Gleanings II – 476 Compliments of Nick Rost van Tonningen (September 7, 2012)
William R. White was born in Kenora, Ont. in 1963 & educated at the University of Windsor in Canada &, on a Commonwealth Scholarship, at the University of Manchester in the UK where he got a Ph.D. in Economics. He worked for three years at the Bank of England, from 1972 to 1994 at the Bank of Canada & then 15 years at the Basle-based BIS (Bank for International Settlements, aka ‘the central banks’ central bank’), most recently as its Economic Adviser. While there he took issue in 2003, at the annual central bankers’ clambake at Jackson Hole, with the low interest rate policy of the then near-untouchable, but since largely discredited, Fed Chairman Alan Greenspan (who pooh-poohed his criticism) & correctly forecast the coming of a financial crisis. After he retired he became, in 2009, Chairman of the OECD’s Economic Development and Review Committee that examines, assesses & makes recommendations on, individual OECD countries’ economic trends & policies. He has just published a paper that can be found at http://dallasfed.org/assets/documents/institute/wpapers2012/0126.pdf trashing the Fed’s monetary policies.
A year ago the price of gold reached an all-time high North of US$1,900/ounce, whence it slipped to roughly US$1,520 by mid-May. Then for three months it traded sideways in a US$100 range above that, with the sole serious buyers being foreign central banks, until in the week ended August 22nd institutional investors & hedge funds jumped back into the fray, buying US$1.37BN-worth of gold & other precious metals & ramming the gold price with ease through the US$1,625 level to the point that it started flirting with US$1,700 (which it has since decisively pierced). Blame Bernanke. For he alluded at Jackson Hole to possibly more easing (Draghi’s plans to start buying bonds had long been ‘priced in the market’ & the unworldly call at the Republican Convention for a return to the gold standard was taken by most with more than just a grain of salt) which was seen as bullish for all markets, incl. gold. This suggests an inconsistency in his policies : on the one hand, the Fed moves Heaven & Earth to keep the price of gold down & on the other he moots a gold price-positive possibility of further monetary easing that may prove short-term needless & long-term undesirable.
The key to Bernanke’s thinking is that he believes super low interest rates will elevate stock & real estate values, and weaken the dollar, thus lowering financing costs, boosting US companies’ global competitiveness & bolstering household wealth. As to the former he has obviously forgotten the old market adage that “you cannot push on a string” and, as to the latter, this is a formula that many Latin American countries long experimented with, but found wanting.
On the subject of Draghi, he announced on September 6th an ‘open-ended’ ECB commitment to buy Eurozone member country bonds provided they ask for help & continue to meet the conditions he imposed on them as the price for that help. Rather interestingly, he conceded the decision had been supported by only a “majority” of the 23-member ECB board (suggesting it was not just the Bundesbank that didn’t support his plans). He also revised his EU GDP growth forecast for this year & next downward, & its inflation forecast upward (even while saying the bonds bought would be “sterilized” so as not to affect the money supply, although no one is really quite sure how is going to do that, what that might entail & even if doing so would make sense (what is sure, however, is that he, like Bernanke in the US, is increasingly moving away from a central bank’s traditional fairly narrow role & usurping some of the traditional role of elected officials). The potential flaw in turning the ECB into a mini-IMF is that it doesn’t have a provision for Argentina-like behaviour, i.e. when a country it has been supporting becomes unable, or unwilling, to meet the conditionalities it had earlier agreed to. While this has never caused a problem for the IMF, which simply waits until the culprit chooses, or is forced, to return to the fold, this would likely be a lose-lose proposition for the ECB since it won’t have the luxury of the time to do so : either the country involved will default or the ECB will have to eat its words. An open-ended commitment to buy bonds may also give rise to “moral hazard” problems, the “too big-to-fail” issue that led to the US banking crisis a few years ago. All of this would be bad, if not terminal, for the Euro, the very event he seeks to pre-empt. All together, it looks like a “Hail Mary” pass, another valiant effort to roll the problem down the road hoping for divine intervention while risking a massive transfer of risk from the private sector to taxpayers’ shoulders.
In the late 90’s Daniel Hannan was a speech writer for then Conservative Party Leader, & now Foreign Secretary, William Hague. At the tender age of 28 he was elected to the European Parliament & has remained a Conservative MEP to this day despite the fact he has been a Euro skeptic since university. He is trilingual in English, French & Spanish to the point he has been known to address the European Parliament in a language other than his mother tongue. In a lengthy article in Mail Online, he makes a strong case that the EU is undemocratic & contemptuous of public opinion, quoting the unelected EC President, Jose Manuel Durao Barroso, as saying that nation states are dangerous because they are excessively democratic & that “Decisions taken by the most democratic institutions are often very wrong.” And he says this is no accident since the EU’s founding fathers didn’t like the populist brand of democracy of the inter-War period & believed that too much democracy would lead, once again, to demagoguery & fascism. So they created a model in which power rested with “disinterested technocrats immune to the ballot box” in the belief that the creation of a single European state would never succeed if every transfer of power from national capitals to Brussels had to be approved by voters. It is worth a read, if only because much of what he says about the EU applies to varying degrees to the way business us conducted in many of today’s democracies..
The world is achanging! From 1995 to 2011 global GDP almost doubled & its composition changed dramatically : the ‘developing’ world’s share skyrocketed from 22% to 52% & the developed world’s crashed from 78% to 48%. This is a testimonial to the compounding effect of differential growth rates : during the period 1990-2000 the developing world’s average annual GDP growth rate was 4.2% vs 2.5% for the developed countries, from 2000-2009 5.9% vs. 1.4% & since 2009 6.0% vs. 1.9%. Even more interesting was the distribution in the developed world : the US went from 24% to 20%, i.e. down 17%, Japan from 18% to 6%, down 66%, Germany, until recently the world’s largest exporter, from 9% to 4%, down 56%, France from 5% to 3%, down 40%, the UK from 4% to 3%, down 25%, Italy from 4% to 2%, down 50% & the rest of the developed world from 14% to 10%, down 29% – while one shouldn’t put too much stock on the percentage change numbers since the basic percentages are rounded off, the picture that emerges is clear : Japan & much of the “core” Eurozone fared worse, & the US, the UK & the rest of the non-core Eurozone OECD countries far better than the average of the developed world.
In the mid-70’s the US debt ceiling started rising, slowly at first but faster as the years went by until it reached US$5.95TR (73.5% of GDP) in 1997. Then it just sat there for four years until in 2001(59.0%) it rocketed upwards & almost doubled (to roughly US$11TR, i.e. by 77%) by early 2009. It now stands at US$16.4TR (106%) & will, almost inevitably, have to be raised further early in the New Year (to, say, at least US$17.5 TR).
While Americans often badmouth the high level of ‘socialist’ Europe’s contingent liabilities from its entitlement programs, & the horrible fiscal shape of the PIIGS countries, research by Morgan Stanley suggests they are in no position to talk. For when the PV of their governments’ contingent liabilities is added to the various countries’ stated national debt, the US heads the “league table” at about 325% of GDP, slightly higher than Greece & Ireland, that are also in the 300+% range, with the Netherlands, the UK, Portugal & Belgium in the 200+%-, and Spain, France, Germany & Italy in the 150%-200%-, range (of course the PV of their contingent liabilities would drop considerably if interest rates were higher – an “Unintended Consequence” of the Greenspan/Bernanke monetary policies). Using central bank data, on a total (i.e. all governments, corporations & households) basis the US is in an only marginally better position. There the UK heads the pack (due to the size of its financial sector?) : since 1990 its total debt number has more than doubled to over 500% & Japan is not far behind with a number also North of 500%. And the US (at 300+%) is worse off than Canada & Germany albeit better off than France, Italy & Spain. The Economist recently calculated what budget surplus, net of interest payments (while currently only about 7% of the budget, that number will inexorably grow in the future from the interplay of continued deficits, higher interest rates & slow budget growth) the US would have to run from 2013 onward to cut its Debt/GDP ratio to 50% by 2050; its answer was 10%, much higher than that for the PIIGS nations.
The US tax burden is shared among income groups in the following manner : the top 1%, 10% & 50% pay 24.2%, 55.3% & 89.2% thereof, & the bottom 50% & 10% only 10.8% & 0.5% respectively. While these numbers are proof for right wing Republicans that the top 10% pay “more than their fair share”, many other Americans may feel, unbeknownst to them in Marxist fashion, that this looks sort of like”From each according to his ability, and to each according to his need.”
The Commerce Department recently revised its Second Quarter annual GDP growth rate from 1.5% to 1.7%, down from 2.0% in the First. While this has been decried as “tepid” growth, & although it certainly isn’t enough to permit a rapid reduction in unemployment, people tend to overlook the fact that the US economy’s long-term trend growth rate likely has declined from yesteryear’s 3% or so to something more like 2½%, or less, today.
22% of the US corn crop is now rated Good or Excellent, vs 52% one year ago, & for soybeans 30%, vs 56% this time last year. Corn crop estimates are now starting to come in < 11BN bushels while it is hoped soybeans will benefit from the recent rains in parts of the drought-stricken area.
Politico is a widely-followed, Arlington, Va-based online politically-, & public policy-, oriented newspaper, started by a couple of Washington Post alums & currently run by a one-time assistant of former Pres. Reagan, that has been accused of having a Republican bias (which would not be surprising given its parentage & current CEO). It recently postulated that insiders in both campaigns agree on three things : Romney’s greatest weakness is that he will never be loved or even liked & Obama’s that many people feel he’s let them down on the economy, that, as the campaign closes, the Obama campaign’s organizing strength may start to outweigh Romney’s better funded advertising campaign and that, although none will say so in public, going into the conventions the states said to be “in play”, especially, contrary to what the polls have been suggesting, Ohio, were favouring Obama – there has been growing talk lately of a replay of 2000, when the Dems won the public vote but the GOP the Electoral College.
Last week CNOOC formally requested Ottawa’s approval of its $15.1BN takeover of Calgary-based Nexen. So Prime Minister Harper will have to ‘fish or cut bait’ by mid-November at the latest. On a non-sentimental basis, the answer is easy : Nexen has long been anything but a stellar performer among Calgary-based oil companies & the lion’s share of its operations take place outside Canada. And Harper recently showed his hand when he said he intended to ‘broadly interpret’ the “net benefit” criterion. But he should extract a price and, given the Chinese concern about ” face”, do that as much as possible ‘sub rosa’, & then he should, post haste, put in place a more substantive policy with respect to foreign takeovers than the current ’Mickey Mouse’ “net benefit” criterion” (as he should have done long ago, if not after the MacDonald-Detweiler episode, then certainly after the Potash Canada one). And, in negotiating he should have two priorities : greater reciprocity & an acknowledgment by what then will be a new regime in Beijng for the next decade that it will make state-owned Sinopec recognize Canadian sovereignty in the case of the two Chinese workers killed in the Alberta oil sands while employed by a Sinopec sub (a case headed for the Supreme Court, because Sinopec refuses to do so) & an iron-clad guarantee that it will allow no more Sinopec-like incidents in the future.
The province of Québec had an election this week. The ruling Liberal party lost (in part due to a high voter turnout), with the Premier even losing his own long-held seat, & the separatist PQ won. This prompted one US analyst to comment “With the separation once again back on the fire, it shall be impossible … if not entirely impossible … to be positive of things Canadian once again.” And he went on to say that ‘we may not yet be a seller, but certainly won’t be a buyer &, as they saying goes, it takes a lot of buying to drive a market up, but not much lack of buying to put it down’. But the new Premier got neither a majority, a robust popular mandate or a ringing endorsement : her party got 31.9% of the popular vote & 54 seats (up 3) in the 125-seat legislature, the Liberals 31.2% & 50 seats (down 16) & the CAQ 27.0% & 19 seats, up 12 (with support from both “soft” separatists & from federalists who couldn’t stomach the Premier any more the latter is neither fish nor fowl and, like Western Canadian NDP governments, it is right of centre on fiscal-, & left of centre on social-, issues; it was very much a place for disenchanted supporters of both ‘traditional’ parties to ‘park’ their vote until the next go-around, possibly as early as next spring).
Since 2002 Beijing’s tax revenues from all sources have increased 500+%, slightly faster than its GDP while its defense budget has increased 600+%. This would presumably justify the part of the official Republican platform that “condemns China’s pursuit of advanced military capabilities without any apparent need”, but for one simple fact : the US, an island nation that has never been invaded but spends a far greater share of its GDP on its military than China, a nation with long land borders that has experienced more than its fair share of foreign invasions (although in this age of increasingly hitech warfare this may be less of a consideration than it used to be). .
Public- & private sector investors’ efforts to diversify out of the US dollar & benefit from the commodities’ boom, have led to foreign holdings of Australian government bonds increasing more than fourfold, from < A$50BN in 2008 to A$200+BN (& from 60% to 80% of the total outstanding). And while its debt-to-GDP ratio is still modest (although it has almost doubled in six years, from 16% to 30%), Spain & Ireland too had relatively modest Debt-to-GDP ratios before the roof caved in on them, in part because their banks, like Australia’s banks, were overly dependent on foreign funding. The risk in this for the health of the Australian economy & banking system lies in the fact that much of this funding is of the “hot money” variety that can be ‘here today, & gone tomorrow”.
GLEANINGS II – 476
Thursday September 6th, 2012
THE US ECONOMY MAY SURPRISE US ALL (FT, Roger Altman)
He may be optimistic with respect to the second, third & fifth of the above, & possibly on the first, but is dead right on the fourth (Altman is a Lehman alum & a one-time Deputy Secretary of the Treasury – during Clinton’s first term -, acted as an advisor to John Kerry & Hilary Clinton in their unsuccessful runs for the Presidency, founded & is Chairman of Evercore Partners, and is a member of the secretive Bilderberg Group’s Steering Committee (which has been chaired for the past decade by Henry de Castries, CEO of the global insurance group AXA who was a class mate of former French Prime Minister Dominique de Villepin, current French President François Hollande & the 2008 Socialist Presidential candidate & former longtime Hollande paramour, Segolène Royal). Founded in 1954 with Prince Bernhard of the Netherlands as a sponsor, it meets annually behind closed doors with 150 or so by invitation-only guests from North America & Europe in attendance (including people from emerging economy countries would “make it too much like a mini-United Nations”) with a bias to senior decision makers in government & multi-nationals, to discuss issues of global interest. It has been criticized for being “heavily biased towards politics of moderate conservatism & big business”.
THE ‘DEAD MONEY’ MYTHS (G&M, Philip Cross)
Carney’s argument was that this ‘dead money’ was unnecessary because he & his fellow central bankers would ensure there would be no financial crisis; obviously corporations are (rightly?) “from Missouri” on this. And only the central bankers themselves can fix that.
THE REALITY OF TRYING TO SHRINK GOVERNMENT (WP, Larry Summers)
The points he makes are all very valid, but, as a public sector technocrat, he is deliberately “talking his own book” & belittling Americans’ traditional ability to meet challenges when the chips are down, when he implies they must resign themselves to the inevitable.
IT’S MITT’S WORLD (NYT, Thomas L. Friedman)
Wonder what Wal-Mart & tens of millions of Wal-Mart shoppers might have to say about higher tariffs on goods from China. He is underestimating the ability, & willingness, of the Fed to buy the UST securities nobody else wants. And Hilary Clinton was quite right a few years several years ago when she warned her then fellow Senators not to “pick a fight with your banker.”
FOR SALE : THE AMERICAN DREAM (al-Jazeera)
This is certainly not the CW. On the other hand, al-Jazeera is not known for unfounded rabble-rousing. If there is any truth to this, the candidates will also aware of it but likely want to let sleeping dogs lie until after the election. And if so, the banks will decide whether or not the issue stays in the closet & they may, rightly or wrongly, believe it might influence the election outcome in a way beneficial to them, i.e. favour Romney (although this could backfire on them).
PM SHOULD FACE POLYGRAPH TEST ON IRAN LEAKS (JP, Herb Keinon)
It is well-known the IDF High Command sees more downsides than upsides in an attack on Iran.
OBAMA DOESN’T UNDERSTAND THE MIDDLE EAST (JP, Lahav Larkov)
Rivlin is a member of Prime Minister Netanyahu’s Likud Party & not of one of the far-right ones. And he was behind the eight ball on this issue because the Dems had already reversed the position on the issue, purportedly at President Obama’s insistence.
AUSTERITY MEASURES ADD TO SPAIN’S WOES (Reuters, Nigel Davies)
The EU policies have been like medieval medical quackery : first they let the sickness rage & then they make matters worse by the economic equivalent of blood-letting.
GREEK BANK DEPOSITS CLIMB (Bloomberg)
While half an egg is better than an empty shell, this doesn’t alter the fact that during the entire four months’ period they are still own 7%. One swallow does not a summer make!
FRANCE SUBSIDIZES YOUTH HIRES (AP)
Like Mitterand in 1981, Hollande came in to office believing Socialists could make water run uphill. And, like him, he will learn they don’t & that his delusion had longer term consequences.
INDIAN TYCOON SEEKS 40-FOLD PAYOUT IN AFRICAN GAS DEAL
(Bloomberg, Ketaki Gokhale)
Dhoot needs the money to reinstate suspended mobile phone licenses in India & claims that, if no buyer is found, he will, & can, borrow the US$1.4 BN needed to pay for his share of the cost of bringing the field into production. While the headline seems to suggest something nefarious, in all fairness Dhoot in 2008 bought a ‘pig in a poke’ & won the lottery.
SOUTH AFRICAN MARIKAN MINERS CHARGED WITH MURDER (BBC)
After an even greater public outcry, the charges were suspended until after the inquiry reports its findings (in February?), & the 50 miners with known home addresses released from jail, with the other 100 or so expected to be released soon. This is only one of many ongoing protests all over South Africa by miners who feel they aren’t getting their fair share of the higher commodity prices but whose wage demands are called “extravagant” by the (often, but not exclusively, foreign) mine owners. The Marikana event, or rather the government’s lackadaisical response thereto, plays into the hands of the former populist leader of the NAC’s radical Youth Wing, Julius Malema, who was expelled from the party earlier this year for insubordination. For he has been siding with the miners to the point of inciting them to violence, and is expected to challenge President’s Zuma’s leadership at the ANC National Congress next December, just as Zuma in 2007 challenged Mbeki’s (a union representing mostly white skilled workers has since laid charges in court against Malema for incitement to public violence & intimidation, claiming that “he is encouraging violence for his own gain … (and) is an opportunist” (who uses unrest to try & revive his own political ends).