from Ian Bremmer:
Why the U.S. is not—and never will be—Japan
By Ian Bremmer The opinions expressed are his own.
Though I’ve already written about the recent Munk debate in Toronto elsewhere, it’s worth taking some space to expand on my position, and why the U.S. truly is not going to experience a Japan-style lost decade of economic stagnation.
(The debate was on this resolution: Be it resolved North America faces a Japan-style era of economic stagnation. I joined Larry Summers in arguing the Con side against Paul Krugman and David Rosenberg.)
Let’s start with the political realities: Japan experienced 50 years of single-party rule. In the last 22 years, the country has had 17 prime ministers. Recently, the Democratic party there defeated the long-time incumbents, the Liberal Democrats, only to find that they had no idea how to govern the nation. They had no idea how the ministries worked, no relationships with industrialists or financial institutions, no grasp on the levers of power in society, and no strong policy apparatus. If the U.S.’s political situation looks bleak, consider that alternative.
In fact, the political situation in the U.S. may not be pretty or easy to watch, but it’s functioning. The President and Republicans continue to hammer out centrist deals on issues like tax hikes and the debt ceiling, albeit at the last possible minute after much gnashing of teeth. Ignore naysayers who say that budget supercommittee doom is coming; a deal will likely get done. And after the presidential election, things will get even better. That’s because Republicans are almost certain to retain the House and take the Senate. Whether Obama or the likely GOP candidate Romney wins the election, their dealings with a unified legislative branch will become far easier than the current divided government.
Our stable government is why foreign investors continue to flood into the dollar. Paul Krugman may have argued at the Munk debate that a strong dollar is what’s harming the U.S. economy, by making the country less internationally competitive, but I believe the confidence that foreign and sovereign investors continue to show in US debt outweighs that negative. Ask yourself what the better scenario is: a strong dollar that puts us at a slight relative disadvantage, or a pullout of investment dollars in the U.S. altogether? Investors continue to make bets in dollars, and that’s good for us. Yes, gold has risen dramatically in recent years, but "gold" is not a country. When investors need security and stability in currency, only the U.S. can still claim to provide it.
Krugman is also frustrated that the U.S. can’t move on a dime to enact policies needed to slam the country out of its current GDP growth lethargy. Looking around the world, there are only a couple countries of size that I can point to with that ability. One is Russia. Vladimir Putin has positively gutted that Moscow's fledgling institutions to let his will be done. Their growth rate has been phenomenal, but at what cost? No one can say what will happen to Russia when Putin exits the stage, and that’s not a situation the U.S. will ever be in. Our institutions endure.
Imagine when China runs a trade deficit
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.
Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S. consumers?
Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow — or shrink less than — exports by at least 23 percentage points.
In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.
If China’s trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.
It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.
This is an interesting article. If this were to happen we could envision a new Walmart-like chain littered with crappy reverse engineered American goods. Shelves stocked to the rafters with Made in U.S.A. All priced at $9.99.
Global rebalancing to weaken dollar, quietly
– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy. Now, as another effort at rebalancing looms, the dollar will again bear the brunt — though officials will try to ensure its fall is less dramatic this time.
That’s the implication of President Barack Obama’s announcement this week that he will push world leaders for a new global “framework” in which the United States would cut its huge trade and budget deficits.
Agreeing on this framework would be politically difficult, since it would require policy changes by many countries — China, for example, would probably have to rein in its explosive export-led growth.
But as the euro’s climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week’s Pittsburgh summit of leaders from the Group of 20 nations.
The Plaza Accord of 1985 called for “orderly appreciation of the main non-dollar currencies against the dollar”; it was followed by central banks’ coordinated intervention to ensure that happened.
This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar’s drop in a more low-key fashion.
Well said Casper Lab. I find the rise in Gold an ancient way of hedging the dollar rise. It is a fool’s game.
I concur, some of the earlier comments are uncalled for, offensive and unjustifiable.
Anibus:
We’re ever becoming more dependent on each other in trade. Manufacturing is integral as a country is developing. There are several economies of scope and scale during a country’s expansion of capacity growth through infrastructure and some of this can be captured through the manufacture of non-durable and semi-durable goods. As infrastructure demand begins to decline (as a rate of demand), countries then move onto higher skilled areas as the value of human skill, capital and technology have higher returns in these areas.
No doubt that there must be some level of manufacture within a country, however, to mandate a minimum level of manufacturing (a so called manufacturing output base) is moving backwards. Besides, how would this be made feasible? Subsidies, lower taxes, tax holidays? This is what distorts the market and transfers the tax burden on individuals.
For Chinese exporters, grass is greener abroad
- Wei Gu is a Reuters columnist. The opinions expressed are her own. -
The U.S.-China tire dispute threatens to spill into other sectors and squeeze Chinese exporters’ already razor-thin margins further. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.
But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.
In addition, selling to large buyers such as Wal-Mart creates volumes large enough to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.
But as the tire spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China. By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.
That’s why Chinese policy makers need to get more serious about stimulating domestic spending. It is time for Beijing to revamp a system built over the past three decades that explicitly and implicitly favours exports and to encourage manufacturers to prioritise selling to the domestic market.
A good first step would be to reduce some of the export incentives China offers to certain industries. These effectively subsidise foreign consumers at the expense of domestic customers. For example, Chinese tyre-makers get a tax rebate of about 9 percent on the value of the products they sell abroad. That’s why tyre makers can afford to price exported tyres more cheaply than ones sold at home, according to Xu Qiyuan, a researcher at China’s Social Science Academy.
That would be good, if you can’t afford to go on holiday, stay at home and landscape you own garden.
from The Great Debate UK:
Obama risks South-American style economic decline
- Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs. The opinions expressed are his own.-
Argentina should be an object lesson for the U.S.
A century ago, it was one of the richest countries in the world. Today, it has fallen far behind Europe and North America, after a hundred years marked by long periods of recession.
Faced with economic crisis, for example during World War I and the Great Depression, Argentina’s politicians turned to socialism. Lame-duck industries were subsidised and protected from competition, and policy was often driven by powerful vested interests such as the trade unions.
Profligate government spending was initially financed by borrowing, and then by printing money. The result was rampant inflation, which damaged investment and growth by making it almost impossible for businesses to plan ahead.
A new IEA study, Economic Contractions in the United States: A Failure of Government, suggests that President Obama’s current economic policies could be similarly ruinous - though, to be fair to Obama, the authors point out that these policies were started by George W. Bush.
Despite deep recession and an exploding budget deficit, Obama is embarking on ambitious and hugely expensive socialist reforms, including a subsidised healthcare programme, extra education spending, and a cap and trade policy to reduce carbon emissions. In the long run, these measures will heap yet more misery on taxpayers following the bailout of banks, insurance companies and the car industry. And they come after George W. Bush's period in office, during which he was one of the most profligate presidents in US history.
President Obama’s current economic policies could be similarly ruinous
Just noticed? Where were you last year, when it was already clearly visible to anyone willing to look? Preferred to close your eyes and enjoy the constant mantra of “change”? Change you’ve got, but is that change to better?
The way things are now, Dems can’t win any upcoming election, unless Republicans themselves manage to snatch defeat from the jaws of victory. Like fielding candidates in the mold of Bob Dole who could not even sell Viagra to ED sufferers, let alone himself to the electorate.
from The Great Debate UK:
The economy: reasons to be miserable
- Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. -
Is the crisis over yet?
In the last 3 months, the Dow and the FTSE have each risen by about 25 percent, the Standard & Poor's 500 by a third. House prices appear to be stabilising in the UK. Stress-tested and backed by seemingly unlimited government funding, the banks are lending again (if only to each other), so that 1-month libor is down to only 0.3 percent.
In the Far East, the Chinese economy may be growing again, and even Japan may have pulled out of its nosedive. The oil price has recovered from its lows.
Is there any reason to doubt that the worst is past?
No reason whatever, except the following (in ascending order of gravity):
1. As unemployment increases, defaults on credit card debt are certain to rise, reducing the banks’ ability and willingness to lend to consumers.
Most of the points raised by Mr. Laurence can be understood. However what I don’t understand how Sterling is gaining against USD despite all financial challenges that UK is facing.
BofE is utilizing quantitative easing which in theory may bring down the Pound, that is not happening we can see the Pound gaining against most currencies.
What would be the outlook of Sterling in the coming few months? Is it going to stabilize, move up or down?
from The Great Debate UK:
A bet against Castro’s immortality
-- Neil Collins is a Reuters columnist. The opinions expressed are his own --
LONDON, April 23 (Reuters) - "Practically everyone who follows Latin American events agrees that Castro's end is near." Thus one Laurence W Tuller, writing in 1994 in his manual on high-risk, high-reward investing. Defaulted Cuban government bonds had jumped on hopes of a settlement to allow the country back into the international capital markets. Today, former leader Fidel Castro's end is 15 years nearer, but he's still there, albeit in semi-retirement, and holders of these pre-Castro bonds with a face value of around $200 billion are still waiting. Castro's regime kept good records, but have paid no interest, and ignored redemption dates since his revolution half a century ago. Few Americans can remember why their administration has been so beastly to Cuba for so long. Those who can mostly live in Florida, a key swing state, and many risked everything to get out of Cuba. They do not want to see their investment devalued by hordes of their former compatriots simply walking off the Delta Airlines flight from Havana. Last week U.S. President Barack Obama eased the squeeze somewhat. Americans can now visit Cuba, but only if they have relatives there. This gesture has re-ignited the bondholders' old hopes. Past settlements of defaulted sovereign bonds have tended to pay about half the total of accrued interest plus principal, so the buyers see plenty of upside. Exotix, a specialist trader in "frontier markets", says its price for a typical Cuban bond instrument has risen from around 9 cents on the dollar at the start of this month to 14 cents on April 23. Mind you, the spread is wide, the market thin and as events crowd in on the President, he might feel there are more pressing problems than to risk upsetting those key-voting Floridian Cubans.
from Global Investing:
Robin Hood in reverse?
Thirty-first U.S. President Herbert Clark Hoover once said: "Blessed are the young, for they shall inherit the national debt."
Governments around the world are borrowing heavily to finance their fiscal expansion – unprecedented in size and scale – to prevent severe economic downturn.
However, outspoken independent economist Roger Nightingale thinks fiscal stimulus will not work.
He predicts a severe, Japanese-style recession to hit major and developing markets.
"There is no way out of this problem. Fiscal policy won’t help it at all," he told a conference in London.
"It’s taking from one type of people and giving it to another… It’s net zero. It’s taking from non-banks and giving to banks. It’s taking from the innocent and giving to the guilty. It’s Robin Hood in reverse."
I would agree with Roger Nightingale. I lived through the ‘lost decade’ in Japan and it looks all too familiar: it’s like, what’s the cliche I should use, watching a car crash in slow motion. There will most likely be a prolonged period of deflation.
Living in London, I can only say that the situation in the United Kingdom is far worse than was the case in Japan or compared to the US now: the level of personal indebtedness, job insecurity, no industry base (trade in goods) that can benefit from the fall in the currency, a smaller domestic economy …
I keep hoping that I will be proven wrong, but will I?
Bleak outlook for U.S. oil refiners
– John Kemp is a Reuters columnist. The views expressed are his own –
Even by the standards of a deep-cyclical industry, the “golden age” of oil refining has proved remarkably brief, lasting no more than three years, before giving way to a new dark age.
Particularly in the United States, refiners have returned to the state of chronic unprofitability that plagued the industry before 2005.
U.S. refiners now have too much capacity and produce the wrong products (gasoline) in a fuel economy increasingly dominated by ethanol and diesel. Capacity cuts of as much as 0.5-1.0 million bpd (equivalent to 4-8 average refineries) and expensive investment to reconfigure the system to increase the diesel yield seem inevitable.
EVAPORATING PROFIT MARGINS
In May 2007, U.S. refiners paid an average of about $64 a barrel to acquire high quality West Texas Intermediate (WTI) crude (less for other grades) and sold gasoline for $97 per barrel – a margin of $33 per barrel or 52 percent.
2008
5:56 am GMT
– well in this situation both demand and supply should be
– balanced that poor consumer would not effect badly like
– what happen in past when the prices was very high and
– people don’t have money to save. So both demand and
– supply should be balance equally that in future we all
– wont face the supply shortage and again it gonna jump
– to above $100.
– – Posted by Muttaqi
The futures market is the machine which does this balancing. The problem is that nobody knows what future conditions will be. We guess. We do the best we can. Anyone who is willing to put their money where their mouth is can participate, through the commodities and commodity futures market in this great feat of prognostication. People who have made good predictions in the past can use their profits to continue to predict. People who have made bad predictions lost money, and so are less able to move the market in the future. It ain’t perfect, but it’s the best *possible* system.
The problem with the Socialist ideal — the government should make these decisions for everybody — is that it presumes that anybody who works for the government is omnipotent and omniscent. Having lived under George Bush’s sad, pathetic reign should have eliminated that superstition, but the socialists now think that Obama has some magic ability to know the future. He doesn’t. Nobody does.
We are imperfect human beings, ignorant of our future, and we have two choices: we can accept our humanity, and live under a capitalist system where we are free to benifit when we’re right and take responsibility when we’re wrong, or we can switch to a socialist system where when the dictator is right everyone benifits and when he’s wrong everyone suffers — except for his henchmen, who still live well at our expense.
I’d rather suffer for my own mistakes than suffer for somebody elses. I’ll take capitalism any day.
from Pakistan: Now or Never?:
America’s expanding war in Pakistan
U.S. military operations crossed another threshold in Pakistan this week when a Predator ‘drone’ aircraft fired missiles into Bannu area in North West Frontier Province (NWFP), away from the seven Federally Administered Tribal Areas where it has conducted raids with impunity.
Attacking the self-governing and semi-autonomous FATA on the Afghan border, considered a haven for al Qaeda and Taliban, is one thing. Targeting the North West Frontier Province, or settled areas as Pakistanis call it, is quite another.
This is a province governed by the national assembly - unlike the tribal areas which are not subject to the national assembly - and therefore represents an expansion of U.S. operating area into Pakistan proper.
Pakistanis are worrying that if the United States can attack deep inside the North West Frontier Province, then what stops them from raining down missiles on Pakistani cities in pursuit of al Qaeda, according to a report in The Hindu. They are wondering just how far will the United States go in its battle against the militants.
At the moment, though, the raid in Bannu in which the five people including an al Qaeda operative were killed, is a signal that there are no limits to targets in Pakistan for the United States.
At this rate and if they are not stopped, the U.S. military may end up attacking Peshawar, the capital of the North West Frontier Province, the Daily Times said, quoting unnamed government and military officials.
Even though a geo-political line has been crossed by attacking Bannu, US has been successful in eliminating the top rung leaders of Al-Qaeda.
US has made its intention clears when Mr. Obama said that he will act if Pakistan deosnt have the will or means to take out Al-Qaeda & Bin Laden. It seems there is a lack of will on Pak side to act. Everytime after a missile strike, details are revealed that some senior members and foreign nationals being eliminated. Though Pak has suffered collateral damage in these strikes the best way out for Pakistan from this jihadi mess is to support the war on terror. It shall be a difficult task for Mr. Zardari to convince his citizens to support this war, but the future of pakistan lies in who wins this war.
Post Kargil, India contemplated of eliminating training camps in PoK by cross-border raids. US is now doing the same. What you cannot do as an ememy can be done by being a friend.
LOL this guy writes a paper like he just discovered something the whole world never knew already. Congratulations guy for showing us the OBVIOUS. Good grief your paper reads like a crappy graduate thesis proposal. Reuters you really hit the bottom of the barrel on this one… You want to know whats wrong with the world guy? We keep wasting our money on columns and jobs like this that add nothing to the productivity of this world.