MacroScope

Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called “Extreme Risks“.

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won’t happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism’s demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

An interesting post on ING’s new eZonomics blog points the reader to a new study on older workers and health.  The findings — as reported in The Lancet — don’t at first glance look terribly surprising:

A poor work environment and health complaints before retirement were associated with a steeper yearly increase in the prevalence of suboptimum health while still in work, and a greater retirement-related improvement; however, people with a combination of high occupational grade, low demands, and high satisfaction at work showed no such retirement-related improvement.

In simple terms, this is saying that if a worker is happy, their health is better. Anyone who has ever had a bad job could have told them that! But the study, of course takes it further.

Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls “imbalance- and bubble-building”.

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to “sequence” the great unwinding.

A new exhibit called Economica: Women and the Global Economy is offering up an online look at how half the world’s population is making it through the current economic turbulence, in which, it says, women are “uniquely impacted”.

Presented by the web-based International Museum of Women, it consists of a series of slide shows looking at issues ranging from the impact of the U.S. mortgage crisis on families to survivng in Egyot with a shortage of bread to Middle East businesswomen redefining roles.

It also looks at credit for women in Latin America, growing debt in India and “Womb Economics”, which questions whether women are paying for China’s economic prosperity with policies that encourage abortion.

Britain's pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it's not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative 'short' positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound's inexorable grind down to parity with the euro captures the popular headlines, the Bank of England's index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years -- by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar's equivalent index has shed only about a third of the pound's losses since mid-2007, while the euro's has jumped about 10% and the yen's approximately 20% over that period.

There's no shortage of negatives -- Britain's deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it's the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound -- the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return. 

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

G20 Finance Ministers Meeting in London

Professor Charles Goodhart of the London School of Economics explains the difference between inflation targeting and price level targeting in the lobby of Jackson Lake Lodge after taking part in an animated discussion of whether central banks should target price levels rather than inflation.

A paper University of California, Santa Cruz economist Carl Walsh presented at the Federal Reserve’s annual mountain retreat suggested that one lesson from the recent financial crisis is that central banks would benefit from the greater flexibility that price level targeting might give them.

A former Fed governor,  Frederic Mishkin, said that while in theory price level targeting may sound attractive, in actual practice it is more difficult to use effectively. One difficulty he cited was in explaining to consumers how it works. 

If it takes two successive quarters of falling GDP to enter a recession, how can a country emerge from recession with only one quarter of growth?  In the past week or so, journalists have declared the recession over in France, Germany and now Japan.  Of course, most reports rightly ask how long this will last and stress that a genuine recovery is far from certain.

Some people regard the two quarters definition of a recession as arbitrary and a bit silly, something supposedly cooked up by one of Lyndon Johnson’s economic advisers  to avoid acknowledging a downturn until after the next election.

But it does serve a serious purpose: At least it reduces the risk that we’ll be misled by a statistical blip in one quarter’s data which might be revised away in the next release.

As the German election approaches and with it a chance he may not hold onto his job, Finance Minister Peer Steinbrueck took a long shot this week to try and boost his legacy as the man who took on the tax dodgers and won. While some of the new rules he proposed in a now trademark campaign against tax fraud failed to pass, the 62-year-old Social Democrat can only have boosted his popularity with voters and upped his chances of holding onto the Finance portfolio after the September 27 vote.

The idea was to give the Finance Ministry a “free hand” in drawing up its own list of countries and jurisdictions it deems uncooperative in efforts to crack down on tax evasion. Finance would thus have a bigger stick to wield as it signs new bi-lateral tax agreements next year, since the threat of sanctions on operations in Germany would have been immediate and easier to execute without the hurdle of consensus in Berlin. Or so the thinking went.

The proposal managed to stand its ground for a day. After supporting the plan on Monday, the Finance Ministry was forced to retreat under a hail of criticism from business lobbies, and when cabinet outlined its new procedures on Wednesday, it was clear that any future sanctions decisions will also have to be agreed by the Foreign and Economy ministries.