Opinion

The Great Debate

China runs circles round adversaries

If the global currency war was a baseball game, they would have to invoke the “slaughter rule” and send China home the winner.

Motivations and consequences aside, China is so adroit in melding diplomacy, jawboning and action to keep the value of its currency low that you have to feel something approaching compassion for its plodding adversaries from the U.S., Europe and Japan.

China’s latest well played move is its pledge to use some of its massive foreign currency reserves to support poor Greece, which the markets widely believe will default some fine day, European Union support or not.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Chinese premier Wen Jiabao said in Athens on Saturday.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

Obama and the American dream in reverse

“It’s like the American dream in reverse.” That’s how President Barack Obama, ten days after taking office last year, described the plight of Americans hit by the faltering economy. His catchy description fell short — the dream has turned into a nightmare for tens of millions.

So much so that an opinion poll this week showed that 43 percent of those surveyed thought that “the American Dream” is a thing of the past. It “once held true” but no longer does. Only half the country believes the dream “still exists,” according to the poll, commissioned by ABC News and Yahoo against a background of dismal statistics on growing poverty, inequality, unemployment, and Americans without health insurance.

Before turning to the gloomy numbers, a brief detour to the meaning of the phrase “the American Dream,” long a familiar part of the U.S. (and international) lexicon.  The survey defined it as “if you work hard, you get ahead.” That’s neat shorthand for the concept that the American social, economic and political system makes success possible for everyone.

Deleveraging a process, not an event

It may be about as fun as having a tooth pulled, but cutting very high levels of debt in an economy is more of a process than a short, sharp event.

That means that for economies like that of the United States, which has private debt equal to 268 percent of gross domestic product, the outlook is for a very long period of subdued growth and one in which there is no assurance that the tools of economic management, traditional or not, will be effective.

The Federal Reserve released its Flow of Funds report last week, detailing the state of the country’s various balance sheets and the news was good, in its own way, but not encouraging.

Looking for Keynes’ angels

Keynesian stimulus works perfectly, but only if you can find politicians who don’t care about re-election and central bankers who aren’t interested in being liked.

The Obama administration, confronted with staggeringly high unemployment and a struggling economy, has proposed another round of, well, stimulus, this time in the form of tax cuts and investment incentives, but such is the toxicity of the word in current debate they can barely bring themselves to utter the “S” word.

As envisioned by economist John Maynard Keynes, in order to successfully run an economy based on counter-cyclical spending during downturns, you need to also have a policy of counter-cyclical savings during fat times. Budget surpluses must be built up so that they can be run down during recessions

Housing double-dip threatens banks

Another dip in U.S. housing looks likely, bringing with it difficulties for banks and for their government guarantors.

What is perhaps worse: having chucked money at supporting asset markets in order to support banks the past two years, the policy options for handling another housing downturn and banking crisis would be greatly circumscribed.

If you think the debate about more fiscal stimulus is heated, wait until you see the venom which the prospect of another housing and banking bailout brings.

The Knightian dog ate my recovery

Remember when business and economic leaders droned on about “100-year storms,” 2008′s get-out-of-jail free card for people who missed the housing bubble?

This was the whole idea that there was no way that people could be held accountable for the crisis because the notion of there being a problem with continual double-digit house price growth and sky-high leverage was just so darned unlikely.

Well, it looks like we have the 2010 version of how the dog ate their homework again and this time it is called “Knightian uncertainty.”

We are all widows and orphans now

It may seem like a  world turned upside down: stocks are desired for their dividends and bonds are all about capital appreciation, or at least preservation.

It was all so different over much of the past 20 years, when despite steady falls in inflation and rising prices for bonds, the real money was perceived to be in equity price gains.

Dividends were for widows and orphans; those without the knowledge or guts to take the big risks and make the momentum plays.

from The Great Debate UK:

Waiting for the other shoe to drop

USA/

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -

The unemployed and the terminal insomniacs who have nothing better to do than read my blogs will know that I have long been gloomy about most of the Western economies. How can you fail to be pessimistic when the world economy is still dominated by the U.S. - a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?

Now house prices are plunging again and, with the dollar still strong, the prospects for an export-led recovery look bleak. In fact, a return to recession is far more likely, and the markets are starting to show signs of that sickening here-we-go-again feeling.

A painful holiday’s end for Europe

Europe’s long summer holiday still has a week to run but this year’s reentry will bring with it evidence that very little progress has been made on the issues that threaten to rend the currency union and upend the global economy.

Despite waving the stress-test magic wand over its banks in late July the same problems continue to grow unchecked: a euro zone periphery that can’t compete, may not be able to pay its debts and so may bring down with them the very banks that have been pronounced healthy.

While the German economy is growing at a rate not seen since the Berlin Wall came down, things are a good bit worse in Ireland, Portugal, Spain, Italy and especially Greece, all of which face some combination of an austerity-induced recession and debts public and private which which threaten their banking systems, local governments and Treasuries.

Stocks from Venus, bonds from Mars

Forget about politics, the biggest divide in the U.S. is between stock and bond investors, who aren’t so much arguing as speaking entirely different languages.

Stocks, while about flat for the year, are priced moderately cheaply by historical standards, implying that investors think they have a reasonable, if not spectacular, outlook for the next couple of years.

Earnings are strong, and forward looking estimates of earnings, while coming somewhat off the boil, are still rosy and cash balances are high.

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