MacroScope

from Reuters Investigates:

China’s U.S. debt holdings make it a powerful negotiator

Worrying about the power China has over the U.S. as America’s largest foreign creditor has become a national pastime. It’s a bipartisan issue in Congress and a favorite subject among pundits lamenting the decline in U.S. influence around the world. But could China really use its Treasury purchases to shape U.S. policy? Diplomatic cables released by WikiLeaks and obtained by Reuters suggest that has already happened.

Emily Flitter’s special report outlines a diplomatic flare-up between the two superpowers following the U.S. financial crisis. Chinese officials said they were worried about the safety of their U.S. investments. U.S. diplomats worked hard to ease the tensions, but the conflict ultimately led to the request of a personal favor by a top Chinese money manager in a meeting with U.S. Treasury Secretary Timothy Geithner.

 

 

 

 

 

 

 

 

 

 

 

 

To read the special report in multimedia PDF format click here.

Paul Eckert has another special report out today based on WikiLeaks cables obtained by Reuters. This one sheds light on how the United States views China's likely next leader, Xi Jinping. See that PDF here.

CHINA-SHANGHAI/CORRUPTION

The Case for a Dovish Fed

The Federal Reserve has gone on the offensive to sell its exit strategy to investors and the public, in the hopes that it can stall an increase in inflation expectations. The effort was first launched by Fed Board Governor Kevin Warsh, who argued in a Wall Street Journal editorial, followed by a speech, that when the time came for Fed tightening, policymakers might have to move quickly. Even Bernanke, whose Great Depression expertise usually pegs him as a dove, was particularly meticulous about describing the Fed’s stimulus-withdrawal tools this week, sending the bond market into a tailspin.

But with the unemployment rate rapidly climbing toward 10 percent — and expected to remain up there for the foreseeable future, some economists are telling Fed officials to hold their horses. Paul Krugman, in his blog, makes a vehement case for an ultra-dovish policy stance. He calculates that the ideal fed funds rate given current economic conditions should be, get this, -5.6 percent. In another post, he argues that even if the U.S. economic recovery is more robust than most believe, the Fed should still keep rates at rock-bottom lows for at least two years.

So where’s the case for monetary tightening? For some reason many Fed officials seem to view it as inherently unsound to stay at a zero rate for several years running — but I’m at a loss to understand what model, or even conceptual framework, leads them to that conclusion. One gets the impression of officials who have decided that they want to tighten, and are making up new conceptual frameworks on the fly to justify their desires.

Your country needs you – to spend, spend, spend

Getting the U.S. consumer spending again is simple. “The government should issue every household with a debit card with an expiration limit of 90 days, and if they don’t use it, they lose it,” says Paul Kasriel, chief economist of Chicago-based Northern Trust.

Kasriel has a reputation of being more pessimistic than the consensus, but given the programmes unveiled to date by the U.S. Treasury, he believes the U.S. economy will start to recover this year. “The Federal Reserve, like other central banks, is a legal counterfeiter, and they can create money out of thin air,” he says, pointing to the TALF, and son-of-TARP, the inelegantly named PPIP.

Under the terms of the Term Asset-Backed Securities Loan Facility, the Fed will provide financing for firms to purchase asset-backed securities of credit cards, auto loans and student loans, whilst accepting most of the credit risk. Kasriel says this $1 trillion programme has gotten off to a slow start, but he believes it will gain momentum over the next few months and will play a key role in kick-starting the credit markets.

from Davos Notebook:

U.S. – They’re skint, they’re frugal, get used to it

Good session on the "Frugal American," an as yet undiscovered species that is coming to a global economy near you.

You know the general idea, a decade or so of living beyond their means, borrowing money against their rising house values to finance consumption is coming to a grinding halt. That's called a recession, but how long will this frugal thing last?

Ian Davis, the MD from consultants McKinsey & Co was blunt:

"Americans have no option but to be relatively more frugal over the next 10-20 years." This is irrespective of the crisis and is a structural issue due to overspending in the past and the huge host of baby boomers who are now moving into what they fondly hope will be their retirement years. Old people buy fewer ipods and ski boots apparently, and are less likely to remodel their kitchens and bathrooms. That is a problem for the global economy.

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.