxation of the rules to allow for trace amounts of unapproved varieties in shipments.


Even in the United States, where genetically engineered food has been generally accepted, the wheat industry has had to rethink its reluctance to accept biotech varieties.


Because about half of the U.S. wheat crop is exported, farmers and processors feared that foreign buyers would reject their products. Facing resistance from farmers, Monsanto in 2004 suspended development of what would have been the first genetically modified wheat.


But some farmers and millers now say that the lack of genetically engineered wheat has made growing the grain less attractive than growing corn or soybeans. That has, in turn, contributed to shrinking supplies and rising prices for wheat.


Milling & Baking News, an influential trade newspaper in Kansas City, Missouri, said in an editorial that companies using wheat were now paying the price for their own “hesitancy, if not outright opposition” to biotechnology.




Food crisis adds to global security worries: UN (National Post, 080420)


ACCRA — Higher food prices risk wiping out progress towards reducing poverty and, if allowed to escalate, could hurt global growth and security, United Nations Secretary-General Ban Ki-moon said on Sunday.


Opening a UN trade and development conference in Ghana, Mr. Ban pledged to use the full force of the world body he heads to tackle the price rises, which threaten to increase hunger and poverty and have already sparked food riots in Asia and Africa.


“I will immediately establish a high-powered task force comprised of eminent experts and leading authorities to address this issue,” Mr. Ban said, after a group of the world’s 49 least developed countries called on Saturday for such a team.


The UN head warned the UN Conference on Trade and Development (UNCTAD) meeting that huge increases in prices of staple foods such as cereals since last year could erase progress made towards goals set by the U.N. of halving world poverty by 2015.


“The problem of global food prices could mean seven lost years ... for the Millennium Development Goals,” he said. “We risk being set back to square one.”


Steps by several countries to ban exports of rice and wheat or introduce incentives for food imports also threatened to distort international trade and aggravate shortages, Mr. Ban said.


“If not handled properly, this crisis could result in a cascade of others ... and become a multi-dimensional problem affecting economic growth, social progress and even political security around the world,” he told the conference.


Meanwhile, the United Nations’ food envoy told an Austrian newspaper on Sunday global food price rises are leading to “silent mass murder” and commodities markets have brought “horror” to the world.


Jean Ziegler, UN special rapporteur on the right to food, an Austrian newspaper told Kurier am Sonntag that growth in biofuels, speculation on commodities markets and European Union export subsidies mean the West is responsible for mass starvation in poorer countries.


Mr. Ziegler said he was bound to highlight the “madness” of people who think that hunger is down to fate.


“Hunger has not been down to fate for a long time — just as (Karl) Marx thought. It is rather that a murder is behind every victim. This is silent mass murder,” he said in an interview.


Mr. Ziegler blamed globalization for “monopolising the riches of the earth” and said multinationals were responsible for a type of “structural violence.”


“And we have a herd of market traders, speculators and financial bandits who have turned wild and constructed a world of inequality and horror. We have to put a stop to this,” he said.


Mr. Ziegler said he believed that one day starving people could rise up against their persecutors. “It’s just as possible as the French Revolution was,” he said.


World Bank President Robert Zoellick has warned that rising food prices could push at least 100 million people in low-income countries into poverty.


West African countries such as Ghana have been among the worst affected by rising food prices caused by factors including poor harvests, record fuel prices, growing demand and tight international supplies. Countries throughout the region, from Mauritania to Cameroon, have witnessed food riots.


Ghanaian President John Kufuor expressed hope the conference would allow developing countries to strengthen economic cooperation and trade, and increase pressure on rich countries to end agricultural subsidies which worsened poverty in Africa.


“Ghana and other African countries are subject to the vagaries of global markets, which leave them with no control over the prices of their own commodities,” he said, giving China and India as examples of developing countries that had learned how to benefit from trade and globalization.


Brazilian President Luiz Inacio Lula da Silva joined both Ban and Kufuor in appealing to all countries to wrap up negotiations for a global trade pact intended to boost the world economy and promote development.


Known as the Doha Round, the negotiations launched in 2001 have stalled and missed past deadlines but momentum has built up in the past two months.


“Achieving success in the Doha Round has become an unavoidable task,” Mr. Lula said. “Multilateral trade systems can and should contribute to more equitable development.”


World Trade Organization (WTO) Director-General Pascal Lamy, also attending the opening of the April 20 to 25 conference, said a breakthrough in the Doha Round talks could be achieved in the next few weeks.




Feed My people (World Magazine, 08003)


For Christian relief groups, the job of feeding the world’s poor just got harder. Understanding what sparked the food price spike is crucial to surviving and providing in the current market crisis | Mindy Belz


In Haiti, a boy shows his tongue after eating a mud cookie.


A dramatic thing happened at the corner of 4th Street and 4th Avenue South in Minneapolis in February. Inside the cavernous Arts and Crafts trading room of the oldest grain exchange in the world, hard red spring wheat hit its highest price in history. For an unprecedented five straight days at the 10-story building that has housed the grain exchange since 1907, the wheat price rose the maximum allowed each day.


In the grain pit, where “open outcry” trading accounts for the bulk of transactions—over 35 years after NASDAQ introduced electronic trading—wheat traders buy and sell futures contracts on behalf of farmers, elevator operators, and food processors like Archer Daniels Midland. Hard red spring wheat at 15% has the highest protein content of any wheat and is sought after for breads, muffins, bagels, pizza crust, and other flour products the world over.


Minneapolis is the principal exchange for hard red, handling up to a million bushels in trades a day. During the last week of February the commodity traded as high as $25 a bushel. Normally it trades at $3 to $7 a bushel.


But no one is remembering normal these days. From the pizzerias of Brooklyn to the street vendors of Cairo and the schoolrooms of south Sudan, February’s record prices in wheat and subsequent high prices of other commodities are still reverberating outward, provoking everything from localized customer revolts to outright street clashes like those in Haiti last month.


“It was the perfect storm,” said Rita Maloney, manager of marketing, communications, and media relations for the Minneapolis exchange. “A lot of factors came together—it’s not as easy as saying it was ethanol production or weather issues or such.”


Minneapolis pit traders conditioned to the rough-and-tumble of face-to-face trading, the stomping of the hardwood floors, the shouting and flailing hands and the occasional cursing, were not accustomed to the run-up: Some traders took in six figures a day during the February spike in wheat. And while record-high prices have fallen off—wheat delivered in March fell to $20 a bushel, still up from about $5 a bushel a year ago—the exchange has had “week after week” of historically high trading volume, Maloney told WORLD. The number of wheat contracts traded at the exchange is up 29% compared to 2007.


But for consumers the high prices are a bitter pill. New Yorkers complain that pizza prices have increased $.50-$1.00 per slice. Domenico DeMarco, owner of Di Fara Pizza in Brooklyn, where pizza sold for 20 cents a slice when he opened in 1964, is unapologetic about raising the price of one of his slices from $3 to $4 a few months ago. The rising cost of fresh ingredients, including flour, forced him to, he told the Associated Press.


In Boston, where chain bakery Au Bon Pain is headquartered, senior vice president of marketing Ed Frechette called the price increases “dramatic.” With locations in 18 states and the District of Columbia and overseas, Frechette told WORLD: “We tend to buy long-term contracts for our wheat so we have not been hit quite as hard on our items as some other companies. We have taken the price up on a few of our baked items and sandwiches but we are trying not to pass on the costs to our guests if possible.”


What’s behind the suborbital prices? One thing is the age-old maxim of supply and demand: U.S. wheat supplies are at a 60-year low, according to the U.S. agriculture department, with global stocks at a 30-year low.


The reasons behind the shortage are varied: In the United States more farmers are putting their acreage into corn production for ethanol; drought and other weather-related issues in the United States and abroad have been a factor, as have political upheaval in former breadbaskets like Zimbabwe, and trade restrictions in high-producing states like Ukraine and Kazakhstan. What that means is that the United States may actually import wheat from Canada this year to meet its own demands. And that in turn siphons off the stockpile for purchasers with growing demand, like China and India.


“We are in uncharted territory,” said London trader James Bower. “The market is desperately trying to tell global producers that we need more acres for wheat production.”


Analysts hope that upcoming harvests in India, Mexico, and Turkey will relieve wheat shortages. But wheat is not the only commodity on an upward trajectory. Rice, a staple food for nearly half the world’s population, rose dramatically in April: The price per metric ton of Thai medium-quality rice, the global benchmark, rose from $760 to $880 in one week. According to the World Bank, global food prices have increased by 83% in the last three years.


The increases are forcing middle-class Americans to dig further into their pockets to buy a loaf of bread. In poor countries sudden price hikes are forcing those who live on less than a dollar a day—the “bottom billion”—to go without.


Investors and traders have been eyeing the food trends for months, but public officials found themselves kicked into the new food reality in April when Haitians rioted and attacked UN troops over food shortages. Hungry protesters stormed the presidential palace April 8 to demand the resignation of President René Préval over food prices that have risen by 40% in less than a year.


The protesters confronted UN peacekeepers, forcing them to fire rubber bullets and tear gas on crowds gathered outside the palace. Some ate grass in front of soldiers and cameras to demonstrate their desperation. Elsewhere other Haitians have come to depend on a traditional stomach-filler known as “mud cookies” or “clay cakes”—a health hazard popularized as a snack and sold on the streets, made from a mixture of dirt, vegetable oil, and salt. Haiti is one of many poor countries that imports nearly all of its food, including 80% of its rice.


Before the street violence eased, Préval announced a price cut on rice and dismissed his prime minister on April 12. The following day a UN police officer bringing food to his unit was pulled from a car and killed execution style in Port-au-Prince. Five others also were killed in the unrest.


At a weekend conference World Bank president Robert Zoellick warned that the crisis could mean “seven lost years” for those fighting poverty: “While many are worrying about filling their gas tanks, many others around the world are struggling to fill their stomachs, and it’s getting more and more difficult every day,” Zoellick said. On April 14, President George Bush ordered that $200 million in emergency food aid be made available to meet “unanticipated food aid needs in Africa and elsewhere.”


But price increases are hitting hardest where reliance on government-supported food is highest. In Egypt, where 85% of bread (or 230 million loaves a day) is subsidized, rising prices are forcing more people to depend on government bread and led to a nationwide strike April 6. At least seven people in Cairo have been killed in bread-line brawls.


In sub-Saharan Africa UN food distribution officials have in the past ladled out grain using a red plastic cup for the day’s individual ration. Six family members? Six cups full. Now this same ration cup is filled only two-thirds full, they say. The UN’s World Food Program has admitted that, despite plans to feed 70 million people this year, it now faces a $500 million budget shortfall.


In south Sudan that means a school lunch program that feeds 2,000 students is in jeopardy. Three schools operated by Servant’s Heart Relief are all that exist to serve a total population of over half a million spread over 15,000 square miles. Many students walk more than five miles each way to school. “A school lunch is important, both because many students don’t have any food at home to feed them and because of the long distances,” said Servant’s Heart director Dennis Bennett. The UN’s World Food Program in the past delivered food by airplane to each school in the remote Eastern Upper Nile province.


This year, due to the rising cost of food globally and UN cutbacks, the World Food Program delivered food only to one location—more than 50 miles away from any of the schools. Now locals and Servant’s Heart must raise money for transport of over 50 metric tons through 50 miles of jungle.


“This expedient probably saved WFP almost 50% of the cost of the food, but the cost did not go away,” said Bennett. “If we can’t raise the money and get the food to the schools, many of the students will have to stop attending.”


For aid groups like Servant’s Heart, the crisis is reviving old debates about how best to feed the poor without institutionalizing their dependency. World Vision International president Dean Hirsch told an international food aid conference April 15 that what works best is what works. “Far more important for World Vision than the method of food aid is that vulnerable children get the food they need. Our focus, therefore, is on outcomes: that no child should go hungry, be malnourished, underweight or stunted,” he told attendees at a conference sponsored by the U.S. government in Kansas City, Mo.


Hirsch said that his agency is testing the various food-aid models in a pilot project in Lesotho in South Africa. “In some communities we are distributing exclusively cash to the beneficiaries. In other communities we are distributing a combination of cash and food (50% cash and 50% food), and in some other communities we are distributing only food.”


World Vision has similar pilot projects in Pakistan and Zambia. “These pilot programs have been launched prior to the major increases in food costs, in order to test and research potential ‘best practices’ before expanding those approaches,” said Walter Middleton, vice president for World Vision International’s food programming and management group.


Aid groups wrestle with whether it is best simply to give hungry people food or to allow them to earn money to “buy” it. For World Vision, whose food aid programs total $340 million or about 15% of its overall budget, testing what kind of short-term relief works best is part of a two-pronged approach: “To respond to the short-term crisis caused by the current increases in food costs, we are calling for an immediate increase in resources, both public and private. People are having problems feeding their families and need immediate help,” Middleton told WORLD.


Long term, the aid group believes, wealthy countries have an obligation to assist poor countries “to build stable food supplies and for them to benefit economically from increases in commodity prices by investing in sustainable agriculture,” Middleton said. “It is a tragedy that many small farmers around the world are not benefiting from the increased return from selling crops at higher prices.”


The new fight to feed the world’s poor may have hit suddenly but will not go away overnight. Wheat analyst Austin Damiani of Minneapolis-based Frontier Futures told WORLD: “General inflation and the weakness in the U.S. dollar are exacerbating prices. When the dollar goes down, then investors buy commodities. If the dollar rallies, then you will see investors with money in commodities put money back into government securities, into cash.” That could help bring food prices down.


When finance ministers and central bank heads of the seven leading industrialized nations met in April, analysts like Damiani hoped they would take action to support the sagging U.S. dollar. But that did not happen, Damiani noted. Instead they emphasized emergency measures like shipping stockpiles of grain and underwriting the cost of increasingly expensive food donations to poor countries. In the absence of a change in monetary policy, are U.S. and other consumers looking at long-term food inflation? Damiani said, “Yes, I think so.”




‘New hunger’ felt as food prices soar (National Post, 080401)


Sharply rising prices have triggered food riots in recent weeks in Mexico, Morocco, Senegal, Uzbekistan, Guinea, Mauritania and Yemen, and aid agencies around the world worry they may be unable to feed the poorest of the poor.


In the Philippines, officials are raiding warehouses in Manila looking for unscrupulous traders hoarding rice, while in South Korea, panicked housewives recently stripped grocery-store shelves of food when the cost of ramen, an instant noodle made from wheat, suddenly rose.


The shadow of “a new hunger” that has made food too expensive for millions is the result of a sudden and dramatic surge in food prices around the world.


Rising prices for all the world’s crucial cereal crops and growing fears of scarcity are careening through international markets, creating turmoil.


Last Thursday, as world rice prices soared by as much as 30% in one day, Egypt decided to suspend rice exports for six months to meet domestic demand and to try to limit price increases.


That was bad news for its main rice customers — Turkey, Lebanon, Syria and Jordan.


Egypt’s move was matched by Vietnam, the world’s second-largest rice exporter after Thailand, which cut exports by 25% and ordered officials not to sign any more export contracts this year.


India and Cambodia also rushed to curb their exports in order to have enough supplies to feed their own people.


With crude oil soaring above US$100 a barrel, higher fuel prices have driven up the cost of production and increased transportation costs for all foods.


Pests in Southeast Asia, a 10-year drought in Australia and a 45-day cold snap in China have combined to aggravate the situation.


At the same time, millions of people in China and India have suddenly become relatively wealthy and are changing their eating habits, consuming more meat and chicken, which places a huge demand on cereal stocks.


In China, per-capita meat consumption has increased 150% since the 1980s. But producing more meat requires more feed to raise more animals.


“You simply feed less people on maize [corn] via cattle than you do in maize direct,” said John Powell, the UN World Food Program’s (WFP) deputy director of external programs in Rome.


Also influencing the food crisis is the move in North America and Europe to biofuel in an effort to ease global warming and reduce reliance on imported energy.


A surge in demand for biofuel has resulted in a sharp decline in agricultural land planted for food crops. About 16% of U.S. agricultural land formerly planted with soybeans and wheat is now growing corn for biofuel.


“For the first time in history, there is a clear link between the price of fuel and the price of food,” Mr. Powell said.


“If there were a miraculous 20% increase in the quantity of food production, we would not know what would go toward increased food consumption and what would go to biofuels.


“Where it would go is where the prices are best.”


Rice is a staple food for half the world’s population. But the sudden surge in prices and restrictions on exports come at a time when stockpiles of rice are at their lowest level in decades.


At the moment, world rice inventories are said to stand at a mere 72 million metric tonnes — about 17% of what the world consumes annually.


The low stockpiles create a market in which any supply disruption will result in radical price swings.


They also complicate delivering foreign aid to those most in need.


The WPF, which feeds 73 million of the world’s most destitute each year, says its costs have increased 55% since June. Unless it gets US$500-million in emergency funding, it may soon have to reduce feeding programs.


Experts predict world food markets will be locked into an inflationary spiral for at least four years, but some say the crisis could linger for a decade or more.


“There is pretty much a sense that what we are seeing is a step change or a structural change and not a peak to be followed by a trough,” Mr. Powell said.


“In other words, we are into an era of high food prices. It’s not just volatility, it’s a step increase.”




Food boom: Canada’s growing wealth (National Post, 080216)


Many times over the years, Gerrid Gust wondered if he’d made a mistake by going to work on the family farm with his father and brothers. This year, all trace of doubt has been blown away by the spectacular and unprecedented boom in crop prices, which is transforming the Prairies.


“I told my wife that when canola hit $12 we’d remodel the kitchen, and it happened a lot sooner than I expected,” he says with a laugh. Thanks to soaring grain prices, the 32-year-old Mr. Gust is not only fixing up his house, he’s also been able to pay down some bills and start setting aside some cash in case one of his neighbours decides to sell and he wants to make an offer.


For more than a century, Mr. Gust’s family has been growing wheat in central Saskatchewan, but past decades have been tough. Growing up, he watched as other farming families gradually lost hope and moved away to the cities, leaving their houses to quietly fall into decay.


But since the grain boom took shape about 18 months ago, that’s all changed. One by one the abandoned farmsteads are being re-occupied, sometimes by returning farmers, but often as not by people from other provinces looking to own a piece of Saskatchewan’s rising real estate. In the nearby Davidson, a tiny farming community that has changed little over the years, there’s a housing boom going on, the biggest in 30 years, says Gust.


Signs of better economic times are everywhere on the Prairies. Tractor dealerships can’t keep up with demand. Land prices are skyrocketing, with acreages in sought-after regions doubling in value in less than two years. Ethanol plants are popping up everywhere. “There’s a lot of optimism in the country,” says Mr. Gust.


For decades, grains like wheat and barley were plentiful and affordable. But since mid-2006, some common wheat varieties have nearly tripled in value, with most of the gain taking place over the last eight months. Last week, wheat soared to a record high of just over US$11 a bushel on the Chicago Board of Trade.


Corn, which averaged around US$2.50 for years, has doubled. Soybeans used to trade for less than US$7.50 a bushel, but have recently jumped to more than US$13 in Chicago. Numerous other crops, from malting barley to lentils, are also close to all-time highs.


The main driver is new demand from China and India, where an emerging middle class is shifting to a higher-quality diet. On top of that, the rise of the biofuel industry is creating additional demand for corn and canola, used in the production of biodiesel. A third factor is a succession of droughts in the Ukraine, Australia and other major crop-growing regions that has put a crimp in global capacity.


At the same time, the world’s inventories - the cusion between supply and demand - are at a 30-year low.


“We are consuming more than we are producing - that’s the fundamental situation,” says Marlene Boersch, a partner at Mercantile Consulting Venture in Winnipeg. According to Ms. Boersch, the recent price moves, especially in wheat, are “extraordinary and unprecedented... This has never happened before.”


And it is not just farmers who are benefiting. Buhler Industries Inc. of Winnipeg makes giant, four-wheel drive tractors that are popular among grain growers. About the size of small house, they come with leather upholstery, climate control - all the features you would expect in a luxury SUV - plus something called “AutoSteer,” a GPS-based autopilot system that frees the farmer up for other tasks, such as checking out the latest grain prices on his BlackBerry.


Despite the $300,000 price tag, Buhler can’t make them fast enough. “We’re back ordered until the middle of the year,” says Adam Reid, the advertising manager. “Everything coming off the line is spoken for until the middle of summer.”


Late last year, Buhler was snapped up by a rival manufacturer. Rostselmash of Russia forked out $187-million for the company in a bid to secure the supply it needed to meet the demands of its own customers.


Over at Morris Industries Ltd. in Saskatoon, another farm machinery manufacturer, owner Casey Davis won’t disclose sales, but offers that demand has been “extremely positive.”


Still, one of the biggest effects of stronger grain prices has been a rise in land prices. In Saskatchewan especially, home to about half of Canada’s arable land, the impact has been dramatic. For decades, cropland values were in the doldrums. With crop prices soaring and an active property market, prices in some sought-after regions are doubling in value.


Doug Emsley, a Regina-based entrepreneur, was one of the first to recognize the potential. In Canada, aside from the Saskatchewan Wheat Pool (which recently changed its name to Viterra) and a handful of fertilizer producers, there are few large public companies with direct links to agriculture. About two and a half years ago, Mr. Emsley set up Agricultural Development Corp., an investment company focused on agricultural real estate. The plan is to buy land and manage it, providing investors with exposure to the profits from farming as well as land appreciation.


The company has just completed its third investment pool - Assiniboia Farmland Limited Partnership 3 - and Mr. Emsley has high hopes for a fourth.


“We were fortunate enough to be the first to get into this business and the opportunities are significant.”


And the farmers themselves are also, finally, reaping some rewards. “You now see satellite dishes on farms because people need access to the Internet and international grain markets. Farmers are doing those things themselves instead of relying on others because the technology allows them to do that,” says Mr. Emsley.




Rising inflation in developing countries worsens problem in West (Paris, International Herald, 080407)


BAT TRANG, Vietnam: The free ride is ending. For decades, Westerners have imported goods produced ever more inexpensively from a succession of low-wage countries - first Japan and Korea, then China, and now increasingly places like Vietnam and India.


But mounting inflation in the developing world, especially Asia, is threatening that arrangement. Not just in China, where rising energy and labor costs have already made exports to the United States and Europe more expensive, but in the lower-cost alternatives to China, too.


“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.


It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to their customers.


Developing countries have had bouts of inflation before - indeed, some are famous for them, like Brazil, which saw triple-digit inflation in the late 1980s and early 1990s.


But two things make this time different, especially in the United States, where the possibility of recession looms.


First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar.


That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.


Asian businessmen say they do not have a choice. “This is a tough time to do business,” said Le Hoai Vu, the sales manager for the Quang Vinh Ceramic Co. in Bat Trang in northern Vietnam.


The company just increased the prices it charges Pier 1 Imports in the United States for hand-painted vases because labor costs are rising 30% a year.


Over all, Vietnam, one of the fastest-growing destinations for manufacturing investments, saw prices rise 19.4% from March 2007 to March 2008.


The cost of imports from less industrialized countries as a group is rising. A U.S. Bureau of Labor Statistics index of average prices for imports of manufactured goods from such countries fell gradually through early 2004, but is now rising briskly and was up 5.6% in February from a year earlier.


That contributes to rising inflation; from March 2007 to February 2008, the prices of goods for sale in the United States increased 4%, according to the government’s consumer price index.


Yet so far, Asian exporters have passed along only a portion of their costs. In China, for instance, prices are now rising almost 9% a year, triple the pace of a year ago.


Workers in the developing world facing higher prices have been increasingly vocal in demanding higher wages, with protests erupting in recent days in Vietnam, Cambodia and Egypt. At the same time, inflation keeps rising: the Philippines announced that inflation at the consumer level had doubled in the past five months, showing a 6.4% increase in March over a year earlier, while weekly inflation at the wholesale level has accelerated further in India, reaching an annual rate of 7% in the week ended March 22, up from 3.1% as recently as last October.


Not long ago, it would have been unlikely for a poor country with high inflation to see its currency strengthen in value against the mighty dollar. But the dollar is not quite as mighty as it once was.


Large U.S. trade deficits and other problems have weakened the dollar’s appeal. And there are signs that the dollar could fall farther if developing countries’ central banks stopped supporting it, particularly in Asia.


Vietnam’s central bank even had to order the country’s commercial banks a week ago to resume buying dollars within the tight range of exchange rates set by the government. Many banks had started betting on dollar depreciation and refusing to accept large sums in dollars, to the point that multinational companies and exporters had trouble wiring money into the country to pay their employees’ salaries.


Additionally, the dollar’s weakness is itself a cause of inflation in developing countries, particularly those that have barely let their currencies rise against the dollar in an effort to hold on to export markets.


In a street market around the corner from the 270-year-old Lungshan Temple in Taipei, Taiwan, Teresa Gau, a fishmonger, is charging up to a third more for fish and crabs than she did a year ago. That is because fishing boat owners are charging her more as they struggle to cover higher costs for diesel fuel, which is priced in dollars.


“They have to raise the price to compensate,” Gau said.


Inflation in Taiwan has started to creep up partly because the government waited until this year to allow the currency, the New Taiwan dollar, to appreciate. Taiwan imports all of its oil and only now is the slightly strengthening New Taiwan dollar starting to hold down the cost for Taiwanese drivers for filling up their gasoline tanks.


In Bat Trang, an ancient ceramics center near Hanoi, Quang Vinh’s fastest-rising expense is for vivid blue ink for painting vases and other pottery. Imported from Belgium, the ink is priced in euros and has soared 80% over the past year in Vietnamese dong.


Keeping the dong inexpensive in dollar terms helped Vietnam increase its exports by 24.1% last year, but also lured a flood of investment. Bank loans rose more than 50% in a single year, feeding a real estate frenzy that has not yet abated.


Brick kiln owners like Le Thi Hop in Bat Trang have responded by tripling brick prices in the past year.


“Most of the people who buy my bricks say the price is crazy, but I say, ‘this is the market,’ “ Hop said cheerily.


High costs for construction materials are making it more expensive for the many multinationals like Samsung of South Korea and Hanes Brand and Emerson Electric of the United States, which are now building factories in Vietnam, partly in response to rising costs in China.


In addition to the weak dollar, economists say that poor countries like Vietnam and Egypt and middle-income countries like China and Brazil are inherently more vulnerable to inflation when, as now, rising prices are led by increasingly expensive commodities.


Soaring food and energy costs have a far greater effect on developing countries like Vietnam, because of their large agricultural and energy-hungry manufacturing sectors, than on industrialized countries, which tend to have larger service sectors than manufacturing sectors.


Quang Vinh, which was founded by a 15th-generation pottery maker, has raised wages by 30% over the past year to keep up with food prices, which have also climbed.


Food is the biggest expense for the company’s workers, who earn $75 a month working eight hours a day, six days a week.


“Before, I used to go out with friends regularly,” said Nguyen Xuan Tu, a 29-year-old Quang Vinh worker who rides a motor scooter, like many Vietnamese. “But now, with the high cost of gasoline, I don’t go out too much.”


Two opposing trends have made it hard to gauge the true extent of inflation in the developing world.


Very heavy investment in new factories, especially in China but increasingly in emerging countries like India and Vietnam as well, has created a lot of extra industrial capacity. That could drag down prices somewhat if the U.S. economic slowdown causes a global slowdown in demand.


But many developing countries, led by China and India, have been able to blunt the full impact of inflation so far through a combination of price controls and subsidies, and more countries are joining them. Vietnam has imposed a series of price controls on transportation and gasoline in the past week, for instance.


As businesses figure out ways around price controls, like charging the same while shrinking the quantities in each package, the cost of subsidies may become unsustainably high and inflation may worsen.




Asian food crisis has political and civil implications (Paris, International Herald, 080418)


Politicians are facing the wrath of angry voters, government budgets are being stretched to pay for increased food subsidies and the potential for civil unrest looms, especially if the cost of essential items like cooking oil and rice continues to climb.


In Malaysia, where the governing coalition was nearly ousted in March elections, voters overwhelmingly cited the surging price of fuel and food as “the most important problem in the country” in a postelection survey carried out by the Merdeka Center, an independent polling agency.


If Prime Minister Abdullah Ahmad Badawi steps down, which many members of his party are pressuring him to do amid postelection turmoil, he will be the region’s first high-profile political casualty of fuel and food price inflation.


In Indonesia, the government recently revised its 2008 budget, increasing the amount it will spend on food subsidies by 2.7 trillion rupiah, or about $290 million. Total government spending on fuel, electricity and food subsidies this year will total $20 billion.


“The biggest concern is food riots,” said H.S. Dillon, a former adviser to the Indonesian Ministry of Agriculture. “I don’t see an immediate danger right now, but it has happened in the past and can happen again,” Dillon said. A rise in soybean prices in January led to months of small but widespread protests across Indonesia.


The price of rice, which on world markets surged 165% over the past year, is being closely watched as a barometer of potential unrest.


“Rice is a political commodity,” said Kwanchai Gomez, the executive director of the Thai Rice Foundation, a research center. “It’s not only an economic one.”


In the Philippines, President Gloria Macapagal Arroyo is scrambling to ensure that there is enough subsidized rice available for the poor.


“The immediate concern is regime survival,” wrote Amando Doronila, one of the country’s most respected political commentators, in Tuesday’s edition of The Philippine Daily Inquirer.


The rise in prices affects consumers differently across Asia. For the wealthiest in Singapore, Hong Kong or Kuala Lumpur, food inflation can engender a political backlash, but it is not a life-or-death problem. But for the poorest across Asia, rising prices mean the prospect of increasing rates of malnutrition.


“Food price increases are especially regressive,” said Paul Risley, the spokesman in Asia for the World Food Program, the UN agency that feeds the world’s destitute.


Singaporeans on average spend only 8% of their income on food, compared with 15% in Malaysia, 26% in Indonesia and Thailand, 28% in China, 33% in India and around 40% in Pakistan and Vietnam, according to the U.S. Department of Agriculture.


Those likely to be hurt the most by the sharp increase in food prices are the urban poor, the residents of Asia’s sprawling megacities, Risley said. People in rural areas may have less cash, but they can resort to hunting and gathering.


Slum dwellers in the Philippines, the world’s largest rice importer, are among the worst off in the region. Even before the spike in food prices this year, poverty and food insecurity were on the rise. According to a government report released in March, the number of people who do not have enough income to meet basic food needs in the Philippines rose to 12.2 million in 2006 from 10.8 million three years earlier, an increase of about 13%.


In recent weeks the government has mobilized police officers and soldiers to supply the poorest Filipinos with subsidized rice. The rice, much of which was imported from Vietnam, sells for 18.25 pesos a kilogram, or 20 cents a pound, half the price of the cheapest commercially sold rice in the Philippines.


Waiting in line outside a warehouse last weekend to buy government-supplied rice was Julieta Casanova, 60, who lives with her two children and eight grandchildren in Tandang Sora, a slum outside of Manila.


“We can’t survive without rice,” Casanova said. The government rations the rice to five kilograms per person, which Casanova said would last two days.


Arroyo, the Philippines’ president, and many other leaders across the region have blamed hoarding by traders and millers for the price increases. Thai Grade B rice, a widely traded variety, reached $854 per ton last week from $322 a year ago, a rise that appears speculative as much as driven by market fundamentals.


Bad weather and increased consumption have caused rice supplies to shrink, experts say, but the world is not in immediate danger of running out. Indonesia is in the midst of a record harvest this year and after years of importing rice will have a surplus of 1.2 million tons, according to Bayu Krisnamurti, deputy for agriculture for the Coordinating Ministry of Economic Affairs. The Food and Agriculture Organization, a United Nations agency, predicts that an overall good harvest this year will increase rice production by 12 million tons, or about 1.8% globally.


Yet this news has been overshadowed in a generalized atmosphere of soaring prices for gasoline and economic uncertainty stemming from the U.S. subprime mortgage crisis. In Hong Kong and other Asian cities, some shoppers have panicked, emptying shelves of rice as news of rice prices became a front-page story.


Even in Thailand, which produces 10 million more tons of rice than it consumes and is the world’s largest rice exporter, supermarkets have placed signs limiting the amount of rice that shoppers are allowed to purchase.


During a recent afternoon in the aisles of Tesco Lotus, a supermarket and department store in Bangkok, three worried customers surveyed large bags of rice and complained about the price increase. Jaruwan Krairit, 60, said the type of rice she usually buys had gone up 60%. Srisuttha Worawan, 57, said she had been to all the major supermarkets in Bangkok and “no one has the cheap rice,” she said, only the fragrant, more expensive varieties.


Yet these particular customers were not worried about going hungry: All three were looking for cheap rice for their dogs.


“I’ll have to give them dry dog food for now,” said Phanit Chatthanasenee, 60, who has 10 canines. “But my dogs don’t like that.”


In Thailand, as in many other up-and-coming Asian countries, food may cost more, but it remains abundant.




Across globe, hunger brings rising anger (Paris, International Herald, 080418)


PORT-AU-PRINCE, Haiti: Hunger bashed in the front gate of Haiti’s presidential palace. Hunger poured onto the streets, burning tires and taking on soldiers and the police. Hunger sent the country’s prime minister packing.


Haiti’s hunger, that burn in the belly that so many here feel, has become fiercer than ever in recent days as global food prices spiral out of reach, spiking as much as 45% since the end of 2006 and turning Haitian staples like beans, corn and rice into closely guarded treasures.


Saint Louis Meriska’s children ate two spoonfuls of rice apiece as their only meal recently and then went without any food the following day. His eyes downcast, his own stomach empty, the unemployed father said forlornly, “They look at me and say, ‘Papa, I’m hungry,’ and I have to look away. It’s humiliating and it makes you angry.”


That anger is palpable across the globe. The food crisis is not only being felt among the poor but is also eroding the gains of the working and middle classes, sowing volatile levels of discontent and putting new pressures on fragile governments.


In Cairo, the military is being put to work baking bread as rising food prices threaten to become the spark that ignites wider anger at a repressive government. In Burkina Faso and other parts of sub-Saharan Africa, food riots are breaking out as never before. In reasonably prosperous Malaysia, the ruling coalition was nearly ousted by voters who cited food and fuel price increases as their main concerns.


“It’s the worst crisis of its kind in more than 30 years,” said Jeffrey Sachs, the economist and special adviser to the United Nations secretary general, Ban Ki-moon. “It’s a big deal and it’s obviously threatening a lot of governments. There are a number of governments on the ropes, and I think there’s more political fallout to come.”


Indeed, as it roils developing nations, the spike in commodity prices — the biggest since the Nixon administration — has pitted the globe’s poorer south against the relatively wealthy north, adding to demands for reform of rich nations’ farm and environmental policies. But experts say there are few quick fixes to a crisis tied to so many factors, from strong demand for food from emerging economies like China’s to rising oil prices to the diversion of food resources to make biofuels.


There are no scripts on how to handle the crisis, either. In Asia, governments are putting in place measures to limit hoarding of rice after some shoppers panicked at price increases and bought up everything they could.


Even in Thailand, which produces 10 million more tons of rice than it consumes and is the world’s largest rice exporter, supermarkets have placed signs limiting the amount of rice shoppers are allowed to purchase.


But there is also plenty of nervousness and confusion about how best to proceed and just how bad the impact may ultimately be, particularly as already strapped governments struggle to keep up their food subsidies.


‘Scandalous Storm’


“This is a perfect storm,” President Elías Antonio Saca of El Salvador said Wednesday at the World Economic Forum on Latin America in Cancún, Mexico. “How long can we withstand the situation? We have to feed our people, and commodities are becoming scarce. This scandalous storm might become a hurricane that could upset not only our economies but also the stability of our countries.”


In Asia, if Prime Minister Abdullah Ahmad Badawi of Malaysia steps down, which is looking increasingly likely amid postelection turmoil within his party, he may be that region’s first high- profile political casualty of fuel and food price inflation.


In Indonesia, fearing protests, the government recently revised its 2008 budget, increasing the amount it will spend on food subsidies by about $280 million.


“The biggest concern is food riots,” said H.S. Dillon, a former adviser to Indonesia’s Ministry of Agriculture. Referring to small but widespread protests touched off by a rise in soybean prices in January, he said, “It has happened in the past and can happen again.”


Last month in Senegal, one of Africa’s oldest and most stable democracies, police in riot gear beat and used tear gas against people protesting high food prices and later raided a television station that broadcast images of the event. Many Senegalese have expressed anger at President Abdoulaye Wade for spending lavishly on roads and five-star hotels for an Islamic summit meeting last month while many people are unable to afford rice or fish.


“Why are these riots happening?” asked Arif Husain, senior food security analyst at the World Food Program, which has issued urgent appeals for donations. “The human instinct is to survive, and people are going to do no matter what to survive. And if you’re hungry you get angry quicker.”


Leaders who ignore the rage do so at their own risk. President René Préval of Haiti appeared to taunt the populace as the chorus of complaints about la vie chère — the expensive life — grew. He said if Haitians could afford cellphones, which many do carry, they should be able to feed their families. “If there is a protest against the rising prices,” he said, “come get me at the palace and I will demonstrate with you.”


When they came, filled with rage and by the thousands, he huddled inside and his presidential guards, with United Nations peacekeeping troops, rebuffed them. Within days, opposition lawmakers had voted out Préval’s prime minister, Jacques-Édouard Alexis, forcing him to reconstitute his government. Fragile in even the best of times, Haiti’s population and politics are now both simmering.


“Why were we surprised?” asked Patrick Élie, a Haitian political activist who followed the food riots in Africa earlier in the year and feared they might come to Haiti. “When something is coming your way all the way from Burkina Faso you should see it coming. What we had was like a can of gasoline that the government left for someone to light a match to it.”


The rising prices are altering menus, and not for the better. In India, people are scrimping on milk for their children. Daily bowls of dal are getting thinner, as a bag of lentils is stretched across a few more meals.


Maninder Chand, an auto-rickshaw driver in New Delhi, said his family had given up eating meat altogether for the last several weeks.


Another rickshaw driver, Ravinder Kumar Gupta, said his wife had stopped seasoning their daily lentils, their chief source of protein, with the usual onion and spices because the price of cooking oil was now out of reach. These days, they eat bowls of watery, tasteless dal, seasoned only with salt.


Down Cairo’s Hafziyah Street, peddlers selling food from behind wood carts bark out their prices. But few customers can afford their fish or chicken, which bake in the hot sun. Food prices have doubled in two months.


Ahmed Abul Gheit, 25, sat on a cheap, stained wooden chair by his own pile of rotting tomatoes. “We can’t even find food,” he said, looking over at his friend Sobhy Abdullah, 50. Then raising his hands toward the sky, as if in prayer, he said, “May God take the guy I have in mind.”


Abdullah nodded, knowing full well that the “guy” was President Hosni Mubarak.


The government’s ability to address the crisis is limited, however. It already spends more on subsidies, including gasoline and bread, than on education and health combined.


“If all the people rise, then the government will resolve this,” said Raisa Fikry, 50, whose husband receives a pension equal to about $83 a month, as she shopped for vegetables. “But everyone has to rise together. People get scared. But we will all have to rise together.”


It is the kind of talk that has prompted the government to treat its economic woes as a security threat, dispatching riot forces with a strict warning that anyone who takes to the streets will be dealt with harshly.


Niger does not need to be reminded that hungry citizens overthrow governments. The country’s first postcolonial president, Hamani Diori, was toppled amid allegations of rampant corruption in 1974 as millions starved during a drought.


More recently, in 2005, it was mass protests in Niamey, the Nigerien capital, that made the government sit up and take notice of that year’s food crisis, which was caused by a complex mix of poor rains, locust infestation and market manipulation by traders.


“As a result of that experience the government created a cabinet-level ministry to deal with the high cost of living,” said Moustapha Kadi, an activist who helped organize marches in 2005. “So when prices went up this year the government acted quickly to remove tariffs on rice, which everyone eats. That quick action has kept people from taking to the streets.”


The Poor Eat Mud


In Haiti, where three-quarters of the population earns less than $2 a day and one in five children is chronically malnourished, the one business booming amid all the gloom is the selling of patties made of mud, oil and sugar, typically consumed only by the most destitute.


“It’s salty and it has butter and you don’t know you’re eating dirt,” said Olwich Louis Jeune, 24, who has taken to eating them more often in recent months. “It makes your stomach quiet down.”


But the grumbling in Haiti these days is no longer confined to the stomach. It is now spray-painted on walls of the capital and shouted by demonstrators.


In recent days, Préval has patched together a response, using international aid money and price reductions by importers to cut the price of a sack of sugar by about 15%. He has also trimmed the salaries of some top officials. But those are considered temporary measures.


Real solutions will take years. Haiti, its agriculture industry in shambles, needs to better feed itself. Outside investment is the key, although that requires stability, not the sort of widespread looting and violence that the Haitian foot riots have fostered.


Meanwhile, most of the poorest of the poor suffer silently, too weak for activism or too busy raising the next generation of hungry. In the sprawling slum of Haiti’s Cité Soleil, Placide Simone, 29, offered one of her five offspring to a stranger. “Take one,” she said, cradling a listless baby and motioning toward four rail-thin toddlers, none of whom had eaten that day. “You pick. Just feed them.”




Skyrocketing Costs Threaten Food Aid for World’s Poorest Children (Foxnews, 080422)


LONDON —  Food aid for some 20 million of the world’s poorest children will have to be cut even if rich nations provide emergency funds to relieve pressure from the rapidly spiraling cost of rice, wheat and other staples, the head of the World Food Program said Tuesday.


Josette Sheeran, executive director of the U.N.’s food aid organization, said projects providing meals to children in Kenya, Cambodia and to poor families in Tajikistan have already been hit.


Rising food prices, stoked by increased fuel costs, have led to the first global food crisis since World War II and sparked protests across the Caribbean, Africa and Asia.


Sheeran, in London for talks with British Prime Minister Gordon Brown, said short term donations, and new long-term strategies are needed.


“We need all the help we can get from the governments of the world who can afford to do so,” she told a news conference.


Brown said rising food costs pose as great a threat to world prosperity as the global credit crunch, and are likely to reverse progress in the developing world and plunge millions into extreme poverty.


The British leader said urgent action to stimulate food production is needed, including a review of the impact of biofuels on global agriculture.


“Tackling hunger is a moral challenge to each of us and it is also a threat to the political and economic stability of nations,” Brown said, in a statement released Tuesday before the meeting in London.


Unrest provoked by the food crisis has led to deaths in Cameroon and Haiti, and cost Haitian Prime Minister Jacques Edouard Alexis his job. Thousands of hungry textile workers have clashed with police in Bangladesh.


“Much of the world is waking up to the fact that food does not spontaneously appear on grocery store shelves,” Sheeran told reporters.


Britain’s International Development Secretary Douglas Alexander on Tuesday pledged an immediate $59.7 million (euro37.47 million) in additional funding from Britain for the U.N.’s World Program before London talks.


Brown said he fears the use of agricultural land to produce biofuels — intended to help tackle climate change — may be a key factor in driving up prices.


Many officials claim shortages are being exacerbated by poor harvests caused by unpredictable weather and because of increased demand from emerging economies like China and India.


Britain introduced targets this month aimed at producing 5% of transport fuel from biofuels by 2010, but Brown said Tuesday that his government will now review the policy.


Rajat Nag, head of the Asian Development Bank, said on Monday that governments across the world should question their use of agricultural subsidies to encourage biofuel production.


Production of biofuel leads to destruction of forests and reduction of the land area available to grow crops for food, Nag said. Paying farmers to grow oilseed and other crops to produce biofuels means they grow fewer food crops, resulting in higher prices for staples such corn.


Sheeran has called on 20 heads of government to offer emergency funding to help poorer countries offset the rising costs of producing, or importing, food.


She told reporters at a news conference that around US$300 million (euro188.31 million) of a required US$500 million (euro313.85 million) in short term aid has been raised.


School feeding projects in Kenya and Cambodia have already been scaled back, while the agency has cut food aid by 50% in Tajikistan, Sheeran said.


In the long term, developing world governments, particularly in Africa, need to dedicate at least 10% of their budgets to agriculture to boost global food production, Sheeran said.


World Bank head Robert Zoellick has said as many as 100 million people could be plunged deeper into poverty by the crisis. U.N. Secretary-General Ban Ki-moon said rising prices threaten to cancel out progress made toward meeting the goal of halving world poverty by 2015.




World Vision Cuts Back Food Aid, Sounds Alarm (Christian Post, 080423)


It’s one of the largest and most trusted humanitarian organizations in the world that leverages compassion and generosity to help the most needy. Yet on Tuesday, World Vision announced a cutback on the number of people it can feed this year as it feels the effects of a slowing economy.


World Vision, a Christian nonprofit that tackles poverty and injustice across the globe, said it cannot feed 1.5 million of the 7.5 million it fed last year, according to CNN. The agency’s food aid programs have been cut in East Timor and Sri Lanka and reduced in such countries as Burundi, Niger, Cambodia, North and South Sudan.


“We’re walking into a very uneven financial environment [and] we’re trying to make appropriate predictions of what’s going to happen,” said Steve Haas, vice president for church relations at World Vision.


World Vision has found a donating base that is well informed of what the organization is doing and continues to see their donating to the group as an important part of their daily faith walk even during a slow economy and it hasn’t felt the bump as much as other charities have, Haas noted. But the global agency still has had to manage expectations and limit certain parts of their program.


The impact of food aid cuts falls mostly on children.


Dean Hirsch, president of World Vision International, said in a written statement, “Despite our best efforts, more than a million of our beneficiaries are no longer receiving food aid.” More than half of them are children, he said.


“Though we’re able to feed people, we’re not feeding people as we would like, and those people we are feeding are getting less than we would like,” said Rachel Wolff, media relations manager for disaster response, CNN reported.


An increase in food prices and an increase in the need for food are primary reasons for the shortfall this year. Wolff predicts that the situation may get worse as the year progresses.


The United Nations’ World Food Program has called the rising costs for food nothing less than a global emergency.


One of the causes for rising food prices is the diversion of corn to the production of ethanol rather than food, Wolff noted to CNN.


The humanitarian agency is sounding the alarm on the impact on poorer countries. Rising global prices for food and fuel, which have put a dent in the budgets of many Americans, have hammered Haiti, which survives largely on imported goods, according to World Vision. There, the unemployment rate is high and most residents earn less than $2 per day, making food unaffordable to many families.


Also, U.N’s World Food Program warned Monday that rising food prices mean the poorest in Asia risk a “silent famine.”


Severe consequences arising from the current food crisis include increased child mortality, lawlessness, and political instability, World Vision staff warned.


“If the world community doesn’t invest this now, everybody will pay for it later,” Wolff said to CNN. “You will have massive economic implications for these countries. Their work force won’t have developed properly. Not to mention that it’s horrific from a humanitarian standpoint. Those are the things we’re sounding the alarm on.”


More than 3.7 million children under 5 die every year due to malnutrition. Child health experts worry that the impact of even a short period of malnutrition will endure for years.


World Vision works in nearly 100 countries and last year distributed 147,000 metric tons of critically needed food aid from the U.S. Government and the World Food Program. The humanitarian group made an urgent appeal to international donors this week to step in.




Spiraling rice price feeding food fears (National Post, 080424)


BANGKOK — Rice prices in Thailand, the world’s top exporter, surged to $1,000 a tonne on Thursday, feeding concerns about food security as far as the United States after export curbs by governments worldwide.


The surging price of food and fuel has sparked riots in Africa and Haiti and raised fears that millions of the world’s poor will struggle to feed themselves. Some analysts, however, attribute much of the surge to panic buying by both consumers and governments rather than a dire shortage of supply.


After this week’s over 5% jump, rice prices stand nearly three times higher than the start of the year. With no sign of the rally relenting, as traders expect more buyers to come into the market, government anxiety about social unrest from the soaring cost of Asia’s staple will deepen.


The crisis, started with India’s imposition of export curbs to protect domestic supplies last year, and was felt in the United States this week, with a few major retailers saying they had started to notice signs of panic buying.


Sam’s Club, a unit of retail giant Wal-Mart, said on Wednesday it was capping sales of 20-pound (9 kg) bulk bags of rice at four bags per customer per visit to prevent hoarding.


The previous day, rival Costco Wholesale Corp said it had seen increased demand for items such as rice and flour as customers, worried about global food shortages, stocked up.


“Everywhere you see, there is some story about food shortages and hoarding and tightness of supplies,” said Neauman Coleman, an analyst and rice broker in Brinkley, Arkansas.


In Bangkok, some traders said Thai 100-percent B grade white rice, the world’s benchmark, could hit $1,300 a tonne due to unsated demand from number-one importer the Philippines, which fell well short of filling a 500,000 tonne tender last week.


There is also a big question mark over Iran and Indonesia, two countries that normally buy as much as 1 million tonnes of Thai rice each year but which have bought nothing so far in 2008 because of the soaring prices.


Even though some analysts say the price, part of a wider global rally in crop prices, is based on jittery governments rather than fundamentals, Thailand’s top exporters say the world is now set for an era of expensive food.


“Prices will remain firm for the rest of the year,” Chookiat Ophaswongse, head of the Rice Exporters Association in Bangkok, told Reuters.


Rice futures on the Chicago Board of Trade climbed 2.5% on Wednesday to an all-time high of $24.85 per hundredweight.


However, grain futures tumbled 4% to a five-month low due to expectations of a large global wheat crop in 2008.


With the northern hemisphere harvest only two months away, officials said planting had started well in Western Australia after good rains, while India said a record harvest and bulging government stocks meant no imports were needed this year.


China’s top wheat-growing provinces of Henan and Shandong were also looking at a bumper winter harvest after recent rains, the Xinhua news agency said.


Brazil became the latest country on Wednesday to suspend rice exports, following in the footsteps of India and its close rival for the mantle of world number-two supplier, Vietnam.


Thailand, which accounts for nearly a third of all rice traded globally, has said repeatedly it would not impose any curbs, a stance that has earned it plaudits from the World Bank for being a “responsible international trading partner”.


“Thailand has even gone the extra mile to explore additional land for rice production,” James Adams, the bank’s Vice President for East Asia Pacific, said in a statement.


The Asian Development Bank and free-trade advocates have criticised the export curbs as an overreaction that has distorted the market.


“If we restrict trade, we’re simply going to add food scarcity to the already large problems of food shortages that exist in different countries,” EU Trade Commissioner Peter Mandelson said.




U.N. Secretary-General Calls Rising Food Prices ‘Global Crisis’ (Foxnews, 080425)


VIENNA, Austria —  A sharp rise in food prices has developed into a global crisis, U.N. Secretary-General Ban Ki-moon said Friday.


Ban said the U.N and all members of the international community are very concerned, and immediate action is needed.


He spoke to reporters at U.N. offices in Austria, where he was meeting with the nation’s top leaders for talks on how the United Nations and European Union can forge closer ties.


“This steeply rising price of food — it has developed into a real global crisis,” Ban said, adding that the World Food Program has made an urgent appeal for additional $755 million.


“The United Nations is very much concerned, as all other members of the international community,” Ban said. “We must take immediate action in a concerted way all throughout the international community.”


Ban urged leaders of the international community to sit down together on an “urgent basis” to discuss how to improve economic distribution systems and the production of agricultural products.




UN leaders to tackle world food crisis (National Post, 080428)


GENEVA — The United Nations’ top brass gathered in Switzerland on Monday to chart a solution to the dramatic food price increases that have caused hunger, riots and hoarding in poor countries around the world.


UN Secretary-General Ban Ki-moon convened the heads of 27 international agencies including the World Bank, World Food Programme (WFP), and World Trade Organisation (WTO) to coordinate their action to dampen the global food crisis.


Officials familiar with the closed-door session said the main priority was to ensure that food aid reached those desperately affected by surging prices of wheat, rice, dairy products, and other dietary staples.


But the agency chiefs will also be looking to chart a way out of the current crisis, which experts have linked to factors including drought in Australia, higher fuel costs, the use of crops for biofuels and speculation on global commodity markets.


WTO spokesman Keith Rockwell said medium- and long-term solutions were needed to lower food prices in a sustainable way.


“That means you are going to need more food production, and a system in which market signals are picked up early and quickly. And you need people who have stopped producing for various reasons to be producing again,” Mr. Rockwell said.


Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development (OECD), has also called for efforts to encourage farmers to grow more crops.


“An old trading adage says ‘the best cure for high prices is high prices,’” he wrote in an International Herald Tribune editorial on Friday. “Higher commodity prices can be expected to lead to higher supply, as long as governments allow price increases to be passed on to farmers.”


The Food and Agriculture Organisation’s (FAO) Food Price Index, which measures the market prices of cereals, dairy, meat, sugar and oils, was 57% higher in March 2008 than the same month last year.


Anger over those increases — which have squeezed the world’s poorest people hardest — have sparked protests, strikes and riots in countries including Cameroon, Mozambique, Senegal, Haiti, Peru, Bangladesh, Indonesia and Afghanistan.


Panic over limited rice supplies, which have come under pressure as a result of export restrictions in Thailand, Vietnam and India, has also spurred binge-buying in Asian countries.


And higher prices have also put extreme budgetary pressure on aid providers such as the World Food Programme, the U.N. agency that aims to feed 73 million people this year.


“This will be the main point in Berne today. It is an absolute urgency,” a U.N. human rights expert, Jean Ziegler, told journalists in Geneva on Monday.


“If humanitarian food aid is stopping, these people have absolutely no alternative,” Mr. Ziegler said, referring to the poor. “The international community needs money really urgently.”


Oxfam, a British-based aid and advocacy group, said it was essential that those meeting in Switzerland think beyond the immediate funding crunch when addressing the food crisis.


“World leaders must take this opportunity to address structural problems such as under-investment in agriculture and unfair trade rules, which are exacerbating the problem,” said Oxfam International deputy advocacy director Celine Charveriat.


Mr. Ban, a South Korean national who took over the United Nations’ helm from Ghana’s Kofi Annan in January 2007, will address the press in the Swiss capital Berne on Tuesday morning.




Potash can help avert food crisis: CEO (National Post, 080425)


Bill Doyle’s assertion that his company is “an essential part of the solution to concerns about the world’s food supply” might sound like an exaggeration coming from anyone else.


But with soaring nutrient prices, plunging food inventories worldwide and a market capitalization that keeps growing, Potash Corp. of Saskatchewan has emerged as an unlikely superstar on the global stage, and Mr. Doyle is always ready to point it out.


Bolstered by his company’s massive first-quarter earnings, the colourful chief executive used his time on a conference call yesterday to address the food crisis and what has to be done by Potash Corp. and others to meet it.


“In eight of the past nine years, including this year, the world has consumed more grain than farmers have produced,” Mr. Doyle said. “This has gone largely unnoticed by global leaders and the public, because countries were able to meet food demand by drawing from inventories, keeping food prices artificially low.”


The cupboards finally started to go dry and food shortages and soaring prices are making daily headlines. Mr. Doyle said a crisis can be averted, but it will take a major commitment to farming practices and proper fertilization, and it will take years to build grain inventories back up to a comfortable level.


In the shorter term, he is expecting the potash market to remain very tight. That point was highlighted last week when China agreed to buy potash from Saskatchewan producers for US$400 a tonne more than it paid last year.


It came up again in Potash Corp.’s first-quarter numbers yesterday, which broke the company’s prior quarterly record by more than 50%. Net income was $566-million, or $1.74 a share, up from $198-million (62¢) in the same period a year ago. The company also hiked its full-year profit guidance by about 50%.


“These conditions have us very excited for the future. This is the environment we have anticipated for two decades,” Mr. Doyle said.


With a capacity expansion of almost 50% expected by the end of 2012, Potash Corp. expects to seize a bigger chunk of global demand, as it is the only potash producer with a significant expansion in the next few years. Other companies are also rushing to increase production capacity but it will take years to bring it online.


That is expected to contribute to chronic undersupply in potash, which many analysts figure will keep Potash Corp. flying high well into the future.


“There is a need to grow food, and you have to use fertilizers to solve that problem,” said one analyst. “And especially in potash, you just don’t have enough capacity that’s going to come into the market-place [in the short term] to make a difference.”




A squeeze on French aspirations (Paris, International Herald, 080429)


LES ULIS, France: Anne-Laure Renard and Guy Talpot, a French couple planning radical lifestyle changes to reduce their cost of living, are in many ways a typical French family.


They live in a three-bedroom apartment in a small town south of Paris, and their combined pay of €40,000 a year, or about $62,500, places them right in the middle of France’s income distribution.


Over the past year, they have become typical in another way: consumer prices rose four times faster than their salaries, climbing 3.2% in the 12 months to March, according to the French national statistics office, Insee. Their bank account is pushing up against their €600 overdraft limit at the end of every month, leading them into an anxiety-filled downward spiral of ever-greater resourcefulness and sacrifice.


“In France, when you can’t afford a baguette anymore, you know you’re in trouble,” Renard quipped. “The French Revolution started with bread riots.”


While the unease about declining living standards is not unique to France, two factors make it urgent. First, the 35-hour workweek has kept average annual pay increases below 1% for nearly a decade, said Robert Rochefort, the director general of Credoc, an institute based in Paris that researches living standards and consumption patterns. Second, French hypermarkets - large, mall-like supermarkets that dominate vast areas with little competition - can keep prices as much as 5% higher than in neighboring Germany, he said.


The surge in French consumer prices over the past year was led by a 20% jump in energy prices and a 5.6% rise in the cost of food.


For Renard, 30, and Talpot, 36, these numbers are the calculus of a stark reality. As a primary school teacher, Renard earns €22,000 a year. This year, she is getting a raise of 0.8%. Her companion, a mailman who makes €18,000, got an annual bonus last year of €89, the equivalent of €7.42 a month before tax. Talpot, who starts each day of his 35-hour workweek at 6:30 a.m. and finishes at 1:45 p.m., has been asking for overtime. Now he is also considering taking on a second job in the afternoons.


They used to do all their shopping at Carrefour, the most emblematic of the hypermarket chains. But when their credit card bill in January showed that they had spent more than €1,500 on food the previous month, they realized that they could no longer afford regular supermarket brands. Since then, they only buy baby milk and diapers at Carrefour and everything else at an outlet store called Leader Price.


For a long time, Renard said, she believed that previous generations had paved the way for her to make it in France. Her great-grandmother was illiterate, her grandmother a factory worker; her mother, who started out as a secretary, now works as an office manager and owns her own house.


Renard studied history, and when she decided to become a teacher, she was confident that it would give her an even more comfortable lifestyle and her children all the opportunities they wanted.


Instead, she still finds herself relying on her parents financially and fretting about her sons’ future. Even though Vincent is not yet walking and Damien, at 3 years, not yet in school, Renard is setting aside €30 a month for each of them in a savings account.


“That is perhaps the most depressing thing,” said Renard. “I already know that I will end up poorer than my parents. What does that mean for my children?”


Renard and Talpot feel a sense of injustice when they acknowledge that restaurant and cinema visits have become a luxury of the past. “The middle classes are getting poor and at the same time bosses are paid millions,” Renard said.


“We have economized as much as we can, there is nothing else to squeeze,” Talpot added.


Almost nothing: The two will get married in a small wedding at the home of Renard’s mother in June, a decision primarily intended to cut their annual tax bill from about €1,500 to almost zero.




Frustration in Italy, and blame for the euro (Paris, International Herald, 080429)


ROME: By conventional measures, life should be good for Francesca Di Pietro and her partner, Gianluca Pompei. They both have jobs. They are not conspicuous consumers. Christmas aside, their impulse purchases do not extend beyond the odd DVD or book.


And since Mario, their son, was born nearly two years ago, they no longer spend big money on entertainment.


But these days, Di Pietro, a secretary, and Pompei, a project manager, are not living easy.


“I’ve become very stressed about money, especially since we had a child,” Di Pietro said. “I’ve become anxious about unexpected expenses that we might not be able to face.”


Their concerns reflect a broader anxiety that has swept through Italy’s working classes, especially as the economy trudges through a year of near zero growth and the price of food, fuel and housing runs far ahead of pay increases.


“It’s straightforward,” Pompei said. “Salaries haven’t kept up with the cost of living.”


The job security their parents had has become as anachronistic as the typewriter, Di Pietro said, while Italy’s political class seems to have run out of ideas, and steam, for change. “There’s a lot of uncertainty ahead,” she said.


The country’s two main warring coalitions both ran in this month’s elections on platforms promising to lighten the financial burden of average Italians. Proposals ranged from eliminating unpopular real estate taxes, subsidizing dental care or even giving free books to the poor. Only when the new government takes office next month will Italians see which promises are kept.


If the future is a distressing question mark, the Roman couple, like many Italians, blame the rising feeling of precariousness on at least one major event rooted in the recent past: the introduction of the euro as legal tender in 2002.


The couple’s combined income is about €2,500, or $3,900, a month. In lira, the money Italy abandoned to join the euro, they would be pulling in about 5 million lire. “We could have paid the mortgage, and still had money left over for an annual vacation, meals out, and put something aside,” said Pompei, who works for a multinational company that provides language and technology outsourcing services.


The European Central Bank, which is charged with fighting inflation, has said there is little evidence that use of the euro has sparked European inflation.


Try telling that to DiPietro, Pompei and consumer groups who have tracked a near doubling in sticker prices following the introduction of the currency. The problem, added Pompei, is that salaries did not double to keep pace.


The couple has begun to cut corners, getting their hair cut at the local hairdressing school; bringing bag lunches to work; visiting relatives in nearby cities less frequently to save on gasoline and toll charges; buying secondhand clothes in market stalls and vacationing at campsites instead of hotels.


They also had to dial back on dreams of living in the center of Rome, after finding that a double-income was not enough. After a year’s search, they found a 70 square meter, or 750 square foot, apartment far from downtown with a second bedroom for their child. Even then, they took a mortgage that Di Pietro’s parents co-signed because their combined salaries did not make them a good risk for the bank.


Statistics issued recently by the main Italian shopkeepers union showed that Italians in general were tightening their belts. Consumer spending in January was down 1.1% from a year earlier, the worst drop in three years. The hardest hit were leisure and recreation, which fell 5.5%.


“I look at people on the bus and they seem sad and beaten down,” said Di Pietro, expounding on the general sense of malaise capping Italy. “We’re 40 years old. We should be feeling more combative but really all we feel is frustrated,” she said.




Changes in China could mean more North American jobs, Home Depot chief says (Paris, International Herald, 080613)


ATLANTA: The rising value of the Chinese yuan, higher pay for Chinese workers and $136-a-barrel oil may mean more factory jobs in North America, the Home Depot chief executive, Frank Blake, says.


The world’s largest home-improvement chain is looking for factories in the United States, Mexico and Canada to build some products that are getting too expensive to make in China, Blake said Thursday in an interview in New York. The Atlanta-based Home Depot imports about 13% of the goods it sells, and most of that is made in China, said a spokeswoman.


A shift in production from China back to North America might help blunt job losses in the region, where U.S. payrolls have declined five straight months. Shrinking employment in the U.S. has hurt consumer confidence and slowed consumer spending, which accounts for two-thirds of the economy.


“There’s a natural cycle to these,” Blake said. “Some of the low-labor, value-added stuff I suspect already is looking for other countries. That’s the nature of this.”


Last month Audi said it was in talks with parent Volkswagen on building a U.S. plant to protect profit against the dollar’s declines. The currency’s two-year slide, coupled with stronger growth in Europe and Asia, is spurring demand for planes built by Boeing and machinery made by Deere & Co.


In countries such as China, the demand for low-cost labor has helped increase worker pay, eroding manufacturing savings for U.S. companies in recent years.


“The long-term trend has been that U.S. manufacturers seek out cheaper countries to produce in,” said Ellen Zentner, a senior U.S. economist at Bank of Tokyo-Mitsubishi UFJ Ltd. “They move production there, they end up raising the standard of living, those workers begin to demand more, and eventually labor costs are no lower than here.”




Americans’ Charitable Giving Hits a Record (Wall Street Journal, 080624)


Americans gave a record amount to charity in 2007, topping $300 billion for the first time, despite mounting economic worries.


Still, there are indications that slowing growth is taking a toll on giving. The 3.9% increase in donations last year was far less than spikes of roughly 10% and 13% in 2004 and 2005, respectively. In addition, researchers revised 2006’s giving increase downward to a meager 0.4% from 4.2%.


Americans donated $306.39 billion last year, according to the closely watched annual report from the Giving USA Foundation, a nonprofit educational organization in Glenview, Ill. After adjusting for inflation, donations rose only 1% from the roughly $295 billion donated in 2006.


The report culls data from the Internal Revenue Service and Bureau of Economic Analysis, among other sources. The findings are preliminary estimates and subject to revision.


The relative slowdown in giving is attributable to increasing economic uncertainty that pervaded much of the back-end of 2007. Economic woes intensified last summer amid high gasoline prices, real-estate market turmoil and a burgeoning credit crunch.


Less-robust giving could continue throughout 2008 as the economy has worsened. “There’s a lot of economic and political uncertainty right now and people don’t like uncertainty,” said Patrick Rooney, director of research at Indiana University’s Center on Philanthropy, which researched and wrote the annual giving report. “Uncertainty is the enemy of investment. In some ways, uncertainty also hurts philanthropy.”


How will your charitable giving this year compare with last year?


Still, on an absolute basis, charitable giving set another record. Every subsector covered by the report except giving to private foundations grew in nominal terms, the first time that has happened since 2001. Researchers cited a healthy stock market in the first half of 2007, measured economic growth and increases in corporate and personal income as factors that kept giving up. Donations accounted for 2.2% of U.S. gross domestic product, the report said.


Over time, Americans’ charitable donations have skyrocketed. Last year’s estimated $306.39 billion in donations is up about 88% from a decade earlier, when giving totaled around $163 billion. Giving by individuals accounted for about 75% of the 2007 donation total. Foundation grants made up 12.6% of the total, contributing a record $38.52 billion. Rounding out the types of donors, bequests and corporate donations both rose, though corporate giving fell slightly when adjusted for inflation.


A slowing economy was not evident at Auction Napa Valley, an annual fundraiser that brings together wine luminaries and raises millions of dollars in one weekend. Stacey Delo reports.


The explosion in donations over the past several years has given rise to a bevy of Wall Street wealth planners, donor-advised funds and even small individual and family foundations as Americans pursue both the satisfaction and recognition that comes with substantial charitable gifts.


Amid the ever-increasing pool of charitable money, various watchdogs have sprung up on the Web in an attempt to help donors find charities that will spend their money most effectively. In Washington, lawmakers and regulators are increasingly scrutinizing nonprofits’ books.


In 2007’s pool of charitable contributions, religious congregations received $102.32 billion, an increase of 4.7% and about a third of all donations.


Giving to educational organizations rose 6.4 % to $43.32 billion. Human-services charities garnered $29.64 billion in gifts, a rise of 8.4%. Health organizations received $23.15 billion, a 5.4% increase.


Arts, culture and humanities organizations received $13.67 billion, a 7.8% increase. That followed a similar increase in 2006 after those groups had struggled in 2005. The rebound is attributable to increased wealth and focused capital fund-raising campaigns from the likes of museums and symphonies, said Del Martin, Giving USA’s chair.


International affairs organizations, which include disaster-relief groups, reaped $13.22 billion in donations, a 16% jump from a year earlier. Giving to international causes has increased in recent years amid celebrity attention to overseas issues and media coverage of foreign disasters such as the 2004 Indian Ocean tsunami, Ms. Martin said.


Giving to private foundations fell 9.4% to $27.73 billion, in part because of a tough comparison with substantial increases over the past two years. In 2006, Warren Buffett donated more than $30 billion to the Bill & Melinda Gates Foundation.




Somali Police Kill 2 as Tens of Thousands Riot in Capital Over Food Prices (Foxnews, 080505)


MOGADISHU, Somalia —  Troops fired into tens of thousands of Somalis rioting Monday, killing two people in the latest eruption of anger over high food prices in Africa, witnesses said.


On the other side of the continent, Senegal’s leader called for the United Nations to disband its main agricultural organization, calling it an incompetent money-eater that failed to alert the world to the global food crisis. Prices of rice and other food staples have risen by 47% worldwide, and by even more in Africa, stoked by poor weather, fuel prices and growing demand from India and China’s burgeoning middle classes. There have been protests, some deadly, in the Caribbean, Africa and Asia.


In Mogadishu, protesters including women and children marched against the refusal of traders to accept old 1,000—shilling notes, blaming them and a growing number of counterfeiters for rising food costs.


“Down with those suffocating us!” the protesters screamed.


Within an hour, a reporter for The Associated Press watched their ranks swell to tens of thousands. They jammed narrow streets, and many wielded thick sticks. Some hurled stones that smashed the windshields of several cars and buses. Rocks also were thrown at shops and chaos erupted at the capital’s main Bakara market.


Hundreds of shops and restaurants in southern Mogadishu closed their doors for fear of looting.


Dr. Dahir Dhere said a man wounded in the protests died on the way to an operating room at the capital’s main Medina Hospital.


Protester Abdinur Farah said he was marching with his uncle along with the uncle’s two wives and six children in southern Mogadishu when government troops opened fire. He said his uncle was hit and died before they could get him to the hospital.


“He was just peacefully expressing his feelings,” Farah said. “It is saddening that the very government which is supposed to support him killed him.”


Other witnesses said four people were wounded and several more injured in the violence.


In Mogadishu, the price of a kilogram (2.2 pounds) of corn meal has gone from 12 cents in January to 25 cents. Another staple, rice, has gone up in that time from $26 to $47.50 for a sack of 50 kilograms (110 pounds).


Food prices also have been affected by the plummeting Somali shilling, which lost nearly half its value this year, tumbling from 17,000 shillings to about 30,000 to the U.S. dollar amid growing insecurity and a market clogged with millions of counterfeit notes printed in bulk locally.


This Horn of Africa nation has been in turmoil for decades and without a functioning government since dictator Siad Barre was overthrown in 1991.


Over the past year, thousands of civilians have been killed and hundreds of thousands forced from their homes in fighting between Islamist insurgents and a U.N-sponsored transitional government supported by troops from neighboring Ethiopia.


The U.N. food security unit warned last week that half Somalia’s population of 7 million faces famine. It blamed an enduring drought as well as soaring food prices.


Food protests also have erupted in three other African countries, including Senegal, whose President Abdoulaye Wade called for the United Nations to dismantle its Food and Agriculture Organization.


In a statement Sunday, Wade said he had long called for the Rome-based organization to be transferred to Africa, “near the ‘sick ones’ it pretends to care for.”


“This time, I’m going further: It must be eliminated,” he said. Wade suggested its assets be transferred to the U.N. International Fund for Agricultural Development, which he said was more efficient, and that the fund set up headquarters in Africa, “at the heart of the problem.”


FAO officials would not comment.


Wade’s government responded to protest marches by securing a deal with India that ensures Senegal’s needs of 600,000 tons of rice a year are met for the next six years. In Burkina Faso, the government eliminated duties and taxes on rice, salt, milk and all products used to prepare food for children.




Food Fight (, 080508)


By Cliff May


It’s become the conventional wisdom and William Tucker, writing in The Weekly Standard, expressed it most eloquently: “Right now, we’re trying to run our cars on corn ethanol instead of gasoline. As a result, we suddenly find ourselves taking food out of the mouths of children in developing nations. That may sound harsh, but it also happens to be true.”


Give this a little thought: The suggestion is that American farmers are growing corn primarily to feed children in the Third World. And since people in these nations lack not only food but also money, it assumes that American taxpayers must buy this corn for them and pay to ship it across the ocean to them.


In other words, implicit in this argument is the notion that developing nations are not developing at all, and perhaps never will be. Instead, they must depend on Americans for subsistence. Is this what we believe? Is this the model – the Third World as permanent American ward and welfare recipient — that we accept and envision for the future?


As a reporter, I witnessed famines up close. I know what nightmares they are. And when a famine occurs, there is nothing to do but get food as quickly as possible into the stomachs of the starving.


But it is a terrible mistake to view famine as the natural state of the “developing” world, to believe that people in such places as Africa must remain forever helpless, incapable of raising enough food even to feed their families. Talk about the soft bigotry of low expectations.


People often think that relief and development are a single discipline. In fact, they are more like opposites. Development means helping people learn to produce food for themselves and their neighbors. With a little development, a nation can avoid famine, even in years of draught and other natural disasters. Relief is what you provide when development fails.


But the moment you send in free food, you collapse local prices and pauperize those farmers who have managed to raise crops and who want to sell them, make money, improve their farms and increase their production in the future.


In Africa, where I once served as a New York Times bureau chief, people are not poor because they are unwilling to work hard, or because they can’t master agricultural skills, or because the land lacks the potential to produce bounty. They are poor largely because they are oppressed by governments that range from the inept to the tyrannical.


In many African countries, a farmer has to sell his crop to the government at fixed – and artificially low — prices. A farmer who improves his land – for example, by building water catchments – invites greedy officials to appropriate his property. Ethiopia in the 1980s suffered the worst famine in recent memory. Few noted the fact that Ethiopian soldiers had plenty to eat, while farmers starved to death by the thousands. Does that not speak volumes?


If Third World governments and their enablers in the “international community” are the primary cause of hunger, the secondary cause is the spiraling price of oil: up tenfold in less then ten years. This is making it too expensive for small farmers to run tractors, buy fertilizer and transport their surplus crops to market. Yet no rioters in Haiti or Cairo have been protesting Saudi Arabia, Iran and other OPEC members for manipulating oil supplies in order to boost prices: In 1999 the world’s oil supply sold for $350 billion. This year it will sell for $4 trillion. The impact that’s had on food prices is enormous – and not so difficult to calculate.


Most Americans understand that we need to begin to replace oil as our only transportation fuel. Our national security and long-term economic health depend on it. The most promising competitors to oil at this moment are alcohol fuels (both ethanol and methanol) made from a variety of sources (not just corn). Brazil, which uses sugar cane to make an alterative to gasoline, imports no foreign oil – and Brazil is not experiencing food shortages or even making do with unsweetened mojitos. They are growing enough sugar cane for both.


Other developing countries could follow this model. They could use indigenous crops, crop residue, weeds and, possibly, bio-engineered plants developed specifically to produce fuels for their own use and to sell overseas. Instead of importing American food as charity, and sending whatever cash they have to members of the OPEC cartel in exchange for oil at inflated prices, they could be importing American farm equipment at market prices, the better to both feed themselves and produce additional products for export.


But the regimes that profit most from high oil prices want none of this. Most of all, they want no competition. So they are selling the notion that alternative fuels are impractical or environmentally disastrous or “take food out of the mouths of children in developing nations.”


Buyers beware.




A Gulf in Giving: Oil-Rich States Starve the World Food Program (Foxnews, 080509)


United Nations Secretary-General Ban Ki-moon and his top lieutenants on Monday are convening the first meeting of the U.N.’s Task Force on the Global Food Crisis. Ban says it will “study the root causes of the crisis,” and propose solutions for “coordinated global action” at a summit of world leaders in June.


Ban might want to consider convincing the oil-rich nations of the Middle East to provide more than the near-invisible amount of money they currently give to the World Food Program (WFP), the U.N.’s food-giving arm, which is charged with alleviating the food crisis.


WFP internal documents show that the major oil producing nations of the Organization of Petroleum Exporting Countries (OPEC) gives almost nothing to the food organization, even as skyrocketing oil prices and swollen oil revenues contribute to the very crisis that the U.N. claims could soon add 100 million more people to the world’s starving masses.


The overwhelming bulk of the burden in feeding the world’s starving poor remains with the United States and a small group of other predominately Western nations, a situation that the WFP has done little so far to change, even as it has asked for another $775 million in donations to ease the crisis.


Donor listings on WFP’s website show that this year, as in every year since 1999, the U.S. is far and away the biggest aid provider to WFP. Since 2001, U.S. donations to the food agency have averaged more than $1.16 billion annually — or more than five times as much as the next biggest donor, the European Commission.


This year, the U.S. had contributed $362.7 million to WFP just through May 4, according to the website. That figure does not include another $250 million above the planned yearly contribution that was promised by President George W. Bush in the wake of WFP’s April warning that a “silent tsunami” of rising food costs would add dramatically to the world population living in hunger. Nor does it include another $770 million in food aid that President Bush has asked Congress to provide as soon as possible.


On the other hand, Saudi Arabia, with oil revenues last year of $164 billion, does not even appear on the website donor list for 2008.


And while Canada, Australia, Western Europe and Japan have hastened to pony up an additional $260 million in aid since WFP’s latest appeal, the world organization told FOX News, the Organization of Petroleum Exporting Countries (OPEC), the international oil cartel, tossed in a grand total of $1.5 million in addition to the $50,000 it had previously donated.


The OPEC total amounts to roughly one minute and 10 seconds worth of the organization’s estimated $674 billion in annual oil revenues in 2007 — revenues that will be vastly exceeded in 2008 with the continuing spiral in world oil prices.


The only other major oil exporter who made the WFP list of 2008 donors was the United Arab Emirates, which kicked in $50,000. UAE oil revenues in 2007 were $63 billion.


By contrast, the poverty-stricken African republic of Burkina Faso is listed as donating more than $600,000, and Bangladesh, perennial home of many of the world’s hungriest people, is listed as donating nearly $5.8 million.




Misers No More? Saudi Arabia Pledges $500 Million to World Food Program (Foxnews, 080523)


Two weeks after a FOX News investigation showed oil-rich Saudia Arabia had donated nothing this year to help the United Nations World Food Program feed the world’s hungry, the globe’s number one oil exporter is finally opening its checkbook.


The United Nations this morning told FOX that the Saudis have pledged WFP a whopping $500 million contribution in response to the urgent WFP appeal in early April for $775 million to help it cope with a crisis caused by lower international grain stocks and rising energy costs. According to WFP that threatened to put at least 100 million more people around the world on the edge of starvation.


The Saudi contribution came two weeks after FOX revealed, based on WFP donor records, that Saudi Arabia had given nothing at all to the food agency this year, despite spiraling oil prices that had brought on the food crisis.


All of OPEC — the Organization of Petroleum Exporting Countries — had collectively given just $1.5 million, or about 1 minute and 10 seconds worth of OPEC’s 2007 oil revenues, FOX disclosed.


Those revenues will be vastly greater this year due to even sharper oil-price hikes.


In noting the Saudi contribution, U.N. Secretary General Ban Ki-moon said that it “comes not a moment too soon, given the needs of millions of people dependent on food rations.”




China: Inflation policy impact (Paris, International Herald, 080602)


Oxford Analytica


China’s consumer price inflation (CPI) came in at 8.5% for April, reflecting strong and continuing pressure on prices. The main driver continues to be food, although prices of other goods are also showing upward pressure:


· April food prices rose by 22.1% from a year earlier. A very rapid rise in pork prices has seen other food categories become susceptible to even small shocks, as price pressures weigh on a wide range of foods through substitution.


· With global grain prices on the rise, local prices for the staple increased by 7.4% over last year, even though price controls have been imposed here.


· Non-food inflation remains relatively low, at 1.8%, yet it is only a matter of time before wages increase in response to the high level of food price inflation and companies begin to pass increased costs on to consumers.


This high inflation compels the monetary authorities to continue monetary tightening, with further increases in reserve requirements; possible interest rate hikes; and strict imposition of lending quotas.


This will create difficulties for stock market and real estate investors who are used to easy credit, with the real estate market, in particular, showing signs of a general slowdown.


Persistent inflation and resulting restrictive monetary policy may also spell trouble for the financial sector. At the end of 2007, loans outstanding to developers and homeowners combined amounted to 4.8 trillion renminbi (691 billion dollars). Even a 10% default rate for these loans would generate around 500 billion renminbi of non-performing loans.


This would not be reason for financial panic, but it would cause investors to take a much closer look at Chinese banks. Furthermore, Beijing would have to engage in more costly write-offs from its foreign exchange reserve.


The outlook is for a likely further rise in interest rates this year, but without necessarily bringing inflation down below 8.0%. There is some risk that this could impact heavily on property prices, and that banks will see their non-performing loans grow.




UN official holds rich nations accountable for food shortages (Paris, International Herald, 080603)


ROME: Resolving the global food crisis could cost as much as $30 billion a year, and wealthier nations are doing little to help developing nations face the problem, United Nations officials said here on Tuesday.


Jacques Diouf, director general of the UN Food and Agriculture Organization, convened a three-day summit meeting attended by dozens of world leaders. He sharply criticized wealthy nations who he said were cutting spending on agriculture programs for the world’s poor and ignoring the loss of rain forests while spending billions on carbon markets, subsidies for their own farmers and biofuel production.


“The developing countries did, in fact, forge policies, strategies and programs that - if they had received appropriate funding - would have given us world food security,” Diouf said, adding that the international community finally mobilized to help after images of food riots and hunger emerged in the media. He said there had been plenty of meetings on the need for anti-hunger programs and agricultural development in poor nations in the last decade, but not enough money to make them a reality.


Another major debate at the conference centered on the role of biofuels in producing food shortages. The U.S. delegation here maintains that only 2 to 3% of the increases in food prices are attributable to the biofuel boom. The United Nations said the contribution was much higher. Biofuel production affects food prices because farmers in many countries have switched from growing crops for food to growing crops for fuel.


Diouf criticized policies like those in the United States that subsidize growing crops for energy.


“Nobody understands how $11- to $12-billion-dollar-a-year subsidies in 2006 and protective tariff policies have the effect of diverting 100 million tons of cereals from human consumption, mostly to satisfy the thirst for fuel for vehicles,” Diouf said.


President Luiz Inácio Lula da Silva of Brazil argued that some biofuels could provide a solution to world hunger if properly deployed. In Brazil, where biofuel is made from sugar cane, the industry has provided jobs for poor people as well as sustainable fuel, he said.


The idea that biofuels have caused the world hunger crisis was “an oversimplification” and “an affront that does not stand up to serious discussion,” da Silva said. He instead blamed the high cost of food on high fuel prices: “It offends me to see fingers pointed at biofuels, when the fingers are coated in oil and coal.”


There was little disagreement at the meeting about what measures were needed to resolve the spiraling costs of food and its impact on the world’s poor: more food aid; additional seeds and fertilizer for poor farmers; fewer export bans and tariffs that restrict the flow of trade; and more agriculture research to improve crop yields. The problem now is convincing wealthy nations to pay for them, at an estimated cost of up to $30 billion a year.


The UN secretary general, Ban Ki Moon, also appealed for financial support from wealthy nations to immediately provide more food aid and help poor countries grow more food. He noted that several governments and global institutions had already pledged additional financial support to deal with the food crisis.


In addition, the United States and others have suggested that genetically modified crops could play a key role in helping poor nations to grow more food, a point that some governments and nonprofit organizations strongly oppose. The United States is by far the world’s leading producer of genetically modified crops and seeds.


At the Circus Maximus, across from the conference, Action Aid unfurled a banner saying “Stop Profiting from Hunger - Right to Food Now.”




India, China sees highest jump in millionaires: survey (National Post, 080625)


SINGAPORE — India and China saw bigger growth in the millionaire population last year than anywhere else, and wealth in the Asia-Pacific is expected to grow nearly 8% a year to 2012 despite a slowdown in the world at large, a survey showed.


The number of millionaires in the Asia-Pacific grew 8.7% from a year ago to 2.8 million people and their combined wealth soared 12.5% to $9.5 trillion, excluding the value of their homes and consumables, Merrill Lynch and Capgemini said at a news conference in Singapore on Wednesday.


Asia was home to some of the world’s fastest-growing populations of millionaires, their annual World Wealth Report said, with India, China, Indonesia, South Korea and Singapore in the top ten in terms of growth.


The number of millionaires in India rose 22.7% to 123,000 people, the fastest growth in the world, and millionaires in China grew 20.3% to 415,000, making it home to the fifth-largest number of millionaires in the world, displacing France in that position.


Li Ka-shing, who controls a vast telecoms and property empire in Hong Kong and China, ranks as the world’s 11th richest man, according to Forbes.


Globally, millionaires grew 6% to 10.1 million people and their wealth rose 9.4% to $40.7 trillion in the same period, the Merrill/Capgemini report said.


Kong Eng Huat, Merrill Lynch’s Southeast Asia head of wealth management, said that in five years millionaires in Asia would have more combined wealth than those in Europe.


“Notwithstanding the recent dislocation in global markets, the robust economies in Asia are increasingly being driven by the domestic consumption story and continue to spur wealth creation in the region,” he said.


Asian millionaires’ wealth would grow annually by 7.9% to $13.9 trillion in 2012 against $13.5 trillion among Europe’s wealthiest, or 4.9% annual growth, the report said.


Although rocky markets have forced Asian investors to conserve cash, they continue to pour money into luxury products such as jewellery and art.


“Luxury goods makers, high-end service providers and auction houses all found ready clients in the emerging markets of the world — most notably China, India, Russia and the Middle East,” the report said.


Soaring wealth, high savings and ample potential have made Asia the world’s hottest market for international and private banks seeking to cater to the rich.


This has led to an influx of new players into Asia, such as Julius Baer, who are competing against established names such as UBS, HSBC and Citigroup.


The report also showed wealthy investors have shifted more money out of real estate and into bonds and cash.


The trend was most dramatic in the Asia-Pacific, where investors have cut real estate holdings by 9%age points from a year ago, to a fifth of their total investments.


But the report warned that the rich face the challenges of slower growth in developed markets hit by the credit crisis, as well as the risk of high inflation in emerging markets.


“The big shock this year has been higher inflation,” said Stephen Corry, head of investment strategy in Asia at Merrill Lynch’s global wealth management unit, at a news conference in Singapore.


“Inflation is the biggest risk for Asia and the global economy.”




China’s financial industry recruits abroad (Paris, International Herald, 081226)


NEW YORK: Mary Yu pitches hard to the recruiter sitting in front of her. “I’ve got experience in risk management,” she explains, naming the bank where she works and watching anxiously as the recruiter scribbles on her résumé.


Yu, 43, breathes a sigh of relief when the recruiter places her résumé in the review pile — she might be called back for another round of interviews.


Yu was just one of hundreds of jobseekers who attended a recruiting event in the ballroom of the Sheraton LaGuardia East Hotel in Flushing, New York, where some of China’s largest financial institutions have traveled to recruit talent from abroad. The recruiters are picking from the ranks of financial sector employees who fear what the future might bring. “I flew all the way from Charlotte, North Carolina, for this event. I’m trying to create a safety net for myself,” Yu said.


The New York event was the last of three stops made by the visiting Chinese delegation, which was made up of recruiters and representatives from more than 27 Chinese financial firms. The delegation, which held events in London and Chicago as part of its global recruiting tour, hoped to fill 170 positions by the end of its trip.


With jobs quickly disappearing from Wall Street and the boom in global finance over for the foreseeable future, China still offers opportunity, even as its own economy slows. Worldwide, thousands of financial service jobs have been erased because of the credit crisis, with London and New York suffering large losses.


Now, in a reverse miniature brain drain, Chinese financial institutions are taking advantage of the downturn and focusing on the newly unemployed to diversify and upgrade their own staffs.


“We’re looking very hard right now for experienced, senior-level talent who have knowledge of China. For our junior-level positions, we continue to recruit from our local Chinese talent pool,” said Hong Chen, the chief executive of the Hina Group, a boutique global investment bank. The company specializes in cross-border mergers and acquisition advisory and has offices in Beijing and San Francisco.


In another reversal of fortune, China, because of its closed financial sector — which Washington and the West have been insisting China open — has been largely shielded from the toxic mortgage-backed securities that brought down many of the world’s banks. Capital flows in and out of China are tightly controlled, and China’s capital markets are closed to foreign companies.


But China’s insular financial system has also kept it underdeveloped. Although employees of large Chinese financial institutions usually graduate from top Chinese universities, they lack practical market experience.


That lack of experience has sometimes led to poor decisions, and in some cases outright blunders. For example, the Citic Pacific Group of China recently said its realized and potential losses from an attempt to hedge currency risk associated with a large purchase of Australian dollars (needed to buy iron for its steel mills in China) topped $2.4 billion. The China Investment Corp., the country’s sovereign wealth fund, which controls $200 billion in assets, has lost money on almost all of its investments, including a loss of $2.46 billion, or 82%, of the $3 billion it invested in the Blackstone Group.


Perhaps it is not surprising then that the majority of the 27 financial institutions represented at the recruiting event, including Citic, the Bank of Shanghai, the Pudong Development Bank and the Shanghai Stock Exchange, all advertised for senior risk managers with 3 to 10 years of experience with international companies in comparable positions.


More than 250 people preregistered for the event and more than 850 packed the ballroom. A long line spilled down the hallway, forcing staff members to limit interviews to three minutes. The applicants were a diverse array of nationalities.


“Institutions here are looking for people to fill senior positions overseeing risk management, compliance and derivatives. Most importantly, they’re looking for people with a global view,” said Qin Wang, 32, a banker and a member of the Chinese Finance Association, which helped organize the New York event.


In addition to formal recruiting events, many financial sector workers have sought jobs in China on their own, working through friends and informal social networks.


Tom Leggett, 30, left his investment banking job at Lazard in New York in July, ahead of expected layoffs, and moved to Beijing to search for opportunities. “I talked things over with my parents and friends and decided to come to Beijing to canvas the scene,” he said. “I’ve been talking to both recruiters and friends in my network.”


Despite the swelling number of unemployed financial service employees, those qualified to work for Chinese firms is extremely small. Leggett’s background in Chinese — he studied Mandarin for four years as an undergraduate student at Columbia — made his move feasible. He has shocked many recruiters with his Chinese ability: “They see a tall, white guy and they’ve got low expectations. When they find out I can say a lot more than ‘hello,’ in Chinese, they begin to take me seriously.”


While most Chinese employees of financial institutions can speak English, Chinese is still a must for many recruiters. “We’re looking for bilingual candidates because we are constantly negotiating with local Chinese companies, and those meetings are all in Chinese,” Hong of the Hina Group said.


Despite the opportunities China can present, many candidates decide, in the end, not to move — hence the Chinese companies’ global search.


Robert Eng, 53, who used to work in the global investment division of Citigroup in New York, traveled to Hong Kong to interview for the director of private wealth position at a large Chinese financial institution. He received an offer, but turned it down, choosing to remain in the United States.


“The compensation package was great, but at this point in my life it doesn’t make sense for me; my family is here. Maybe if I were 20 years younger,” Eng said.


For many ambitious overseas candidates, a matter of worry is that they are all but guaranteed to hit a glass ceiling at state-run Chinese companies. Senior management is appointed by the personnel department of the Communist Party — regardless of the votes or recommendations of shareholders or board directors.


And for many foreigners, the decision to move to mainland China involves accepting a drastic change in lifestyle.


Brian Connors, 35, is the owner of the Bridge café, a popular Italian-style restaurant and café in the northwest of Beijing that caters to foreigners studying Mandarin and Chinese looking to practice their English.


“I’ve seen expatriates come and go — it’s a cyclical thing here. One of the major setbacks that causes foreigners to leave is health: pollution and congestion are hard on your body and lifestyle. The cost of living is really low and there’s great service here but the infrastructure is still developing,” he said. “It’s like living like a king over here; a king of a sort of busted castle.”


The transition is easier for bilingual overseas Chinese like Kenneth Chen, 29, who is studying for his MBA at the New York University Stern School of Business. Chen said that if he was offered a job, the decision to move to China would be a no-brainer: “In this environment, I don’t need anyone to persuade me to go to Shanghai. I want to go.”




Asian Data Shows Severity of Slump (Paris, International Herald, 090331)


HONG KONG - As world leaders assembled in London for the Group of 20 summit meeting this week, the latest evidence of the severity of the economic crisis emerged from Asia on Wednesday, with business confidence in Japan plummeting to a record low, South Korean exports falling for a fifth consecutive month and a manufacturing index deteriorating in China.


The data from three of the largest Asian economies underscored a picture of slumping exports and production, and hammered home that despite some recent signs that the situation may have stopped deteriorating in parts of the world, the global economy remained in the middle of the worst downturn in decades.


The so-called Tankan survey in Japan - a closely watched quarterly poll by the Bank of Japan measuring sentiment among big manufacturers - plummeted to -58 in March from -24 in December, the lowest level since the survey began in 1974.


The reading, which was worse than economists had projected, came as the Japanese economy continued to shrink at a time of tumbling exports and weak domestic demand. Japanese exports, which make up about one-third of the overall economy, fell by nearly half in January and February, in part because the yen's strength has made Japanese goods more expensive for consumers abroad.


South Korea has also had to grapple with falling exports, though the pace of decline there has been much less severe than in Japan. Fresh data Wednesday showed overseas shipments in March had fallen 21.2 percent from a year earlier. Imports slumped 36 percent.


In China, a purchasing managers index compiled by the brokerage C.L.S.A. slipped back in March, to 44.8, down from 45.1 in February, snapping a three-month streak of tentative improvement. It was the eighth month in a row that the reading had come in below 50, which is the dividing line between expansion and contraction.


The discouraging data follows downward revisions at several leading institutions' growth forecasts for the year. On Tuesday, the Organization for Economic Cooperation and Development said it expected the economies of its 30 member states to contract 4.3 percent this year, rather than by the 0.4 percent it forecast last November.


"The global recession will worsen this year before a policy-induced recovery gradually builds momentum through 2010," the O.E.C.D. said in its report.


The Asia-Pacific region was relatively well insulated from the financial turmoil that began in the United States in 2007. It began to be caught by the global downdraft only toward the end of last year - months after the United States and Europe - and many of the economies in the region, notably China's and India's, will still see significant, though slower, growth this year.


Still, the data Wednesday indicate that the global slump has months to run. Moreover, economists say that the labor market, already bad, is set to deteriorate as companies face intense pressure to scale back costs and output.


This, in turn, will put added pressure on government finances already strained by the stimulus and bailout packages that countries around the world have put in place.


Japan, in particular, is in severe straits, with economists projecting that the first quarter of the business year, which started Wednesday, showed yet another deep contraction. Prime Minister Taro Aso has pledged to compile an added stimulus package by mid-April, adding to two previous plans totaling ¥10 trillion, or $101 billion.


The Tankan survey results, Credit Suisse economists said in a note Wednesday, "confirm that the Japanese economy is facing an extremely difficult predicament, with many indicators hitting their worst levels on record."


They also said forecasts for the quarter ahead suggested that corporate sentiment might not worsen, but it would be "quite some time" before any significant upturn came in the real economy, because corporate earnings kept deteriorating and production capacity and employment levels were considered "highly excessive."


By contrast, recent data from South Korea has had a silver lining. Its export data showed Wednesday that the pace of decline had slowed from previous months. And factory output data for February, released Tuesday, showed an increase from a month earlier.


Stock markets in Asia took the bleak economic picture in stride. The Nikkei 225 index in Japan rallied nearly 3 percent and the Kospi in South Korea rose 2.25 percent. Stocks in mainland China rose 1.47 percent in Shanghai, and 1.87 percent in Shenzhen.


But the performance was mixed across the region, with the Hang Seng index in Hong Kong falling 0.42 percent. The Straits Times index in Singapore inched 0.33 percent higher, while the S&P/ASX 200 in Australia both edged 0.07 percent lower.




E.U. Says Europe Faces Deep Recession (Paris, International Herald, 090504)


PARIS - The European Commission on Monday revised lower its forecast for growth in the European Union this year as consumers react to the weakening labor market and amid a slump in world trade and an ongoing housing market correction.


EU Commissioner for Economy and Monetary Affairs Joaquin Almunia addressed the media at the European Commission headquarters in Brussels on Monday.


The commission, the executive arm of the E.U., forecast in its spring quarterly economic forecasts that gross domestic product in both the European Union and the euro area would contract by 4 percent this year and then by 0.1 percent next year.


In its last report, the executive forecast an EU contraction this year of 1.8 percent and positive growth next year of 0.5 percent.


"The downswing is affecting not only all member states but also almost all demand components," the report said, adding private investment in particular is suffering, reflecting depressed expectations of future demand as consumers react to the deterioration in the employment market.


Exports have contracted sharply as world trade flows dwindle.


The E.U. has not yet released its initial estimates of first quarter growth, but the report said survey and other data suggest a "further deterioration" for the period.


The more upbeat outlook for 2010 was based on the effect of tax and interest rate cuts and as financial markets starts to stabilize.


"The European economy is in the midst of its deepest and most widespread recession in the post-war era," said Joaquín Almunia, the commissioner for economic affairs "But the ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year."


The slump has prompted the European Central Bank to lower its benchmark interest rate by 3 percentage points to a record low of 1.25 percent. It has suggested that it may take further steps to lower borrowing costs at its next meeting Thursday.


To facilitate a recovery, Almunia said, authorities need to proceed rapidly "with the cleaning up of the 'impaired assets' on bank balance sheets and recapitalize banks when appropriate."


The E.U.'s estimates were slightly less pessimistic on the outlook for the region than those of the International Monetary Fund, which forecast last month a contraction of 4.2 percent this year and 0.5 percent next year for the euro area.


Labor markets, which tend to react relatively slowly to changes in growth rates, will continue to be severely affected, the E.U. said, with the unemployment rate expected to increase to 11.5 percent in the euro area next year, from 9.9 percent this year. The jobless rate in the region was 8.5 percent in February.


The public deficit is also projected to rise sharply, as tax receipts decline and spending rises, while governments enact fiscal stimulus packages and as the exceptional revenue windfalls witnessed during the recent boom are reversed.


The report forecast an E.U.-wide budget deficit to 7.3 percent of GDP in 2010, from 6 percent this year. Most countries are forecast to run shortfalls well in excess of the limit of 3 percent of G.D.P. stipulated by the bloc's own fiscal rules.


Inflation has fallen sharply in recent months and is projected to continue to do so during the second and third quarter of this year, the report said, citing base effects, a weak economic outlook and an assumed decline in commodity prices.


Over all, inflation was projected at 0.4 percent in the euro area in 2009, reaching a trough in the third quarter. As base effects of past hikes in energy and food prices drop out of the annual rate this autumn, HICP is expected to gradually pick up next year to above 1 percent.


There was some positive economic news for the region on Monday.


The Markit euro-zone manufacturing purchasing managers' index of around 3,000 companies rose to 36.8 in April, its highest level since last October, from 33.9 in March.


It was, though, the 11th consecutive month below the 50 mark which divides growth from contraction.


The release "confirms that the downward momentum in euro-zone industry has slowed considerably," said Martin van Vliet, an economist at ING in Amsterdam. "But with the index remaining at a fairly depressed level, the industry sector is certainly not out of the woods yet."


The improvement was broadly-based across the euro region. The German manufacturing PMI surged to 35.4 from 32.4; France's manufacturing PMI jumped to 40.1 from 36.5.




European Economy Shrinks 2.5% in Quarter (Paris, International Herald, 090515)


PARIS - The euro-zone economy plunged deeper into recession during the first quarter, as domestic demand weakened and exports flagged, according to figures on gross domestic product released Friday.


Analysts, however, suggested that the figures may represent a trough for the region's economy.


Gross domestic product declined by 2.5 percent during the first quarter from the previous quarter in the 16 nations that use the euro currency and the 27-country European Union, according to an initial estimate from Eurostat, the E.U.'s statistical office. Both regions had seen their economies decline 1.4 percent in the fourth quarter of 2008.


In Germany, the largest European economy, gross domestic product plunged 3.8 percent in the first three months of the year from the fourth quarter, when it fell 2.2 percent, the German Federal Statistics Office in Wiesbaden said. Economists had forecast a 3 percent decline.


The decline was the largest since 1970, when official quarterly results were first formally published in West Germany. The German economic growth rate has fallen for four consecutive quarters. Imports and exports declined.


The French economy also shrank for the fourth straight quarter as companies cut investments and exports plunged. The economy shrank 1.2 percent from the fourth quarter, when it slipped 1.5 percent, the French statistics office Insee said. Insee also revised earlier data, revealing that France has been in a recession since the third quarter of 2008.


In Italy, the economy also contracted for a fourth straight quarter in the three months through March. The Italian economy shrank 2.4 percent from the fourth quarter, when it contracted by 2.1 percent, Istat, the statistics office in Rome, said. It was the biggest decline since the agency began publishing data in 1980.


Spain released data Thursday showing its economy shrank by 1.8 percent during the first quarter compared to the fourth quarter.


Paul Mortimer-Lee, head of market economics at BNP Paribas in London, said the data, although "terrible," suggest that the worst of the effects of the financial crisis on growth in Europe was probably felt during the first quarter, while in the United States the trough may have been the last quarter of 2008.


In the United States, gross domestic product shrank at an annual rate of 6.1 percent from January through March, its third straight quarter of decline.


Mr. Mortimer-Lee noted that some indicators in Europe are starting to point toward an improvement in activity, suggesting that the scale of the contraction for the rest of the year will moderate, probably helped by the manufacturing sector responding to declining inventory levels.


"It's like being on a bungee rope," he said. "After you go down so far, you have to come back; the question now is how far."


The European Commission this month lowered its forecast for economic growth in the European Union this year as world trade contracts, housing prices fall and consumers react to the weakening labor market.


But the commission, the executive arm of the E.U., was relatively sanguine about next year, arguing that the effect of tax breaks, interest-rate cuts and gains in asset prices should steady the economy. It predicted that gross domestic product in the European Union and the euro area would contract by a total of 4 percent this year and by 0.1 percent next year.


The E.U.'s estimates were slightly less pessimistic on the regional outlook than those of the International Monetary Fund, which last month forecast a contraction of 4.2 percent this year and 0.5 percent next year for the euro area. For the United States, the fund forecast a contraction of 2.8 percent this year and flat growth in 2010.


The slump in Europe has prompted the European Central Bank to lower its benchmark interest rate by 3.25 percentage points since October to a record low of 1 percent. It has also announced further steps to ease borrowing conditions.


Governments have also announced stimulus spending plans of varying degrees to try to bolster confidence, although rising deficit and debt levels are limiting the ability of most to enact the degree of public spending that is being seen in the United States.


European labor markets, which tend to react with a lag to changes in growth rates, will continue to be severely affected, the E.U. said, with the unemployment rate expected to increase to 11.5 percent in the euro area next year, from 9.9 percent this year. In Spain, it may touch 20.5 percent next year, almost doubling from 2008.


The Hong Kong economy shrank 4.3 percent in the first quarter from the previous three months, the worst performance since records were first compiled in 1990 as plummeting exports hurt investment and consumption, Reuters reported from the city Friday.


The worse-than-expected quarterly contraction prompted the government to revise its full-year forecast for gross domestic product. It expects the economy to contract by between 5.5 and 6.5 percent this year, against an earlier forecast for a 2 to 3 percent drop.


Financial Secretary John Tsang said the government would announce more relief measures to help the economy within a month.


"I anticipate that Hong Kong's economic performance in the second quarter will remain difficult," he told a news conference.


The economy has shrunk for four straight quarters, its longest downturn since 2001. Compared with a year earlier, gross domestic product fell 7.8 percent in the quarter, worse than a forecast 5.2 percent decline.




Swings in Price of Oil Hobble Forecasting (Paris, International Herald, 090705)


The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.


The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.


A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55% since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.


“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”


Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.


At the close of last week’s trading, oil futures fell $2.58, to $66.73 a barrel, after rising above $72 a barrel last month.


These gyrations have rippled across the economy. The automakers General Motors and Chrysler have been forced into bankruptcy as customers shun their gas guzzlers. Airlines are on pace for another year of deep losses because of rising jet fuel costs.


And households, already crimped by falling home prices, mounting job losses and credit pressures, are once more forced to monitor their discretionary spending as energy prices rise.


While the movements in the oil markets have been similar to swings in most asset classes, including stocks and other commodities, the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.


Government officials around the world have become concerned about a possible replay of last year’s surge. Energy officials from the European Union and OPEC, meeting in Vienna last month, said that “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated” without more oversight.


Many factors that pushed oil prices up last year have returned. Supply fears are creeping back into the market, with a new round of violence in Nigeria’s oil-rich Niger Delta crimping production. And there are increasing fears that the political instability in Iran could spill over onto the oil market, potentially hampering the country’s exports.


The OPEC cartel has also been remarkably successful in reining in production in recent months to keep prices from falling. Even as prices recovered, members of the Organization of the Petroleum Exporting Countries have been unwilling to open their taps.


Top officials said that OPEC’s goal was to achieve $75 a barrel oil by the end of the year, a target that has been endorsed by Saudi Arabia, the group’s kingpin.


“Neither the organization, nor its key members, has any real interest in halting the rise in oil prices,” said a report by the Center for Global Energy Studies, a consulting group in London founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister.


But unlike last year, when the economy was still not in recession and demand for commodities was strong, the world today is mired in its worst slump in over half a century. The World Bank warned the recession would be deeper than previously thought and said any recovery next year would be subdued.


The International Energy Agency held out the prospect that energy demand was unlikely to recover before 2014. Yet the indicators that would traditionally signal lower prices — like high oil inventories or OPEC’s large spare production capacity — do not seem to hold much weight today, analysts said.


“Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” Deutsche Bank analysts said in a recent report.


Investors are betting that the worst of the economic slump may be coming to an end, and are bidding up what they perceive will become scare resources once demand kicks back again, analysts said. This uncertainty is making it difficult for companies to plan ahead, they said.


“People do not like that kind of volatility, they want to know what their costs are going to be,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group.


For the global airline industry, the latest price surge is certain to translate into more losses this year, according to the industry’s trade group, I.A.T.A. Airlines are expected to post losses of $9 billion this year, following last year’s losses of $10.4 billion. “Airlines have not yet felt the full impact of this oil price rise,” according to I.A.T.A.’s latest report.


At Southwest Airlines, for example, fuel accounts for about a third of the company’s costs, according to Ms. Wright, the chief financial officer. The experience of the past year, she said, “has convinced us we cannot afford to not be hedged.”


The company has currently hedged part of its fuel use for the second half of the year at $71 a barrel, and for 2010 at $77 a barrel. Hedging acts as an insurance policy if prices rise above these levels.


But last year, Southwest reported two consecutive quarters of losses, as prices spiked and collapsed — all within a few months. “Prices were falling faster than we could de-hedge,” Ms. Wright said.


To survive the slump, many airlines have cut routes and raised both fares and fees, like charging for luggage, while some of the industry’s top players have merged. For example, Delta Air Lines bought Northwest Airlines last year, and in Europe, Lufthansa of Germany bought Austrian Airlines and Air France-KLM acquired Alitalia of Italy.


Likewise, automobile showrooms emptied out as gasoline prices rose, forcing General Motors and Chrysler to cut production sharply as they wade through bankruptcy. Meanwhile, they are under pressure from Washington to improve their fuel ratings.


“Do not believe for an instant that sport utilities are making a comeback,” George Pipas, Ford’s chief sales analyst, told reporters last week.


But to Jeroen van der Veer, who retired as chief executive officer of Royal Dutch Shell last week, prices are increasingly dictated by long-term assessments of supply and demand, rather than current market fundamentals. He advised taking a long-term view of the market.


“Oil has never been very stable,” Mr. van der Veer said. “If you look at history, you have to expect more volatility.”




In Europe, Economic Signs Point to a Recovery (Paris, International Herald, 090813)


Workers at a foundry in Schmiedeberg, in eastern Germany. Europe’s economy strengthened unexpectedly in the second quarter, indicating the recession would likely end later this year.


FRANKFURT — The European economy bounced back with unexpected strength in the second quarter after contracting sharply at the beginning of 2009, data released Thursday showed. The statistics offered the clearest evidence yet that a searing recession would probably become a very modest expansion later this year, but many economists believe that the European recovery could slacken or stall in 2010.


The economy of the 27-nation European Union shrank 0.3% in the three months through June, or at an annual rate of roughly 1.2%. The 16 countries that use the euro, the common European currency, registered a 0.1% decline in activity for the second quarter, an annual rate of roughly 0.4%.


The dramatic easing of the recession put Europe roughly on par with the United States, where the economy shrank at an annual pace of 1% during the same period. That reflected the ebbing of an acute shock that rippled through economies worldwide after the collapse of Lehman Brothers and the subsequent chaos in financial markets.


However, economists expect a divergence in performance between the United States and Europe next year as lagging efforts to repair a damaged banking system in key countries like Germany and sharply rising unemployment tarnish the outlook in Europe over the next six months.


“We will really see the difference in recoveries next year,” said Thomas Mayer, chief Europe economist at Deutsche Bank in London. “That will be when the U.S. bounces back more quickly than Europe.”


Signs that both the U.S. and European economies are turning a corner may be good news for Asia’s export-driven economies.


Despite being in negative territory, the European data underscore a sharp recovery from the first quarter of this year, when both the EU and the euro zone saw a 2.5% contraction compared to the previous quarter.


Underlying the surprisingly strong reading were solid performances in France and Germany, both of which grew by 0.3% in the second quarter, government data showed.


Germany, Europe’s largest economy, will still probably see its gross domestic product contract by about 6% for the full year, economists say.


Within the euro area, France and Germany are balancing out much weaker performances in Italy, a perpetual laggard, and Spain, where a collapsing housing market has brought an acute recession. And Eastern Europe — particularly in Hungary and the Baltic economies — remains deeply troubled.


The surprise expansion in Germany — most economists had expected a flat or slightly negative reading — underscores how the country’s exporters are benefiting from growth in Asia and what may be a bottoming of the downturn in the United States. The news comes after four straight quarters of contracting output in Germany, meaning the nation’s recession, its worst since World War II, has technically ended.


Economists are now debating about whether the V-shaped recovery can get traction or whether rising joblessness will drag down consumption and shake consumer confidence, leading to another dip later this year — a so-called W-shaped expansion.


“An export-driven, V-shaped recovery in the second half of this year is in the pipeline,” said Andreas Rees, chief Germany economist at UniCredit in Munich.


But Erik Nielsen, chief Europe economist at Goldman Sachs in London, said: “You might get something resembling a W simply because of the strength of the rebound.


“It’s almost mathematical after the deep trough” in the first quarter, he added.


Other developments are weighing on the European outlook, creating uncertainty about how the economy will shape up in 2010.


News last week that German exports had leapt 7% in June over the previous month foreshadowed the positive reading on gross domestic product. But that masked an overall collapse of orders from abroad; German exports in June were down 22% compared with a year earlier.


And unemployment is expected to rise sharply later this year as a raft of government programs that kept people on private payrolls throughout Europe begin to expire.


Already, the euro area’s unemployment rate stands at 9.4%, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate a political backlash in Europe, economists said.


“Growth is not going to get where it needs to be to the point where companies do not have to fire their surplus workers,” said Julian Callow, chief Europe economist at Barclays Capital in London.


The financial system is another cloud on the horizon, though it may be healing faster than expected.


The International Monetary Fund has criticized Europe for not moving quickly enough to recapitalize banks and clean balance sheets of bad assets. However, the European Central Bank projects lower losses in Europe than the I.M.F., suggesting a banking recovery is under way.


The most recent data from the E.C.B. suggests credit flows are easing, although individual countries still report problems with longer-term loans. “We have to worry about tighter credit less than we thought we did earlier in the year,” Mr. Callow said.




World Bank says recession worse than thought (National Post, 090622)


The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.


The world economy will contract 2.9%, compared with a previous forecast of a 1.7% decline, the Washington-based lender said in a report on Monday. Growth will be 2% next year, down from a 2.3% prediction, the bank said.


The bank, formed after World War II to fund health and development projects in poor countries, said that while a global recovery may begin this year, impoverished economies will lag behind rich nations in benefiting. The lender called for “bold” actions to hasten a rebound and said the prospects for securing aid for the poorest countries were “bleak.”


“The recovery is not going to be V-shaped,” said Alvin Liew, an economist at Standard Chartered Bank in Singapore. “We may see slower consumer demand over a prolonged period.”


The bank is more pessimistic than its sister organization, the International Monetary Fund. The IMF, which is forecasting a global contraction of only 1.3% this year and growth of 2.4% in 2010, said June 19 that it plans to revise estimates “modestly upward.”


The lender’s view also contrasts with that of billionaire hedge fund manager George Soros, who on June 20 told Polish television that the worst of the global financial crisis “is behind us.”


The MSCI Asia Pacific Index of stocks rose 1.3% as of 2:22 p.m. in Tokyo, led by BHP Billiton Ltd. and China Mobile Ltd.


The World Bank cut its forecast for the U.S. this year, calling for a 3% drop in the world’s biggest economy, after predicting a 2.4% contraction in March.


Japan’s gross domestic product will shrink 6.8%, more than the previous prediction of a 5.3% decline, the lender said. The euro area’s economy may shrink 4.5%, compared with the previous estimate of a 2.7% contraction.


Global trade may drop by 9.7%, compared with a March forecast of a 6.1% decline.


“Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,” the World Bank said. While the world is set to return to growth in the second half of 2009, a recovery will be subdued, the report said.


Reduced capital inflows from exports, remittances and foreign direct investment means “increasingly grave economic prospects” for developing nations, the lender said. After peaking at US$1.2 trillion in 2007, inflows this year may fall toUS$363 billion, it said.


Reduced aid from advanced economies because of the economic crisis will also likely weigh on their finances, the bank said.


Economic growth in the developing world will be 1.2%, the World Bank said, scaling its outlook back from 2.1%. Developing nations in eastern Europe and Central Asia will be some of the hardest hit, the revised forecasts show. The region’s economy is likely to shrink 4.7% this year, down from the 2% decline projected in March.


China, which is the biggest of the developing economies, will keep pumping money into its financial system during this “critical” phase of its recovery, Premier Wen Jiabao said in a statement on the government’s Web site yesterday.


Efforts to revive domestic economies through stimulus spending should be coordinated internationally, the bank said.


“Any country that acts alone — even the United States — may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing,” the report said.


The U.S. is implementing a two-year,US$787-billion stimulus package, while China is spending US$585-billion.




U.S. loses equivalent of every job created in decade (National Post, 090702)


The U.S. economy has lost the equivalent of every job created in the past nine years.


All job growth since the final year of the dot-com bubble, its recovery from the bust, and the ensuing six years of consumer-driven boom is now gone, leading some economists to fear an outright decline in wages will be next. Others believe the United States is on track for a painful “jobless recovery.”


“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007,” said Heidi Shierholz, an economist at Washington-based think tank The Economic Policy Institute. “It is apparent that, despite the substantial positive impact of the February recovery package, the economy’s dramatic deterioration from November to March was even greater than anticipated.”


Non-farm employment fell for the 18th consecutive month in June, dropping by a worse-than-expected 467,000, U.S. Bureau of Labor Statistics figures showed Thursday. The decline marked the longest run of job destruction in the post World War II period.


Since the recession began in December 2007, the jobs market has shrunk by 6.5 million positions, pushing the unemployment rate up 4.6 percentage points to 9.5% — the highest rate since 1981. Nine million part-time workers are in want of full-time jobs, and a record 29% of unemployed have been jobless for more than six months.


Derek Holt, vice-president economics at Scotia Capital said the U.S. unemployment rate would likely eclipse the 10.8% record set during the early 1980s recession.


“This has become, without question, the worst ever post-war pace of job market downsizing in the U.S. economy,” Mr. Holt said.


He said unemployment would weigh on an economic recovery by restraining consumer spending. It would also cause further concerns about credit quality and retail bank revenue growth.


The employment market’s problems do not end at job losses. Earnings are under pressure. Average hourly earnings rose an annualized 0.7% in the past three months — the smallest gain since records began in 1964. The annual change in hourly earnings slipped to a rise of 2.7% from 3% the previous month.


“Wages will soon be falling outright, a classic deflation signal,” said Ian Shepherdson, the chief U.S. economist at High Frequency Economics.


Compounding problems, average hours worked fell further in June to be down 0.8% to a cyclical low of 33 hours a week. The average workweek has shrunk 8.2% since the start of the recession, placing added pressure on household cash flows. It also means employers will be slow to hire because there is ample room to increase work hours.


Sal Guatieri, an economist at BMO Capital Markets, said the conditions increasingly pointed to what is known as a “jobless recovery,” where economic growth returns without a corresponding rise in employment.


He said the decline in work hours could weigh on gross domestic product in the second and third quarters, and could cause GDP to come in worse than predicted. BMO has forecast the U.S. economy to contract by an annualized 2.9% in the second quarter and remain flat in the third quarter.


The dispirited outlook for the United States will have a direct impact on Canadian jobs by keeping business conditions weak. Dale Orr of Dale Orr Economic Insight said Canada’s unemployment rate would likely peak near 10% in early 2010, up from 8.4% now. “I do not expect solid reductions in the unemployment rate until 2012,” he said.


There was one positive in the U.S. employment report: the pace of job losses in June remained lower than the massive declines of winter, when a record 741,000 jobs were lost in January alone. Even so, it was the first increase in the number of job losses in five months. A large part of the decline in June was due to a 49,000 drop in government employment, mostly due to layoffs of temporary workers hired to prepare the 2010 Census.


But Wednesday’s rise in the purchasing managers index, which reflected expansion for a second consecutive month, suggested better employment conditions ahead.


“Historically, firms will wait for production to expand for a few months before they start adding to payrolls,” said Stéfane Marion, the chief economist at National Bank Financial. “This development suggests a much better tone to labour markets by this fall.”




Retirement age needs to be 70: think-tank (National Post, 090703)


OTTAWA — Immigration to Canada would need to more than double from current levels, surpassing 600,000 a year, to offset the drag on living standards from an ageing population — a scenario that is “unrealistic,” a prominent think-tank warns in an analysis.


As a result, policymakers need to focus on potentially controversial initiatives that would delay the normal age of retirement, from 65 to 70, and persuade Canadian families to have more children, says the C.D. Howe Institute-issued paper, released Thurday.


Further, governments must revisit the country’s lacklustre productivity growth, which has taken a backseat as legislators have crafted policies aimed at mitigating the impact of the financial crisis.


William Robson, the think-tank’s president, said the changing demographics have to be dealt with because left unchecked, growth in the workforce and economic output will slow.


Furthermore, working-age households will have more of their income tapped by governments to cover the increased costs associated with paying out pension benefits and health-care for Baby Boomers.


“One of the concerns you have to have is that if people think immigration is going to solve the problem, they aren’t going to look at anything else,” Mr. Robson said.


But, he warned, policy makers need to look at other options. Based on scenarios and simulations the think-tank conducted, it found Canada would need “huge” increases in immigration — roughly 2.5 times the current pace, of roughly 225,000 and 255,000 per year — to offset the number of elderly people expected to leave the workforce.


That type of increase is “unrealistic,” the C.D. Howe study concluded.


Canada is not alone in dealing with the impact of an ageing population. In the United States, the White House is looking to revamp the health-care system on the fear that its Medicare program could become insolvent in less than a decade as demand from retired Baby Boomers escalates.


Under roughly status quo conditions, the think-tank suggested the so-called old-age dependency rate — or the ratio of Canadians 65 and over to those of working age — will skyrocket from its current 21% level to over 45% by 2058.


To delay and mute the rise of the dependency rate, policy makers should look to policies that delay the retirement age, to 70, and promote higher fertility rates.


The study said advances in longevity and shifts toward later entry into the workforce means that the equivalent of working until age 65 in 1970 is now working until at least age 70. “A later ... retirement age would provide a medium-term boost to workforce growth,” the study said.


Mr. Robson noted Ottawa has moved in the right direction with changes to the Canada Pension Plan, announced in May, that reward Canadians who delay retirement until age 70 with richer benefit.


But he said more is needed, including an official change to the retirement age to 70. But he acknowledged that would be politically unpopular and could spark a war with public-sector unions, whose members are entitled to collect their rich defined-benefit pensions at 65.


Further, Mr. Robson said politicians should look at ways at boosting fertility rates. Quebec attempted to increase family sizes in the late 1980s with a bonus of up to $8,000 per birth of a child.


“There’s no debate about at all, it is almost like a taboo subject — but I don’t think that’s reasonable at all,” Mr. Robson said.


In the end, however, the study indicated one of the best options available to government is to try and improve growth in labour productivity, or the output per hour of worked. Productivity rose 0.3% in the first quarter, the largest such gain in two years.


“Unlike later retirement, faster productivity growth involves an ongoing, rather than one-time shift,” the study said. “And unlike higher fertility, it increases incomes without increasing the number of people among whom the higher incomes must be divided.”




Swings in Price of Oil Hobble Forecasting (Paris, International Herald, 090705)


The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.


The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.


A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55% since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.


“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”


Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.


At the close of last week’s trading, oil futures fell $2.58, to $66.73 a barrel, after rising above $72 a barrel last month.


These gyrations have rippled across the economy. The automakers General Motors and Chrysler have been forced into bankruptcy as customers shun their gas guzzlers. Airlines are on pace for another year of deep losses because of rising jet fuel costs.


And households, already crimped by falling home prices, mounting job losses and credit pressures, are once more forced to monitor their discretionary spending as energy prices rise.


While the movements in the oil markets have been similar to swings in most asset classes, including stocks and other commodities, the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.


Government officials around the world have become concerned about a possible replay of last year’s surge. Energy officials from the European Union and OPEC, meeting in Vienna last month, said that “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated” without more oversight.


Many factors that pushed oil prices up last year have returned. Supply fears are creeping back into the market, with a new round of violence in Nigeria’s oil-rich Niger Delta crimping production. And there are increasing fears that the political instability in Iran could spill over onto the oil market, potentially hampering the country’s exports.


The OPEC cartel has also been remarkably successful in reining in production in recent months to keep prices from falling. Even as prices recovered, members of the Organization of the Petroleum Exporting Countries have been unwilling to open their taps.


Top officials said that OPEC’s goal was to achieve $75 a barrel oil by the end of the year, a target that has been endorsed by Saudi Arabia, the group’s kingpin.


“Neither the organization, nor its key members, has any real interest in halting the rise in oil prices,” said a report by the Center for Global Energy Studies, a consulting group in London founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister.


But unlike last year, when the economy was still not in recession and demand for commodities was strong, the world today is mired in its worst slump in over half a century. The World Bank warned the recession would be deeper than previously thought and said any recovery next year would be subdued.


The International Energy Agency held out the prospect that energy demand was unlikely to recover before 2014. Yet the indicators that would traditionally signal lower prices — like high oil inventories or OPEC’s large spare production capacity — do not seem to hold much weight today, analysts said.


“Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” Deutsche Bank analysts said in a recent report.


Investors are betting that the worst of the economic slump may be coming to an end, and are bidding up what they perceive will become scare resources once demand kicks back again, analysts said. This uncertainty is making it difficult for companies to plan ahead, they said.


“People do not like that kind of volatility, they want to know what their costs are going to be,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group.


For the global airline industry, the latest price surge is certain to translate into more losses this year, according to the industry’s trade group, I.A.T.A. Airlines are expected to post losses of $9 billion this year, following last year’s losses of $10.4 billion. “Airlines have not yet felt the full impact of this oil price rise,” according to I.A.T.A.’s latest report.


At Southwest Airlines, for example, fuel accounts for about a third of the company’s costs, according to Ms. Wright, the chief financial officer. The experience of the past year, she said, “has convinced us we cannot afford to not be hedged.”


The company has currently hedged part of its fuel use for the second half of the year at $71 a barrel, and for 2010 at $77 a barrel. Hedging acts as an insurance policy if prices rise above these levels.


But last year, Southwest reported two consecutive quarters of losses, as prices spiked and collapsed — all within a few months. “Prices were falling faster than we could de-hedge,” Ms. Wright said.


To survive the slump, many airlines have cut routes and raised both fares and fees, like charging for luggage, while some of the industry’s top players have merged. For example, Delta Air Lines bought Northwest Airlines last year, and in Europe, Lufthansa of Germany bought Austrian Airlines and Air France-KLM acquired Alitalia of Italy.


Likewise, automobile showrooms emptied out as gasoline prices rose, forcing General Motors and Chrysler to cut production sharply as they wade through bankruptcy. Meanwhile, they are under pressure from Washington to improve their fuel ratings.


“Do not believe for an instant that sport utilities are making a comeback,” George Pipas, Ford’s chief sales analyst, told reporters last week.


But to Jeroen van der Veer, who retired as chief executive officer of Royal Dutch Shell last week, prices are increasingly dictated by long-term assessments of supply and demand, rather than current market fundamentals. He advised taking a long-term view of the market.


“Oil has never been very stable,” Mr. van der Veer said. “If you look at history, you have to expect more volatility.”




In Europe, Economic Signs Point to a Recovery (Paris, International Herald, 090813)


Workers at a foundry in Schmiedeberg, in eastern Germany. Europe’s economy strengthened unexpectedly in the second quarter, indicating the recession would likely end later this year.


FRANKFURT — The European economy bounced back with unexpected strength in the second quarter after contracting sharply at the beginning of 2009, data released Thursday showed. The statistics offered the clearest evidence yet that a searing recession would probably become a very modest expansion later this year, but many economists believe that the European recovery could slacken or stall in 2010.


The economy of the 27-nation European Union shrank 0.3% in the three months through June, or at an annual rate of roughly 1.2%. The 16 countries that use the euro, the common European currency, registered a 0.1% decline in activity for the second quarter, an annual rate of roughly 0.4%.


The dramatic easing of the recession put Europe roughly on par with the United States, where the economy shrank at an annual pace of 1% during the same period. That reflected the ebbing of an acute shock that rippled through economies worldwide after the collapse of Lehman Brothers and the subsequent chaos in financial markets.


However, economists expect a divergence in performance between the United States and Europe next year as lagging efforts to repair a damaged banking system in key countries like Germany and sharply rising unemployment tarnish the outlook in Europe over the next six months.


“We will really see the difference in recoveries next year,” said Thomas Mayer, chief Europe economist at Deutsche Bank in London. “That will be when the U.S. bounces back more quickly than Europe.”


Signs that both the U.S. and European economies are turning a corner may be good news for Asia’s export-driven economies.


Despite being in negative territory, the European data underscore a sharp recovery from the first quarter of this year, when both the EU and the euro zone saw a 2.5% contraction compared to the previous quarter.


Underlying the surprisingly strong reading were solid performances in France and Germany, both of which grew by 0.3% in the second quarter, government data showed.


Germany, Europe’s largest economy, will still probably see its gross domestic product contract by about 6% for the full year, economists say.


Within the euro area, France and Germany are balancing out much weaker performances in Italy, a perpetual laggard, and Spain, where a collapsing housing market has brought an acute recession. And Eastern Europe — particularly in Hungary and the Baltic economies — remains deeply troubled.


The surprise expansion in Germany — most economists had expected a flat or slightly negative reading — underscores how the country’s exporters are benefiting from growth in Asia and what may be a bottoming of the downturn in the United States. The news comes after four straight quarters of contracting output in Germany, meaning the nation’s recession, its worst since World War II, has technically ended.


Economists are now debating about whether the V-shaped recovery can get traction or whether rising joblessness will drag down consumption and shake consumer confidence, leading to another dip later this year — a so-called W-shaped expansion.


“An export-driven, V-shaped recovery in the second half of this year is in the pipeline,” said Andreas Rees, chief Germany economist at UniCredit in Munich.


But Erik Nielsen, chief Europe economist at Goldman Sachs in London, said: “You might get something resembling a W simply because of the strength of the rebound.


“It’s almost mathematical after the deep trough” in the first quarter, he added.


Other developments are weighing on the European outlook, creating uncertainty about how the economy will shape up in 2010.


News last week that German exports had leapt 7% in June over the previous month foreshadowed the positive reading on gross domestic product. But that masked an overall collapse of orders from abroad; German exports in June were down 22% compared with a year earlier.


And unemployment is expected to rise sharply later this year as a raft of government programs that kept people on private payrolls throughout Europe begin to expire.


Already, the euro area’s unemployment rate stands at 9.4%, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate a political backlash in Europe, economists said.


“Growth is not going to get where it needs to be to the point where companies do not have to fire their surplus workers,” said Julian Callow, chief Europe economist at Barclays Capital in London.


The financial system is another cloud on the horizon, though it may be healing faster than expected.


The International Monetary Fund has criticized Europe for not moving quickly enough to recapitalize banks and clean balance sheets of bad assets. However, the European Central Bank projects lower losses in Europe than the I.M.F., suggesting a banking recovery is under way.


The most recent data from the E.C.B. suggests credit flows are easing, although individual countries still report problems with longer-term loans. “We have to worry about tighter credit less than we thought we did earlier in the year,” Mr. Callow said.




UAE to Back Banks Amid Dubai Meltdown (Foxnews, 091129)


DUBAI, United Arab Emirates  —  The United Arab Emirates’ central bank said Sunday it would offer additional liquidity to banks, signaling a push by the federal government to reassure investors worried about the country’s banking sector and its exposure to Dubai’s crushing debt.


Global equity markets were set to reopen Monday, and investors are worried about a routing similar to that seen last week after Dubai’s chief engine for growth, Dubai World, announced it wanted more time to pay some of its roughly $60 billion in debts.


The UAE’s official WAM news agency said the central bank issued a notice to Emirati banks and foreign banks with branches in the country saying it would make available “a special additional liquidity facility linked to their current accounts at the central bank.” The statement said the facility can be drawn upon at a rate of 50 basis points — half a percent — above the three-month Emirates interbank offered rate.


International investors reacted with shock and outrage at Dubai World’s announcement Wednesday that, as part of its restructuring effort, it would ask creditors to delay repayment of its debt and that of its real estate arm, Nakheel, until at least May. Nakheel has a $3.5 billion bond coming due in December.


The company’s roughly $60 billion in debt makes up the brunt of the at least $80 billion Dubai owes as a result of a meteoric decade-long growth boom that saw the tiny city-state transformed into a Middle Eastern Las Vegas, New York and Los Angeles all wrapped into one. Dubai World was a key driver of that growth, with interests ranging from ports to real estate.


In the days since the announcement, Dubai officials have gone to neighboring Abu Dhabi, the oil-rich home to the federal government for a series of meetings. Some analysts have speculated that the timing of Dubai World’s announcement — on the eve of a three-day Islamic holiday — caught even Abu Dhabi’s rulers by surprise, putting them under pressure to act decisively in a bid to shore up confidence in the country’s banks.


Emirati banks are believed to be shouldering a large chunk of Dubai’s debts, and international ratings agencies have either downgraded the ratings of some of the country’s banks — or at least placed them on review for further downgrades — citing exposure to Dubai World’s debt.


The central bank’s statement was also aimed mitigating any negative fallout on the country as a whole, with concerns that Abu Dhabi would be branded with the same iron of pessimism and skepticism that Dubai will likely endure for years to come.


The UAE’s banking system is “more sound and liquid than a year ago,” the bank said.


Dubai World’s call for more time is seen by many analysts as a classic case of over-extension — a tale of a city-state whose dreams for development propelled it to stardom with its indoor ski-slopes, man-made islands and world’s tallest tower.


But that dream was built on borrowed time and money, and as the global recession hammered Dubai, driving property prices down by 50% in a year, forcing layoffs and project delays and cancellations, the emirate no longer had access to the easy credit on which it had pinned its growth.


It simply couldn’t pay.


At the beginning of the year, it launched a $20 billion bond program, of which $10 billion was snapped up by the UAE’s central bank. The same day Dubai World issued its murky statement about a debt-extension, the emirate’s government said a new $5 billion bond issuance had been bought up by two banks majority owned by Abu Dhabi.


While the Dubai World statement made clear that the bonds were not linked to its debt woes, it was obvious that the emirate had little recourse but to turn to Abu Dhabi, whose more conservative growth was fueled by the same oil that Dubai lacks.


Dubai’s debt saga is not new.


It’s been obvious for some time that the emirate owes more money than it can repay. But what remained unclear was the overall extent of the debt load and what officials were doing to avert a panic at a time when the world was in the nascent stages of emerging from its worst recession in over six decades.


UAE newspaper Al-Itihad on Sunday quoted an unidentified Dubai World official as saying the conglomerate, over the past few months, “totally rejected the idea of selling some of its good investment and real estate assets at low prices.”


The official said that any asset sale needed to be in a “commercially fair manner in order to achieve (Dubai World’s) long-term strategic objectives, away from ... economic pressures.”




Canada to lead G7 in 2010 recovery: RBC (National Post, 091214)


OTTAWA — Although Canada experienced a deep recession for most of 2009, the country is now expected to lead the G7 in economic recovery next year, according to a report released Monday by RBC Economics.


The report stated that after contracting at an average rate of 2.5% this year, real GDP is expected to rise by 2.6% in 2010 as stimulus spending reaches its peak. GDPis expected to jump to 3.9% in 2011, it said.


“While challenges remain, a peak in stimulus and infrastructure spending across the federal, provincial and municipal governments, along with low interest rates, should result in a sustained recovery,” said Craig Wright, senior vice-president and chief economist at RBC.


“The price tag for the stimulus is high with large budget deficits, but it is still lower, relative to GDP, than the peaks reached in the early 1990s.”


With interest rates low and confidence improving, consumer spending is projected to increase by 2.3% in 2010 and by 2.7% in 2011. However, the report also indicated the unemployment rate is expected to remain high at 8.7% in 2010 and fall to 7.8% in 2011.


On Friday, Finance Minister Jim Flaherty told reporters in Quebec City the federal government’s multi-billion-dollar stimulus package is just starting to gather speed now as environmental assessments for infrastructure projects are completed.


Earlier this month, Statistics Canada said the economy grew at an annual rate of 0.4% in the third quarter, marking the official end of recession. However, the growth was far lower than the 1% economists had forecast and the 2% predicted by the Bank of Canada.




China’s Export of Labor Faces Growing Scorn (Paris International Herald, 091220)


TRUNG SON, Vietnam — It seemed as if this village in northern Vietnam had struck gold when a Chinese and a Japanese company arrived to jointly build a coal-fired power plant. Thousands of jobs would start flowing in, or so the residents hoped.


This is the eighth in a series of articles examining stresses and strains of China’s emergence as a global power.


Four years later, the Haiphong Thermal Power Plant is nearing completion. But only a few hundred Vietnamese ever got jobs. Most of the workers were Chinese, about 1,500 at the peak. Hundreds of them are still here, toiling by day on the dusty construction site and cloistered at night in dingy dormitories.


“The Chinese workers overwhelm the Vietnamese workers here,” said Nguyen Thai Bang, 29, a Vietnamese electrician.


China, famous for its export of cheap goods, is increasingly known for shipping out cheap labor. These global migrants often work in factories or on Chinese-run construction and engineering projects, though the range of jobs is astonishing: from planting flowers in the Netherlands to doing secretarial tasks in Singapore to herding cows in Mongolia — even delivering newspapers in the Middle East.


But a backlash against them has grown. Across Asia and Africa, episodes of protest and violence against Chinese workers have flared. Vietnam and India are among the nations that have moved to impose new labor rules for foreign companies and restrict the number of Chinese workers allowed to enter, straining relations with Beijing.


In Vietnam, dissidents and intellectuals are using the issue of Chinese labor to challenge the ruling Communist Party. A lawyer sued Prime Minister Nguyen Tan Dung over his approval of a Chinese bauxite mining project, and the National Assembly is questioning top officials over Chinese contracts, unusual moves in this authoritarian state.


Chinese workers continue to follow China’s state-owned construction companies as they win bids abroad to build power plants, factories, railroads, highways, subway lines and stadiums. From January to October 2009, Chinese companies completed $58 billion of projects, a 33% increase over the same period in 2008, according to the Chinese Ministry of Commerce.


From Angola to Uzbekistan, Iran to Indonesia, some 740,000 Chinese workers were abroad at the end of 2008, with 58% sent out last year alone, the Commerce Ministry said. The number going abroad this year is on track to roughly match that rate. The workers are hired in China, either directly by Chinese enterprises or by Chinese labor agencies that place the workers; there are 500 operational licensed agencies and many illegal ones.


Chinese executives say that Chinese workers are not always less expensive, but that they tend to be more skilled and easier to manage than local workers. “Whether you’re talking about the social benefits or economic benefits to the countries receiving the workers, the countries have had very good things to say about the Chinese workers and their skills,” said Diao Chunhe, director of the China International Contractors Association, a government organization in Beijing.


But in some countries, local residents accuse the Chinese of stealing jobs, staying on illegally and isolating themselves by building bubble worlds that replicate life in China.


“There are entire Chinese villages now,” said Pham Chi Lan, former executive vice president of the Vietnam Chamber of Commerce and Industry. “We’ve never seen such a practice on projects done by companies from other countries.”


At this construction site northeast of the port city of Haiphong, an entire Chinese world has sprung up: four walled dormitory compounds, restaurants with Chinese signs advertising dumplings and fried rice, currency exchanges, so-called massage parlors — even a sign on the site itself that says “Guangxi Road,” referring to the province that most of the workers call home.


One night, eight workers in blue uniforms sat in a cramped restaurant that had been opened by a man from Guangxi at the request of the project’s main subcontractor, Guangxi Power Construction Company. Their faces were flushed from drinking Chinese rice wine. “I was sent here, and I’m fulfilling my patriotic duty,” said Lin Dengji, 52.


Such scenes can set off anxieties in Vietnam, which prides itself on resisting Chinese domination, starting with its break from Chinese rule in the 10th century. The countries fought a border war in 1979 and are still engaged in a sovereignty dispute in the South China Sea.


Vietnamese are all too aware of the economic juggernaut to their north. Vietnam had a $10 billion trade deficit with China last year. In July, a senior official in Vietnam’s Ministry of Public Security said that 35,000 Chinese workers were in Vietnam, according to Tuoi Tre, a progressive newspaper. The announcement shocked many Vietnamese.


This is the eighth in a series of articles examining stresses and strains of China’s emergence as a global power.


“The Chinese economic presence in Vietnam is deeper, more far-reaching and progressing faster than people realize,” said Le Dang Doanh, an economist in Hanoi who advised the preceding prime minister.


Conflict has broken out between Vietnamese and Chinese laborers. In Thanh Hoa Province in June, a drunk Chinese worker from a cement plant traded blows with the husband of a Vietnamese shopkeeper. The Chinese man then returned with 200 co-workers, igniting a brawl, according to Vietnamese news reports.


One reason for the tensions, economists say, is that there are plenty of unemployed or underemployed people in this country of 87 million. Vietnam itself exports cheap labor; a half-million Vietnamese are working abroad, according to a newspaper published by the Vietnam General Confederation of Labor.


Populist anger erupted this year over a contract given by the Vietnamese government to the Aluminum Corporation of China to mine bauxite, one of Vietnam’s most valuable natural resources, using Chinese workers. Dissidents, intellectuals and environmental advocates protested. Gen. Vo Nguyen Giap, the 98-year-old retired military leader, wrote three open letters criticizing the Chinese presence to Vietnamese party leaders.


No other government in the world so closely resembles that of China as Vietnam’s, from the structure of the Communist Party to economic policies and media controls. Vietnamese leaders make great efforts to ensure that China-Vietnam relations appear smooth. So over the summer, the central government shut down critical blogs, detained dissidents and ordered Vietnamese newspapers to cease reporting on Chinese labor and the bauxite issue.


But in a nod to public pressure, the government also tightened visa and work permit requirements for Chinese and deported 182 Chinese laborers from a cement plant in June, saying they were working illegally.


Vietnam generally bans the import of unskilled workers from abroad and requires foreign contractors to hire its citizens to do civil works, though that rule is sometimes violated by Chinese companies — bribes can persuade officials to look the other way, Chinese executives say.


At the Haiphong power plant, the Vietnamese company that owns the project grew anxious this year about the slow pace of work. It sided with the Chinese managers in pushing government officials to allow the import of more unskilled workers.


The Chinese here are sequestered in ramshackle dorm rooms and segregated by profession: welders and electricians and crane operators.


A poem written on a wooden door testifies to the rootless nature of their lives: “We’re all people floating around in the world. We meet each other, but we never really get to know each other.”




Numbers on jobless benefits continue to decline in Canada (National Post, 091222)


OTTAWA - The number of people receiving employment insurance benefits declined in October, continuing a downward trend that began in July, Statistics Canada reported Tuesday.


Regular EI beneficiaries were down 0.5% from September to 809,600, the federal agency said. Still, beneficiaries were up 61.8%, or 309,300, from a year earlier.


“The number of regular EI beneficiaries peaked in June at 829,300. Since then, it has declined slightly,” it said. “This is in contrast with the trend from October 2008 to June 2009, when monthly increases averaged 41,100 people.”


Meanwhile, the number of initial and renewal claims received in October totalled 270,300, down by 7,000 or 2.5%, the agency said, noting the biggest decline was in Ontario.


“The number of EI claims received has been on a downward trend since the most recent peak in May 2009.”




Credit Agency Warns U.S. and Others of Risk to Top Rating (Paris, International Herald, 100315)


PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.


The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”


“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”


Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.


Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.


Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country.


In the United States, the Obama administration estimates that the deficit will rise to 10.6% of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64% of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4% of G.D.P.


For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7% in the current year, after peaking at 10.0% two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”


In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90% of G.D.P. — could balloon, undermining the credit rating.


In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially.


Pierre Cailleteau, managing director of sovereign risk at Moody’s, noted that “discretionary fiscal adjustment” — cutting programs or raising taxes — has become “the principal means of repairing the damage that the global crisis has inflicted on government balance sheets,” and it remains to be seen whether governments are capable of carrying out the painful measures necessary.


“Growth will support some governments’ adjustment plans more than those of others,” Mr. Cailleteau said in the report, “but no government can rely on it.”


There is also a danger that, with governments unwilling or unable to begin withdrawing stimulus, central banks could take the initiative to raise interest rates before the economy is ready, the report found. Such a situation might “quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.”


Moody’s praised Spain’s recent efforts to address its finances, although “its adjustment process will undoubtedly be drawn out and painful.”


As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.




The Blog Prophet of Euro Zone Doom (Paris International Herald, 100608)


BARCELONA, Spain — For years, almost nobody paid attention to the sky-is-falling alarms of Edward Hugh, a gregarious British blogger and self-taught economist who repeatedly predicted that the euro zone could not survive.


Living a largely hand-to-mouth existence here on his part-time teacher’s salary, he sent one post after another into the Internet wilderness. It was the height of policy folly, he warned, to think that aging, penny-pinching Germans could successfully coexist under one currency umbrella with the more youthful, credit-card-wielding Irish, Greeks and Spaniards who shared the euro with them.


But now that the European sovereign debt crisis is rattling world markets, driving the euro lower almost every day and raising doubts about the future of the monetary union, his voluminous musings have become a must-read for an influential and growing global audience, including policy makers in the White House.


He has even been courted by the International Monetary Fund, which recently asked him to fly to Madrid to assist in its analysis of the Spanish economy.


“It’s quite nice, actually,” Mr. Hugh, 61, said with amusement as he leaned back in a plush town car that was taking him to his latest speaking engagement organized by the Círculo de Economía, an influential business lobbying group in Barcelona. “I am meeting all sorts of interesting people and they are paying me to have lunch with them.”


But in other ways, his life has changed very little. Last week, in fact, he even had to borrow money from friends to buy clothes presentable enough to allow him to address the conference of Spanish politicians and business executives. He still mostly supports himself by teaching English to locals here, where he has lived for two decades.


“I guess I am countercyclical,” he said with a laugh. “For all the years during the boom when everyone was doing well here, I wasn’t doing anything. Now I am a household name in Catalonia.”


Well, not quite. The idea of the economist as a pop celebrity in the mold of a Nouriel Roubini, whose early prediction that the United States housing market would collapse later brought him fame and a worldwide consulting brand, or a Paul Krugman, the Nobel-winning economist who writes an Op-Ed Page column for The New York Times, is still unformed in Europe and in particular in Spain.


But as questions rise over how European governments can escape their debt trap and resume growth, Mr. Hugh, who has been pondering this topic for years, is for the first time being turned to for insights and wisdom.


His bleak message, in newspaper columns, local television and radio appearances, and in meetings with officials, is almost always the same: since Spain and other struggling countries of the euro zone like Greece, Portugal, Ireland and Italy cannot devalue their common currency unilaterally, they have little choice but to endure what would essentially be a 20% internal devaluation instead. That means their public and private sector wages need to fall by roughly that amount if those countries are ever to restore competitiveness, lift exports and bring in the cash needed to pay down their debts.


“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more. The younger a country is, the more dependent it is on credit to get growth.”


Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries.


By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust. Wages were pushed up, encouraging spending but soon making it all but impossible for their industries to compete with the thrifty Germans, Dutch and other Northern Europeans.


Most economists, beholden as they are to their “promiscuous but essentially useless” economic models, Mr. Hugh rails, missed what he considers an easily predictable outcome. And that, he adds, “is why we are in such a big mess now.”


Mr. Hugh’s demographic thesis is not airtight: in fact, it was Italy, not Greece, that attracted his early attacks.


But Italy, perhaps because its overall debt level was already so high and its population was older, pursued a policy of greater fiscal rectitude than its neighbors and avoided a real estate bubble.


And Mr. Hugh’s main policy proposal — that Germany leave the euro, which would almost immediately push the value of the currency down sharply, improving competitiveness for the weaker countries that remained behind — reads better as a provocative blog post than as a practical solution.


Still, the sudden vulnerability of the euro zone and the search far and wide for answers by policy makers, investors and economists have caused his once obscure ramblings to go viral.


“He is an information channel that I value a lot,” said Brad DeLong, an economist at the University of California, Berkeley, who was a United States Treasury official in the administration of President Bill Clinton and a prominent blogger in his own right.


Mr. Hugh has also attracted a cult following among financial analysts.


“Edward was writing very clearly about the imbalances in Europe and the likelihood of a crisis long before it was even on the radar screen of economists or analysts,” said Jonathan Tepper of Variant Perception, a London research firm that caters to hedge funds and wealthy investors. “He is a thinking machine.”


At the same time, Mr. Hugh is determined to resist some of the newfound temptations that have lately come his way. He said he had turned down lucrative offers from hedge funds to provide exclusive research because he did not want his views monopolized by any one entity — although he said he was considering an offer to join the stable of contributors who work for Mr. Roubini.


And when the Michael Milken Institute — financed by Mr. Milken, a felon who managed to hang on to a fortune even after having to pay a $550 million fine for his actions during the junk-bond boom of the 1980s — paid him $3,000 for a short report he did in a day on Eastern Europe, Mr. Hugh gave the money to a friend who was having trouble paying her mortgage, he said.


“I don’t want to take a check from Michael Milken, thank you very much,” he said.


Born in Liverpool, Mr. Hugh studied at the London School of Economics but was drawn more to philosophy, science, sociology and literature. His eclectic intellectual pursuits kept him not only from getting his doctorate but also prevented him from landing a full-time professor’s job.


“I was once described by my departmental professor as a ‘thief’ for accepting my doctoral grant while continuing to spend my time reading the books and attending the courses that I chose to read and that I chose to attend,” he said.


Seeing himself more as a European than an Englishman, he moved to Barcelona in 1990.


His blog posts reflect his varied interests, often citing Bob Dylan, Charles Bukowski, Jean-Paul Sartre, Friedrich Nietzsche and even the sociable behavior of his beloved bonobos, the primate species that is the closest relative to humans in the animal kingdom.


Mr. Hugh cultivates the pale and shabby look of someone who has spent 12 to 14 hours a day sitting in front of a computer for the last 10 years.


But he is no recluse. His merry, convivial spirit and his religious adherence to the principles of reciprocity and exchange have made him a social networker par excellence. His embrace of the mores of Barcelona (he speaks fluent Catalan) has given him his own support network of middle-aged housewives as well, some of whom have provided him a place to live as he moves from abode to abode.


He currently lives in a farmhouse in a village of 60 people in northern Spain, where he writes for a suite of blogs — including A Fistful of Euros Global Economy Matters and a number of country-specific blogs that focus on the Japanese, Hungarian, Latvian and Greek economies. More than anything, though, he still mostly reads and thinks. He also maintains a vibrant Facebook page


“In the Middle Ages, curiosity in excess was regarded as a sin,” he said with yet another laugh. “But with the Internet, I feel that I can do what I like. This makes me feel that I can really do something.”




Employment for Minimum Wage Workers Falls by Over 10% after Hike (Employment Policies Institute, 100831)


States that Aggressively Expand Minimum Wage May Do More Harm Than Good


8/31/10, WASHINGTON – Today, the Employment Policies Institute (EPI) released a new study by economists Nicole Coomer of the Workers Compensation Research Institute and Walter Wessels of North Carolina State University that shows how increases in the minimum wage have a disproportionately harmful impact on those who work in minimum wage jobs.


“While raising the minimum wage is politically popular, the unintended consequences far outweigh the benefits,” said Michael Saltsman, research fellow at EPI. “This study shows that increases in the minimum wage erode the entry-level job market.”


Drs. Coomer and Wessels demonstrate that a 10% increase in the minimum wage causes as much as an 11.1% drop in employment for 16-to-19-year-olds working jobs that pay the minimum. For young teens aged 16 to 17 the employment loss is even higher at 13%.


A one page policy brief summarizing the study’s key findings is available here:


Total job loss is curbed by businesses not covered by the minimum wage; these businesses can offer alternative employment to those teen and entry-level workers shut out of a job by higher wage rates. But in states where the minimum wage has been raised or expanded beyond the federal level, fewer alternatives remain for teens—suggesting larger employment losses.


“Teens nationwide are facing an unprecedented 26% unemployment rate and are desperately in need of employers who can pay them a wage commensurate with their skills.” Saltsman continued. “This new research suggests that many state legislators were unwise to expand coverage of their own minimum wage beyond the federal level, leaving teens without an alternative.”


“There’s a cruel irony to this study’s findings: A higher minimum wage means fewer job opportunities for the young workers who traditionally fill minimum wage jobs,” Saltsman concluded.




The Money of Fools (, 100914)

Thomas Sowell


Seventeenth century philosopher Thomas Hobbes said that words are wise men’s counters, but they are the money of fools.


That is as painfully true today as it was four centuries ago. Using words as vehicles to try to convey your meaning is very different from taking words so literally that the words use you and confuse you.


Take the simple phrase “rent control.” If you take these words literally— as if they were money in the bank— you get a complete distortion of reality.


New York is the city with the oldest and strongest rent control laws in the nation. San Francisco is second. But if you look at cities with the highest average rents, New York is first and San Francisco is second. Obviously, “rent control” laws do not control rent.


If you check out the facts, instead of relying on words, you will discover that “gun control” laws do not control guns, the government’s “stimulus” spending does not stimulate the economy and that many “compassionate” policies inflict cruel results, such as the destruction of the black family.


Do you know how many millions of people died in the war “to make the world safe for democracy”— a war that led to autocratic dynasties being replaced by totalitarian dictatorships that slaughtered far more of their own people than the dynasties had?


Warm, fuzzy words and phrases have an enormous advantage in politics. None has had such a long run of political success as “social justice.”


The idea cannot be refuted because it has no specific meaning. Fighting it would be like trying to punch the fog. No wonder “social justice” has been such a political success for more than a century— and counting.


While the term has no defined meaning, it has emotionally powerful connotations. There is a strong sense that it is simply not right— that it is unjust— that some people are so much better off than others.


Justification, even as the term is used in printing and carpentry, means aligning one thing with another. But what is the standard to which we think incomes or other benefits should be aligned?


Is the person who has spent years in school goofing off, acting up or fighting— squandering the tens of thousands of dollars that the taxpayers have spent on his education— supposed to end up with his income aligned with that of the person who spent those same years studying to acquire knowledge and skills that would later be valuable to himself and to society at large?


Some advocates of “social justice” would argue that what is fundamentally unjust is that one person is born into circumstances that make that person’s chances in life radically different from the chances that others have— through no fault of one and through no merit of the others.


Maybe the person who wasted educational opportunities and developed self-destructive behavior would have turned out differently if born into a different home or a different community.


That would of course be more just. But now we are no longer talking about “social” justice, unless we believe that it is all society’s fault that different families and communities have different values and priorities— and that society can “solve” that “problem.”


Nor can poverty or poor education explain such differences. There are individuals who were raised by parents who were both poor and poorly educated, but who pushed their children to get the education that the parents themselves never had. Many individuals and groups would not be where they are today without that.


All kinds of chance encounters— with particular people, information or circumstances— have marked turning points in many individual’s lives, whether toward fulfillment or ruin.


None of these things is equal or can be made equal. If this is an injustice, it is not a “social” injustice because it is beyond the power of society.


You can talk or act as if society is both omniscient and omnipotent. But, to do so would be to let words become what Thomas Hobbes called them, “the money of fools.”




Part 2 (100915)


Words are supposed to convey thoughts, but they can also obliterate thoughts and shut down thinking. As Justice Oliver Wendell Holmes said, a catchword can “delay further analysis for fifty years.” Holmes also said, “think things, not words.”


When you are satisfied to accept words, without thinking beyond those words to the things— the tangible realities of the world— you are confirming what philosopher Thomas Hobbes said in the 17th century, that words are wise men’s counters but they are the money of fools.


Even in matters of life and death, too many people accept words instead of thinking, leaving themselves wide open to people who are clever at spinning words. The whole controversy about “health care reform” is a classic example.


“Health care” and medical care are not the same thing. The confusion between the two spreads more confusion, when advocates of government-run medical care point to longer life expectancies in some other countries where government runs the medical system.


Health care affects longevity, but health care includes far more than medical care. Health care includes such things as diet, exercise and avoiding things that can shorten your life, such as drug addiction, reckless driving and homicide.


If you stop and think— which catchwords can deflect us from doing— it is clear that homicide and car crashes are not things that doctors can prevent. Moreover, if you compare longevity among countries, leaving out homicide and car crashes, Americans have the longest lifespan in the western world.


Why then are people talking about gross statistics on longevity, as a reason to change our medical care system? Since this is a life and death issue, we need to think about the realities of the world, not the clever words of spinmeisters trying to justify a government takeover of medical care.


American medical care leads the world in things like cancer survival rates, which medical care affects far more than it affects people’s behavior that leads to obesity and narcotics addiction, as well as such other things as homicide and reckless driving.


But none of this is even thought about, when people simply go with the flow of catchwords, accepting those words as the money of fools.


Among the many other catchwords that shut down thinking are “the rich” and “the poor.” When is somebody rich? When they have a lot of wealth. But, when politicians talk about taxing “the rich,” they are not even talking about people’s wealth, and what they are planning to tax are people’s incomes, not their wealth.


If we stop and think, instead of going with the flow of catchwords, it is clear than income and wealth are different things. A billionaire can have zero income. Bill Gates lost $18 billion dollars in 2008 and Warren Buffett lost $25 billion. Their income might have been negative, for all I know. But, no matter how low their income was, they were not poor.


By the same token, people who have worked their way up, to the point where they have a substantial income in their later years, are not rich. In most cases, they never earned high incomes in their younger years and they will not be earning high incomes when they retire. A middle-aged or elderly couple making $125,000 each are not rich, even though politicians will tax away what they have earned at the end of decades of working their way up.


Similarly, most of the people who are called “the poor” are not poor. Their low incomes are as transient as the higher incomes of “the rich.” Most of the people in the bottom 20% in income end up in the top half of the income distribution in later years. Far more of them reach the top 20% than remain in the bottom 20% over the years.


The grand fallacy in most discussions of income statistics is the assumption that the various income brackets represent enduring classes of people, rather than transients who start at the bottom in entry-level jobs and move up as they acquire more experience and skills.


But if we are going to base major government policies on confusions between medical care and health care, or on calling people “rich” and “poor” who are neither, then we have truly accepted words as the money of fools.




Controversial study finds Boomers are over-saving by ‘hefty margin’ (National Post, 101002)


As Canadian Boomers begin to turn 65 next year, they might actually find themselves with more wealth than they need. A controversial new study by pension consultants Morneau Sobeco argues many Canadians are “over-saving by a hefty margin.”


For decades, the financial industry has been telling Canadians, especially those not belonging to rich guaranteed pension plans, that they aren’t saving enough for retirement. The long-established target was to build a nest egg big enough that it would replace 70% of working income. Achieving that number would allow retirees to maintain their standard of living.


With longevity, stock market crashes and economic downturns putting pressure on pension plans, the message to save more has become pitched in recent years. A case in point: A retirement-planning conference that opened this week in Toronto bills itself as confronting “Boomer fears, costs.”


But Morneau Sobeco’s paper, “Saving for Retirement: a Fresh Perspective,” argues the 70% income replacement target may be too high.


In the paper, the Montreal-based pension consultants refer to a 2009 report for the Department of Finance, which found the necessary retirement savings target closer to 50% for average families.


The argument is based on the assumption that people need less disposable income in retirement than they do in their working years. They likely have paid off the mortgage, the children have left the nest and they no longer have work-related expenses. The paper’s chief author, Fred Vettese, defines disposable income as the income remaining after pre-retirement expenses are deducted, but not expenses that continue such as taxes, food, shelter, clothing and entertainment.


Malcolm Hamilton, an actuary for pension and benefits consulting firm Mercer Canada, agrees a 50% target might suffice for average families. This is especially true as retirees will pay less income tax and won’t have to divert cash flow to retirement savings.


“Many of those in defined-benefit pension plans who replace 70% of their employment income will find they enjoy a better standard of living after retirement than when they were working,” he said.


He suggested some families should delay retirement saving until the mortgage and children are out of the way, and they can afford to save without a cut in their standard of living.


Low-income Canadians may not need to save at all to enjoy a standard of living in retirement comparable to when they worked, said Carleton University economics professor Frances Wooley in an interview. They will get Old Age Security, Canada Pension Plan, the Guaranteed Income Supplement and maybe some provincial top-ups.


The question of how much is enough for retirement is a hotly debated one.


Independent pension consultant Greg Hurst says “50% is a gross over-simplification that is less prudent than the equally gross over-simplification of 70%.”


Cary List, president of the Financial Planning Standards Council, said there is no “correct” number or “one-size-fits all” target.


It also depends on how generous one’s pension plan is. Those whose employers offer old-fashioned guaranteed defined-benefit pensions, now mainly found in the public sector, may not need to save much beyond their pension contributions.


But the financial industry argues there is a huge group of middle-income workers in the private sector who are underserved by employer pensions. Mr. Hurst said the Morneau Sobeco study merely underscores the “huge gap between public-sector employees and the unwashed masses of private-sector workers without pension plans.”


But if the new book Boomergeddon is accurate, it may be risky for non-savers to count on debt-ridden governments and employer plans to underwrite retirement. U.S. author Jim Bacon warns that for the vast majority of America’s 78 million aging Boomers, “retirement will be a bitter pill.” He predicts the U.S. social security system will start to implode around 2027, with benefits trimmed by a third, and what remains ravaged by inflation.




Geithner Calls for Global Cooperation on Currency (Paris International Herald, 101006)


WASHINGTON — Treasury Secretary Timothy F. Geithner warned Wednesday that the necessary rebalancing of the economy was “at risk of being undermined” by countries trying to prevent their currencies from rising in value.


Mr. Geithner, in a speech at the Brookings Institution, said that some of the world’s biggest economies should “focus on strengthening growth, rather than risking a premature shift to restraint” by cutting government spending too rapidly.


His message — aimed at countries like China and Germany, but also an appeal for support from other major economies — came as the International Monetary Fund predicted that the world economy would grow 4.2% next year, down from the estimate of 4.8% for this year, but that “a sharper global slowdown is unlikely.”


As finance officials from around the world gather here this weekend for the annual meetings of the I.M.F. and the World Bank, American officials are concerned that the degree of cooperation that was evident in the recent financial crisis is eroding as countries go their own ways. In particular, the Obama administration is looking to the I.M.F. to help bring about what months of negotiations have failed to achieve: greater exchange-rate flexibility by China.


Instead of the “competitive devaluation” of the 1930s, which exacerbated the Depression, the world faces a threat of “competitive non-appreciation,” Mr. Geithner said, citing a term coined by Edwin M. Truman, a former official at the Treasury and the Federal Reserve.


That was a reference not only to China but also Japan and Brazil, which have taken steps recently to prevent their currencies from rising in value.


“Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies,” Mr. Geithner said. “The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.”


In his speech, Mr. Geithner called the problem a “damaging dynamic” and a collective-action problem that “requires a collective approach to solve.” Later, in a question-and-answer session, Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”


His warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.


“The world economic recovery is proceeding,” the I.M.F. chief economist, Olivier J. Blanchard, said at a news conference. “But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries.”


As many as 210 million people worldwide may be unemployed, an increase of more than 30 million since 2007, the report found. Three-fourths of the increase has been in the most-developed economies.


In those advanced economies, growth is now projected at 2.7% for this year and 2.2% for next year — compared with 7.1% and 6.4%, respectively, for emerging and developing economies.


Developing Asia, which does not include Japan, South Korea and Taiwan, is expected again to lead the world in growth, with projected rates of 9.4% this year and 8.4% next year. The fund left its growth projections for China — 10.5% this year and 9.6% last year, the highest of any major economy — unchanged from July.


The fund slightly revised downward its projections for the United States, whose economy is projected to grow 2.6% this year and 2.3% next year. The euro area’s economy is expected to expand 1.7% this year and 1.5% this year.


The European projections were a slight uptick from July projections, largely on account of stronger-than-forecast growth in Germany, whose economy is expected to expand by 3.3% this year and 2.0% next year.


The biggest economies need to carefully calibrate efforts to restrain government deficits and debts without derailing the recovery by cutting off fiscal support too sharply, Mr. Blanchard said.


“If growth were to slow or even stop in advanced countries, emerging market countries would have a hard time decoupling,” he said, emphasizing the interconnectedness of the world economy. “The need for careful design at the national level, and coordination at the global level, may be even more important today than they were at the peak of the crisis a year and a half ago.”


In his remarks at the Brookings Institution, Mr. Geithner suggested that the European debt crisis had caused an overreaction.


“What happened in Europe in the spring was very, very damaging,” Mr. Geithner said. The euro-zone nations “took a long time, far too long” to agree to support their most heavily indebted members. The result, he said, was doubts about “whether Europe had the will or the ability to stand behind their members” and but also “an exaggerated shift” toward fiscal restraint in the healthier, bigger economies.


That remark seemed most directed at Germany, which has led European calls for fiscal restraint but could also apply to Britain, where a new Conservative government has pushed through drastic cuts in public spending. Without citing any nation by name, Mr. Geithner said that some countries were at risk of repeating a “classic mistake,” “which is to move prematurely to excess restraint.”


He said it was critical to distinguish countries like Greece, Ireland, Portugal and Spain, which he said “had no choice but to move very, very aggressively” to cut spending, from bigger, less indebted economies like the United States, which continue to enjoy very low interest rates for long-term borrowing, giving them more short-term room to maneuver.


But he also conceded that it was imperative for Congress and the administration to reach agreement on long-term measures to reduce the American deficit and stabilize the nation’s public debt level.




IMF fails to strike deal over currency frictions (Daily Telegraph, 101009)

The International Monetary Fund on Saturday night failed to reach agreement on tackling mounting global “frictions” over exchange rate policies despite US calls to deal with the issue more forcefully.


The IMF policy committee, which has been struggling to agree a consensus on easing currency tensions among key economies including China and the US, said the organisation should instead keep the issue under watch.


Pressure has been piling on China to speed up the pace of economic reform by dropping its policy of using a weak currency and reserve accumulation to boost exports. Finance ministers at the 187-strong lending agency have accused China of imperilling the global recovery by fostering the imbalances that are preventing deficit countries like the US and UK from returning to economic health.


IMF officials argue that if China let its currency appreciate, Chinese imports would become more expensive, potentially sparking demand for US goods. The US is facing crippling levels of unemployment despite returning to growth, which has raised fears of a “jobless recovery” that could trigger political and social unrest.


European Central Bank president Jean-Claude Trichet last night pointedly reminded China of its commitment last June to “engage in exchange rate flexibility”, adding: “There is no need for [emerging economies] to continue to accumulate immense amount of reserve assets.”


Earlier, US Treasury Secretary Timothy Geithner told the committee that the IMF had to speak more forcefully about how countries manage their currencies. He called on the IMF to “increase the candour of its surveillance” and said that “meaningful reform of IMF surveillance is a core challenge of the institution”.


Despite calls for tougher action, the IMF could only pledge to “work towards a more balanced pattern of global growth, recognising the responsibilities of deficit and surplus countries”.


Mr Trichet added that while “we have a consensus on imbalances, the problem is implementation – as always”. China on Friday hit back at calls for it to let the currency rise, saying it rejected such “shock therapy” but is committed to a more “flexible” currency regime.


George Soros, the respected hedge fund manager, also weighed into the debate. Speaking in London, he said a global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy. Mr Soros said the China had created a “lopsided currency” system and suggested it allow the yuan to appreciate by 10% a year – far more than the Chinese will contemplate.


The IMF Committee’s chairman Youssef Boutros-Ghali said at the conclusion of talks at the agency’s Washington headquarters that “frictions” did exist. “These are being addressed. We have come to the conclusion that the IMF is the place to deal with these issues,” he said.


IMF managing director Dominique Strauss-Kahn, when asked about the failure to come up with a stronger statement, said that “there is only one obstacle, and that is an agreement of the members”, before adding that the line was a joke. He added that “I don’t believe action can be done in a way other than in a co-operative way.”


Recent IMF figures showed Beijing had currency reserves of $2.447 trillion, the largest in the world and nearly 30% of the global total.




Currency wars are necessary if all else fails (Daily Telegraph, 101010)

The overwhelming fact of the global currency system is that America needs a much weaker dollar to bring its economy back into kilter and avoid slow ruin, yet the rest of the world cannot easily handle the consequences of such a wrenching adjustment. There is not enough demand to go around.


By Ambrose Evans-Pritchard


Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.


The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.


They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1% on the latest U6 index and rising again.


Each country is doing so for understandable reasons: Japan to avoid a deflationary crisis, China to hold together a political order that is more fragile than it looks. In both these cases they are trapped because they clung too long to a mercantilist export strategy, failing to wean themselves off American demand when the going was good.


Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.


The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 ‘a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.


This is what QE2 means, though Fed officials prefer to talk of their “mandate” of supporting employment. It is nothing like QE1, which was emergency action to halt the economic free-fall of late 2008 and early 2009. This time the Fed is using QE as a long-term tool to manage America’s chronic ailments.


Uber-dovish Fed comments over recent days have been enough to send the dollar crashing to a 15-year low of 82 against the Japanese yen, to below parity against Swiss franc, and back to the EMU pain barrier of $1.40 against the euro.


There was much tut-tutting about currency warfare at the IMF meeting over the weekend. “If one lets this slide into protectionism, we run the risk of the mistakes of the 1930,” said World Bank chief Robert Zoellick.


You have to say this kind of thing if you run a Bretton Woods institution, but in real life wars occur because somebody finds the status quo unacceptable, perhaps justifiably so. As Nobel economist Paul Krugman puts it: “people are looking for innocuous ways to deal with this problem, and there aren’t any”.


Devaluation was not the mistake of the 1930s: it was the cure, albeit a bad one. The Gold Standard broke down during the inter-war years because the US and France had structurally undervalued exchange rates (like China/Asia today) and ceased recycling their trade surpluses (like China/Asia today). This caused a deflationary downward spiral for everybody.


Escaping from such a deformed system was a path to recovery. The parallel with modern globalization – though not exact – is obvious. So is the 1930s lesson that currency and trade clashes are asymmetric: they are calamitous for surplus countries, but not always for deficit countries. Britain enjoyed a five-year mini-boom after retreating into an Empire trade bloc in 1932.


Fed chair Ben Bernanke knows his history. In a speech as a junior Fed governor he described Roosevelt’s 40pc devaluation against gold as “an effective weapon” against deflation and slump, adding “1934 was one of the best years of the century for the stock market”.


I suspect that the Bernanke Fed is working with the Treasury to steer the dollar lower, and above all to stop it rising again, since the global dollar index looks poised for a powerful rebound.


There is certainly something odd about the latest Fed rhetoric. New York chief William Dudley said inflation had fallen to “unacceptable” levels. Has it really? The Dallas Fed’s ‘trimmed-mean’ CPE inflation index has been creeping up over the last three months.


His Chicago colleague Charles Evans has called for “much more accommodation”. Why now? Bank credit has stopped contracting. The M2 money supply growth has accelerated sharply to a 7.4% rate over the last month of published data. The St Louis Fed’s monetary multiplier has edged up at last. By the Fed’s own account, the double-dip scare of the early summer has abated.


I happen to think that the Fed will need to launch QE2 on a big scale as US fiscal tightening bites, the inventory spike fades, and the housing foreclosure crisis gathers pace. But we are not there yet. Fresh QE cannot be justified at this juncture under any normal understanding of central bank policy.


Is the Fed in reality trying to shore up consumption by juicing asset prices, and trying to ensure that the effect boosts jobs at home rather than in China, Germany, or Japan by holding down the dollar?


This is a dangerous moment for the world, and may backfire against the US itself. We are already starting to see the same sort of rush into oil and resources that played such havoc in mid-2008, and may have been a key trigger for the Great Recession. There is a risk that this commodity shock will hit before QE stimulus filters through.


And while the French deny that they are in talks with China over the creation of a new currency regime, I heard French finance minister Christine Lagarde say in person at a meeting in Italy that France would use its G20 presidency to push for an alternative to the dollar. She specifically cited the “Bancor”, the idea floated by Keynes in the 1940s for a commodity currency priced off a basket of metals. The US risks gambling away the “exorbitant privilege” it has enjoyed for two thirds of a century as currency hegemon.


Yet the surplus states have most to lose if this brinkmanship tips into commercial war. They must know this, but what we are witnessing may run deeper than a calculus of advantage. Was it naïve to think that Confucian Asia and the old democracies of the Atlantic seaboard can share an open global trading system?




Expect some currency battles but not a war (Daily Telegraph, 101010)

It’s not just a crude scramble for recovery that’s making currencies central. The steady shift in capital flows towards emerging nations and a reshaping of the global economy to prevent a repeat of the crisis are as key.


By Richard Blackden


There are drawbacks to most professions. For those who make a living from the $4 trillion (£2.5 trillion) global foreign-exchange market, the weekend’s annual meeting of the World Bank and the International Monetary Fund will have been a reminder of theirs: the need to decipher the often elliptical prognostications of finance ministers, central bankers and assorted policy wonks.


A market used to analysing inflation, current accounts and comparative bond yields has spent the past fortnight digesting the increasing talk of a global currency war. The IMF’s communqiué made a veiled reference to the rising tensions, saying nations must “detract from policy actions” that would dent a global recovery.


Those in the markets are unsurprised that currencies appear to be taking centre stage three years after the financial crisis erupted. Governments have, after all, already yanked very hard on the monetary and fiscal levers to try to ignite growth, particularly in the US, Britain and Europe. “Policymakers will keep debating the use of the exchange rates to maintain growth,” said Mansoor Mohi Uddin, who runs currency strategy at UBS, the second-biggest bank in the market.


But it’s not just a crude scramble for recovery that’s making currencies central, experts say. The steady shift in capital flows towards emerging nations such as Brazil and a reshaping of the global economy to prevent a repeat of the crisis are as key. Both US President Barack Obama and the Coalition in Britain have pledged to put exports at the heart of economies that became too reliant on their own indebted consumers. At the same time, capital flows into fast-growing emerging economies are rising, putting upward pressure on their currencies. The Institute for International Finance, for example, forecasts that capital flows into emerging economies will jump to $825bn this year from $581bn in 2009.


So, inevitably, the mood has darkened. In the US, the House of Representatives this month passed a bill that would allow tariffs to be imposed on Chinese imports into America. But currency investors are as sceptical of a war breaking out this week.


What traders on dealing floors in London - the heart of the foreign-exchange market - are braced for are more central banks trying intervention on their own, and much higher volatility. “It’s guerrilla warfare,” said Thanos Papasavvas, head of currencies at Investec Asset Management. “The market will be having to listen to what the Bank of Japan says, then the Chinese, then the US.”


The Bank of Japan shocked markets in September by intervening for the first time since 2004, as it spent 2.1 trillion yen (£16bn) trying to halt the currency’s surge against the dollar. But it was only joining the South Koreans and the Israelis, who have already sought to weaken the won and the shekel against the dollar this year.


With many now expecting the greenback to slide further as the Federal Reserve embarks on another round of quantitative easing, investors say there is a real risk of tensions escalating.


Over the weekend, George Soros, perhaps the world’s best-known currency trader, joined the chorus predicting a battle. Papasavvas of Investec says the European Central Bank president, Jean-Claude Trichet, will be alarmed if the euro, already at an eight-month high of $1.39, moves much closer to $1.50.


Though currency traders may have had to spend the weekend unpicking the International Monetary Fund’s communique, the savvy ones could prove the winners as tensions mount.




US Federal Reserve set on QE2 course as dissenter speaks out (Daily Telegraph, 101012)


The Federal Reserve’s leading opponent against more quantitative easing said there’s “no strong evidence” it will work, as the minutes from the central bank’s last meeting cemented expectations that his colleagues believe more money printing is necessary.


By Richard Blackden, US Business Editor


Thomas Hoenig, the president of the Federal Reserve Bank of Kansas, on Tuesday launched his most strident attack yet against QE, arguing it would not help drive an economic recovery.


“There is simply no evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down,” Mr Hoenig told an audience in Denver.


However, the separate release of the minutes of the Fed’s Open Market Committee (FOMC) metting on September 21 underlined that Mr Hoenig is in a minority of one in his dissent.


Although the minutes acknowledged that FOMC members expect the recovery to be sustained in 2011, much of the nine-page statement emphasised their fears that an already faltering economy could lose further momentum. In particular, the minutes voiced concern over a slowing in business investment, muted inflation and the still high level of unemployment.


“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon.”


Stock markets were cheered by the news with the S&P 500 erasing losses after the release of the minutes, which also explained that the Fed’s statement of Sept 21 was designed to convery “members’ sense that such accommodation may be necessary before too long.


The FOMC, whose meetings are led by Fed chairman Ben Bernanke, also discussed specific measures that could be used in a new round of QE, including the purchase of longer-dated government bonds. The minutes also discussed ways of lifting inflation expectations as part of a drive to fuel growth.




China warns US against making yuan dispute a ‘scapegoat’ for a flagging economy (Daily Telegraph, 101015)

China has again warned the US not to use the dispute over the value of the Chinese currency, the yuan, as a “scapegoat” for its high unemployment and flagging growth prospects.


China warns US against making yuan dispute a ‘scapegoat’ for a flagging economy.

The artificially weak Chinese currency has become a political issue in the US where it is blamed for giving Chinese exporters an unfair advantage at the cost of US jobs. Photo: Getty


The remarks from China’s ministry of commerce came hours before the US was due to release a report on whether it considers China a “currency manipulator” as fears grow that tensions over the currency could lead to a protectionist trade war.


The report has been repeatedly delayed despite a growing chorus of demands from US legislators and union bosses for the Obama administration to take tougher action against China’s alleged trade distortions.


However Yao Jian, a Chinese Ministry of Commerce spokesman, rejected US complaints as unfair. “It’s totally wrong to blame the yuan for the Sino-U.S. trade imbalance,” he said, “The Chinese yuan shouldn’t be a scapegoat for the U.S.’ domestic economic problems.”


The artificially weak Chinese currency, which some analysts say is trading up to 25pc below its true market rate, has become a growing political issue in the US where it is blamed for giving Chinese exporters and unfair advantage at the cost of millions of US jobs.


However China has repeatedly said it cannot afford the costs of substantially re-valuing the yuan at a time when global demand for its exports remains weak and the recovery from the global recession remains fragile.


“Job losses would hurt the Chinese economy and domestic consumption. A relatively large yuan appreciation would definitely hurt Chinese exports, so a stable yuan exchange rate is needed for domestic consumption and the stability of the world economy,” Mr Yao added.


China has also said that legislation currently being formulated in the US to impose trade tariffs as a result of the yuan’s under-valuation would be in breach of World Trade Organisation regulations.


China has allowed the yuan to appreciate by 2.65pc against the dollar since June when the country’s central bank pledged to allow the currency to rise gradually. However the appreciation has been insufficient to quiet concerns in the US.


The international row over the yuan is the headline dispute in a growing global battle over currency valuations, as many countries seek to maintain flagging growth by weakening their own currencies to prop up exports.


The issue of currency manipulation is expected to be the central theme of a meeting of Group of 20 finance ministers meet in South Korea on October 22-23 ahead of a heads of state meeting in early November.


On Monday South Korea’s President Lee Myung-Bak, himself under pressure from Japan for the South’s own currency interventions, warned that failure to settle currency disputes could fuel protectionism and damage the world economic recovery.


“If the world fails to reach agreement on matters such as foreign exchange policy and insists on its own interests at a time when the global economy is in recovery phase, it will bring about trade protectionism and cause very difficult problems to the global economy,” Mr Lee said.




Raising the Barricades Against a Rush of Capital (Paris, International Herald, 101013)


HONG KONG — The risk of a global currency and trade war is intensifying: What started primarily as a dispute between the United States and China is now spreading to the emerging world as policy makers there move to shield their economies from powerful economic forces that threaten their own development.


Economic weakness and low interest rates in advanced economies are prompting an extraordinary flow of investment to healthier emerging markets, undermining their exports as their currencies appreciate and creating the risk of destabilizing asset bubbles.


This week, Thailand announced a tax on foreign investment in government bonds, a step designed to slow the flow of foreign capital into its markets. Last week, Brazil took a similar step. South Korea has said it will inspect banks’ handling of foreign currency, a move analysts believe is designed to help resist appreciation of the Korean won.


And numerous central banks, including those of South Korea and Japan, have been intervening in the foreign exchange markets to keep their currencies from rising too rapidly, angering policy makers in the United States and elsewhere, who believe such “competitive nonappreciation” puts their exporters at a disadvantage.


The U.S. Treasury secretary, Timothy F. Geithner, said Tuesday night in a U.S. television interview that there was “no risk” of a currency war, and a senior Chinese government official, Cui Tiankai, the vice foreign minister, told reporters Wednesday that China was “doing our best to avoid” one.


On Tuesday in New York, Jean-Claude Trichet, president of the European Central Bank, spoke out against protectionism. “What we need today is not ‘wars’ of any kind, but a strong and renewed commitment to confident and resolute cooperation.”


The issue is likely to top the agenda when leaders from the Group of 20 major economies convene next month in Seoul.


Global finger-pointing over currency intervention and other policy tools has increased in recent days. Japan, which tried to weaken the yen in September by buying dollars, criticized South Korea for doing the same thing with the won.


“As chair of the G-20, South Korea’s role will be seriously questioned,” Yoshihiko Noda, the Japanese finance minister, told a parliamentary panel, Reuters reported.


On Wednesday, China disclosed that its trade surplus was a high $16.9 billion in September, a figure that was likely to continue to irk those who argue that Beijing should allow the renminbi to rise more markedly against the dollar than it has so far. China has argued for a gradual rise in the renminbi because it fears that its manufacturers would come under pressure and that huge job losses would ensue, perhaps inciting social unrest.


At risk is more than mere soured relations, economists and policy makers say. Protectionism is widely believed by market liberals to hamper economic growth by creating inefficient allocation of resources.


Much of the problem now facing Brazil and other emerging nations in Asia and elsewhere stems from the slow growth of economies of Europe and the United States. The emerging markets are simply more attractive to investors.


Many developed nations are still striving to inject cash into their economies — through low interest rates and outright spending programs. But rather than keeping that money at home, investors are sending much of it abroad — so much so that policy makers in Asia have started to fret about a tidal wave of capital, which has driven up currencies, stock markets and property prices, raising the specter of inflation — and even localized bubbles — across the region.


“It’s becoming an increasing issue,” said Robert Subbaraman, chief economist for Asia, excluding Japan, at Nomura in Hong Kong. “In a way, it’s a bit like Asia is becoming a victim of its own success,” he said.


“The last thing Asia wants is asset price bubbles,” he said. “If we continue to see very strong inflows, Asian policy makers will get a whole lot more creative with the policy tools they deploy to deter excessive inflows.”


Nicholas Kwan, head of research at Standard Chartered in Hong Kong, estimates that global investors had poured about $8.6 billion into Indian, Indonesian, South Korean, Philippine, Taiwan, Thai and Vietnamese bonds during the first nine months of this year, compared with just $94 million during the same period last year.


In the third quarter of this year, he wrote in a report last week, about $11.5 billion of net foreign capital was invested in the stock markets of those seven countries — more than five times the amount recorded during the April-to-June quarter.


And David Carbon, Asia economist at DBS in Singapore, estimates that Asia — excluding Japan — has seen inflows to the tune of $2 billion a day since April 2009, as investors have sought to capitalize on the region’s rapid growth and on the higher interest rates that prevail there.


The influx has helped push up stock markets up across much of the region.


Since the start of 2010, the Kospi in South Korea has risen about 11%. India is up nearly 18% in that time, and Indonesia has soared more than 40%. In Hong Kong, the Hang Seng has gained about 7%.


Many of the region’s stock indexes are still below where they were during the exuberant times of 2007, before the financial crisis began to gather steam. But portfolio inflows can be volatile, and any renewed nervousness about the health of the global economy could quickly have overseas investors pulling their assets back closer to home again.


Another worry is that many Asian currencies have risen markedly because of the inflows. This has made life difficult for exporters, whose goods have effectively become more expensive for Western buyers and less competitive compared with those from China.


The Thai baht and the Malaysian ringgit, for example, have gained about 10% against the dollar since the start of 2010. The Indian rupee and the Indonesian rupiah have strengthened about 5%.


The Chinese renminbi, by contrast, has risen only about 2% against the dollar since Beijing allowed limited currency fluctuations in mid-June.


Moreover, the influx of capital is unlikely to reverse any time soon, analysts believe. On the contrary, it may well accelerate further if, as is widely expected, the U.S. Federal Reserve resumes buying vast amounts of government debt to spur the U.S. recovery.


“Easy money is available in the West, and everyone wants a piece of the East,” Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong, wrote in a note this week. “The result: capital keeps pouring into the region. It’s difficult to see an end to this. Asia is receiving something en masse that it already has too much of: liquidity. With the Fed bound to turn the spigot yet again, this could continue for a long, long time.”


Higher interest rates in many emerging markets also make them attractive for U.S. and European investors.


Policy makers in developing nations are in a bind as to what to do next.


On the one hand, many economies are ripe for more rate increases — which are an effective tool to prevent excessively rapid growth and inflation pressures. Many of the problems experienced by advanced economies before the global financial crisis — like low interest rates — are now “migrating to emerging markets, with potentially very critical consequences for both these economies and the global system,” Lorenzo Bini Smaghi, a member of the E.C.B. executive board, said last week.


On the other hand, raising rates further could attract even more money, and thus intensify fears that bonds, property and equities will become overvalued.


Increasingly, Asian policy makers have thus looked to other tools to dampen price rises and slow foreign capital inflows — and analysts believe more such steps are bound to follow.


Most economists here believe the overall picture for developing Asia remains positive.


But the key, said Mr. Carbon of DBS, is not to let the capital inflows get out of hand. And that, analysts say, will be a tough balancing act to pull off.




G20 inks pact to avert trade war, seals IMF power shift (National Post, 101023)


GYEONGJU, South Korea — The Group of 20 major economies agreed on Saturday to shun competitive currency devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects.


At a meeting in South Korea, G20 finance ministers recognized the quickening shift in economic power away from western industrial nations by striking a surprise deal to give emerging nations a bigger voice in the International Monetary Fund.


A closing communique contained no major policy initiative after a U.S. proposal to limit current account imbalances to 4% of gross domestic product, a measure aimed squarely at shrinking China’s surplus, failed to win broad enough backing.


Indeed, the United States itself came under fire from Germany and China for the super-loose monetary policy stance it has adopted to try to breathe life into the sluggish U.S. economy.


German Economy Minister Rainer Bruederle said he had made clear that easing was the wrong way to go.


“An excessive, permanent increase in money is, in my view, an indirect manipulation of the [foreign exchange] rate,” he said.


The main aim of the two days of talks, which precede a G20 summit in Seoul on Nov. 11-12, was to ease currency strains that some economists feared could escalate into trade wars.


Developing countries are worried that Washington, by flooding the U.S. banking system with cash, is pumping up their asset prices and exchange rates, thus undermining the competitiveness of the export industries on which they rely for growth.


China, among others, frets that the U.S. policy stance will debase the dollar, the lynchpin of the global economy.


In a thinly veiled reference to the United States, the G20 statement said advanced countries, including those with reserve currencies, would be vigilant against excessive volatility and disorderly movements in exchange rates.


Washington, by contrast, is frustrated over the refusal of China in particular to let its currency rise to a level that reflects its growing economic power and would help reduce its big trade surplus with the United States.


“If the world is going to be able to grow at a strong, sustainable pace in the future . . . then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis,” U.S. Treasury Secretary Timothy Geithner said.


U.S. officials were pleased that the communique committed G20 members to “refrain from competitive devaluations” of their currencies and to pursue a full range of policies to reduce excessive external imbalances.


Geithner will keep up the pressure on Sunday for a stronger yuan when he holds talks in Qingdao, China, with Vice-Premier Wang Qishan, who has broad responsibility for economic policy.


“The content of the G20 statement is generic and broadly in line with expectations, but this should not detract from the fact important progress was made in giving emerging market countries a greater voice in the IMF,” said Claudio Piron, a currency strategist at Bank of America Merrill Lynch in Singapore.


Despite the sniping from Germany and China, whose finance minister demanded responsible policies from issuers of major reserve currencies — code for the United States — host South Korea put an optimistic spin on the outcome of the meetings.


“This will put an end to the controversy over foreign exchange rates,” said Finance Minister Yoon Jeung-hyun.


South Korea was also able to point to the deal to shift more than 6% of the IMF’s quotas — membership subscriptions that help determine voting power — to emerging economies whose clout in the Fund has not kept pace with their economic ascent.


Europe will give up two seats on the fund’s 24-strong executive board.


IMF Managing Director Dominique Strauss-Kahn called the agreement historic. “This makes for the biggest reform ever in the governance of the institution,” he said.


As part of the agreement, China will overtake traditional powerhouses Germany, France and Britain to become the third most powerful member of the IMF, up from sixth spot now. India will also wield more power in the fund.


“Our complaint was that the quota share should reflect ground reality and economic strengths currently. Otherwise, it would have eroded the credibility of the institution. That has now been corrected,” Indian Finance Minister Pranab Mukherjee said.




China bull run or bubble? Six experts’ views on the biggest emerging market. (Daily Telegraph, 101106)


Sometimes one shrewd observation is worth a sea of statistics. For example, “Louis Vuitton in Kowloon on a Sunday night is like Primark on a Saturday morning in Oxford Street”, reports David Coombs, head of multi asset investments at Rathbone Unit Trusts. He is the latest in a series of smart stockpickers – including Hugh Hendry of Eclectica and Simon Mungall at Ignis – to claim that the Chinese economy is overheating dangerously and could be a bubble about to burst.


That would be very bad news for all of us – as China is the second biggest economy in the world, as well as its most populous nation – and is especially worrying for investors, like me, with direct exposure to this emerging market. I first began investing there 14 years ago, through what was then Fleming Chinese Investment Trust – which now trades as JPMorgan Chinese – and, in recent years, Gartmore China Opportunities.


You can see from this graph what an exciting ride it has been, compared to a dismal decade for the British stockmarket. Regular readers will know that I took some profits a year ago, selling half the Gartmore units in my self-invested personal pension (SIPP) to pay down mortgage debt. For a time, that looked wise but seems less so now that the price has resumed its upward trajectory.


Against all that, you haven’t made a penny until you sell and I no longer need to worry about paper profits on that half evaporating if markets plunge – as they did in 2008. But what about the other half which I still own? I asked six of the shrewdest independent financial advisers I know for their views.


Justin Urquhart Stewart of Seven Investment Management said: “China has been cracked for years but no one wanted to see the fissures. Investors see what they want to see and not necessarily appreciate the reality.


“China is not a manufacturing economy, but a peasant-based agrarian economy run by a communist dictatorship. Its legal system is despotic and its laws – especially property law – not codified.


“Investors beware, the domestic stock markets bear little resemblance to anything we know elsewhere. One of the great maxims of investing is first of all – avoid the holes. Especially ones covered in bamboo.”


So, that’s a sell, then. Mark Dampier of Hargreaves Lansdown is more bullish: “The word ‘bubble’ is much overused in financial circles, being a term to describe just about any asset that has the temerity to be going up.


“The last true bubble was the internet, a once-in-a-generation event. I think it is too early to call the top of the China market just yet. Unlike the developed countries, mortgages are still in their infancy and loan to equity values very low in China. With another round of quantitative easing likely to create much more liquidity, this will boost demand and valuations for China and so it is too soon to to jump.”


Gavin Haynes at Whitechurch Securities is also upbeat: “By 2020 the Chinese economy is projected to make up over 18% of global gross domestic product (GDP), yet many investors have little or no exposure to the Chinese stockmarket.


“I don’t expect the China growth story to be a smooth ride, and whilst there are areas that look overvalued – such as property – it doesn’t feel like the market as a whole is in bubble territory. I am encouraged by the lack of euphoria and healthy amount of pessimism from investors. The 7.9% return on the Morgan Stanley China Index this year hardly represents a spike and valuations in many areas do not seem stretched, given growth prospects. China is projected to have 100 cities with a population of more than 3m people by 2020.”


Those damned statistics again. John Kelly of Chelsea Financial Services runs with the bulls – and the bears: “Fears abound on whether the stellar growth can continue and I am concerned by China valuations in the short term. Yet, all things considered, I believe there is a strong case for investment over the long term.


“The shift from West to East is undeniable, and foreign investment and a growing middle class will continue to power growth. Urbanisation will see 261m new inhabitants in China’s cities creating huge domestic demand.


“If you are looking to take profits and de-risk, I recommend a broader approach to emerging markets rather than trying to focus on any one nation. First State Asia Pacific Leaders looks to buy the best companies across Asia.”


Nic Round of Murray Round added: “The key issue of timing – when to be in or out of a stock or market sector or country – can work if you get it right as there are enormous gains to be made. Yet who consistently gets it right?


“The answer is to design an asset allocation strategy that includes China based on your own individual risk profile. Rebalance your asset allocation over time but stay married to your decision. Use low cost investment products, such as exchange traded funds (ETFs).


“China’s economic growth may stutter but the allocation of capital to China is likely over time to generate a successful investment experience.”


Alan Steel of Alan Steel Asset Management, who describes himself as “a bull in a China shop” was even more forthright: “I was saying to the wife only last night as we watched ‘Bad News at Ten’ that as soon as one investment shock horror scare story peters out, along comes the next. Now, apparently, it’s China bursting!


“On what evidence, you have to ask. Too much debt? No. Insufficient growth? No. Evidence of gross overvaluations in stocks? Well, no. Too many investors piling in too much money? No.


“Right now Chinese equities are no more than normally valued on any basis you use and only a handful of investors have as much as 5% of their portfolios in China. All the evidence, as far as we can see, supports the China demand theme lasting for most of this decade – but that does not mean it will not suffer the odd correction. Indeed, right now one is probably overdue. But this bull market will run on for a few years yet.”


I intend to hang on for the white-knuckle ride.




G20 tensions rise over the future of the global economy (Daily Telegraph, 101107)

G20 leaders gather in Seoul this week ready for a showdown amid tensions over the future of the global economy.


The daisy chains, kaftans and sweet haze of pot may have been missing, but last year’s G20 summit in Pittsburgh was the closest to a love-in that the world’s leaders have come. In the eye of the financial crisis, with recession gripping most major economies, heads of state joined hands and agreed to promote “strong, sustainable and balanced growth”.


Those dangerous, destabilising global imbalances would be addressed, they pledged. “Deficit” countries, such as the UK and US, would save and export more. “Surplus” countries, such as China and Germany, would export less and get their consumers spending. Every country would do their bit, pull together, and all the bountiful progress would be chronicled the following year at the G20 summit in Seoul.


Unfortunately, relationships formed under intense circumstances rarely last. This week, with most countries a year out of recession, G20 leaders reconvene in Seoul to discuss their efforts. Twelve months on, nationalism has replaced globalism. Peace and love have given way to currency wars. The imbalances are as entrenched as ever. And, most frightening, the battle drums are beating for protectionism and trade barriers.


At last month’s International Monetary Fund (IMF) meeting, the mood was sombre. Dominique Strauss-Kahn, head of the IMF, spoke of “a new kind of economic co-operation at the global level which never had existed in the past [that] was very strong [at the G20] in London, very strong in Pittsburgh. I think it is fair to say that the momentum is decreasing.”


The European Central Bank president, Jean-Claude Trichet, also warned that while “we have a consensus on imbalances, the problem is implementation – as always”.


The US last week stoked the simmering tensions by unveiling plans for another $600bn (£370bn) of quantitative easing (QE), on top of the $1.7 trillion already in place. The dollar crashed in what is being seen as the latest round of competitive devaluations, as nations seek to debase their currencies to help domestic industry.


Brazil retaliated by buying dollars. Xia Bin, a member of the Chinese central bank’s monetary policy committee, branded the US stimulus plan “abusive” and warned it could spark a new global downturn. German finance minister Wolfgang Schäuble accused the US of breaking the promise made at June’s G20 in Toronto, saying he would “speak critically about this at the G20 summit in South Korea”.


Just two weeks earlier, G20 finance ministers at the warm-up summit in Gyeongju, South Korea, had pledged to refrain from competitive devaluation and Tim Geithner, the US Treasury Secretary, had promised the US would retain its “strong dollar” policy. At Seoul, the US will be facing accusations of empty rhetoric.


The harmonious language of hope at the Pittsburgh summit has now given way to something brazenly belligerent. The Brazilian President, Luiz Inácio Lula da Silva, has said he will go to the G20 meeting in Seoul ready “to fight”. For President Obama, who has just lost a bruising midterm election battle, it will mean another painful encounter.


At the IMF meeting last month, it was China that stood accused of destabilising the global recovery. Having pledged to drop its dollar peg and revalue slowly to give US manufacturers a stronger competitive footing, there had been scant evidence of action. China has since stepped up its efforts. In the last few months, the yuan has appreciated relatively rapidly against the dollar – from 6.81 to 6.64. The US, though, wants it to move faster, and behind the request lies the menacing threat of protectionism.


America could restore domestic industry by throwing up trade barriers, but economists fear that the damage wreaked by such policy action might be far worse – citing the prolonged 1930s depression. The outlook from the Organisation for Economic Co-operation and Development (OECD) ahead of the G20 meeting noted: “The recent unilateral interventions in foreign exchange markets and the resulting volatility could prompt protectionist responses. Better e_SLps to reach a common understanding on how global imbalances are to be reduced.”


Geithner last week sought to “reach a common understanding” with proposals that are likely be at the centre of discussions in Seoul. He raised the prospect of using current account targets as a way of reducing the imbalances, suggesting a 4pc of gross domestic product (GDP) benchmark. Under his plan, countries with persistent deficits would have to boost savings and those with lasting surpluses would have to cut export reliance.


Unsurprisingly, both China, with a 4.5pc surplus, and Germany, with a 5.1pc surplus, would have to take immediate action. In a damning riposte, Cui Tiankai, a Chinese deputy foreign minister, said the US plan harked back “to the days of planned economies”.


Despite the pitched battles, there is some common cause. All nations want to reduce the imbalances. Exporting countries need to build internal markets so they are less reliant on US and UK consumption habits. Deficit countries need to borrow less. The dispute is over timing, as Mervyn King, the Bank of England Governor, has observed. Deficit nations are facing immediate pressure from the bond markets, while surplus countries cannot change their economic structures overnight.


Senior UK figures suggest surplus nations such as China need to agree a timetable for change with staged goals to silence those in the US baying for trade barriers. President Obama is likely to seek just such a timetable in a private one-on-one meeting with Chinese President, Hu Jintao, scheduled for the sidelines of the G20. He is likely to strike some form of accord.


Despite Tiankai’s political posturing, China sees current account targets as a way of defusing the currency debate. Yi Gang, a deputy central bank governor, has even indicated that China plans to reduce its current account surplus to 4pc in the medium term. David Cameron is likely to raise the issue on his trip to China ahead of the G20 summit as he drums up support for British industry as part of the annual UK-China dialogue.


Although imbalances will dominate the agenda, the G20 will make progress on the banks. Basel III, the new rules on capital, liquidity and leverage, will be officially signed into agreement. The bigger goal, though, will be to make headway on the “strategically important financial institutions” (SIFIs) – the too-big-to-fail lenders.


Under Basel III, banks will have to increase their equity capital from a 2pc minimum to a 7pc minimum. Extra capital buffers are expected to be agreed for the systemically important banks of 2pc to 4pc. Britain, headed by the Prime Minister and George Osborne, has been at the forefront of negotiations and is likely to take the lead again.


At least one issue has been agreed – what to drink. Delegates breaking from negotiations can kick back with a “Heart and Seoul”, a mix of the Korean spirit soju and crushed blueberries chosen as one of the summit’s signature cocktails. Leaders will be hoping it rekindles a little of the happy Pittsburgh spirit.


What the US wants:


1 Currency appreciation by all major G20 members, notably China


2 Specific targets to limit currency account surpluses


3 Recognition of the dangers of seeking “competitive advantage by either weakening currency or preventing appreciation of undervalued currency”


4 Countries running up large trade surpluses to commit to structural and fiscal policies to encourage greater imports into their markets


5 A cap on trade surpluses


What China wants:


1 An approach that leads to balanced economic growth


2 Recognition for agreeing to improve its exchange rate system to increase the yuan’s flexibility


3 An end to commercial imbalances and trade protectionism


4 A restructuring of the global financial system, with the support of France’s forthcoming presidency of the G20


5 The rest of the G20 to recognise its importance on the international stage




America will survive the errors of Ben Bernanke’s trigger-happy Federal Reserve (Daily Telegraph, 101107)

America is a resilient nation, with far healthier demographics than China, Japan, Korea, Germany, Italy or Russia. The storm will blow over.


At each stage of the great 20-year debt bubble we were told by the US Federal Reserve that it was not the job of central banks to worry about the dotcom boom or the surging cost of California property or the price of any other asset in the grip of credit fever.


A Princeton professor named Ben Bernanke was chief theorist for this doctrine. At the Fed’s Jackson Hole conclave in 1999 he gave a speech laden with data arguing that central banks should ignore asset booms and focus exclusively on inflation.


Fed chair Alan Greenspan liked the speech so much that groomed Bernanke for the next vacancy at the Fed Board in Washington. He had a last found an academic willing to clothe his own proclivities with Ivy League respectability.


Yet after leading America and the world into calamity with this seductive mischief – which overlooked the well-documented risks of credit seizures once a debt bubble pops – we are now told by Bernanke that the purpose of printing more money is to push up house prices and feed Wall Street.


“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,” he wrote in the Washington Post. So there we have it, the ‘Bernanke Put’ in open daylight, the affirmation of asymmetric monetary policy. Let booms run unchecked: shield investors from loss when things go wrong.


This is at least honest, unlike Bernanke’s suggestion that US inflation is now so low that it may “morph into deflation” unless the Fed takes out insurance with $600bn of fresh bond purchases — QE2 to you and me.


“The Fed’s claim that there is a risk of deflation should embarrass it,” said Professor Allan Meltzer, author of the magisterial A History of the Federal Reserve.


Yes, there was a risk some months ago that deflation would creep up on America. This danger has receded. The Dallas Fed’s “trimmed mean” index of PCE inflation has nudged back up to 1pc.


The M2 money supply – which contracted in March and April – is now growing at an 8pc rate. Narrow M1 is rising at 15pc. Money velocity has sprung back to life, and is accelerating. Bank credit is expanding again. Non-farm payrolls jumped 151,000 in October.


These are not circumstances that cry out for emergency liquidity, or drastic action to force long-term interest rates even lower. It is certainly possible America will dive into a double dip recession next year as fiscal tightening starts to bite, but that is not the Fed’s own forecast and we do yet know whether the Gridlock Congress will renew the Bush tax cuts. This surely is the moment to stand back and wait to see if the economy can heal itself.


Bernanke is no doubt right to worry than an economy with combined public, corporate, and household debt at 350pc of GDP cannot withstand deflation for long because it would risk the sort of debt-deflation spiral described by Irving Fisher in 1933 – as Ireland is discovering.


But America is not in deflation. Nor is it credible to insist on extra QE to pre-empt the risk that prices and wages may one day fall, as if deflation is the 9th Circle of Hell, from which no country returns once it puts a single foot across the line. Bernanke is peddling an urban legend.


Japan waited 11 years before it launched QE – in modest amounts – and even then it more or less worked. The economy perked up. Prices stopped falling. There is no historical evidence anywhere in the world, ever, to show that a light brush with deflation cannot be reversed by forcing up the quantity of money. Do they take us for fools?


I suspect that Bernanke decided months ago to ram through the biggest QE blitz possible before three more hawks — Plosser, Fisher, and Kocherlakota – join the Federal Open Market Committee as voting members in January, at which point he faces a de facto veto because too much dissent is untidy. All have questioned whether it makes sense to try to tackle a jobs and solvency crisis by spraying the economy with liquidity.


Of course, Bernanke’s other purpose – unstated, though he stated it in a speech in 2002 – is to drive down the dollar. He has succeeded. The dollar has crashed though parity against the Swissie, the Aussie, and the Loonie (Canada), and hit a 15-year low against the yen. Money is leaking out of the US at a robust rate. Unfortunately, the tsunami is flooding straight into emerging markets in this new dollar “carry trade”, causing various degrees of mayhem.


The howls of protest from China and fellow mercantilists over the inflationary effects of this are self-serving. If they are so worried, they should let their currencies rise. But what are Brazil, Mexico, Indonesia or New Zealand supposed to do?


This is turning into a bun-fight. Either the victims of QE manage to fight the Fed to a standstill with “quantitative tightening” – or QT as it is already dubbed – or commodity prices will go through the roof, negating much of the stimulus from QE2 for America itself.


Meanwhile, lower “real” interest rates in the US will deplete the incomes of savers and pensioners. My guess is that the US will end up with more or less the same level of economic output as it would have had anyway, but with greater distortions, and incipient stagflation to complicate matters further. Brilliant.


In the end, America is a resilient nation, with far healthier demographics than China, Japan, Korea, Germany, Italy, or Russia. The storm will blow over just as it did after President Nixon closed the gold window in 1971, smashed the Bretton Woods system, and let the dollar go to hell.


It was all the rage then to write off America as a deadbeat. The confluence of defeat in Vietnam, Watergate, and the Carter economy seemed devastating, yet these episodes faded remarkably quickly as America drew on its deeper strategic strengths.


Within a decade the Reagan dollar was so strong that the G5 had to launch concerted action at the Plaza Accord to bring it back down. Within 20 years America had seen off the Soviets, and re-emerged as global hegemon. It was running away with the internet age, while Japan faded away.


So let us put all this global posturing in perspective as we deliver our verdict on Ben Bernanke’s policy error. Not even a trigger-happy Fed can ruin America.




Fed Counts on ‘Psychological Bump’ With Borrowing, but May Just Add to Debt, Inflation (Foxnews, 101109)


Investors beware: The Federal Reserve may have just agreed to make $600 billion more available for borrowing, but don’t expect to see that money flooding the market any time soon.


At least that’s the warning from some financial experts who say the Federal Reserve’s pledge to buy $600 billion in Treasury bonds is unlikely to help improve inflation or interest rates, which are at historically low levels, but it will add to the U.S. debt.


The Fed is “looking for a psychological bump to get (Americans) out of the doldrums they’re in,” said Michael Canet, head of Prostatis Financial Advisors Group and host of the “Savvy Investor” radio show out of Baltimore, Md.


“Unemployment is still 9.5% ... manufacturing is still at 70% capacity,” he noted.


Canet is among a slew of economists, politicians and financial planners who say the Fed’s use of monetary policy to push the economy forward could have the opposite effect of what Federal Reserve Chairman Ben Bernanke intends.


“We already have very loose monetary policy, very, very low interest rates. This is going to give us an inflation problem in the future. It’s going to give us an interest rate problem in the future. It is destabilizing investment horizons,” Rep. Paul Ryan, R-Wis., the next House Budget Committee chairman, said on “Fox News Sunday.”


The Federal Reserve’s plan, called “quantitative easing” by policy wonks, is an effort to make more money available so that banks will lend more and people will feel freer to spend. Three years ago, the Federal Reserve did a similar trick, purchasing $300 billion in Treasury bonds to make credit more accessible.


That was at the start of the recession. The economy has started to grow since then, which to many means Fed policy should be looking at ways to wipe debt from the books, not take more on.


“I didn’t argue with the first quantitative easing but the economy is growing for 16 months now,” said Alan Reynolds, a senior fellow at the libertarian Cato Institute and member of Ronald Reagan’s transition team at the Office of Management and Budget.


Reynolds noted that “3.1% real growth in the past year is about half what it ought to be but it’s not nothing.” He argued that with growth, people expect inflation to rise so the Fed doesn’t need to “throw fuel on the fire.”


But with interest rates nearly zero and banks still tight-fisted with the cash they have available to lend, the Fed announced last week that it will buy an additional $600 billion in Treasury bonds in the next eight months.


“Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the (Federal Open Market) Committee judges to be consistent, over the longer run, with its dual mandate,” the central bank announced in a statement last week.


“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to expand its holdings of securities,” it said.


President Obama — traveling in India on Monday — praised the move.


“The Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole,” he said, adding that the Federal Reserve is an independent agency from his administration.


“The United States has been an engine for growth, for trade, for opportunity for decades now. ... And the worst thing that could happen to the world economy, not ours — not just ours, but the entire world’s economy — is if we end up being stuck with no growth or very limited growth. And I think that’s the Fed’s concern, and that’s my concern as well,” he said.


Canet told that the Federal Reserve is trying to flood money into the market in an effort to push down interest rates and encourage borrowing. For instance, he said, if mortgage rates do down from 3.5% to 2.5%, it ideally would spur home purchases. The action conceivably would also drive down the value of the dollar and make U.S. products more desirable and affordable overseas.


But the problem with the plan, Canet warned, is that there aren’t enough remaining buyers in the housing market who were just holding off to wait out interest rates. Likewise, the middle class globally isn’t large enough to close the trade imbalance that is adding to U.S. indebtedness.


“I don’t know if it’s going to play out that way,” Canet said of the Fed’s intentions. “I think they’re wrong but that’s what they’re hoping for.”


He added that the other problem with the plan is that banks aren’t lending the money the Federal Reserve is trying to make available.


“The banks make their bottom line look better, their stock prices go up ... the fact that it’s all smoke and mirrors is irrelevant,” Canet said.


Former Republican vice presidential contender Sarah Palin argued that inflation rates are already on the rise, which Americans can feel when they go grocery shopping. That being the case, the Federal Reserve doesn’t need to make more money available for spending.


“Pump priming would push them even higher,” she said of inflation rates, using the slang for government-sponsored stimulus.


Reynolds predicted that the positive impact of the move will be “temporary at best,” and he likened it to the government’s “cash for clunkers” program that offered incentives for people buying new, high gas mileage cars. Auto purchases rose during the length of the program, but quickly dropped again once the rebate offer ended.


“The Fed can print money but it can’t print jobs,” he said.


Canet and Reynolds did offer some practical advice. They agreed that it’s unwise for investors to put all their eggs in one basket — and the adage that the older one gets, the more liquid one’s assets should be is dead.


“Bernanke is really messing with those people” who live by that rule, Reynolds said.


Canet said the bond market still can make sense for people who want to save, but consumers probably want to look at individual bonds and not invest in mutual funds with a basket of bonds unless it is short-term.


He said he is on a wait-and-see approach to bonds to give time to “let the QE2 shake itself out.”


As for the stock market, it has had a good year.


“Lots of people say the stock market has gone up because of Bernanke. I don’t buy that.


... It’s hard to square that circle,” Reynolds said.


“The approach you need today is how do I create an income stream that I’m not going to outlive,” Canet said




Europe Fears That Debt Crisis Is Ready to Spread (Paris International Herald, 101116)


LONDON — European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.


Any such plan would have to be preceded by a formal request for assistance from each country before it would be put in place. And for months now, Ireland has insisted that it has enough funds to keep it going until spring. Portugal says it, too, needs no help and emphasizes that it is in a stronger position than Ireland.


While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously.


European authorities stepped in with a rescue package, expecting an economic recovery and the creation of new European rescue funds to fend off future panics by bond investors whose money is needed by countries to refinance their debt.


But with economic conditions weakening, markets are once again in turmoil. Rescuing Ireland may no longer be enough.


Stronger countries and weaker countries using the common currency of the euro are being pulled in different directions.


Some economists wonder if unity will hold or if some new system that allows countries to move on one of two parallel financial tracks is needed.


Despite the insistence of Irish officials that only its banks need additional help, investors continue to bet on an Irish rescue, driving down the bond yields on that country’s debt against a benchmark again on Monday.


Portugal’s yields increased to 6.7%, underscoring the emerging concern in Brussels, the administrative center of the European Union, that it would be irresponsible to adopt a plan to prop up Ireland without addressing the possibility that turmoil could ultimately engulf Portugal, or even Spain. Like Ireland, Portugal has struggled to grow under the fixed currency regime of the euro. Though Portugal has raised enough funds of late from bond markets, its budget deficit is 9% of its gross domestic product, much higher than the 3% limit for countries in the euro zone. With its weak government and slow growth, investors have grown fearful that Portugal, too, will eventually run out of funds.


While Ireland has largely impressed European officials with its commitment to austerity, Portugal has been lagging in this regard, according to European officials. One official in Europe, who asked for anonymity because he was not authorized to speak publicly, said that the budget recently presented by the government in Lisbon did not contain the type of far-reaching changes proposed by other countries, like Spain.


“If Ireland were to ask for aid, then you’d have to look at what’s going on in Portugal as well,” the official said, putting forward a view rescuing Ireland alone would not keep speculators from other vulnerable countries.


José Manuel Barroso, president of the European Commission, said on Monday that Ireland had not requested aid. “We have all the instruments to address the problems that may come either in the euro area or outside the euro area,” he told reporters in Brussels.


The Portuguese finance minister, Fernando Teixeira dos Santos, said Monday evening in Brussels that the situation in Ireland was creating dangers for all countries using the euro.


“If things are getting worse in Ireland, for instance, that will have a contagion impact on the other euro zone economies and particularly on those that are under closer scrutiny of markets, like Portugal,” he said. Asked if Ireland should accept a bailout to stem the contagion, Mr. Teixeira dos Santos said, “It’s not up to me to make that assessment.”


Even so, Mr. Teixeira dos Santos emphasized that his country was not preparing to ask for a rescue package.


Mr. Teixeira dos Santos also said his government was preparing a robust budget that would cut wages, freeze pensions and raise taxes. “We are really committed to meet our targets,” he said. “I think we deserve that the market gives us the chance to show that.”


The bureaucratic machinations in Brussels highlight one of the main concerns that grew out of the establishment earlier this year of a rescue fund of 500 billion euros (about $680 billion at today’s exchange rate) by the European Union after the Greek budget crisis: What happens if, in the next crisis, multiple countries need aid at the same time?


Months later, it remains unclear how, in practice, countries like Ireland and Portugal would tap the rescue money.


Of paramount concern to policy makers in Europe is Spain, which is struggling to close its own deficit of 9% of G.D.P. at a time when unemployment is more than 20% and the economy is failing to grow.


Just as the growing inability to get a precise reading on Ireland’s banking losses has propelled the Irish crisis, the extent of Spain’s own banking vulnerabilities — which, like Ireland’s, originate from a real estate boom and bust — remain unclear.


Until now, a series of austerity measures has allowed Spain to escape investor scrutiny. But late last week the spread, or risk premium, between Spanish and German bonds widened to a record high of 2.3%, underscoring investor fears.


Worries about the banks have peaked recently in light of data showing that distressed loans are now 5.6% of total Spanish bank loans — the highest level since 1996.


In Ireland, banking troubles lie at the root of what many in Europe are now calling a solvency crisis, reflecting long-term concern over Ireland’s ability to repay its debts, as opposed to the lack of short-term funds that forced the Greek rescue last spring.


“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”


Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.


Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50% of the economy. As long as housing prices continue to fall, these losses cannot be capped.




Europe struggling to contain debt turmoil (AP News, 101126)


Europe struggled to contain its growing debt crisis Friday, as Portugal took radical austerity measures to fend off the speculative trades that are pushing it toward a bailout and Ireland negotiated the final terms on its own imminent rescue.


With Portugal and Spain’s insistence that they will not seek help echoing similar declarations from Ireland and Greece before them, an eery sense of deja-vu struck investors and Europe braced for what seemed to have become inevitable _ more expensive bailouts.


The Portuguese Parliament approved a debt-reducing package of unpopular measures, including tax hikes and pay and welfare cuts, similar to those introduced in other European countries scrambling to restore market confidence in their economies.


While that move helped avoid a sharper deterioration in bond markets, the sense among analysts was that it was just buying time. Yields remained near record highs, stocks slumped across the board and the 16-nation euro lost another 0.8% on the day to trade at $1.3241, just off two-month lows.


Portugal’s high debt and low growth have alarmed investors, but the government insists it doesn’t require an international rescue _ a line ominously reminiscent of statements by Greece and Ireland before their rescues.


Analysts say markets need more reassurance from EU leaders that the rot can be stopped in Portugal before possibly spreading to Spain, the continent’s fourth-largest economy _ a scenario that would threaten the 16-nation euro currency itself.


Portugal’s Finance Minister Fernando Teixeira dos Santos said that some in Europe didn’t agree with his government’s refusal to consider a bailout.


“There are those among our (European Union) partners who think the best way to ensure the euro’s stability is to push and force those countries which are most in the spotlight to accept assistance,” he was quoted as saying in an interview with daily Jornal de Noticias published Friday.


Teixeira dos Santos did not specify whose views he was referring to, but the European Commission, the European Central Bank and the German government all denied they were pressuring Portugal to take financial aid.


Prime Minister Jose Socrates said in a brief statement after Parliament approved the government’s 2011 spending plan that the country had “no alternative at all” to the belt-tightening policy.


“We must make this effort,” Socrates said. He did not take questions.


But the financial crisis is unlikely to abate any time soon. Finance Minister Teixeira dos Santos said he reckoned Portugal, where a major strike this week shut down many public services, has six months to show markets it is able to bring its spending under control.


Greece, which accepted a bailout six months ago, and Ireland are still far from being able to return to international debt markets.


The Athens government has had to draw up even tougher reforms for 2011 to keep receiving international loans worth euro110 billion ($150 billion), despite public outrage and a planned Dec. 15 general strike.


Dublin on Friday continued negotiating the final details of an EU-IMF rescue package, which is expected to be presented within days. Uncertainty that the country’s austerity measures will survive political turmoil kept pressure on the country. Bonds yields rose to a new euro-era high of 9.19%, up from 9.02% the day before, as investors dumped its debt.


Markets have been jaded by policymakers’ lack of coherence and determination in their response to the debt crisis. So when Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday declared that there is “absolutely” no chance Spain will seek a bailout, the statement failed to instill much confidence.


The yield on Spain’s 10-year bonds hovered around 5.2 after touching 5.3% earlier. By contrast, Germany’s 10-year bond yield _ a benchmark of lending safety _ stood at only 2.7%.


Though Portugal’s banks are said to be sound and the country’s budget deficit last year was lower than those of Greece, Ireland and Spain, its high debt load compared to its gross domestic product and its meager growth of around 1% a year over the past decade have made it especially vulnerable to market jitters.


A record of poor financial management and grim prospects for growth _ in part also due to the austerity package _ have led investors to demand higher returns for risking their money on Portugal.


That contributed to a rise in the yield on Portugal’s 10-year bonds to a euro-era record of 7.045% Friday before it fell back slightly.


Socrates, the prime minister, said Portugal is on track to lower its budget deficit to 7.3% of GDP this year _ which would be lower than those of Britain, France and Spain _ from 9.6% last year, the fourth highest in the eurozone.


For 2011, the government hopes to cut the deficit to 4.6%, below the EU average.


Portugal faces broader, long-term problems, however. Labor laws that make it hard to fire workers, industry’s reluctance to risk adopting more modern work practices, a congested legal system and education levels among the lowest in Europe have cooled the interest of foreign investors and will be hard to correct by a government already seeking to recover voters’ trust.


The austerity measures carried a political cost for the minority center-left Socialist government which managed to pass the plan only after negotiating its content with the main opposition party. All other parties voted against it, saying it would worsen hardship in a country which is among the continent’s poorest and where the average wage is around euro800 a month.


The Organization for Economic Cooperation and Development predicts the Portuguese economy will contract 0.2% next year after growing around 1% this year. The unemployment rate is 10.6%, just above the eurozone average of 10.1%.




Bernanke’s QE3 faces stiff resistance (Daily Telegraph, 101205)

Ben Bernanke, chairman of the Federal Reserve, was expected to open the way for a third blast of bond purchases in a 60 Minutes interview, but any such move is likely to face resistance from Fed hawks and mounting criticism in Congress.


Transcripts suggest that Mr Bernanke is sufficiently worried about the risk of an economic relapse next year - and a slide towards deflation - that he is already mulling further “credit easing” or QE3 as it is dubbed. The US jobless rate spiked to 9.8pc in November, while long-term unemployment is the highest since the 1930s.


However, Mr Bernanke faces a shift in the balance of power as hard-liners join the Fed’s voting body this year. Jeffrey Lacker from the Richmond Fed said he was “not well-disposed” to bond purchases, suspecting that the “risks exceeed the benefits.” Kevin Warsh from the Fed board has raised doubts, as have the Fed chiefs from Dallas, Philadephia, Minneapolis, and Kansas.


Mr Bernanke’s stated purpose is to force down borrowing costs, yet inflation fears have instead pushed up yields on 10-year Treasuries by 60 basis points to 3pc since early October. Long rates are used to price mortgages and company debt. Oil has shot up to $90 a barrel. This acts as a tax on US consumers.


The push for QE3 comes as Democrats and Republicans play political chicken over the extension of the Bush tax cuts. Unless Congress can cut a deal by mid-December, taxes will automatically rise. Fiscal tightening will occur by default. Gridlock will also push up capital gains, prompting a likely stock sell-off as investors rush to beat the deadline.


The Senate voted against the Democrat package over the weekend, insisting that the renewed tax cuts should cover the rich as well as the middle class. President Barack Obama offered to compromise but only if his $150bn wish-list is respected, including tax credits for the working poor.


The Fed bought $1.7 trillion of bonds in its first round of QE and is now buying a second batch of $600bn, but the purpose has shifted from preventing a credit meltdown to the subtler task of creating jobs. This mission-creep has led to a backlash in Congress, with growing calls to limit the Fed’s mandate.


Mr Bernanke says stimulus can boost jobs, but this is a hotly-disputed area of economics. Monetary policy is a blunt tool against structural unemployment.




Hedge fund manager Mark Hart bets on China as the next ‘enormous credit bubble’ to burst (Daily Telegraph, 101129)

Mark Hart, an American hedge fund manager who has made millions predicting the crises in US sub-prime market and European debt, has launched a fund to bet on the imminent implosion of China.


Hedge fund manager Mark Hart bets on China as the next credit bubble to burst. Mark Hart says complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the United States sub-prime crisis and European sovereign debt crisis.


Mr Hart, who runs Corriente Advisors from Fort Worth Texas, has told potential investors in a presentation that China is in the “late stages of an enormous credit bubble”.


When this bursts, the financier said he expects an “economic fall-out” that will be as “extraordinary as China’s economic out-performance over the last decade”.


Asking for a minimum $1m (£640,000) stake, Corriente said it will use sovereign and corporate credit default swaps, interest rate and foreign exchange options to cash-in on the collapse.


Mr Hart, who launched a record performing sub-prime fund as early as 2006 and, in 2007, a fund that bet on a European debt crisis, told investors: “Complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the United States sub-prime crisis and European sovereign debt crisis.”


In the presentation, which amounts to a devastating attack on the prevailing belief that China is an engine for growth, the financier argues that “inappropriately low interest rates and an artificially suppressed exchange rate” have created dangerous bubbles in sectors including:


Raw materials: Corriente says China has consumed just 65pc of the cement it has produced in the past five years, after exports. The country is currently outputting more steel than the next seven largest producers combined – it now has 200m tons of excess capacity, more that the EU and Japan’s total production so far this year.


Property construction: Corriente reckons there is currently an excess of 3.3bn square meters of floor space in the country – yet 200m square metres of new space is being constructed each year.


Property prices: The average price-to-rent ratio of China’s eight key cities is 39.4 times – this figure was 22.8 times in America just before its housing crisis. Corriente argues: “Lacking alternative investment options, Chinese corporates, households and government entities have invested excess liquidity in the property markets, driving home prices to unsustainable levels.” The result is that the property is out of reach for the majority of ordinary Chinese.


Banking: As with the credit crisis in the West, the banks’ exposure to the infrastructure credit bubbles isn’t obvious because the debt is held in Local Investment Companies – shell entities which borrow from Chinese banks and invest in fixed assets.


Mr Hart reckons that “bad loans will equal 98pc of total bank equity if LIC owned, non-cashflow producing assets are recognised as non-performing.


As a final blow, Mr Hart says that the market belief that the Chinese government has “ample resources” to bail out its banks is flawed.


Corriente’s analysis of the ratio of China government debt to GDP comes out at 107pc – five times higher than official published numbers. The hedge fund says this number uses “conservative assumptions” and the real figure could be as high as 200pc.


The result is that, rather than being the “key engine for global growth”, China is an “enormous tail-risk.”


He is so convinced by his arguments that he has warned investors that the fund, called the China Opportunity Master Fund, is prepared to “burn” 20pc of their cash each year until his theories are proved.




For Tottering States, Bankruptcy Could Be the Answer (, 101129)

Michael Barone


We won’t be able to say we weren’t warned. Continued huge federal budget deficits will eventually mean huge increases in government borrowing costs, Erskine Bowles, co-chairman of Barack Obama’s deficit reduction commission, predicted this month. “The markets will come. They will be swift, and they will be severe, and this country will never be the same.”


Bowles is talking about what the business press calls bond market vigilantes. People with capital are currently willing to loan money to the federal government, by buying U.S. bonds at low interest rates. That’s because interest rates are generally low and because Treasury bonds are regarded as the safest investment in the world.


But what if they aren’t? What if investors suddenly perceive a higher risk and demand a higher return? That’s what Bowles is talking about, and there are signs it may be starting to happen. The Federal Reserve’s second round of quantitative easing — QE2 — was intended to lower the interest rate on long-term bonds. Instead, the rate has been going up.


The federal government still seems a long way from the disaster Bowles envisions. But some state governments aren’t.


California Gov. Arnold Schwarzenegger came to Washington earlier this year to get $7 billion for his state government, which resorted to paying off vendors with scrip and delaying state income tax refunds. Illinois seems to be in even worse shape. A recent credit rating showed it weaker than Iceland and only slightly stronger than Iraq.


It’s no mystery why these state governments — and those of New York and New Jersey, as well — are in such bad fiscal shape. These are the parts of America where the public employee unions have been calling the shots, insisting on expanded payrolls, ever higher pay, hugely generous fringe benefits and utterly unsustainable pension promises.


The prospect is that the bond market will quit financing California and Illinois long before the federal government. It may already be happening. Earlier this month, California could sell only $6 billion of $10 billion revenue anticipation notes it put on the market.


Individual investors have been selling off state and local municipal bonds this month. Meredith Whitney, the financial expert who first spotted Citigroup’s overexposure to mortgage-backed securities, is now predicting a sell-off in the municipal bond market.


So it’s entirely possible that some state government — California and Illinois, facing $25 billion and $15 billion deficits, are likely suspects — will be coming to Washington some time in the next two years in search of a bailout. The Obama administration may be sympathetic. It’s channeled stimulus money to states and TARP money to General Motors and Chrysler in large part to bail out its labor union allies.


But the Republican House is not likely to share that view, and it’s hard to see how tapped-out state governments can get 60 votes in a 53-47 Democratic Senate.


How to avoid this scenario? University of Pennsylvania law professor David Skeel, writing in The Weekly Standard, suggests that Congress pass a law allowing states to go bankrupt.


Skeel, a bankruptcy expert, notes that a Depression-era statute allows local governments to go into bankruptcy. Some have done so: Orange County, Calif., in 1994, Vallejo, Calif., in 2008. Others — perhaps a dozen small municipalities in Michigan — are headed that way.


A state bankruptcy law would not let creditors thrust a state into bankruptcy — that would violate state sovereignty. But it would allow a state government going into bankruptcy to force a “cram down,” imposing a haircut on bondholders, and to rewrite its union contracts.


The threat of bankruptcy would put a powerful weapon in the hands of governors and legislatures: They can tell their unions that they have to accept cuts now or face a much more dire fate in bankruptcy court.


It’s not clear that governors like California’s Jerry Brown, who first authorized public employee unions in the 1970s, or Illinois’s Pat Quinn will be eager to use such a threat against unions, which have been the Democratic Party’s longtime allies and financiers.


But the bond market could force their hand and seems already to be pushing in that direction. And, as Bowles notes, when the markets come, they will be swift and severe.


The policy arguments for a bailout of California or Illinois public employee union members are incredibly weak. If Congress allows state bankruptcies, it might prevent a crisis that is plainly looming.




China seen as the candidate for ‘next catastrophe’ (Daily Telegraph, 110524)

Beware the China bubble because until hedge funds have found a way of directly shorting the soaring economy it will remain unchecked, says Greg Zuckerman, author of The Greatest Trade Ever.


Mr Zuckerman’s book was one of the first to reveal the billions in profits which hedge funds and banks from taking bets against the sub-prime market just before the housing bubble burst.


China, where the economy has expanded 10.1pc a year on average since 1978, is reminiscent of the housing market before credit default swaps allowed hedge funds to make bets against the entire market, according to Mr Zuckerman.


When China’s growth will decelerate or come to an abrupt stop is probably the most critical question facing the world economy. But predictions of a hard landing on everything from bad loans to investment-led overheating or inflation has yet to derail the country’s expansion.


This is because the government-controlled economy is insulated from speculators testing the true voracity of the market, claims Mr Zuckerman. “We need short sellers,” he said.


“The problem with the housing bubble was that for a long time people couldn’t bet against it. Credit default swaps gave hedge funds specific tools to short the entire market. That pricked the housing bubble.


“It is very difficult to make a direct bet against China. You can short property companies in Hong Kong but it is not the same thing. It is a candidate for the next catastrophe.”




Chinese inflation eases off 32-month high (Daily Telegraph, 110511)

China’s inflation eased slightly in April from a 32-month high as repeated interest rate hikes and other controls began to cool an overheated economy.


The country’s consumer price index rose 5.3pc year on year in April, down from 5.4pc in March but well above Beijing’s official four-percent target for 2011.


The politically-sensitive inflation reading had widely been expected to slow, mainly on the back of falling vegetable prices caused by increased supply.


Economists still expect prices to remain high and peak around mid-year, even as Beijing tries to rein in rising costs of food, housing and other household essentials.


“The general rising trend of CPI has been initially contained and government measures to control prices had initial positive effects,” said Sheng Laiyun, spokesman for the National Bureau of Statistics.


But he warned: “Even though the trend has been initially contained, CPI is still under rather big pressure due to the situation in the country and abroad.”


Inflation had hit 5pc for the first quarter.


Alistair Thornton, economist for IHS Global Insight in Beijing, said: “The broad message is this slight pullback far from signals the end of China’s inflationary concerns. It’s clear this is still a key policy priority.”


The International Monetary Fund has forecast China’s inflation should fall to just above four percent by the end of the year on the back of Beijing’s tough tightening policies.


Interest rates have been raised four times since October and the central bank has increased on numerous occasions lenders’ reserve requirement ratio, which effectively limits the amount of money they can loan out.


The potential for spiralling inflation to spark unrest was highlighted last month when hundreds of truckers went on strike at port facilities in Shanghai over rising fuel costs, prompting a heavy police response to restore calm.


Output from the country’s millions of factories and workshops expanded by 13.4pc on-year in April, the NBS said.


Fixed asset investment, a measure of government spending on infrastructure, rose 25.4pc in the first four months of 2011, compared with the same period a year earlier.


Retail sales, the main gauge of consumer spending in the world’s second-largest economy, rose 17.1pc in April from a year ago.




Chinese trade surplus widens to £7bn as officials hold economic talks in US (Daily Telegraph, 110510)

China reported an unexpectedly large April trade surplus, likely fuelling US pressure over currency controls and market access as American and Chinese officials hold high-level talks in Washington.


China’s global trade surplus widened to $11.4bn (£7bn) as import growth fell amid government efforts to cool an overheated economy and exports rose by nearly 30pc, data showed Tuesday. The gap exceeded private sector forecasts of $5bn to $10bn and was a strong rebound after China reported a rare trade deficit in the first quarter of this year.


China’s trade gap has angered Washington and other trading partners who blame currency controls and other policies they say are hampering trade and a global recovery.


At the start of two days of talks in Washington, US Treasury Secretary Timothy Geithner pressed China’s envoys on Monday to allow its yuan to rise faster against the dollar. That might help to boost Chinese imports, narrowing the American trade surplus with China, which hit an all-time high last year.


Chen Deming, China’s commerce minister, responded that yuan appreciation was being carried out in a “very healthy manner”. He said the US needed to change its policies on hi-tech sales and investment to spur American manufacturing.


Beijing has allowed the yuan to rise about 5pc against the dollar since it promised more exchange rate flexibility last June but American manufacturers and others say the currency still is undervalued. The yuan’s link to the dollar means it has declined against the euro as the American currency weakened over the past year.


China’s April trade surplus with the US rose 52pc over a year ago to $15.1bn. The gap with the European Union, China’s biggest trading partner, narrowed slightly to a still large $10.3bn.


Foreign manufacturers complain China’s trade surplus also is swelled by policies that hamper imports and encourage companies to shift production to China.


The country’s global trade gap, up from just $1.7bn in April 2010, reflected a slowdown in demand for imports as Beijing tries to cool an economy that grew by a rapid 9.7pc in the first three months of this year.


China’s trade surplus usually narrows early in the year as manufacturers restock following the Christmas export rush. This year’s decline was unusually large due to high prices for oil and other commodities.


China recorded a trade deficit for the first three months of 2011 and a surplus of just $140m for March.


Still, analysts expect China to show a global trade surplus for the year of $160bn to $200bn. Last year, China ran a trade surplus of about $16bn a month.


Regulators have tightened curbs on lending and investment to rein in a boom that has driven demand for imported iron ore, oil, machinery and other goods.


Imports in April were $144.3bn but growth slumped to 21.8pc from March’s rapid 32.6pc expansion. Exports surged 29.9pc to $155.7bn, reflecting stronger global demand.


The wider trade surplus suggests Beijing is making only limited progress in efforts to rebalance China’s economy away from reliance on trade and investment by boosting domestic consumption.


High commodity prices also have depressed Chinese demand. Crude oil imports for the first four months of this year fell 9.1pc from the same period of 2010 despite growth in auto sales.




UN sees risk of crisis of confidence in U.S. dollar (National Post, 110525)


UNITED NATIONS – The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.


In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.


The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.


This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.


“As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.


The 17-page report referred at another point to the “still looming risk of a collapse of the United States dollar.”


Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.


“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts — like the risk of the U.S. not being able to service its obligations,” he told Reuters.


UN economists have for some time queried whether the dollar should continue to be the world’s sole reserve currency. Others have also expressed concerns about U.S. finances.


Standard & Poor’s threatened on April 18 to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress found a way to slash the yawning federal budget deficit within two years.


A downgrade would erode the status of the United States as the world’s most powerful economy and the dollar’s role as the dominant global currency.


Treasury Secretary Timothy Geithner said on Wednesday the U.S. government would “never default on its obligations.”




Assessing the broader global economy, the UN report said recovery from the 2008 financial crisis continued to be led by China, India and Brazil, but that their growth outlook was moderating due to fears of inflation and domestic asset price bubbles.


It took a slightly more optimistic view of world growth prospects than it did six months ago, forecasting 3.3% expansion this year and 3.6% in 2012, compared with 3.1% and 3.5% respectively.


The United Nations uses a different exchange rate calculation than the International Monetary Fund and the Organization for Economic Cooperation and Development, making its global growth figures slightly lower.


It boosted its forecast for U.S. gross domestic product growth this year from 2.2% to 2.6% but kept next year’s estimate steady at 2.8%.


The report cut Japan’s growth outlook this year by more than a third to 0.7% following March’s catastrophic earthquake, tsunami and nuclear plant crisis. It put damage to buildings and infrastructure at about 25 trillion yen (US$305-billion) or 5% of GDP.


Despite a recent surge in oil prices, it predicted that barring major disruptions from political unrest in the Middle East, they would level off at an average $99 a barrel this year — close to the price of U.S. crude on Wednesday — and fall to an average of US$90 next year.


“Supply and demand conditions do not warrant a continued upward trend,” it said.


Food prices have also been soaring but the report said better harvests were expected to moderate them in the second half of this year.




Nokia shares take ‘icy plunge’ after profit warning (Daily Telegraph, 110531)

Nokia shares crashed 22pc after the world’s largest mobile phone company said it might not make a profit in its core business this quarter, slashed revenue forecasts, and scrapped all targets for 2011.


The Finnish company is struggling to keep up in a mobile phone market that has been transformed by the BlackBerry, iPhone, and Google’s mobile operating system, Android. In China, it has been hit by price competition for cheaper phones.


Earlier this year, Stephen Elop, chief executive, said Nokia was like a man on a burning North Sea oil platform, who must decide whether to plunge into icy waters or perish. His language yesterday was less flowery, but the numbers suggest the “icy plunge” has been far from easy.


The core devices and services division may only just break even in the second quarter, rather than achieve the 6pc to 9pc operating margins that had been forecast. Sales are expected to be “substantially below” the previous target of €6.1bn to €6.6bn (£5.3bn to £5.8bn) for the quarter.


Nokia said it could not provide financial forecasts for the rest of the year, and any previous targets are no longer valid.


“Going through this transition, it’s hard,” Mr Elop said. “There is definitely less visibility than we’d like; 2011 will be a difficult year.”


He is betting on a new alliance with Microsoft to regain market share in the smartphone market. Research by Gartner shows that Nokia’s share of the global smartphone market in the first quarter crashed to 27pc from 44pc a year earlier.


Mr Elop said yesterday Nokia still plans to ship its first product with Microsoft’s Windows operating platform in the fourth quarter this year.


Ryan Kim from technology blog GigaOm said: “It will have to get that first wave of devices right or risk losing even more of its reputation. The margin of error keeps getting smaller for Nokia with each passing quarter.”




US housing market in double dip as prices fall to fresh lows (Daily Telegraph, 110531)

US house prices have fallen to fresh lows, according to a widely-watched report that managed to stand out among a blitz of worrying data for the world’s biggest economy.


Average home prices slumped 5.1pc in the first quarter of the year from the same period in 2010, the latest report from the S&P Case-Shiller index showed yesterday.


The index’s reading of 125.41 for the quarter was the lowest since house prices began falling in the summer of 2006.


The report “is marked by the confirmation of a double-dip in home prices across much of the nation,” said David Blitzer, chairman of the committee that puts together the report. “Home prices continue on their downward spiral with no relief in sight.”


While the housing market has been a well-known Achilles heel for the recovery, yesterday also saw evidence that the country’s manufacturing sector - a robust, albeit small, part of the economy - is slowing.


A reading from the Institute for Supply Management’s index that measures the state of manufacturing around Chicago showed a decline to 56.6 last month (MAY) from 67.5 in April.


There were further signs that high food and gas prices are denting the confidence of consumers, whose spending is central to the economy’s fortunes.


Consumer confidence reached a six-month low in May, according to an index from the Conference Board, as the reading dropped to 60.8 from 66 in April.


The latest slew of readings adds more pressure on the US jobs market to continue its recovery and shore up Americans’ confidence. The monthly jobs report for May will be released on Friday.


“Weakness in manufacturing also points to a risk of a weaker-than-expected payroll report on Friday and reinforces the general sense the economy is losing steam,” said Chris Low, an economist at FTN Financial.




A sudden rise in the yuan would solve nothing (Daily Telegraph, 110604)

The main beneficiaries of a stronger yuan would not be American and European companies but the factories of Vietnam and Bangladesh.


Before we start, let me make a full disclosure. I live in China, but unfortunately I am paid in pounds, not yuan.


When I arrived, three years ago, the arrangement seemed generous. At nearly 15 yuan to the pound, sociable expats could be seen on Shanghai’s Bund drinking £5 martinis with abandon. But it turns out that, according to the dry martini index, the pound was overvalued. A 28pc dip against the yuan since then has helped Shanghai sober up.


These days I may drink less, but my apartment is smaller. I have a nervous tic of scanning the foreign exchange rates for signs of trouble. And I get a queasy feeling in my wallet when economists and politicians start calling for China to revalue its currency.


So let me try to debunk the various arguments underpinning the non-stop nagging for China to have a stronger currency.


In the United States, politicians have been jumping up and down and threatening a trade war for years.


They argue that by fixing the yuan at a low rate to the dollar, the Chinese are cheating. They complain that the weak yuan makes Chinese goods cheaper than they should be and the US has suffered as a result. Thousands of jobs have been lost in US factories, and they want a 25pc tax on Chinese imports in order to even things up.


I have some sympathy with them. No matter what China claims, it is impossible to have a free market economy without the price of currency, in which all other prices are denominated, being set by supply and demand.


If the value of the yuan was to be set by the market, we might be able to ascribe a true value to goods and assets in China. We may discover – as a former colleague of mine once pointed out – that plastic toys cost more than we thought, and apartments in Shanghai less.


Don’t get me wrong: I dislike the current state of affairs – in which China sews all our clothes and assembles all our gadgets and nick-nacks – as much as anyone.While I admire the doggedness of Chinese workers, I cannot pretend that I feel comfortable about buying Chinese-made goods. I have seen too many grim factories and heard too many safety-related horror stories.


But there is no turning back the clock. A stronger yuan is not likely to invigorate American and European manufacturers against their nimble Chinese opponents. The knock-out blow has already been dealt.


Manufacturers in the West who were washed away by a wave of cheap Chinese goods are not going to re-tool and re-open. These days, China’s only competition comes from other developing countries.


The main beneficiaries of a stronger yuan would not be American and European companies but the factories of Vietnam and Bangladesh. In the short term, a sharp upwards move in the yuan would simply cause a spike in the price of America’s baseball caps and Nike shoes. Gadgets, meanwhile, are mostly made from Japanese, Korean and Taiwanese components, and then cheaply assembled in China.


Since the currencies of Taiwan, Korea and Hong Kong have all been falling against the dollar, the effect of the yuan’s appreciation is, to a large extent, cancelled out. The main victims of a rapid currency appreciation would probably be the likes of Apple, which would see its enormous margin trimmed.


The economists at the St Louis Fed have done the sums. They believe a 25pc rise in the value of the yuan would cause US inflation to rise by nearly 1pc point.


“Chinese-made goods cannot easily be substituted with American-made goods over the medium term,” they say.


Indeed, between 2005 and 2008, the yuan did appreciate against the dollar by some 20pc in nominal terms and by as much as 50pc if you take rising Chinese inflation into account. Did US manufacturers benefit? It seems not. The trade imbalance between China and the US grew by nearly a third and Chinese imports continued to increase across all major categories.


Of course there are several reasons why it is in China’s interests to allow a gradual rise in its currency. The most pressing is that inflation is threatening to touch 5.5pc this month and a stronger currency would help cheapen all the imports of oil, coal, copper and other raw materials that China relies upon and whose prices are denominated in dollars.


Yesterday was the 22nd anniversary of the Tiananmen Square protests, so it is worth mentioning in passing that runaway inflation was one of the main sparks for igniting the demonstrations.


While much of China’s inflation has been caused by the rising price of food, in which the country is practically self-sufficient, it is worth remembering that two-thirds of the price of vegetables in China’s cities comes from the cost of transporting them to market, so cheaper oil could result in cheaper cabbages.


A stronger yuan would help curb the flows of speculative money flowing into China, waiting for the yuan to rise in value.

And Alistair Thornton, an economist at IHS Global Insight in Beijing, points out that the central bank would have to print off fewer new notes to swap for the dollars being earned by Chinese exporters.


But the risks of an abrupt revaluation are huge. Thousands of exporting companies could be driven out of business. By holding the yuan down, the Chinese authorities have caused a massive distortion of capital. Foreigners have poured investment into the country, even though they are not sure how they will get their profits, if any, out.


And the Chinese have responded by opening up factories of their own. Large swathes of the economy are over-invested. Chinese banks, whose entire business model seems to be based on loaning money to well-connected businessmen, have made the situation worse. The result is that many of China’s exporters are running on vapour and would be driven out of business if the yuan suddenly jumped.


In the long run, the global imbalances will take care of themselves. China is facing challenges that will slow its growth dramatically. For the past decade, China’s boom has been fed by low-hanging fruit. But now it is in the big leagues. If China wants to build innovative and hi-tech industries, it will be up against the likes of Korea, Germany and Japan. Competition will be stiffer, and China’s low prices and enormous manpower will matter less.


Meanwhile, as each year passes, and China gets richer, its imports swell, bringing the country’s surplus down. In the past decade, for example, petrol consumption has doubled. Last year, China overtook the US as Saudia Arabia’s largest customer.


With 10m new cars hitting the roads each year, and with scarce resources of its own, China faces an enormous problem producing enough exports to pay for just its fuel.


Again, in the food sector, China’s self-sufficiency is being threatened by the growing appetite of its people. Agricultural reforms will help boost production, but there will also be rising imports, again adjusting the balance of trade.


In the long-run, the yuan should gently rise to a normal level, and a controlled rise will help keep China’s economy balanced. Any sudden moves and there could be severe discomfort for China, for the rest of the world, and indeed for me.




Lessons of Argentina crisis ignored in handling of Greece (Daily Telegraph, 110704)

For a vision of how the Greek debt meltdown is going to end, look no further than the International Monetary Fund’s post mortem into a similar crisis that came to a head almost exactly a decade ago - Lessons From The Crisis In Argentina.


The policy review document was originally published in October 2003 and signed off by a then relatively unknown IMF official called Tim Geithner, now the US Treasury Secretary no less.


Strangely enough, he seems entirely to have forgotten about this eight-year-old tome, whose candid and illuminating account of Argentina’s descent into economic and fiscal chaos, and the not inconsiderable role the IMF played in the process, provides an object lesson in how not to proceed.


There’s no application of its lessons to Greece and the rest of the troubled eurozone periphery; worse, in blind disregard for its own analysis, the IMF is making exactly the same mistakes all over again.


On Karl Marx’s famous dictum that history always repeats itself, once as tragedy, second as farce, Argentina provides a case study in where Greece is heading, which is out of the single currency, into default and a brutally imposed re-engagement with harsh economic realities.


It’s still remotely possible that notions of “European solidarity” might avert this process through a system of indefinite fiscal transfers, but to believe that Germans are ready to subsidise Greeks on a more or less permanent basis requires something of a leap of faith.


The parallels with Argentina are so strikingly exact as to bear repeating at length. Substitute the word Greece for Argentina in the IMF’s analysis, and euro for currency board, and you’d have a near perfect account of the present crisis, all written nearly eight years ago.


Here’s what happened in Argentina. In the hope of eliminating hyper-inflation and years of currency turmoil, Argentina adopted a “currency board regime”, which pegged the peso to the dollar.


Policy credibility depends crucially on the idea that a currency board is hard to escape, so the effect is much like being part of a single currency. To begin with, it worked just as the doctor ordered. Inflation was tamed and Argentina was widely hailed as a model for successful economic reform.


Beneath the surface, however, nothing much had changed. Corruption and tax evasion was still rife, the government routinely hid the true size of the budget deficit with heavy off-balance sheet spending, there was little if any progress in labour market and other forms of structural reform, and behind the candy floss of debt-fuelled, consumer-led growth there was progressive loss of competitiveness.


Tying yourself to someone else’s monetary policy is always high risk, but for a small economy such as Argentina to be joined to the mighty US is a bit like trying to ride a whale. As the Federal Reserve tightened policy to choke off the overheating of the boom, Argentina plunged into deep recession, made even worse when Brazil, its largest export market, devalued.


As the IMF put it: “Once the downturn had started, the currency board arrangement limited the authorities’ ability to prevent a tightening of monetary policy and the public debt dynamics, which were exacerbated by the protracted slump, ruled out loosening fiscal policy…


“The currency board arrangement remained viable as long as there was sufficient political will to subordinate fiscal policy to maintaining the peg… At some point during the 1990s, Argentina slipped back into a ‘fiscally dominant’ regime, ultimately dooming the currency board arrangement.”


Yet this moment of realisation was preceded by a prolonged period of denial, both by the Argentine government and the IMF, which in almost every detail mirrors events in Greece today. There were repeated IMF bail-outs, and successive rounds of ever deeper austerity measures. There were riots (“cacerolazo”, or banging of pots and pans), yet more austerity, and as the flight of capital escalated, there were capital controls.


There was even a “voluntary” debt forgiveness initiative very similar to the “rollover” proposed for private holders of Greek sovereign debt today. None of it worked.


The IMF concluded its post mortem by saying that when “debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring”.


So how come the IMF has failed to follow its own advice with Greece, and contrary to what it did with Argentina, foregone the bail-outs and organised as orderly an exit and default as remains possible?


The best answer to this question is that the IMF has become no more than a tool of the eurozone policy-making elite. The failed solutions of Dominique Strauss-Kahn are maintained through the seamless succession of Christine Lagarde and sustained by the EU’s dominant share of the IMF vote.


A Greek exit, they fear, might finish off the European project altogether. Greece must accept penury and fiscal enslavement in selfless pursuit of the greater good.


From his current berth at the US Treasury, Tim Geithner seems to agree that to allow Greece to go the same way as Argentina might be to trigger a second global credit crunch. There’s a systemic dimension which was absent from the Argentine crisis, where the only casualties from the redenomination of dollar debt as devalued pesos were the Argentines themselves and their external creditors.


He should reread his own report. Argentina only began its long march back to economic salvation after President Fernando de la Rúa had to be quite literally helicoptered out of office, with the rioters at his door. There’s every chance Greeks will eventually demand a similar solution.




Robert Zoellick warns of new “danger zone” for global economy (Daily Telegraph, 110903)

Fears for the global economy increased yesterday after Robert Zoellick, head of the World Bank, warned that we were entering a “new danger zone” as confidence plunged, global growth slowed and nations were crippled with debt.


“The financial crisis in Europe has become a sovereign debt crisis, with serious implications for the monetary union, banks, and competitiveness of some countries,” Mr Zoellick said at a conference in Beijing.


“The United States must address the issues of debt, spending, tax reform to boost private sector growth and a stalled trade policy,” Mr Zoellick added. “The world economy is entering a new danger zone this autumn.”


Mr Zoellick’s “danger zone” warning is his second in two months. The World Bank chief said in August that investors had lost confidence in the economic leadership of several countries, led by America’s bitter Congress debate to raise its debt ceiling and avoid default.


“What we’ve seen is that confidence is a fragile element of how the market economy works [...] and I think that those events combined with some of the other fragilities... have pushed us into a new danger zone. And I don’t say those words lightly,” he said at a dinner in Sydney, Australia.


Grim employment data from across the Atlantic on Friday sent global markets into a tailspin. The figures showed that the US economy added no new jobs at all in August, bringing ten consecutive months of rising figures to a grinding halt.


Mr Zoellick went on to urge China to speed up the reform of its economy. Western critics have argued that the country is too reliant on government investment and exports to fuel growth, instead of stimulating domestic consumption.


“We are living in a global economy. Decisions in Europe, decisions in the United States, decisions in China – they affect all of us,” the World Bank chief said.


“If China were to continue on its current growth path, by 2030 it would have an economy equivalent to 15 of today’s South Koreas, using market prices,” he said. “It’s hard to see how that expansion could be accommodated with an export and investment-led growth model.”


“China’s structural challenges occur in a current international context of slowing growth and weakening confidence,” he cautioned.


Mr Zoellick warned that China, which has seen its economy grow at about 10pc for each of the last ten years, could enter a “middle income trap”, noting that many countries have been able to make it from low income to middle income, but relatively few have carried on to become a high income nation.


“That’s a transition that only a handful of countries have made – and, sadly, many have failed,” Mr Zoellick said. In July, the World Bank reclassified China as an upper middle income economy. However, the World Bank chief added that he thought China was “well-positioned” to join the ranks of the world’s high income countries.




FTSE 100 sees £49bn wiped off shares on euro fears and bank lawsuit (Daily Telegraph, 110905)

Forty-nine billion pounds was wiped off the value of the UK’s leading shares on Monday following renewed fears over the health of the British economy and concerns over the fate of British banks being sued by US regulators.


The FTSE 100 tumbled 3.6pc - 189.45 points - to close at 5,102.58 after investor confidence was knocked by an unexpectedly sharp fall in services sector growth in August.


The Markit/CIPS services purchasing managers’ index fell to 51.1 in August from 55.4 in July, the biggest drop since the foot and mouth crisis a decade ago. Economists were alarmed by the scale of the fall, which had been far larger than expected and triggered fears that the UK is now on course for a double-dip recession.


David Noble, chief executive of CIPS, described the decline in services growth as “eye-watering”. Accounting for three-quarters of the UK economy, the services sector has a crucial impact on gross domestic product figures.


Investor confidence was also dented by the news that Royal Bank of Scotland, HSBC and Barclays are being sued by the US Federal Housing Finance Agency for a combined $196bn (£121bn) for their role in the sale of toxic mortgage debt to Fannie Mae and Freddie Mac, the American home loan financial institutions, in the run-up to the financial crisis.


Investors across Europe were also in cautious mode as key indices in Germany and France suffered heavy losses.


Traders said the market turmoil on Monday could mark the beginning of another volatile week for the markets.


“The FTSE has started the week off with a triple-digit loss, as significant drops in the likes of Barclays and RBS have dragged blue-chips lower,” said Yusuf Heusen, sales trader at IG Index .


“This is in reaction to the weekend news of the lawsuits filed by the US government against a selection of banks covering mis-selling of mortgage-backed securities prior to the financial crisis.”


“We may have to wait until the resumption of US trade on Tuesday to see if [the] drop is just a correction or the start of another steeper sell-off.”


Analysts said the lawsuits were likely to hang over the banks for a prolonged period, despite a vigorous denial of any wrongdoing from RBS, which was the biggest faller on Monday.


“At this stage it is impossible to put an accurate estimate on the potential financial impact for the banks involved, but we note that Royal Bank of Scotland is by far the most exposed and hence we expect its shares to come under the most pressure as a result,” said Gary Greenwood of Shore Capital.


The pound closed down a cent against the dollar, at $1.6103.


Heightened market uncertainty and the recently weak data for the UK economy will provide a gloomy backdrop for the latest meeting of the Bank of England’s Monetary Policy Committee, which begins on Wednesday.


Although the MPC is expected to hold interest rates at 0.5pc for the foreseeable future, economists said there was now a greater chance that it would re-start its quantitative easing programme in the coming months in a bid to stimulate the economy. It will announce its decision at noon on Thursday.




European banks face collapse under debts, warns Deutsche Bank chief Josef Ackermann (Daily Telegraph, 110905)

Josef Ackermann, the chief executive of Deutsche Bank, Germany’s biggest bank, has warned that “numerous” European lenders would collapse if they were forced to book their losses on stricken sovereign bonds.


Mr Ackermann said that the value of billions of euros of loans has plunged to a level that could overwhelm smaller banks.


He told a conference in Frankfurt: “Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”


Mr Ackermann said market conditions were as febrile as the height of the banking crisis. “We should resign ourselves to the fact that the ‘new normality’ is characterised by volatility and uncertainty,” he said. “All this reminds one of the autumn of 2008.”


The volatility was demonstrated as Deutsche Bank shares tumbled 8.9pc as banks led a stock markets lower across Europe.


Deutsche Bank’s shares closed at €23.79, valuing the company at €21.6bn (£18.9bn) - its lowest level since it completed a €10.2bn rights issue last October. The Stoxx Europe 600 banking index fell to its lowest level for 29 months. The DAX fell to its lowest level in two years.


Traders said fears over the banks’ exposure to European debt were exacerbated by the uncertainty of the US legal cases and regulatory reform.


The debt crisis has also squeezed bank revenues as mergers and acquisitions – as well as stock market listings – have been shelved. Trading figures have also fallen. Mr Ackermann said that bank profits will take a long time to recover.


“Prospects for the financial sector overall... are rather limited,” he said. “The outlook for the future growth of revenues is limited by both the current situation and structurally.”


Deutsche Bank has already warned that it could miss its target of €6.4bn pre-tax profits this year without a quick and sustainable resolution of the European debt crisis.


Even so, Mr Ackermann firmly rejected the proposal by Christine Lagarde, the new head of the International Monetary Fund, for another round of recapitalising European banks.


Mr Ackermann claims that the move would be “counterproductive” and argued that “a forced recapitalisation would give the signal that politicians do not themselves believe in the measures” they have implemented to bolster fragile eurozone countries.


Ms Lagarde has said banks need another capital injection to “avert contagion”. She told reporters she believed it is “necessary to recapitalise European banks so that they are strong enough to withstand the risks linked to the debt crisis and weak growth”.




Why Capitalism Glorifies God (, 111017)


Katie Kieffer


I contend that if you profess to believe in God, you must also embrace capitalism.


Lately, many religious shepherds are abandoning reason in favor of sentiment. Catholic nuns are joining Occupy Wall Street revelers, like zombies witnessing to rapturous fans. Meanwhile, Jewish activist and commentator Jake Goodman is hailing the Manhattan demonstration (which includes numerous blatantly anti-Semitic protesters) as a group of people “philanthropizing with their feet.”


Even within the same religion, emotional progressives are clashing with rational believers. Dominican Sister Pat Daly of New Jersey told Catholic News Service, “I’m thrilled to see this momentum as more and more people are taking to the streets.” Conversely, Father Robert Sirico of Michigan told CNS, “The ethos of this all is the rage against wealth for wealth’s sake. … You don’t alleviate poverty by redistributing wealth, you alleviate poverty by creating wealth.”


If you believe that God created the universe, then you must assume that he wanted man to live differently from animals. Otherwise, man would not have reason. Upon realizing that reason both defines and differentiates man, wouldn’t you set logic—not sensation—as the moral compass for human activity? Or would you “shepherd the flock” by encouraging young people to bully job creators, embrace sloth, strut topless in Manhattan and openly mate in parks?


Squirrels scamper about and get frisky in public parks. Squirrels are also feral; they will never cultivate the land, own property, develop iPhones or create a monetary system. I think humans who reject reason by acting like squirrels have no business preaching about God.


I find that atheists admit the metaphysical more than progressives who claim to believe in God. For, atheists revere reason while progressive “believers” adore emotion: They shop around until they find a church that washes them mindless with foolishly sentimental and entertaining services. They make themselves feel charitable by marching two-by-two past wealthy residences in midtown Manhattan with signs like “No Billionaire Left Behind.” They interpret the eighth commandment that God gave to Moses as: “Thou shalt share.”


Progressive “believers” cite charity when they call for the redistribution of wealth. But is charity the same thing as stealing? Because stealing violates the eighth commandment. If these zealots used reason instead of emotion to formulate their moral codes, they would never demand that the government confiscate private property from their wealthier brothers in the name of love.


Aristotelian philosopher and theologian Thomas Aquinas contends that all men are governed by a natural law that is rooted in reason, not emotion. He argues thus in his Treatise on Law: “As, in man, reason rules and commands the other powers, so all the natural inclinations belonging to the other powers must needs be directed according to reason. Wherefore it is universally right for all men, that all their inclinations should be directed according to reason.”


Capitalism acknowledges reason and natural law whereas socialism denies natural law. By reason, we know that we have the right to own private property and the fruits of our labor. Capitalism is rational because it allows you to keep the fruits of your labor.


As John Locke points out, reason tells you that you own your body. No one else owns your body—not your neighbors, your family or the government. If you use your body to till the land and make it useful by growing wheat, then logic tells you that you own the land and any profits from the wheat, not the hungry passerby who comes across the land and steals the wheat that you grew.


Capitalism also allows for rational generosity whereas wealth redistribution fosters poverty. Reason says that you should be able to freely share your wheat with a person whom you know to be in genuine need or whom you wish to employ—not the able-bodied bum whom the government deems worthy of assistance.


Rational men glorify God just as glowing candles glorify a candlestick maker; men must behave rationally in order to completely function and prosper—just as candles must hold a flame in order to fulfill their purpose of brightening a room. Said differently, a man that acts like an animal must be as disappointing to his maker as a candle that cannot hold a flame.


I believe in one God, the creator of the universe. I believe that renouncing capitalism is irrational and that to deny reason is to deny the existence of God.




Brazil to overtake UK as sixth-largest economy (Daily Telegraph, 111031)

Brazil will overtake the UK to become the world’s sixth biggest economy this year, according to new projections.


The Latin American giant’s GDP for 2011 is expected to hit $2.44 trillion (£1.51 trillion) compared with $2.43 trillion for the UK, the latest monthly forecasts from the Economist Intelligence Unit (EIU) show.


This will see Brazil, which last year overtook Italy to become the world’s seventh biggest economy, move up one more place to sixth with the UK falling to seventh.


Robert Wood, the EIU’s chief economist on Brazil, said the country’s surge up the table owed much to a growing consumer class and a booming trade relationship with China, based on the Asian giant’s need for commodities such as soy and iron ore.


“It’s partly the story of the lower income classes rising up in Brazil to join the middle-class and partly the sheer size of the population of nearly 200m,” said Mr Wood.


“This also links in with Brazil’s emergence in terms of being dragged up by demand from China. We are in the middle of a commodity super-cycle that will last for some time but at some point the really good times Brazil is enjoying will cool off a bit.”


According to the EIU, Brazil will lose sixth place to India in 2013 but regain it in 2014 – the year it will host the World Cup - when its GDP overtakes that of France.


The forecasts suggest that Brazil’s economy will be bigger than any in Europe by 2020 when it overtakes Germany to become the fifth biggest globally – after China, by then the world’s leading economy measured in dollars, the US, India and Japan.


The UK will find itself placed ninth in the global league table in 2020, predicts EIU, with Germany sixth, Russia seventh and France eighth.


Brazil grew by 7.5pc last year after comfortably weathering the financial crisis of 2008 and 2009. The EIU predicts it will see growth of 3pc this year and 3.5pc in 2012, compared with 0.7pc for both years in the UK.