World economy too reliant on China and US

[nittie]

Re: How Long Will America Lead the World?

Those articles don't talk about the real danger of being reliant on two economies prolly because they don't want to acknowledge what's really going. America is aready the world's biggest consumer if China ever reached our level of consumption it would be a disaster to mankind and an end of life as we know it. The world watched helplessly as America became a Super-consumer now it's obvious this planet cannot substain two countries eating up most of the world's resources...if China or America don't slow it's growth and consumption it's assured the rest of the world will unite and slow it for us.

 

[Greed]

Capitalist Manifesto

Capitalist Manifesto
A specter is haunting Europe. It's the gospel of free markets, loosed from chains.
By Stefan Theil
Newsweek International

Aug. 14, 2006 issue - Europe could use more people like Ehssan Dariani. The 26-year-old entrepreneur runs a hot Internet start-up called studiVZ—Europe's fastest-growing social network for university students. Since setting up in a cheap Berlin loft only last fall, he's already hired 25 people. Yet when Dariani looks back at his high-school days, a decade ago in the west German city of Kassel, he remembers his teachers warning against exactly what he's doing. "They taught us the market economy was a dangerous wilderness full of risk and bankruptcy," Dariani says. "We never learned how prices affect supply and demand, only about evil managers and unjust wages." If he'd listened to his teachers, he'd be among the vast majority of German students who dream of becoming civil servants or fitting into the comfortable hierarchy of a traditional corporation. Instead he set out and created some desperately needed jobs.

Ask any European what he learned at school about how the economy works, and you'll likely hear a similar story. A recent study of German high-school textbooks by the Institute for the German Economy, in Cologne, found entrepreneurs—instead of getting credit for creating jobs—taking the blame for everything from unemployment to alcoholism to Internet fraud and cell-phone addiction. Some high-school social-studies textbooks teach globalization as an unmitigated catastrophe; students are advised to consult the radical anti-globalization protest group Attac for further information. In France, books approved by the Education Ministry promote statist policies and voodoo economics. "Economic growth imposes a way of life that fosters stress, nervous depression, circulatory disease and even cancer," reports "20th-Century History," a popular high-school text published by Hatier. Another suggests Margaret Thatcher and Ronald Reagan were dangerous free-market extremists whose reforms plunged their countries into chaos and despair.

Such blatant disinformation sheds new light on the debate over why it is that Europeans lag so far behind Americans in rates of entrepreneurship and job creation. It also helps explain widespread resistance among Europeans to accepting even the smallest reforms of their highly regulated economies. But recently there appears to be a small but growing backlash against the popular vilification of capitalism. Unthinkable only a decade ago, business associations, think tanks and a whole slew of capitalist and libertarian activists, many only in their 20s and 30s, are leading a tiny but noisy counterattack. Their common goal: making sure the next generation of Europeans is less in tune with Karl Marx and more with Adam Smith.

Fighting windmills? Maybe not. In Germany, the Banking Association is helping change attitudes by supplying instructional materials explaining markets to more than 20,000 teachers. "A few years ago the Education Ministry would have kicked us out," says the association's Wilhelm Bürklin. One participating social-studies teacher, Christel Stoldt at Winkelmann High School in the town of Stendal, reports rising interest among students about how the market economy works. "I have to overcome a lot of prejudice against companies and entrepreneurs," she says. In France, the Centre de l'Entreprise has sent several hundred teachers on internships to companies. Director Jean-Pierre Boisivon says they often return astonished that the corporate world isn't the Darwinian struggle between bosses and workers they'd been taught it was. Junior Achievement, a U.S. organization promoting student entrepreneurship, now has three dozen European chapters and plans to reach 5 million students by 2010. JA Europe chief Caroline Jenner says that 30 percent of the kids who participate in its programs later start their own companies, compared with just 7 percent in the general population. "How else are we going to get jobs for 19 million unemployed Europeans if we don't teach kids that entrepreneurship is OK?" she asks.


It's been harder to create a space for openly pro-capitalist views in the public debate, but even that is starting to change. A good place to judge is Europe's bookstores. While anti-capitalist and anti-globalization screeds—plus the usual Third Way literature—still dominate, there is now a small but growing pro-capitalist shelf. Virtually nonexistent just a few years ago, it already has its own cult classics, such as "In Defense of Global Capitalism" by the young Swedish ex-anarchist Johan Norberg, translated into a dozen languages from Spanish to Albanian since it appeared in 2001. In France last year, two new books claiming widespread indoctrination at public schools hope to set off a new discussion over what children are taught. At Vienna University, the works of the great Austrian school of capitalist thinkers were all but ignored for more than half a century. In 2005, thanks to fund-raising by a local free-markets group, there is now a new professorship teaching such key theorists as Joseph Schumpeter (think "creative destruction") and Friedrich Hayek (famed for his impassioned critique of socialism).

If Europe was once a hotbed for capitalist thought, people like Helen Disney think it can be so again. When she founded the Stockholm Network in 1997 as a loose organization of pro-market and libertarian activists, she says, many members were at first surprised that like-minded people even existed in Europe. Now the network includes more than 130 groups, from Poland's Adam Smith Foundation to Belgium's Centre for the New Europe. "The pro-market movement has definitely reached critical mass," Disney says. Every February since 2003, they head to the Capitalist Ball in Brussels—not a gala for cigar-wielding plutocrats, but a networking confab for Europe's growing number of free-market think-tankers and activists.


Some of the new groups are taking the fight into the streets. In France, Liberté Chérie is leading the pro-capitalist fringe, organizing the country's first pro-reform demonstrations and counter protests to recent union strikes. Its biggest demo drew only 80,000 people, but it was the first time many French learned that there were ordinary citizens supporting pro-market reforms. Bigger changes will likely come in a decade or two, says Disney, when the twenty- and thirty-somethings who dominate the new pro-market groups today become editors, politicians and business leaders. Indeed, a recent poll by the IPOS Institute finds the market economy's approval rating rising to 59 percent among Germans under 30, with only 32 percent saying the state needs to play a bigger role. Ten years ago, the figures were reversed. "The values shift is already underway," says Bürklin. It's about time.

http://www.msnbc.msn.com/id/14206355/

 

[Greed]

Asean speeds up free market plan

Asean speeds up free market plan

Members of the 10-strong Association of Southeast Asian Nations (Asean) have agreed to speed up plans to form a single economic community.

Comprising countries such as Thailand, Singapore and Vietnam, Asean hopes to compete better against fast-growing economies such as China and India.

Asean leaders now hope to establish a single trading market similar to the European Union as early as 2015.

They are also currently in talks to liberalise trade with the US.

The developments came as Asean economic ministers were meeting for talks in Kuala Lumpur.

Efficiency drive
"We all agreed that we should move in that direction [establishing a free trade region]," said Asean secretary general Ong Keng Yong.

He added that member nations also realised that they had to speed up work to make their economies more efficient.

The 39-year-old Asean group began liberalising trade between its members in 1993.

Its plan for a single market would allow free flow of goods, services and investment, but stops short of proposing a new single currency.

Asean hopes to announce a reduction in tariffs between it and the US later this week.

Its full membership is made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, Philippines, Singapore, Thailand and Vietnam.

http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/5273992.stm

 

[Greed]

U.N.: Global economy needs bloost

U.N.: Global economy needs bloost
By FRANK JORDANS, Associated Press Writer
Fri Sep 1, 4:45 AM ET

Japan and Germany are failing to stimulate the world economy, leaving the United States with the difficult burden of generating enough demand for goods and services to sustain growth around the world, a U.N. report said Thursday.

But Washington's steep trade deficit means that a downturn in the U.S. economy would cause "serious repercussions" for rich and poor countries dependent upon the engine of American economic growth, the U.N. Conference on Trade and Development warned in its flagship report.

"It's a big credit to the U.S. economy that it has been providing the growth impetus while some parts of the world have not been participating, like Europe," said Supachai Panitchpakdi, the former World Trade Organization chief now heading the U.N. agency.

Supachai said, however, the time has come to issue a "warning signal" because Americans cannot continue buying so many foreign goods forever.

According to the U.N. body, the U.S. had a current account deficit of 6 percent of GDP last year.

"There needs to be a reduction in the trade deficit of the United States, that's for sure," Supachai said, adding that Japan and Germany, as two of the world's biggest economic powers, need to help shoulder the load.

He said poorer countries, who have made important gains in the last few years thanks to high export growth, will suffer if demand in other countries doesn't rise.

Holger Flassbeck, a senior official at the agency, said another country would need to take over the role as "the global engine of growth" in the next two years as Americans reach their spending limits.

The United States' largest trade deficit is with China, which enjoyed an overall surplus that surged to $160 billion — or 7 percent of its GDP — in 2005.

Japan and Germany, meanwhile, had surpluses of about 4 percent of GDP, a combined $355.2 billion according to the report.

But the report said China's rapid growth has benefited raw material exporters in Africa and Latin America, while the healthy trade surpluses for Japan and Germany, two of the world's most developed countries, have not contributed to export growth in poorer countries.

Robert Wade, a professor at the London School of Economics, agreed with the 237-page report's analysis. He said China has been unfairly singled out as the only culprit.

"It is Germany and Japan that are building up (trade) surpluses, and therefore they have a responsibility," he told The Associated Press.

A spokesman for the German Economics Ministry rejected the suggestion that Germany doesn't do enough to stimulate world trade, noting that the German economy grew 0.9 percent in the second quarter compared to the quarter before, its fastest pace in more than five years. The official spoke on customary condition of anonymity.

The U.N. report recommends that global trade rules should be changed to allow countries more leeway for promoting innovative sectors of their economy through selective tariffs and targeted subsidies.

"It is a strategic approach for trade integration," Supachai said.

The report argues that existing trade rules ignore the reality that poor countries don't have the same flexibility to promote their economies as rich countries because they lack the necessary infrastructure.

It recommends that poorer countries be allowed to increase certain import taxes as long as they remain under an average tariff rate for all goods.

This position puts the U.N. body at odds with the World Trade Organization, where countries have negotiated industry-specific tariffs as part of the Doha round of free trade talks, which collapsed in July.

But the differences between the U.N. and the WTO are less pronounced than in the past, say experts, because both sides agree that countries need to liberalize their industries in order to develop.

Simon Maxwell, director of London-based Overseas Development Institute, said the conclusion are "in some ways less radical" than in previous reports.

"This is not a call for massive protection, or for very high levels of state intervention. It is pretty market-friendly," he said.

http://news.yahoo.com/s/ap/20060901/ap_on_bi_ge/un_trade_and_development_1

 

[QueEx]

Re: U.N.: Global economy needs bloost

<font size="5"><center>Europe's New Asian Trade Approach</font size></center>

Strategic Forecasting
Geopolitical Intelligence Report
September 19, 2006

Summary

Speaking from Germany, EU Trade Commissioner Peter Mandelson called Sept. 18 for the European Union to launch trade negotiations with a host of Asian states. The announcement is a substantial shift in European policy, and one that will lead to a bifurcation of the global economy even as it plays to Europe's strengths.

Analysis

EU Trade Commissioner Peter Mandelson called Sept. 18 for the European Union to launch trade negotiations with a host of Asian states. This is a sharp change in European trade policy, but one the Europeans can expect to be significantly successful -- even as they fight for access.

Until now, three broad criteria have guided European trade policy. First, preferential agreements link the union to former colonies. These were not free trade zones per se, but more precisely legal structures to maintain colonial-era trade relations with the developing world -- under which Europe got raw materials in exchange for some limited access to the European markets. Second, full free trade agreements were offered exclusively to states the European Union was willing to consider potential members. Third, all other agreements were shunned in favor of the overarching efforts of the World Trade Organization (WTO).

During the past few years, however, two things have changed. First, the European Union's appetite for expansion has slowed from a heady sprint to a reluctant crawl. The 2004 expansion that took in 10 of the mostly poorer Central European and Mediterranean states strained not just the union's finances, but its public's willingness to consider further expansions. Bulgaria and Romania will almost certainly still join the European Union in January 2007, but after that the possible candidate list -- Albania, Bosnia, Croatia, Macedonia, Montenegro, Serbia, Turkey and Ukraine -- reaches into states that are financial basket cases, would plant cultural time bombs, generate political nightmares and/or bring with them unsealable borders.

Second, the WTO's Doha Round has not simply run out of steam, it has stalled completely. Under the negotiations' aegis, any existing WTO member has a full veto over the entire process, so for the negotiations to succeed, all 140-odd members must agree on everything. That is an excruciatingly tall order under any circumstances, but with agriculture -- the world's most heavily subsidized sector -- supposedly the centerpiece of the Doha Round, hopes for success have not so much proven elusive as nonexistent.

In part, this is Europe's fault. The EU agricultural subsidy network, the Common Agricultural Policy (CAP), has its roots in the early post-WWII years, when a defeated Germany agreed in essence to subsidize French agriculture. Fifty years later the CAP absorbs half of the EU budget and is a sacred cow of French politics. So long as Paris decides it wants to keep the CAP, Doha has no future. And of course American and Japanese agricultural subsidies make the perfect mortar to cement the blocks of the CAP into a beautifully impenetrable wall for Doha negotiators.

With expansion slowed and Doha on hold, Mandelson and his European compatriots have two options: stay put in fortress Europe waiting for the political mood in Europe (or at least in Paris) to shift to a more integrationist and less-subsidized perspective, or branch out using Europe's best tool: trade.

Moreover, this is a strategy with a chance of succeeding regardless of which direction the European Union evolves. As a (unlikely) superstate, Europe certainly is an attractive trading partner. But even if, as Stratfor expects, the union degenerates into something more closely resembling the North American Free Trade Agreement (NAFTA), rather than integrates into a supranational government, it certainly retains the gravitas to be a major economic hub with which others will want to trade. This can for the most part overcome cultural concerns, as the case involving Turkey has shown. Few European states wish to grant Turkey full membership, but Turkey has enjoyed all the benefits of a customs union (read: free trade agreement) with Europe for years.

Europe, however, is not the only entity moving in such a direction. Washington, under the Bush administration, has been assembling a piecemeal trade alliance that seeks to branch out from NAFTA into another 35 states. Israel, Jordan, Morocco, Australia, Singapore and Central America already have had their trade deals signed and ratified.

Send questions or comments on this article to analysis@stratfor.com.

 

[Greed]

Europe, Japan Wean Themselves From Dependence on U.S. Consumers

Europe, Japan Wean Themselves From Dependence on U.S. Consumers
By Shobhana Chandra and Matthew Benjamin

Sept. 25 (Bloomberg) -- Europe, Japan and emerging economies around the world are weaning themselves from dependence on the American consumer, and economists say it's just in time.

Demand in the world's largest economy is slowing as the U.S. housing market falters, a development that the International Monetary Fund on Sept. 14 called a key risk to global expansion. If so, it's a risk that the biggest exporting nations are better prepared to weather now than five years ago.

``Domestic demand in so many other parts of the world is picking up,'' says Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. ``If there ever was a good time for the U.S. to slow, this is it.''

The share of global exports purchased by U.S. consumers and businesses fell to 17.9 percent in 2005 from 21.8 percent in 2000 as demand increased in the European Union, Japan and emerging markets in Asia and Eastern Europe. Exporting nations in Europe and Asia are poised to grab a larger share of world markets with trade agreements that don't include the U.S.

The European Union said Sept. 9 it will seek bilateral trade deals with China and South Korea. In August, Japan proposed a 16- nation economic bloc, including 10 Southeast Asian nations, China, Japan, South Korea, India, Australia and New Zealand.

``That will expand trade amongst these countries at the expense of trade with the U.S.,'' says Michael Mussa, a former International Monetary Fund chief economist who's now with the Institute for International Economics in Washington.

Largest Drivers

Of course the world is nowhere near becoming immune to the ups and downs of the U.S. economy, says Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``The U.S. is still one of the largest drivers of growth,'' Bryson says. ``We're probably decades away from people saying the U.S. won't matter.''

The U.S. remains the biggest importer by far, buying $1.7 trillion in goods and services from the rest of the world last year, more than double the amount that second-place Germany took in, according to the Economist Intelligence Unit, a London-based research company.

Still, says Joseph Stiglitz, a Nobel laureate economist who teaches at Columbia University in New York, ``the U.S. is no longer the single pivotal player to world trade that it was, because China and India and other nations have become a major part of the engine of global growth the past five years.''

The 2001 U.S. recession struck a blow to the rest of the world. Taiwan's economy contracted 2.2 percent that year, its worst slump on record, as exports tumbled. The economies of Japan, Singapore, Malaysia and Thailand were hurt too. Recessions in Argentina and Mexico deepened, while growth in Germany and Italy slowed.

U.S. Slows, Others Expand

Now, as the U.S. decelerates, other economies are expanding. U.S. economic growth is expected to slow to 2.6 percent in the final three months of 2006 from 5.6 percent in the first quarter, according to a Bloomberg News survey of economists. Growth in consumer spending, representing more than two-thirds of the U.S. economy, will slow to 2.7 percent from the first quarter's 4.8 percent gain.

The euro region is on track this year for the fastest growth since 2000, led by Germany, Europe's largest economy. Domestic demand in Japan is reviving after seven years of deflation, and China's economy grew in the second quarter at the fastest rate in more than a decade.

``It is better for the U.S. not to be in a dominating position, and to have other countries rising faster,'' says Robert Kuhn, a senior adviser to Citigroup Inc. in New York and the author of ``The Man Who Changed China: The Life and Legacy of Jiang Zemin.'' ``Diversification will make the system more robust.''

China's Trade

China including Hong Kong has in the last three years overtaken the U.S. to become Japan's and South Korea's biggest trading partner. The share of Japanese exports purchased by the U.S. dropped to 22.9 percent last year from 30.1 percent in 2000. Some Japanese shipments to China, though, were unfinished goods ultimately destined for U.S. consumption.

Similarly, the proportion of European Union exports going to the U.S. declined to 7.9 percent last year from 9.1 percent in 2000. While important to trade for the 25-nation EU, the U.S. has lost its preeminence there, says European Central Bank President Jean-Claude Trichet.

``As regards trade links, the United Kingdom is more important for the euro area than the United States,'' Trichet said in an Aug. 31 interview. ``It also means that for the United Kingdom, the euro area is much more important than the United States.''

The picture is similar in Asia. The U.S. share of Asia's exports fell to 19.7 percent last year, from 24.5 percent in 2000.

``Intra-Asia trade for sure is expanding rapidly and Europe- China trade is booming,'' says Fred Bergsten, director of the Institute for International Economics in Washington.

Trade Talks

The stalemate in world trade talks may lead to an even faster proliferation of bilateral and regional free trade agreements. A new World Trade Organization deal to lower tariffs and open markets would have pumped at least $96 billion into the world economy, according to World Bank estimates. Its July collapse means a major pact among the 149 WTO members is unlikely before 2009, says Carlos Braga, senior trade adviser with the World Bank in Geneva.

The U.S. has signed deals with countries including Morocco, Nicaragua and El Salvador in an attempt to pressure WTO members into a worldwide agreement, a strategy former U.S. Trade Representative Robert Zoellick termed ``competitive liberalization.'' It hasn't worked, says Jagdish Bhagwati, a Columbia University economics professor and former WTO adviser.

`Piffling' Agreements

While the U.S. is lining up ``piffling little bilateral agreements,'' says Bhagwati, ``Asian free trade agreements are breaking out rapidly, and the U.S. is not part of it.''

A major Asian trade deal excluding the U.S. would divert $25 billion from U.S. trade in the first year and more over time as investment patterns change, says Bergsten. ``That is already motivating the U.S. to beef up its own free trade agreements and perhaps try to go back to the WTO with a better offer,'' he says.

Demand building in developing nations is a major driver behind changing trade routes.

The so-called BRICs economies, Brazil, Russia, India and China, account for about 30 percent of world growth in the past five years, says O'Neill of Goldman Sachs.

``Domestic demand in so many parts of the world is picking up, and that's the biggest driver of world trade,'' O'Neill says. ``As the BRICS become bigger, the world's exporters export more to them and less to the U.S.''

http://www.bloomberg.com/apps/news?pid=20601109&sid=ak8nnXvw01uw&refer=exclusive

 

[QueEx]

Re: Europe, Japan Wean Themselves From Dependence on U.S. Consumers

[frame]http://atimes.com/atimes/Global_Economy/HL23Dj01.html[/frame]

 

[GET YOU HOT]

Bump this thread, since we are on the subject of China, there is alot of relevant information here...

 

[QueEx]

<font size="5"><center>Markets: Brace for a China-led chill </font size></center>

Asia Times
By Chan Akya
May 12, 2007

Eighteen years ago, Chinese students and intellectuals massed in Tiananmen Square to push through their vision of democratic reforms, egged on by an apparently conflicted central government, where the forces loyal to Deng Xiaoping were seemingly marginalized by those loyal to Zhao Ziyang initially, with tragic results for both the students and China in general.

While the comparison of the events of June 4, 1989, to today's stock markets appears overly sensational at first, the thrust of recent articles on China, including my previous one, [1] has been on the apparent loss of policy efficacy by the central People's Bank of China (PBoC) in recent months.

Six months ago, total transaction volumes on the Shanghai and Shenzhen exchanges were less than US$5 billion per day. That figure now stands 10 times as high, at $50 billion per day. This volume is something China can be proud of, barring one minor detail, namely that the central bank and various policymakers would much rather not see it happening.

Even as central bankers exhort the country's citizens to beware of bubble-like conditions in the stock markets, investors appear unruffled, reversing the policy impact of any announcement. Be they students, farmers or construction workers, every Chinese living in the two big cities of Shanghai and Shenzhen appears now to have a brokerage account. Conversations in the normally noisy dai pai dongs [2] in Guangdong province and Hong Kong drop to a quick hush whenever the subject of stock tips comes up. In short, the stock market today represents a revolution against the diktat of the PBoC, questioning its very authority.

A symphony of bubbles
Experience from the rest of the world shows that stock-market bubbles are neither infrequent nor unpredictable; in most cases, they are compounded by the mistakes of policymakers. The technology bubble of the 1990s is a case in point, as investors chased the dream of a new economy that could offset the apparent physical constraints imposed on the functioning of the real economy, ie, bricks and mortar. Initially, the promise of new technologies wasn't accompanied by enough listed companies, thereby concentrating the bets of investors. It took a few years for enough listings to appear, but by then the damage had been done to the long-term prospects of the sector.

The dotcom era's little experiment failed because investors mistook the medium for the message, in other words, that emerging new technologies merely helped to rearrange the habits of consumers but did not necessarily alter the physical provision of products and services. Thus, while book lovers would move away from their local bookshop to an Internet store, they would still be buying books, and perhaps in higher quantities.

To that extent, the zero-sum game was the right strategy for investors, which was to sell the stocks of traditional stores while buying into online stocks. Meanwhile, a number of fancy technologies had no underlying cash flows, thereby rendering guaranteed losses for anyone purchasing them.

As the bubble burst in the early part of this decade, the US Federal Reserve cut interest rates and attempted to shift the consumption dynamic to the housing market. The result was a rapid expansion in house prices across the United States, fueled by a sharp relaxation in lending standards. Starting with the two coasts, the home-price boom moved rapidly inland like a wayward hurricane, uprooting economic assumptions in its wake.

Eventually, the market will have to come to terms with the reality of too many houses for a declining group of richer immigrants and lower-quality employment for anyone remaining in the hinterlands. I have previously written about what is likely in store for the US housing market; [3] recent observations with respect to prices of higher-end residences in New York only serve to strengthen that view. I am well aware that the article upset a number of bullish readers, but such is the problem with propagating unpopular views.

The US housing and stock bubbles positively pale in comparison to the ones being observed in many other markets, including property and stock markets across Asia. There are some notable exceptions such as Thailand, where a combination of policy missteps has left markets relatively stable rather than rising, but in most other places the boom is all too apparent. Even in straitlaced Singapore, house prices have risen broadly over the past two years, wiping out pent-up equity losses from the previous 10 or so years.

Chindia to the fore
But all these markets are mere sideshows compared with what's going on in China and India. It is well-nigh impossible to complete secondary market transactions on high-end property in both markets, as a flood of new offers pour in. Most new property developments are sold within the first week of announcement, with the period more likely to be a day or so in the big cities of the two countries. By most estimates, property prices have doubled in the past two years in major Chinese cities, and more than tripled across major Indian cities.

Stocks are very similar, with significant money flows chasing a limited number of listed entities. The lack of selection is the key factor in pushing up overall market valuations to unsustainable levels, and as such is an eerie reminder of the aforementioned technology bubble.

More than India, it is China that faces the threat from investors chasing too few stocks. India's markets have a much longer history and, more important, many investors still remember the stock-market scandal of the early 1990s that wiped out the nest eggs of a few thousand people. China's problem is also one of magnitude: with more than 100 million investors directly participating in the markets, the impact of any downturn will be broad, and politically suicidal. As I wrote previously, problems encountered in the government of Hong Kong after a two-thirds decline in house prices since 1997 will help to guide policy direction in mainland China.

India's central bank has practiced vigilance on asset markets for a longer time, ensuring that banks are not providing easy loans for equity investing, and also tightening the guidelines on property loans in recent months. Rate rises have also played a part in keeping the equity markets below frothy valuations, although that is entirely relative to the excesses observed elsewhere in Asia. In contrast to the market behavior in India, Chinese investors have shrugged off recent rate rises, and banks have circumvented restrictions on lending through other means.

What will happen?
China will have to choose between the lesser of two evils, namely the protection of employment in its export-dominated industries or the safety net being created by investments in property and stocks by millions of its citizens. I believe it will choose to protect people's wealth more than lower-end manufacturing jobs; therefore a sharp revaluation of the Chinese currency, the yuan, is certain in the next few weeks.

In its aftermath, the economic cognate will have to shift from production to consumption; therefore we should see the stock prices of exporters falling even as those of companies servicing domestic demand will increase. Banks will have to absorb billions of yuan in defaults from the export sector, particularly to the many inefficient state-owned companies in northern China. That will cause a sharp decline initially in their stock prices, but I expect the outlook to improve rapidly thereafter.

For the rest of Asia, a yuan revaluation would set off increased volatility as investors try to take profits and other Asian countries adjust their currency values. In turn, their holdings of US and European government bonds as part of foreign-exchange reserves would diminish, sending up bond yields globally. That is how the adjustment in China would likely set off broader stock-market declines globally as investors come to terms with both higher interest rates and lower Asian appetite for Group of Seven assets. Sharp declines in stock prices would necessarily follow in most major Asian markets.

This correction would prove cathartic to the performance of Asian economies in the decades to come, but in the short term, pain is unavoidable.

Notes
1. India 1, China 0, Asia Times Online, March 3.
2. Dai pai dongs are uniquely Cantonese, generally specializing in a limited range of food items. Besides the delicious and cheap food, the eateries are also known for their communal seating, and extremely high noise levels.
3. Hobson's choice, ATol, March 7.

(Copyright 2007 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

http://atimes.com/atimes/China_Business/IE12Cb04.html

 

[QueEx]

<font size="5"><center>China's Worrisome Inflation Data</font size>
<font size="4">The mainland's consumer price index shot up
5.6% in July from the previous year, the
fastest rate of increase in a decade </font size></center>

Business Week
by Brian Bremner
August 13, 2007

China's high-speed economy has largely been insulated from the credit-squeeze drama that has pummeled global stock markets.

The mainland's $2.8 trillion economy clocked 11.9% growth in the second quarter, the fastest pace in about 12 years. And the closely watched CSI 300 Index that tracks listed A-share stocks on the mainland is up a head-turning 130%-plus in 2007.

Indeed, the biggest challenge confronting China isn't a scarcity of capital, but way too much of it. On top of that, China's inflation rate has moved up sharply this year. It was 3.2% in the first half, above a 3% government target. On Aug. 12, Beijing announced that its consumer price index shot up 5.6% in July year-over-year, the most dramatic rise in 10 years.

Trigger for Social Unrest
Particularly disturbing was the 15.4% year-over-year increase in food prices. The rise in meat prices is mainly driven by an ongoing surge in the cost of pork, China's staple meat. In recent months, there has been hoarding of meat by anxious Chinese citizens, prompting Chinese Premier Wen Jiabao earlier this year to publicly vow to contain further price rises.

A big jump in the inflation rate, which undercuts the purchasing power of ordinary Chinese families, is a worrisome trend in the eyes of Beijing leaders. In the past, most notably in the months leading up to the 1989 Tiananmen Square protests, inflation has been the cause of great social unrest.

A bigger problem at the moment is that the inflation rate is growing faster than the returns on bank deposits (now about 3.3%), providing a big incentive for Chinese families to shift savings into the raging stock markets in Shanghai and Shenzhen. Economists are somewhat split on what the latest reading on consumer prices means for the overall economy and monetary policy.

Central Bank May Move in September
Analysts are quick to point out that if you strip out food, China's inflation rate isn't that big a deal. Core inflation, or nonfood inflation, was stable at 0.9% year-over-year. However, Standard Chartered Bank (SCBFF) Senior Economist Stephen Green thinks the latest inflation number, plus the fact that in July, M2, a broad measure of money supply, grew 18.5% from a year earlier, may prompt the People's Bank of China to raise interest rates twice more this year to prevent the economy from overheating. He expects increases of 27 basis points each that would take China's benchmark one-year loan rate to 7.38%.

The domestic stock markets remain white-hot, and there are signs that housing prices are on the march upward in some big urban markets. "Shanghai house price inflation is accelerating again, and where Shanghai goes, the rest of China is bound to follow," noted Green in a research note on the Aug. 13 inflation data.

Lehman Brothers (LEH) analyst Mingchun Sun in Hong Kong thinks the higher-than-expected inflation number for July means the central bank will only make one more rate move, probably before the end of September.

Alternatively, Jing Ulrich, chairman of China equities at JPMorgan Chase (JPM), isn't forecasting another interest-rate hike. She figures raising interest rates more this year would only invite more speculative inflows of capital in search of higher returns and place upward pressure on the yuan, a scenario Beijing wants to avoid.

She argues the spike in food prices likely will prove transitory, since the government has made moves to increase meat supplies. China has already taken steps to increase food supplies, which should ease supply shocks by the end of the year, she noted in an e-mail message. "These include subsidies for hog farming and restrictions on nonfood crops."

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.

http://www.businessweek.com/globalb...p+news_top+news+index_businessweek+exclusives

 

[Greed]

Trouble With Trade

December 28, 2007
Op-Ed Columnist
Trouble With Trade
By PAUL KRUGMAN

While the United States has long imported oil and other raw materials from the third world, we used to import manufactured goods mainly from other rich countries like Canada, European nations and Japan.

But recently we crossed an important watershed: we now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.

For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing. Above all, it offers backward economies their best hope of moving up the income ladder.

But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.

Let’s talk for a moment about the economics.

Trade between high-wage countries tends to be a modest win for all, or almost all, concerned. When a free-trade pact made it possible to integrate the U.S. and Canadian auto industries in the 1960s, each country’s industry concentrated on producing a narrower range of products at larger scale. The result was an all-round, broadly shared rise in productivity and wages.

By contrast, trade between countries at very different levels of economic development tends to create large classes of losers as well as winners.

Although the outsourcing of some high-tech jobs to India has made headlines, on balance, highly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade. For example, ThinkPad notebook computers are now made by a Chinese company, Lenovo, but a lot of Lenovo’s research and development is conducted in North Carolina.

But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren’t sufficient compensation.

All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn’t say that it’s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists — myself included — looked at the data and concluded that any negative effects on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006.

And the biggest growth in imports has come from countries with very low wages. The original “newly industrializing economies” exporting manufactured goods — South Korea, Taiwan, Hong Kong and Singapore — paid wages that were about 25 percent of U.S. levels in 1990. Since then, however, the sources of our imports have shifted to Mexico, where wages are only 11 percent of the U.S. level, and China, where they’re only about 3 percent or 4 percent.

There are some qualifying aspects to this story. For example, many of those made-in-China goods contain components made in Japan and other high-wage economies. Still, there’s little doubt that the pressure of globalization on American wages has increased.

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

http://www.nytimes.com/2007/12/28/opinion/28krugman.html

 

[Greed]

Europe’s Philosophy of Failure

“Economic growth imposes a hectic form of life, producing overwork, stress, nervous depression, cardiovascular disease and, according to some, even the development of cancer,” asserts the three-volume Histoire du XXe siècle, a set of texts memorized by countless French high school students as they prepare for entrance exams to Sciences Po and other prestigious French universities. The past 20 years have “doubled wealth, doubled unemployment, poverty, and exclusion, whose ill effects constitute the background for a profound social malaise,” the text continues. Because the 21st century begins with “an awareness of the limits to growth and the risks posed to humanity [by economic growth],” any future prosperity “depends on the regulation of capitalism on a planetary scale.” Capitalism itself is described at various points in the text as “brutal,” “savage,” “neoliberal,” and “American.” This agitprop was published in 2005, not in 1972.

This is a world apart from what American high school students learn. In the United States, where fewer than half of high school students take an economics course, most classes are based on straightforward, classical economics. In Texas, the state-prescribed curriculum requires that the positive contribution of entrepreneurs to the local economy be taught. The state of New York, meanwhile, has coordinated its curriculum with entrepreneurship-promoting youth groups such as Junior Achievement, as well as with economists at the Federal Reserve. Do American schools encourage students to follow in the footsteps of Bill Gates or become ardent fans of globalization? Not really. But they certainly aren’t filling students with negative preconceptions and suspicions about businesses and the people who run them. Nor do they obsess about the negative side effects and dangers of economic activity the way French textbooks do.

Taught that the free market is a dangerous wilderness, twice as many Germans as Americans tell pollsters that you should not start a business if you think it might fail. According to the European Union’s internal polling, just two in five Germans and French would like to be their own boss, compared to three in five Americans. Whereas 8 percent of Americans say they are currently involved in starting a business, that’s true of only 2 percent of Germans and 1 percent of the French. Another 28 percent of Americans are considering starting a business, compared to just 11 percent of the French and 18 percent of Germans. The loss to Europe’s two largest economies in terms of jobs, innovation, and economic dynamism is severe.

http://www.foreignpolicy.com/story/cms.php?story_id=4095

 

[Greed]

What to Expect When You’re Free Trading

What to Expect When You’re Free Trading
By STEVEN E. LANDSBURG
Published: January 16, 2008

Rochester

IN the days before Tuesday’s Republican presidential primary in Michigan, Mitt Romney and John McCain battled over what the government owes to workers who lose their jobs because of the foreign competition unleashed by free trade. Their rhetoric differed — Mr. Romney said he would “fight for every single job,” while Mr. McCain said some jobs “are not coming back” — but their proposed policies were remarkably similar: educate and retrain the workers for new jobs.

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney?

Um, no. Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

In what morally relevant way, then, might displaced workers differ from displaced pharmacists or displaced landlords? You might argue that pharmacists and landlords have always faced cutthroat competition and therefore knew what they were getting into, while decades of tariffs and quotas have led manufacturing workers to expect a modicum of protection. That expectation led them to develop certain skills, and now it’s unfair to pull the rug out from under them.

Once again, that argument does not mesh with our everyday instincts. For many decades, schoolyard bullying has been a profitable occupation. All across America, bullies have built up skills so they can take advantage of that opportunity. If we toughen the rules to make bullying unprofitable, must we compensate the bullies?

Bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted. When a free trade agreement allows you to buy from the Mexican after all, rejoice in your liberation — even if Mr. McCain, Mr. Romney and the rest of the presidential candidates don’t want you to.

Steven E. Landsburg, a professor of economics at the University of Rochester, is the author, most recently, of “More Sex is Safer Sex: The Unconventional Wisdom of Economics.”

http://www.nytimes.com/2008/01/16/opinion/16landsburg.html

 

[Greed]

SWF Seeks Loving American Man

SWF Seeks Loving American Man
The hottest session at Davos is about … sovereign wealth funds?
By Daniel Gross
Posted Thursday, Jan. 24, 2008, at 12:02 PM ET

For financial types, the hot session at Davos this morning—after the Bono/Al Gore love-in—was the sovereign wealth funds panel. Sovereign wealth funds are the much-talked-about, little-understood enormous pools of government-controlled capital that have recently vaulted to prominence. The panel included: Muhammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency; Bader al-Sa'ad, managing director of the Kuwait Investment Authority; Kristin Halvorsen, Norway's minister of finance; and Aleksey Kudrin, Russia's minister of finance, who all have billions upon billions in state oil profits to invest around the world.

As one, the officials reassured audiences that they had nothing to fear from the SWFs. After all, they're just passive investors, seeking to provide some security for their commodity-based economies. The governments of said nations aren't interested in using ownership stakes in publicly held companies to advance geopolitical goals. According to the panelists, the SWFs are nothing more than cuddly mutual funds—only really big ones whose managers speak with strange accents and whose shareholders are Scandinavian citizens, oil sheikhs, and Vladimir Putin's regime.

It fell to former Treasury Secretary Larry Summers to inject a slightly discordant note. His few well-chosen words were the smartest, best performance I've seen at Davos so far. While agreeing that the U.S. financial system has been helped in recent months by SWFs that have invested in American banks, and noting that "there's not much that SWFs have done to date that one can be critical of," Summers gave voice to some of the concerns that plenty of free-trading, noneconomic-nationalists have about SWFs. "In the U.S., we have made a decision that our national Social Security Trust Fund will not be invested in anything but government bonds," he said. "Given that we've made that decision, it is not absurd to have certain concerns about the possibilities when other countries invest."

Summers said he has three principal concerns about SWFs becoming more active investors.

1. Corporate governance. SWFs may protect the management of poorly run companies: "SWFs are some people's model investors, and other people's version of 1-800-ENTRENCH. What could be better for not entirely secure management than a long-term, nonvoting shareholder?"

2. Multiple-motive issues. "It's the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country, perhaps we want the bank to do extensive business in the country, suppose we want suppliers in our country to be sourced, perhaps we want some disablement of a competitor for our country's national champion. When there's no assurance that value maximization is not being pursued, there is a potential question."

3. General politicization. He provided two examples. "First, suppose that a country ran an active trading operation, and say it was a very inspired one, and found itself in an investment much like George Soros' short position in the pound. Would we be comfortable with the concept that the nation of X had decided that nation of Y's currency was overvalued and launched an attack? There should be some kind of understanding that that won't happen. Also, the SWF of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?"

His proposed remedy: a code of conduct. "I'm baffled by why SWFs don't get together and put an end to all this discussion by agreeing on some piece of paper that says: We're under no circumstances going to speculate in currencies; we're always going to be a long-term investor; we're never going to use our SWF to pursue any political objective."

The SWF managers protested, as one, that since they had never engaged in any of the activities that Summers expressed concern about, there was no reason to try to regulate them so. "You're talking about how to pre-emptively regulate something that may happen," said Muhammad Al Jasser of Saudi Arabia. "We've had a lot of resistance to regulating the hedge funds, and the rating agencies, even though there were failures galore. So, let's be a little bit more balanced." Touché! Kristin Halvorson of Norway responded that while Norway would appreciate having some common rules, the hypothetical examples Summers cited "would never be possible in Norway."

Summers responded with an anecdote about how the Norwegian fund had sold short the shares of Icelandic banks, and the potential political complications those actions raised. Touché, right back! (At which point I turned to the private-equity executive sitting behind me, and said: "He's so sharp they should make him the president of Harvard." The response from the Harvard grad: "This is why he didn't make it as president of Harvard.")

Later, however, in discussing the rising concern in the United States about SWFs buying American assets, Halvorson had the last word: "It seems you don't like us, but you need our money."


Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at moneybox@slate.com. He is the author of Pop! Why Bubbles Are Great for the Economy.

Article URL: http://www.slate.com/id/2182746/

 

[Greed]

Société Générale’s Sales May Have Incited Market Plunge

Société Générale’s Sales May Have Incited Market Plunge
By NELSON D. SCHWARTZ and NICOLA CLARK
January 26, 2008

PARIS — As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks.

Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel.

As the bank struggled on Friday to determine how Mr. Kerviel could have run up $7.2 billion in losses before anyone caught on, the scope — and global impact — of his fraud began to emerge.

From his desk in the middle of the trading floor on the sixth floor of Société Générale’s Alicante building in the La Défense business district outside Paris, Mr. Kerviel, 31, took huge bullish positions on the Dow Jones Euro Stoxx 50 index and the German DAX in particular, according to a fellow trader still working there who insisted on anonymity.

Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.

“I have little doubt that Société Générale’s unwinding of those positions absolutely pressured indexes worldwide,” said Barry L. Ritholtz, chief executive of FusionIQ, a New York-based investment research and money management firm. “And wouldn’t it be embarrassing if the Fed had to make one of the biggest emergency rate cuts ever because of some rogue trader?”

Granted, fears of a recession in the United States and continuing worries about the spread of the subprime mortgage collapse were also responsible for the market downdraft in the last 10 days. But Mr. Ritholtz argued the rapid move by Société Générale to close out tens of billions in futures positions might have been a major factor in pushing an already nervous market into an outright panic.

Mr. Ritholtz is not alone in his suspicions. “I definitely think there is a link,” said Byron R. Wien, chief investment strategist at Pequot Capital Management and a 40-year Wall Street veteran. “This precipitous unwinding created the negative momentum that spread around the world.”

Mr. Wien also singled out the Federal Reserve chairman, Ben S. Bernanke, for criticism. “Bernanke has been reacting to events, rather than anticipating them,” he said.

On Monday afternoon, with United States markets closed for Martin Luther King’s Birthday, Mr. Ritholtz said, many Wall Streeters were struggling to figure out just why Europe and Asian markets were off so steeply. “Instant messages were lighting up, and people were saying ‘This looks like a big European hedge fund blew up.’ ” Indeed, there was little market-moving data before the plunge.

He was quick to add that the French bank’s rapid turnover of the positions assembled by Mr. Kerviel would not have been enough to push the German market down 7.2 percent Monday. But in today’s fast-paced markets, hedge funds and investment firms often pile on once the selling starts. “These things take on a momentum of their own,” he said.

On Tuesday, the volume on the DAX and Euro Stoxx 50 contracts was twice that of open futures contracts, suggesting that the bank was having to sell and then buy back contracts to cover leveraged positions. Ten percent of the volume on DAX futures on Tuesday alone was 9.2 billion euros.

On a typical day, the total open interest on the Dax futures market is roughly $50 billion, according to Hélyette Geman, a professor of mathematical finance at ESSEC business school in Paris. Although the exact positions are not known at this moment, she said, it was quite likely that Société Générale’s trades would have accounted for a major portion of DAX futures activity in recent weeks. She added that settling those positions might have created some downward pressure in the market.

The trader said that Mr. Kerviel, a member of Société Générale’s Delta One team, frequently worked late into the night after other members of the group had gone home. He added that it appeared the pace of Mr. Kerviel’s trading picked up toward the close of 2007. Many of the trades were placed on near-term futures contracts, the trader said.

Jean-Pierre Mustier, chief executive of Société Générale’s corporate and investment banking division, declined to identify which particular indexes formed the bulk of the specious trades, but insisted during an interview that closing the positions early in the week did not cause the steep plunge in markets across Europe.

Meanwhile, the legal noose appeared to tighten around Mr. Kerviel, as French police raided his apartment in the suburban Paris neighborhood of Neuilly-sur-Seine Friday evening.

A spokeswoman for the Paris prosecutor’s office, which on Friday opened a preliminary investigation into the case, declined to comment on the raid. “An investigation is under way,” said the spokeswoman, Isabelle Montagne. “We must let the police do their work.”

At the same time, French government authorities signaled growing frustration with Société Générale.

Indeed, Paris appeared to be putting pressure on Société Générale to come forward with a more detailed accounting of how Mr. Kerviel could have racked up the staggering losses by himself over the course of a year without raising any red flags among either his supervisors or the internal auditors of the bank.

François Fillon, the French prime minister, expressed frustration Friday at having been kept in the dark about the unfolding crisis until Wednesday — four days after Société Générale’s chief executive, Daniel Bouton, informed the governor of the country’s central bank, Christian Noyer.

Speaking to reporters at a briefing in Luxembourg, Mr. Fillon conceded that as a private bank, Société Générale was not obliged to inform the French government. He said, however: “It’s an affair of such an importance for the French financial system, that maybe the government could have been informed earlier.”

Mr. Fillon said that he had asked the finance minister, Christine Lagarde, to conduct a separate inquiry into the affair and report back to him within eight days.

A spokesman for Ms. Lagarde could not be reached for comment.

The bank, meanwhile, identified four other individuals, in addition to Mr. Kerviel, who had been dismissed in connection with the scandal and would face disciplinary action: Marc Breillout and Grégoire Varenne, co-heads of fixed-income trading; Christophe Mianné, global head of market activities; and Luc François, global head of equities and derivatives activities.

James Kanter contributed reporting.

http://www.nytimes.com/2008/01/26/b...86&ei=5124&partner=permalink&exprod=permalink

 

[Greed]

The Free-Trade Paradox

The Free-Trade Paradox
by James Surowiecki
May 26, 2008

All the acrimony in the primary race between Barack Obama and Hillary Clinton has disguised the fact that on most issues they’re not too far apart. That’s especially the case when it comes to free trade, which both Obama and Clinton have lambasted over the past few months. At times, the campaign has looked like a contest over who hates free trade more: Obama has argued that free-trade agreements like NAFTA are bought and paid for by special interests, while Clinton has emphasized the need to “stand up” to countries like China. Two weeks ago, both senators signed on as sponsors of a new bill that would effectively impose higher tariffs on China if it doesn’t revalue its currency. The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.

It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad. In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

Then, too, the specific products that middle- and lower-income Americans buy are much more likely to originate in places like China than the products that wealthier Americans buy. Despite a huge increase in imports from China—they sextupled as a percentage of U.S. imports between 1990 and 2006—Chinese products are still concentrated mostly in lower-price markets. (By some estimates, Wal-Mart alone has accounted for nearly a tenth of all imports from China in recent years.) By contrast, much of what wealthier Americans buy is made in the U.S. or in high-wage countries like Germany and Switzerland. This is obvious when it comes to luxury goods—Louis Vuitton bags, Patek Philippe watches, and so on—but it’s also true of many other goods, like electronics, kitchen appliances, and furniture, categories in which American and European manufacturers have continued to thrive by selling to the high-end market. According to the Yale economist Peter K. Schott, machinery and electronics products made in developed countries sell in the U.S. for four times the average price of Chinese products. And, since the late nineteen-eighties, that price gap has widened by almost forty per cent.

This may not always be the case; as China’s economy continues to boom, its companies will likely move up the quality ladder and, eventually, become serious competition for high-end American and European manufacturers. But for the moment the benefits of free trade with China, at least when it comes to shopping, are concentrated overwhelmingly among average Americans. And the result is that, in the past decade, the products that they spend more on have become a lot cheaper compared to the stuff that rich people spend more on. Broda and Romalis, in their recent paper, calculate that between 1999 and 2005 alone the inflation rate for lower-income Americans was almost seven points lower than it was for the wealthiest Americans. That means that free trade with China has made average Americans, at least as consumers, much better off—in the sense that it’s made their dollars go further than they otherwise would have.

Now, there’s a lot that’s left out of this equation, such as the fact that free trade may help richer Americans by increasing corporate profits. And cheap DVD players may not, on balance, make up for lost jobs. But the reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain—in the form of higher prices—far more quickly and more directly than rich Americans will. Obama and Clinton, in their desire to help working Americans—and gain their votes—are pushing for policies that will also hurt them.

http://www.newyorker.com/talk/financial/2008/05/26/080526ta_talk_surowiecki

 

[Greed]

We're all capitalists now? Not any longer

September 12, 2008
We're all capitalists now? Not any longer
An historic turning point has been reached: the West is ditching its faith in free markets and private enterprise
Anatole Kaletsky

Whatever happened to the triumph of global capitalism? Even more than “the end of history”, the idea that “we're all capitalists now” became an article of faith around the world from the early 1990s onwards. In the past few years even the few holdouts - countries such as Libya, Cuba and North Korea - seemed on the point of acknowledging that markets, competition and private enterprise were the only rational way of organising economic life, regardless of politics or history or religion or national cultures.

But just as the triumph appeared to be complete the innermost sanctum of the global capitalist system suddenly collapsed.

The nationalisation last weekend of Fannie Mae and Freddie Mac, the two largest financial institutions the world has ever known, signalled the complete failure of the biggest, most dynamic, most innovative and competitive markets that have existed in the history of capitalism - the Wall Street stockmarket and the market for US bonds.

Their failure has been so obvious, that even the most capitalist administration ever, in the world's most capitalist country, had decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrats.

The reasons for these failures - related, ironically, to the dogmatic belief among regulators, politicians and financiers that “the market is always right” - have been much discussed. Much less widely considered have been the consequences of this justifiable disillusionment with market forces.

Even more than the mind-boggling $5,500 billion size of the two US mortgage companies, it was the political significance of their nationalisation that marked it out as an historic turning point. This was, after all, the biggest expropriation of private property undertaken by a government outside the former communist world, yet there was absolutely no protest, nor even discussion, about the terms imposed by the US Treasury.

Viewed from across the Atlantic, where nationalisations of relatively unimportant industries such as steel, shipbuilding or coal provoked years of parliamentary opposition and legal argument, it seems astonishing that the US Government could simply announce itself as the owner of these giant companies, wiping out overnight some $20 billion of shareholder wealth. But what is even more significant is that nobody in American politics or business objected to this anti-capitalist coup.

This lack of any serious debate about the sudden fate of Fannie and Freddie may help to stabilise the US economy and housing market in the months ahead, since American homeowners should soon enjoy a potentially unlimited supply of government-financed mortgages. But the effects of this nationalisation on the future of the world financial system will be more far-reaching and profound.

The Fannie and Freddie precedent implies that any other bank requiring government support in future - certainly in America and probably also in Britain and Europe - will have to agree to its shareholders being wiped out. The need to punish shareholders to deter future reckless behaviour is an argument heard even more vociferously in Britain, and especially in the Bank of England, than in the US.

But will such punitive treatment strengthen market capitalism? More likely, it will do the opposite. Most big banks have recently raised extra money from their shareholders to strengthen their finances. Yet many - including Citibank, Merrill Lynch, Lehman Brothers, UBS, Halifax Bank of Scotland, Royal Bank of Scotland, Barclays, Deutsche and Credit Agricole - are still widely believed to be undercapitalised.

Until last weekend it seemed probable that most of these banks would be able, if necessary, to turn to their shareholders for extra capital, if this was needed to cover unexpected losses or to expand their business. But any such attempts to raise new capital are now doomed to failure.

It is hard to imagine Saudi Arabia or China wanting to add to the huge investments they have already made in Citibank or Merrill Lynch, now that they have seen the enormous losses deliberately inflicted by the US Treasury on investors who pumped $20 billion of new money into Fannie and Freddie since November last year. Particularly so as the two mortgage giants raised this money with the explicit support of the regulators and the US Treasury.

It was hardly surprising that Korean suitors withdrew from talks to recapitalise Lehman Brothers, the weakest of the remaining US banks, immediately after the Fannie Mae rescue was announced.

A likely consequence of the Fannie and Freddie rescue, whose punitive terms the British and European authorities have strongly endorsed, is that no leading bank in America, Britain or Europe can hope to raise new capital, either from private investors or from governments in Asia and the Middle East.

Meanwhile, an overzealous determination by regulators to prevent reckless lending in future suggests that banks will need even more capital than in the past to increase their lending. Much of the growth of credit and bank lending in the world economy will therefore have to come from governments instead of the private sector, at least for the next few years.

It is hard to imagine how squeezing private ownership out of the banking system could strengthen the cause of free enterprise and free markets. An early sign of which way the wind is blowing will come from a vote in Congress later this month on a request from General Motors and Ford for $25 billion in subsidised government loans to support their investment programmes through the energy and housing crunch. A few months ago such a request, which would, of course, be illegal under EU state aid rules, would have been unthinkable. Today, however, the question in Congress is not whether to grant this subsidy; it is whether to leave it at $25 billion or raise it $50 billion, as both Barack Obama and John McCain now propose.

With banking systems around the world hobbled by the lack of private capital, the motor industry will not be the only supplicants demanding state support. There will be many more demands from industries, workers and consumers, as much in Britain and Europe as in the US.

If the US loses faith with free markets, compromises the protection of property rights and hobbles its financial markets - all of which it has dramatically done in the past seven days - then Europe will surely follow suit. Emerging economies such as China and India will become even more ambivalent about market economics. Instead of We Are All Capitalists Now, There Are No Capitalists Left may become the ideology of the next decade.

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4735446.ece

 

[Greed]

The Progressive Case For Free Trade

The Progressive Case For Free Trade
By SEN. JOE LIEBERMAN | Posted Friday, September 12, 2008 4:20 PM PT

As recently as eight years ago, when the Clinton-Gore administration ended, a bipartisan consensus existed among Democrats and Republicans in favor of free trade, which leaders of both parties recognized was in America's economic interest.

Now, unfortunately, the consensus has unraveled, with most Democrats in Congress opposing key free trade agreements with some of our closest allies and Sen. Obama, the Democratic presidential candidate, threatening anti-trade policies if elected.

This reversal is very disappointing for many reasons, not least because it is Democratic progressives who should be the strongest champions of free trade. There is a reason that Democratic presidents from Franklin Roosevelt to Bill Clinton have been committed free traders — they understood that free trade advances precisely those goals that have historically mattered most to Democrats, both at home and abroad.

Domestically, free trade today is caricatured by the anti-trade left as sending companies overseas and hurting American workers. But this caricature is deeply flawed. In fact, it is middle- and lower-income American workers and families who are among free trade's greatest beneficiaries.

To begin with, trade supports millions of jobs in America. All told, 25% of jobs in the U.S. today are linked to world trade. And in the current economic downturn, exports are one of our few growth sectors. Demand for American exports is at the highest level ever, total exports are up 7% in the first six months of the year, and our exports to China are up 20% from a year ago.

Free trade also means that ordinary Americans pay lower prices for consumer goods. Anti-trade policies, by contrast, translate to higher prices from the grocery store to the shopping mall — an indirect tax increase that inflicts the greatest harm on those who have the least money to spend.

While most people gain from trade, some workers are losing their jobs as our economy changes and develops. It is our responsibility to help them. We can do that by retraining those left unemployed, and helping businesses create new jobs for them — by creating the right economic incentives.

As President Clinton used to point out, 96% of the world's population lives outside the United States, and there is only so much we can make and sell to the 4% who live here. Our economic well-being depends on reaching the other 96%, and that means reducing foreign tariffs so we can sell more American-made goods around the world.

Consider the Free Trade Agreement with Colombia, now blocked by Democrats in the House. Though opponents of the agreement often claim to do so in the name of American workers, the fact is, most Colombian goods already enter the U.S. duty-free.

The trade agreement would give Americans equal access to the Colombian market. At the moment, our companies are at a disadvantage. According to the Commerce Department, U.S. exports face an estimated $1.9 million in tariffs each day, or $693 million each year, because of the absence of two-way free trade with Colombia.

The progressive case for free trade, however, is not just about advancing our own economic self-interest. Free trade also advances a cause that progressives have historically cared passionately about: the fight against global poverty.

Forty years ago, countries in Asia like South Korea and Singapore were as impoverished as their counterparts in sub-Saharan Africa. Today, hundreds of millions of people in Asia enjoy middle class prosperity, with hundreds of millions more soon following in their path. This is one of the great success stories of human history — and it was made possible by trade.

Trade is also beginning to help Africa's development. Since its enactment eight years ago, the African Growth and Opportunity Act has helped expand U.S. trade and investment with sub-Saharan Africa. In 2007, U.S. exports to sub-Saharan Africa ($14.4 billion) were more than double the 2001 level, and U.S. imports ($51 billion) were more than triple the 2001 level. This increase in trade in turn is helping to reinforce Africa's efforts at economic and political reform.

Free trade also decreases the threat of war. From the Taiwan Strait to the Middle East, we have seen how trade can reduce tensions between rivals and create economic incentives for countries to resolve their differences peacefully.

For nearly 60 years, Democrats understood and advanced all of these arguments in favor of free trade. It was FDR who won authority from Congress to negotiate free trade agreements with other countries, and it was John F. Kennedy who pushed through ambitious legislation that expanded the president's authority to negotiate lower tariffs.

President Clinton, putting free trade at the heart of his successful economic program, signed NAFTA, completed the Uruguay Round of trade negotiations, and helped create the World Trade Organization.

Sadly, today's Democratic Party, including Sen. Obama, has largely turned its back on this proud legacy. Sen. Obama, for instance, voted against the Central America Free Trade Agreement, has threatened to renegotiate NAFTA — calling it a "bad deal" — and opposes pending free-trade agreements with South Korea and Colombia.

This anti-trade posture is ironic, given Sen. Obama's pledge to restore America's reputation around the world. In fact, free trade is the embodiment of international cooperation. By pledging to backtrack on longstanding agreements, throw up protectionist barriers, and abandon our closest allies, Sen. Obama has charted a course that will undermine our global leadership and risk putting our country into a deep recession.

America needs a president who — like FDR, Truman and Clinton — will stand up to self-protecting special interests and champion free trade. A great irony this year is that the presidential candidate who best represents the progressive Democratic legacy of free trade is not a Democrat at all — but the Republican nominee: John McCain.

Lieberman, a former Democrat turned independent, is the junior senator from Connecticut.

http://ibdeditorials.com/IBDArticles.aspx?id=306110191457898

 

[Greed]

America and the New Financial World

America and the New Financial World
Politicians can make the adjustment more or less painful.
OCTOBER 6, 2008

Soon enough, America's financial crisis will wind down -- maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.

In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we're headed down.

What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.

In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large -- and there is considerable debate on that subject -- the outflow of wealth is a fact.

You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.

That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.

Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.

It is at an end for two reasons. One is structural. There are now vibrant economies that don't depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital.

There is no small irony in the fact that state-driven capitalism, which is the norm in the Persian Gulf and China, finds the U.S. too restrictive. Sovereign wealth funds, with enough cash on hand to bail out Wall Street and the U.S. housing market many times over, invested billions a year ago but are now saying no.

Uncertain growth for the United States is one reason. But the nature of the American regulatory regime is also to blame. Sarbanes-Oxley and the Patriot Act -- whose anti-money-laundering provisions had the unintended consequence of repelling legitimate investors -- combined with a tax code that places a heavy burden on corporations doing business in the U.S. has meant that, as the wealth transfer has happened, there is less and less inclination for global institutions to place that capital in the U.S.

This is a fact regardless of whether you believe that a high corporate tax rate is morally and fiscally correct. In truth, because of the differentials between high U.S. corporate taxes and the rates in Europe (lower) and Asia (in places nonexistent), even U.S.-listed companies that operate globally keep their profits outside the U.S., and thereby avoid those high taxes altogether.

In addition, the regulatory requirements of listing a company in the U.S. have led many companies to look to other markets and other exchanges for financing, hence the boom of financial centers such as Hong Kong, Dubai and even London.

This should not be a partisan argument. It is perfectly fair to argue that wealthy corporations should pay a greater share of the tax base than struggling middle-class Americans. Fair, but not realistic. The U.S. government can no longer dictate to global capital. Once, when the U.S. was the engine of global growth, when the world needed Wall Street for funding, capital could be taxed and controlled by the fiat of the U.S. government. No longer. The U.S. may have the will; it does not have the power.

The current debate in Washington gives no indication that this reality is understood. Both sides of the aisle are susceptible to a false sense of American economic sovereignty. Companies and countries flush with cash increasingly view U.S. laws, regulations and attitudes as undue burdens. As consumer activity accelerates outside the U.S. and Europe, and as financial centers spring up elsewhere, there is increasingly less inclination and less need for the world to go either to Wall Street or to Main Street.

For now, even with the breakdown of Wall Street, the U.S. remains vital to the global economy. It is the largest market, with a dynamic consumer culture, innovative companies, and is deeply enmeshed in the international system. But it is not the alpha and the omega; it is not the center; and the crisis hitting Wall Street is leading the rest of the world to form bonds that bypass the U.S.

Not all of this need be an absolute negative. In a truly interconnected world, more affluence and activity globally can be a universal benefit. U.S. companies operating outside the United States and Europe have already been reaping the rewards. But failure to accept the new reality will lead to the worst of all worlds.

As the U.S. government plunges into the markets, we must understand that this is the end of an era, and that attempts to unilaterally force capital to stay here will only lead to its continued flight. We are now one market among many, a huge and affluent one to be sure, but a wise nation recognizes both its strengths and its limitations. A more secure domestic capital base depends on the U.S. being seen as a desirable place for investment, and not as King Lear raging against the storm, alone, deluded and abandoned.

Mr. Karabell is president of River Twice Research. His latest book, "Chimerica: How the United States and China Became One," will be published next year by Simon & Schuster.

http://online.wsj.com/article/SB122325757745406687.html

 

[QueEx]

Re: America and the New Financial World

<font size="5"><center>
China's sitting on piles of money.
Why won't it help?</font size></center>


McClatchy Newspapers
By Tim Johnson
October 10, 2008

BEIJING — China sits on a huge pile of money, and its policymakers crave global assets. So why doesn’t China spend a little and save the world from global financial meltdown?

Economists give a number of reasons why China prefers to sit on the sidelines of the global turmoil, focusing instead on protecting its economy and maintaining growth powered by consumers at home.

"In this type of global crisis, the best China can do is take care of itself," said Qing Wang, chief economist on China for Morgan Stanley. "Its role in the global economy is still quite small."

An export powerhouse, China has amassed foreign reserves of $1.81 trillion, an unprecedented stockpile, and is awash in the savings of its thrifty citizens. That war chest has drawn cries from other corners of the globe for China to help bail out the global financial system — a cry that’s been resisted in China.

Economists said it is easy to overlook that China’s foreign reserves are already largely locked up — including some $1 trillion in U.S. government bonds.

"The money is already spent. . . . It's not sitting there in cash," Wang said.

Earlier this week, Premier Wen Jiabao suggested that the "biggest contribution" China could do to help the global crisis is to maintain "steady and fast growth."

China's economy expanded at a blistering 11.9 percent in 2007, but the pace is slowing markedly. The International Monetary Fund forecasts China's economy will grow 9.7 percent in 2008. Several Wall Street firms forecast 2009 growth at around 8 percent — a significant slide.

The crisis has certainly buffeted China. Its stock exchange in Shanghai has followed the stomach-churning slides of major exchanges elsewhere, although to a milder degree than in Tokyo, which plunged 9.6 percent Friday, or Hong Kong, which sunk 7 percent. Shanghai's major stock index fell 4.6 percent and has lost two-thirds of its value in a year.

Still, some independent economists suggest that as China weans off its dependence on exports it should use its savings and begin scouring the globe for distressed foreign banks or big companies to buy at fire-sale prices. Or at least buy some more U.S. Treasury bonds in a sign of confidence in the global system.

Others preach caution.

"The financial markets are very sophisticated, and the Chinese players have less experience than elsewhere," said Chen Zhao, an economist at Shanghai’s Fudan University. "Chinese players are cautious."

China, after all, has learned painfully that it can lose. Last year, its sovereign wealth fund bought a $5 billion chunk of Morgan Stanley, only to see its investment drop in half, a story repeated with its investment in the Blackstone Group.

"We can't evaluate American assets until the subprime lending crisis is over. We must wait for a time," said Wang Songqi, chief editor of The Banker magazine.

"It's not the bottom of the market yet," Chen added.


There's no reason for China to wade in and buy distressed companies if others don’t have the nerve to do so either, several economists said.

Any attempt by China to purchase a large bank or other sensitive asset could raise howls on Capitol Hill, just as happened in 2005 when a China state offshore oil company bid on Unocal, then the ninth largest oil company in the world, said Andy Rothman, a Shanghai-based economist for CLSA Asia-Pacific.

"How would Congress respond if a Chinese Communist Party-owned bank were to make a bid for a major U.S. bank? You just have to go back a few years to see the reaction to CNOOC’s bid for Unocal."

Rothman said China is on the right path of trying to stimulate domestic consumption in a nation with few social safety nets where most families save furiously to pay for education, health care and retirement. Chinese families save an average of 16 percent of their disposable income, he wrote in a research note this week.

In this year’s most important political meeting, Communist Party honchos are in a four-day plenary through the weekend to discuss rural reforms that could sustain economic growth, a pillar of the party’s legitimacy now that it has largely ditched socialist ideology.

The reforms are expected to "make it easier for farmers to lease or transfer the management rights of their land," the China Daily newspaper said Friday. Under a collective ownership system in place for the past three decades, China's 750 million rural dwellers manage land for 30-year periods through contracts with village or township bodies, but don't own it outright.

Millions of farmers have been dispossessed in recent years by village and township chiefs eager to sell land to developers.

Last year, the party beefed up property rights of urban residents.

"If rural people could have this right equally, they could benefit equally from the urbanization process. This would decrease urban-rural inequality in China," Chen said.

http://www.mcclatchydc.com/255/story/53724.html

 

[QueEx]

Re: America and the New Financial World

<font size="5"><center>
Beijing restrains buying urge</font size></center>

Asia Times
By Antoaneta Bezlova
Oct 10, 2008

BEIJING - The Wall Street fire-sale has prompted economic pundits in China and elsewhere to call on Beijing to snap up stakes in United States financial institutions and further China's influence on global financial power.

From Mexico to South Africa, investors and strategists are calling on China's leaders to use the opportunity of the spreading financial crisis to help determine the new set of financial rules that will emerge from it.

"China cannot easily afford to pass up such an opportunity," says Chen Jie, professor of economics at Shanghai Fudan University. "We have been anxiously trying to find investment opportunities for our financial capital but before the crisis there existed a myriad of visible and invisible barriers for Chinese investment overseas, particularly in the United States."

China should lead rescue efforts for the US financial crisis, Mexican tycoon Carlos Sim, one of the world�s richest men, told the press last week.

"China is now the most important country to help responsibly in this crisis," he said. "In the past, developed countries had reserves and financed developing countries, while today developed countries, especially the United States, are being financed with resources from developing countries".

But China's response to expectations at home and abroad has been unassuming. Although fortified with great liquidity and large reserves, Chinese banks and government investors have preferred to sit on their hands rather than go on a shopping spree of tumbling Wall Street firms.

Chinese politicians have expressed support for the US bailout plan to save banks and arrest the financial turmoil but stopped short of pledging to do more than keep their own financial house in order.

Premier Wen Jiabao summed up China's cautious position: maintaining "steady and fast growth" is the "biggest contribution" China can make to help the world overcome the current financial crisis stemming from the United States, he said during an inspection tour of Chinese provinces this week.

Chinese bank officials have dismissed as groundless reports that China plans to buy up to US$200 billion worth of US Treasuries to help Washington combat the deepening financial crisis. In a statement published on the central bank's website this week, governor Zhou Xiaochuan said the bank views a "stable currency and job creation" as priorities in the current situation.

Some of Beijing's conservatism stems from the fact that the global credit crisis has walloped the value of the Chinese government's initial batch of investments in US financial institutions such as Morgan Stanley and Blackstone Group. In Internet forums and the press at home the government has been criticized for taking equity stakes in US financial companies that have nose-dived.

"No one can see the light at the end of the tunnel for the US crisis and in view of our past blunders it will be prudent of China to observe more and act less," the Investors Daily said last week.

Several media outlets have engaged in predictions about the decline of US dominance in world affairs, presenting the demise of Wall Street as a retribution for US "arrogance and greed".

"The crisis that befell ordinary American people is caused by the greed of Wall Street bankers," Wang Songqi, financial analyst with the Chinese Academy of Social Sciences, told the China Business Journal.

An editorial in the Economic Observer said: "The United States is no longer the omnipotent savior and global protector of American values ... The demise of Wall Street means that the cornerstone of this global financial empire has been broken and no one knows whether it can ever be repaired."

Officially, few Chinese officials have shared in the European politicians' criticism of the Anglo-Saxon model of capitalism, which they blame for spawning the global financial crisis.

While embarrassed by the nosedive of its initial Wall Street investments, Beijing has more pressing tasks than assigning blame for the crisis. Chinese policymakers have been racing to prevent the country's economy from slowing too sharply because of global economic forces.

The legitimacy of the ruling communist party rests on maintaining a robust economic growth and providing prosperity to its people. Over the past 30 years of reforms, Chinese people have grown richer but not much freer and the country's rulers have staked their future on efforts to preserve the status quo by fueling continuous economic growth.

A survey by the Pew Global Attitudes Project this spring found that 86% of Chinese said they were content with their country's direction, double the percentage who said the same thing in 2002. By contrast, only 23% of Americans polled in the survey said they were satisfied with their country's direction.

Yet China's growth, fueled by foreign investment and exports, is interlinked to the global economy. Any radical downturn in economic prosperity could undermine the communist party's chance of holding on to its political scepter. There are already signs of a slowdown. Growth in GDP dropped to 10.1% in the second quarter from 11.9% in all of 2007.

To counter the fallout, in recent weeks Beijing has made a u-turn on its tight monetary policy set last year to fight overheating and inflation. The government relaxed caps on bank lending and approved new tax breaks for textile exporters, which have been hard hit by weakening demand and rising costs.

Experts anticipate that the forthcoming plenum of the central committee of the communist party would approve even more decisive measures of easing fiscal and monetary policies to prevent the global financial crisis from dramatically slowing down the Chinese economy.

(Inter Press Service)

http://atimes.com/atimes/China_Business/JJ10Cb01.html

 

[Greed]

Stable Money Is the Key to Recovery

Stable Money Is the Key to Recovery
How the G-20 can rebuild the 'capitalism of the future.'
By JUDY SHELTON
NOVEMBER 14, 2008

Tomorrow's "Summit on Financial Markets and the World Economy" in Washington will have a stellar cast. Leaders of the Group of 20 industrialized and emerging nations will be there, including Chinese President Hu Jintao, Brazilian President Luiz Inacio Lula da Silva, King Abdullah of Saudi Arabia and Russian President Dmitry Medvedev. French President Nicolas Sarkozy, who initiated the whole affair, in order, as he put it, "to build together the capitalism of the future," will be in attendance, along with the host, our own President George W. Bush, and the chiefs of the World Bank, the International Monetary Fund and the United Nations.

One thing is guaranteed: Most attendees will take the view that Wall Street greed and inadequate regulatory oversight by U.S. authorities caused the global financial crisis -- never mind that their own regulatory agencies missed the boat and that their own governments eagerly bought up Fannie Mae and Freddie Mac securities for the higher yield over Treasurys.

But whatever they agree to pursue, whether new transnational regulatory authority or globally mandated limits on executive remuneration, would only stultify prospects for economic recovery -- and completely miss the point.

At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence.

Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry. Entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles.

To speak of "overvalued" or "undervalued" currencies is to raise the question: Why can't we just have money that works -- a meaningful unit of account to provide accurate price signals to producers and consumers across the globe?

Consider this: The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) -- over 12 times the world's nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts.

In other words, some three-quarters of the massive derivatives market, which has wreaked the most havoc across global financial markets, derives its investment allure from the capricious monetary policies of central banks and the chaotic movements of currencies.

In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits. Meanwhile, price signals in the global marketplace are hopelessly distorted.

For his part, British Prime Minister Gordon Brown says his essential goal is "to root out the irresponsible and often undisclosed lending at the heart of our problems." But if anyone has demonstrated irresponsibility, it is not those who chased misleading price signals in pursuit of false profits -- but rather global authorities who have failed to provide an appropriate international monetary system to serve the needs of honest entrepreneurs in an open world economy.

When President Richard Nixon closed the gold window some 37 years ago, it marked the end of a golden age of robust trade and unprecedented global economic growth. The Bretton Woods system derived its strength from a commitment by the U.S. to redeem dollars for gold on demand.

True, the right of convertibility at a pre-established rate was granted only to foreign central banks, not to individual dollar holders; therein lies the distinction between the Bretton Woods gold exchange system and a classical gold standard. Under Bretton Woods, participating nations agreed to maintain their own currencies at a fixed exchange rate relative to the dollar.

Since the value of the dollar was fixed to gold at $35 per ounce of gold -- guaranteed by the redemption privilege -- it was as if all currencies were anchored to gold. It also meant all currencies were convertible into each other at fixed rates.

Paul Volcker, former Fed chairman, was at Camp David with Nixon on that fateful day, Aug. 15, when the system was ended. Mr. Volcker, serving as Treasury undersecretary for monetary affairs at the time, had misgivings; and he has since noted that the inflationary pressures which caused us to go off the gold standard in the first place have only worsened. Moreover, he suggests, floating rates undermine the fundamental tenets of comparative advantage.

"What can an exchange rate really mean," he wrote in "Changing Fortunes" (1992), "in terms of everything a textbook teaches about rational economic decision making, when it changes by 30% or more in the space of 12 months only to reverse itself? What kind of signals does that send about where a businessman should intelligently invest his capital for long-term profitability? In the grand scheme of economic life first described by Adam Smith, in which nations like individuals should concentrate on the things they do best, how can anyone decide which country produces what most efficiently when the prices change so fast? The answer, to me, must be that such large swings are a symptom of a system in disarray."

If we are to "build together the capitalism of the future," as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value.

Gold has occupied a primary place in the world's monetary history and continues to be widely held as a reserve asset. The central banks of the G-20 nations hold two-thirds of official world gold reserves; include the gold reserves of the International Monetary Fund, the European Central Bank and the Bank for International Settlements, and the figure goes to nearly 80%, representing about 15% of all the gold ever mined.

Ironically, it was French President Charles de Gaulle who best made the case in the 1960s. Worried that the U.S. would be tempted to abuse its role as key currency issuer by exporting domestic inflation, he called for the return to a classical international gold standard. "Gold," he observed, "has no nationality."

Mr. Sarkozy might build on that legacy if he can look beyond the immediacy of the crisis and work toward a future global economy based on monetary integrity. This would indeed help to restore the values of democratic capitalism. And Mr. Volcker, an influential adviser to President-elect Barack Obama, could turn out to be a powerful ally in the pursuit of a new stable monetary order.

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

http://online.wsj.com/article/SB122663373660027575.html

 

[Greed]

Nations Competing With Tax Cuts, Not Increases

November 19, 2008
Nations Competing With Tax Cuts, Not Increases
By Steven Malanga

Barack Obama’s election has elicited debate about whether he will drive America toward a European-style economy, one that is heavy regulated and relies on high taxation of the rich to redistribute income and finance generous government programs.

How ironic, then, that Europe itself is moving away from European-style taxation as part of a broader trend by developed and developing countries to compete more extensively for capital and talent. In the past five years alone, 33 countries, including 20 in Europe, have cut their top personal income tax rates, according to a study released just before the U.S. presidential election (and predictably ignored in the U.S. media) by the accounting firm KPMG International. Even more impressively, in the past four years, 60 countries have cut their corporate income tax rates, according to a World Bank survey.

The tax-cutting binge is taking place in what some have called “Old Europe.” France, Germany, Italy, and Spain have cut their top personal income tax rates since 2003. Germany, Italy, Spain and the U.K., meanwhile, have trimmed corporate tax rates, too, in just the past year.

Driving the Western European governments is aggressive tax policy in New Europe, that is, Eastern European countries, which are competing for workers and investment. Many of these countries had the opportunity to design their own tax systems after the fall of the Soviet Union and they have often opted for tax schemes that are simpler than the U.S. or Western European systems. Many feature only a few tax brackets and a few are flat tax schemes. Bulgaria has a new flat tax rate of 10 percent, down from a top tax rate of 29 percent in 2004. Estonia has cut its flat tax rate to 21 percent from 26 percent, while the Slovak Republic has trimmed its top rate from 38 percent to a flat tax rate of 19 percent. Romania has eliminated its top rate of 40 percent and gone to a flat tax of 16 percent.

In Asia-Pacific, Hong Kong’s low taxes (top rate, 16 percent) have continued to make it a magnet for both people and money and prompted tax cuts in other countries. Australia cut its top income tax rate two percentage points to 45 percent to try and lure back talent fleeing to Hong Kong and Singapore, but Australia has a long way to go to be competitive. Singapore has countered by slashing its top rate to 20 percent from 22 percent.

“It is common to hear from foreign workers that once families have become accustomed to the huge increase in spending and saving power that low tax rates provide, it can be very difficult to justify going home,” says KPMG’s Rosheen Garnon of the tax battle in the Pacific.

The tax cutting of the past few years has eroded the United States’ competitive position. One measure of where the U.S. is competitively: According to the KPMG study, the average top personal income tax rate worldwide have fallen to 28.8 percent today, from 31.3 percent in 2003, while our top rate remains at 35 percent. On corporate taxes, the U.S. now ranks second highest within the OECD, below just Japan. We sport a top rate of 35 percent, compared to an average rate of 26.6 percent among the OECD 30. However, many U.S. states also have their own corporate income taxes which they layer on top of the federal rate, making the combined tax in many states among the highest in the developed world. And we have obstinately ignored a worldwide trend. As the World Bank writes in its publication, Paying Taxes 2009, “Reducing corporate taxes has been the most popular reform” of tax codes around the world in the past four years.

Although there was plenty of talk about U.S. tax policy in the presidential campaign, little of it seemed to have anything to do with international competitiveness. Perhaps we simply believe that the U.S. is too attractive a place to worry about competing for talent and capital with the rest of the world. Or maybe we cling to outmoded notions about the prevalence of the European welfare state and haven’t noticed how much and how rapidly tax policy is changing elsewhere.

Perhaps it is time for a little bit of reevaluation. During the presidential campaign, Obama justified his plans to raise taxes on those earning more than $250,000 a year on the grounds that these households needed to “pay their fair share.” He never explained why he didn’t think these folks are paying a fair share in our progressive income tax system. But perhaps someone should point him to OECD data on the progressiveness of household taxes (that is, income and payroll taxes) around the world.

According to the OECD calculations, in the U.S., the top 10 percent of households earn one third of the country’s total income and pay 45 percent of all household taxes. That’s the highest ratio of taxes-to-income among OECD members. In France, for instance, the top 10 percent earn a quarter of national income and pay 28 percent of all taxes; in Sweden they earn 26.6 percent and pay 26.7 percent of all taxes; in Canada, it’s 29 percent of earnings and 35 percent of all taxes.

Most surveys taken before the presidential election showed that residents of foreign countries in the developed world, particularly in Western Europe, heavily favored Obama and would have voted for him if they had been American citizens. Considering how uncompetitive America is becoming on taxes and the direction Obama would take us, I think I now understand why.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

http://www.realclearmarkets.com/articles/2008/11/nations_competing_with_tax_cut.html

 

[QueEx]

Re: Nations Competing With Tax Cuts, Not Increases

<font size="4"><center>
China's President warned that the economic situation
was a test of the Communist Party's ability to govern.
"External demand has obviously weakened and China's
traditional competitive advantage is being gradually
weakened," . . . Growth has slowed to 9% - and
predictions say that it may drop to 7% or 8% next
year . . . there's a widespread belief - even a
superstition - in China that growth needs to
stay above 7% in order for
social stability to be maintained.

</font size>
</center>





<IFRAME SRC="http://news.bbc.co.uk/2/hi/asia-pacific/7757105.stm" WIDTH=780 HEIGHT=1500>
<A HREF="http://news.bbc.co.uk/2/hi/asia-pacific/7757105.stm">link</A>

</IFRAME>

 

[Les W]

Re: Lazy ass Europeans

good shit looks like we might be headin for another market crash if mf's don't fix shit soon esp with the social security shit goin the way it is

what part of those 2 articles make you think a downturn is near?

personally, i didnt get that.

He said that in 2005 good call..

MAYBE YOU SHOULD READ SOME OF THESE ARTICLES YOURSELF AND COME WITH AN OPINION RATHER THAN COPY AND PASTE - OTHERWISE STFU

 

[QueEx]

Re: Lazy ass Europeans

He said that in 2005 good call..

MAYBE YOU SHOULD READ SOME OF THESE ARTICLES YOURSELF AND COME WITH AN OPINION RATHER THAN COPY AND PASTE - OTHERWISE STFU

and I suggest you read the rules of this board.

QueEx

 

[Les W]

Re: Lazy ass Europeans

and I suggest you read the rules of this board.

QueEx

I did honestly before I posted here. I did not 'attack anyone personally' if that is what you are asserting, just attacked his methods. But you are the mod here so I'm out.

 

[Greed]

The optimum government

RAHN: The optimum government
Richard Rahn
Thursday, January 29, 2009

If you knew economic growth and new job creation begin to slow when total government spending is larger than about 25 percent of the economy, and you knew total government spending in the United States is about 36 percent of gross domestic product (GDP), would you propose policies to make government larger or smaller to create more jobs and boost economic growth?

Over the last few decades, many economists have done studies on the "optimum" size of government. A new study just completed shows the optimum size of government is less than 25 percent of GDP.

Optimum is defined as that point just before government becomes so large as to reduce the rate of economic growth and job creation. Governments are created to protect people and property. A government too small to establish the rule of law and protect people and their property from both foreign and domestic enemies is less than optimal.

The American Founding Fathers also believed government had public health functions (as contrasted with spending on private health), such as draining swamps where malaria-infected mosquitos thrived; and some public works functions (e.g. building and maintaining roads, and ensuring basic education - but not necessarily state-operated schools).

The American Founding Fathers also understood that government could easily become too large, which would diminish the liberties of the people and discourage them from engaging in productive activity. The socialist utopians were in denial of the basics of human nature, which scholars like Adam Smith and the American Founders well understood.

Nevertheless, countless socialist schemes to enlarge the size of government have been sold to naive people. After two centuries of experimentation and the unnecessary loss of hundreds of millions of human lives, most of mankind now understands that pure socialism leads to tyranny and economic stagnation.

The question remains: Between the extremes of virtually no government and a pure communist state, how much government is necessary and desirable, and when does it become a drag on both liberty and economic well-being?

Economists have tried to quantify the question by looking at the experience of countries (and economic/political entities) over time as the size of their government grew or contracted, and by making comparisons of governments of various sizes. Most studies measure the size of government as a share of GDP (realizing it is an imperfect measure because it does not measure counterproductive regulation, restrictions on liberty and other factors, but is a reasonable approximation).

Wise observers have well understood that free markets and uncontrolled prices do a far better job in allocating resources (labor and productive investment) than politicians, who tend to resort to deciding what they believe is best for other people and, of course, rewarding their friends.

Most of the studies of the optimum size of government made by reputable scholars in recent decades have indicated that total government spending (federal plus state plus local) should be no lower than 17 percent, nor larger than about 30 percent of GDP. In a just completed paper, economists at the Institute for Market Economics in Sofia, Bulgaria, have provided new estimates of the optimum size of government, using standard models, with the latest data from a broader spectrum of countries than had been previously available. Their conclusion is that there is a 95 percent probability that the optimal size of government is less than 25 percent of GDP.

Because most governments are - and have been for many years - larger than the optimal, there are insufficient data to give a point estimate as to the best size, other than it is less than 25 percent. Other studies have shown small-population homogeneous countries, such as Finland, may have slightly higher optimal government sizes than heterogeneous countries, such as Switzerland and the United States.

The ramifications of this study and previous ones are important for the current debate going on in the United States and many other countries, about having the government spend more to "stimulate" the economy - i.e. create jobs and increase growth rates.

Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run.

There is virtually no empirical evidence - in the United States or anywhere else - to support the belief of economists of the Keynesian school that a big increase in government spending will make matters better, rather than worse. Economists of the Austrian school have, in general, supported smaller government as a way to achieve higher levels of both prosperity and individual freedom, and the empirical evidence shows them to be correct.

In the United States, periods of rapid economic growth, such as 1983-89 and 1992-99, have been associated with a reduction in the total size of government. During the 1970s and much of the last decade, total (federal, state and local) government spending grew to a post-World War II record (36 percent), and these periods were associated with lower economic growth. In recent decades, many European countries have greatly increased government spending as a percentage of GDP, and as a result most of them experienced lower growth rates and much higher rates of unemployment than the United States.

Those members of Congress and parliamentarians in other countries who vote for a "stimulus package" that increases the size of government will be voting for slower economic recovery and higher rates of unemployment over the long run, based on both solid empirical evidence and theory.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

http://washingtontimes.com/news/2009/jan/29/the-optimum-government/

 

[Greed]

The Global Recession, Graded on a Curve

The Global Recession, Graded on a Curve
By FLOYD NORRIS
Published: February 19, 2009

If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.

In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.

Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.

Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.

Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.

The real world, alas, does not score success in that way.

Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.

In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.

But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.

Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.

All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.

Nowhere does the situation appear more dire now than in Eastern Europe.

Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.

Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.

“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.

The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.

The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.

The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.

That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.

It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.

Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.

But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.

When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

http://www.nytimes.com/2009/02/20/business/economy/20norris.html?_r=1&ref=business

 

[QueEx]

China’s Economic Reset
Likely to hurt world’s emerging economies

McClatchy Foreign Staff
By Stuart Leavenworth
January 31, 2014


BEIJING — Countries that supply China with raw materials got a taste in January of what the future holds as the world’s second largest economy prepares to restructure itself and dampen its mega-growth of the last two decades.

Rattled investors engaged in a massive sell-off of stocks and currencies from so-called emerging markets, hammering countries from Brazil to South Africa that have profited from mining exports to China.


China's Rebalancing

This won’t be the last time the world’s markets react – some would say overreact – to what some call China’s “rebalancing.” China is just getting started on boosting the domestic economy and scaling back the kinds of resource-intensive industries that have made it the world’s manufacturing giant. Because of China’s enormous size and economic clout, even a few baby steps can make the world tremble.

Michael Pettis, a professor of finance at Peking University, said China’s transition would harm numerous developing countries, particularly those that had invested heavily in exporting iron and other metals to China.

“There is no way around it,” said Pettis, who’s also a senior associate in the Asia Program at the Carnegie Endowment for International Peace. “If you are Brazil, Peru or Chile and you made a big bet on (metal) commodity prices, you are going to be very disappointed.”

China isn’t the sole source of financial headaches for certain emerging economies. The U.S. Federal Reserve has been “tapering off” its bond buying program that helped supply many of these countries with foreign capital to fuel their exports.

But for big mining industries in Brazil, Australia, South Africa and other countries, diminishing returns from China are looming, and alarming. China’s steel industry consumes more than 60 percent of the world’s iron ore imports; a staggering figure, given that China is also the world’s largest producer of iron ore.



Some U.S. Economist Surprised at World Markets Response

Some U.S. economists said they were surprised at how world markets responded to reports that Chinese manufacturing had contracted in January for the first time in six months.

“We all knew that China’s growth rate had to slow. We all knew that the growth rates of the past 30 years were unsustainable,” said Jock O’Connell, a California-based trade economist. “Now, apparently, slower growth in China has investment analysts on Wall Street sounding a trifle hysterical.”

O’Connell noted that China’s gross domestic product is expected to grow this year at a very respectable pace: roughly 7.4 percent, as opposed to 7.7 percent last year, according to some estimates. But for Wall Street and world markets accustomed to years when China’s economy regularly hit double-digit growth, that drop is a disappointment.


Rebalancing, Debt & Banking

It also comes amid rising concerns about China’s debt problems and so-called “shadow-banking” sector.

China uses much of that steel to pump up the economy with government-funded infrastructure projects. But excess investment in subways, bridges, steel mills, housing projects and factories has left the country with massive debt and pollution problems. “Investment is like opium for government,” one Chinese business leader, Cheng Siwei, said in a story published Thursday in China Daily, a government-controlled newspaper.

Dominated by government-controlled entities, China’s banking system is actually two systems. Regular depositors in this country of 1.3 billion people open accounts that offer low interest rates, supplying the government with cheap capital for infrastructure projects. Seeking higher returns, wealthier Chinese have been putting their money into investment funds and other forms of shadow banking, which largely are unregulated by the government.

In January, a major Chinese investment fund nearly went into default. The fund – issued by China Credit Trust Co. and marketed by Industrial and Commercial Bank of China Ltd., the world’s largest bank – was set up to raise money for a coal-mining company, the Shanxi Zhenfu Energy Group. When the company’s leading shareholder was arrested and accused of banking irregularities in 2012, it focused attention on the coal company’s finances and the riskiness of many shadow-banking investment funds. Days before a default was possible, China Credit somehow came up with the money to pay off investors, possibly helped by a bailout from a government-controlled bank that was worried about a “run” on other investment trusts.

Analysts differ on whether these trusts are a ticking time bomb for China. Victor Chu, a Chinese investment banker who’s the CEO of First Eastern Investment Group, acknowledges the rising debt of shadow banks but said recently that he thought it could be handled. “It’s still a manageable part of the system. . . . It’s totally manageable,” he said during a panel discussion on China at the World Economic Forum in Davos, Switzerland.

In order for China to “manage” its shadow banking and change its overall economic focus, it will have to enact policies that will upset some of its political elite, Pettis said. The nation’s staggering growth has been based on low interest rates for bank depositors, low wages for workers and an undervalued currency, all of which have promoted exports.

But that growth model has kept household spending low, resulting in an unbalanced economy. The government’s challenge now is to increase domestic spending, which will help some Chinese industries but hurt others that are dependent on the traditional economic model of heavy industry and exports.



On a global scale, Pettis said, the good news is that some countries will benefit from China’s transition, even as others are harmed. Wealthier Chinese families will want better meat and produce, giving countries that export food to China a boost. Countries such as Mexico also may benefit, he said, since their manufacturing bases will be better able to compete worldwide as China’s wages rise.



These changes won’t happen rapidly, Pettis said, but they have started and will surely cause more market eruptions as Beijing enacts them. “Keep an eye on China,” he said. “The next year will be very interesting.”

​

Email: sleavenworth@mcclatchydc.com; Twitter: @sleavenworth

Read more here: http://www.mcclatchydc.com/2014/01/31/216559/chinas-economic-reset-is-likely.html#storylink=cpy