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Reflections on world economy and more by Nick Rost van Tonningen of Canada

September 8th, 2011

Rep. Darrell Issa (R.-Cal.) operates a website featuring a ‘Doomsday Clock’ tracking, by the second, the time left until he says , the US Post Office, that employs half a million people, will default at 0001 hrs on October 1st – same old story : too much staff, too little business.    

The Bank of Canada has been studying a concept called “price-level targeting” to replace a fixed inflation number (for many years 2%) as the driver of monetary policy, and is supposed to decide by year end whether to do so. This is not a new concept; in fact it has been discussed in academia for close to two decades.  Whereas inflation-targeting is 100% forward looking, i.e. it focuses on next year’s inflation rate, “price-level targeting” is said to be both forward- & rearward-looking, adjusting the inflation target for tomorrow in light of yesterday’s inflationary experience. So, for example, if the target rate is 2% & last year’s inflationary experience was 1%, the central bank would targeting 3% inflation for next year, and vice versa.  

In the words of Deputy Governor Jean Boivin at a conference “Under price level targeting, the monetary authority would commit to reverse deviations of the price level from its target path”, explaining that the Bank expected companies would feel less compelled to change prices if they knew any recent shocks in price levels would be reversed over the next year. But then he went on to say that, if expectations didn’t adjust favourably, price level targeting’s edge over inflation targeting would be diminished (in other words, the whole house of cards would collapse if companies didn’t behave in a way the Bank of Canada thinks they will, & ought to). Apart from a possible academic naivete as to how corporations behave, there seem to be at least two problems with this idea : like “core inflation”, it is intellectually appealing to academics but irrelevant to Joe & Mabel Average Canadian Taxpayer, & one must wonder if it might suffer the same fate as John Keynes’ counter-cyclical budgeting idea, that decisions makers adopted, & acted on, with a vengeance when it suited them & studiously ignored when it didn’t. 

One of the handful of people running for the Alberta Conservative Party leadership & therefore, as things stand, the Premier’s office, has been campaigning, among others, on “open government”. But it has now come to light that, as Minister he found a way around the Freedom of Information Act by informing his officials that in his emails to them he would use his full first names but not his last name so that any request under the Act using his last name would come up dry. And, presumably again to enhance “openness in government, he had all documents related to his term in office as a Minister shredded before resigning to run for Party Leader.  

Rather interestingly, the government of Kazakhstan, recently gave its central bank ‘first dibs’ on all newly-mined gold produced in the country. While the amount is not terribly significant, this means nevertheless that 3% of global newly mined gold will be diverted into the central bank’s vault and, for all intents & purposes, never make it onto the supply side of the market. 

The Swiss Central Bank’s move last weekend to try & cap the SF/Euro exchange rate at 1.20 was heroic; for it risks soon finding itself in a position like China, with FX reserves coming out of its ears. Few people fully appreciate the magnitude of daily trading volume in global FX markets, an amount close to one-third US GDP, 50+% greater than China’s official reserves & 5x Switzerland’s foreign currency reserves (not including its gold holdings). Rather interestingly, Switzerland now holds only 25% of its foreign currency reserves in US$, & 55% in Euros, whereas in 1997, before the Euro came into being, they had been 80% in US dollars. Also interesting is that Switzerland, with the world’s 38th largest economy & 95th largest population has the world’s seventh largest official gold holdings, 1,040 tons, after the US - 8,134 tons, Germany - 3,401 tons, the IMF - 2,847 tons, Italy - 2,452 tons, & France - 2,435 tons, and ahead of Russia - 775 tons, Japan 765 tons & the Netherlands 615 tons (one ton of gold at US$1,750/ounce is worth US$50MM, more or less), and that Switzerland was a chronic seller of gold from 1999 to 2006, running its holdings down 60%, from 2,590 tons to 1,040 tons, where they remain today (the above numbers also may explain why some European countries are agitating for future bailouts to involve gold as security : they must be eying Italy’s holdings.    

When I first saw the headline of the op-ed piece by Vice President Joe Biden entitled China’s Rise isn’t our Demise, the first thing that came to mind was the old saying that ‘the more vehemently something is denied, and the higher in authority the person is doing the denying, the more likely it is about to happen’ And when I started reading it, I got as far as his observation a few lines into the article that “We’re engaging with the Chinese military to understand and shape their thinking” (bolding mine), at which point I put it aside : anyone who thinks he can “shape” Chinese thinking, is geopolitically-challenged!   


No. 426 - September 8th,  2011 


(FT,  Ambrose Evans Pritchard)  

  • Germany’s Finance Minister, Wolfgang Schauble, told German Radio on September 8th there will be no more money for Greece until it “actually does” what it had agreed to do, saying “I understand ... there is resistance among the Greek population to austerity measures. But in the end it is up to Greece whether it can fulfill the conditions necessary for membership of the common currency. We offer no discounts.” And his Dutch colleague said his country “will not participate” in further payments to Greece until it gets the go-ahead from the EU-IMF troika (whose team left Athens abruptly last week after talks broke down).

This came after the ECB abandoned its push for higher interest rates & slashed its EU economic growth forecasts for the next two years, warning that the situation is “extraordinarily demanding” & that the “downside risks” have intensified. 


  • ECB President, Jean-Claude Trichet, said on September 5th there is an “immediate need” to implement the bailout plans agreed on by the Eurozone leaders in July. But  growing opposition across Europe makes that unlikely. Finnish lawmakers have demanded their country get gold collateral for (its share of) any further loans to Greece. And while, also on the 5th, Slovakia’s Finance Ministry called on Parliament to speedily pass the necessary legislation since waiting would be “counterproductive in the current circumstances”, it’s Speaker has declared he will do everything in his power to postpone a vote on the issue until at least the end of the year (& as Speaker he has significant control over Parliament’s legislative agenda), saying “It’s not possible to solve a debt crisis by creating new debt”. Furthermore that, while Slovakia had been forced to agree to strict adherence on everything from deficits to inflation rates before being admitted to the Eurozone in 2009, “what is being allowed for Greece and Italy ... makes me angry ... We have to pay because of this double standard. It’s a real injustice” (what specifically really galls many in Slovakia is that they, the second-poorest Eurozone country, are being asked to bail out others that are considerably better-off).

This is part of a growing anger among politicians & their constituents in the fiscally more prudent  Eurozone nations that they are now being asked to subsidize citizens of other Eurozone countries that have long been spending beyond their means (this is nothing new : see Aesops’ fable of the Ant & the Grashopper and/or Proverbs 6 : 6). 


  • Waning growth, the sixth poor state election showing for German Chancellor Merkel’s Christian-Democratic party, plunging bank share prices, growing evidence that Greece won’t be able to meet the pre-conditions for its next dollop of bailout money, Italy’s half-hearted austerity package  & a warning by IMF Managing Director Christine Lagarde the global economy is on the brink of a fresh crisis, heighten fears a new recession cannot be avoided. European bank shares got hit as the Italian debt crisis got worse & Deutsche Bank’s CEO, Joseph Ackerman, opined “It’s stating the obvious that many European banks would not survive having to revalue sovereign debt on the banking book at market levels”.
  • Strategists & economists are increasingly saying government cutbacks - the central feature of all plans to put debt-choked economies back on track - are hurting growth just as it is needed to boost employment & restore consumer & business confidence.

Roosevelt once said, “The only thing we have to fear is fear itself”. And such headline-seeking reporting helps to feed fear & kill growth in the Atlantic community. The real reason why nothing is happening lies in the abject failure of political leadership on both sides of the Ocean to instil confidence that they know what they are doing & that they are thinking of the common good, rather than their own wellbeing; to paraphrase part of President Obama’s speech last Sunday, ‘It’s time politicians quit worrying about their jobs, and start worrying about those of the common people’. What the occasion calls is some common sense, bottom up-driven solutions with a short payback periods, not more recycling of the same flawed, hackneyed, top down-driven policies that have failed before. Thus it is hard to see how the cut in the payroll taxes is going to put any money in the pockets of the 14MM Americans who don’t have a job (& who increasingly are running out of unemployment benefits) while simultaneously undermining the future viability of the SS system. 


  • If copper is worth its mettle in predicting the future, as has long been the common wisdom, the global economy may not be as sick as it seems. For, after its price dipped briefly below US$4.00 subsequent to it hitting an all-time peak of US$4.60 six months ago, in August it averaged US$4.20 (although it was back down to US$4.06 on September 5th).  

Another possible cause may be that its strength is a function of China (& other emerging economy governments) are hoarding copper, the industrial commodity most  critical to development, to get rid of unwanted US dollars and/or as a hedge against inflation.    

A NEW TAKE ... ON INFLATION (G&M, Kevin Carmichael) 



  • For 20+ years a 2% inflation rate was the monetary policy target for developed country central bankers who remembered what it had taken to choke off inflation in the early 80's. But there were always some who disagreed with that number; thus in February 2010 Olivier Blanchard, the IMF’s Chief Economist, published a paper suggesting 4% would be more appropriate & that the financial crisis had shown the central banks’ (in)tolerance to price increases was overdone. 
  • While then he “got hammered” for his efforts, now he is getting company. Two weeks ago, Charles Evans, the Chicago Fed President, a ‘dove’ on, & a 2011 voting member of, the FOMC, told CNBC he favoured letting inflation rise to over 3% to help lower unemployment. Peter Diamond, the MIT labour economist & co-winner of the 2010 Nobel Prize in Economics (whom President Obama kept nominating for the Federal Reserve Board until Diamond took himself out of the running this spring) said in a recent interview : ”Sometimes it would be good to have a higher inflation rate ... If the Fed would cause 4-per-cent inflation, I would vote for it immediately”, with  Roger Myerson of the University of Chicago & a co-winner of the Nobel Prize in Economics in 2007 sharing his view of the need for a ‘more flexible’ approach. And Kenneth  Rogoff, another former IMF Chief Economist now at Harvard who in 2009 co-authored This Time is Different : Eight Centuries of Financial Folly, showing that historically economic growth potential had waned once the National Debt-to-GDP ratio exceeded 90% (the US’ current level, which is bound to increase further over the next few years), last month reiterated “a sustained burst of moderate inflation” might be the most practical way to ease the debt burdens weighing down the economies of the US & Europe.
  • And it is already happening in the real world : the Bank of England has kept its benchmark rate at 0.5% even though inflation is more than double its target, & the Fed last month committed itself to leaving  its key rate near zero until mid-2013, even as price pressures are mounting.

So ‘the fix is in’, & the message clear : Americans’ expectation that inflation a year hence will be North of 5% may well turn out to be closer to the truth than the ‘talking heads’ contend (although it may well take more than a year to fully get there) &, in a worst case scenario, the US could be in for a bout of ‘stagflation’ (high inflation & minimal growth). This may turn out to be another example of the phenomenon of long standing in the world of finance whereby each generation makes the same mistakes as the one preceding it since the current advisers & decision makers were professionally too wet behind there ears during the last occurrence of similar events and/or believe themselves to be smarter, & to have better tools & a better understanding, than their predecessors. But, as the American Enterprise Institute’s Vincent Reinhart (the husband of Carmen Reinhart who co-authored the above book with Rogoff), who himself had a long career at the Fed, that included being Secretary of the FOMC & Director of its Monetary Affairs Division, puts it “If inflation gets higher than you want it, it can be costly to bring it down” (i.e. the lesson of the early 80's)    


(Reuters, Mark Felsenthal) 

  • The ‘Beige Book’ prepared for the forthcoming FOMC meeting, an unusual two-day affair  on September 20th-21st, says that consumer spending had increased in most of its Districts, but ex-cars had been flat, & that manufacturing conditions, while mixed across the country, had slowed in many of them, and that growth was “modest” or “slight” in five Districts & “subdued” or “very slow” in the other seven. More generally speaking, it called the economy sluggish, factory activity unsteady, retail sales poor in most areas, & the housing market flat, but said “economic activity continued to expand at a modest pace”. Separately a report made public on September 7th showed demand for US home loans down for the third week running despite mortgage rates at, or near, record lows.

On the other hand, the ISM August Index of Non-Manufacturing Activity, which accounts for 80% of the economy, was 53.3 (vs. 52.7 in July, & the 51.0 forecast), slower than before but still solidly in positive territory.             


(BBCNews, Wyre Davies) 

  • Last Saturday, September 3rd, 300,000 protesters (i.e. 5% of Israel’s population, 10% of that of the Tel Aviv metropolitan area, & 75% of the city itself) took to the streets of Tel Aviv. Those in the tent city lining Tel Aviv’s Rothschild Boulevard have many different motives incl. help for handicapped children, the high cost of rents & education, and the high cost of living generally. One lawyer, whose husband works in Israel’s hi-tech sector, who gave up her job to look after her learning-challenged son with little help from the state, said she had never imagined herself involved in a street protest, but was “desperate”.
  • As in the Arab Spring elsewhere, the genie may now be out of the bottle in the ‘Israeli Summer’. For in Israel too a tiny majority of families & individuals control a hugely disproportionate amount of the wealth (which in its case represents a sharp departure from its quasi-socialist founding principles of social responsibility & cohesiveness. The government by its own admission was caught off guard and, while it is not yet threatened, Prime Minister Netanyahu belatedly promised to revisit his government’s priorities (but it remains to be seen if it can divert some of the bloated defence budget towards the social policy ‘envelope’).

Israel’s defense budget at last report was US$16BN, 15% of its government’s total budget & 6.3% of its GDP. The latter is the fifth highest in the world, after Eritrea (20.9%), Saudi Arabia (11.2%), Oman (9.7%) & the UAE (7.3%), and much higher than the US’ 4.7% & China’s 2.2%. But what the article doesn’t mention is that over the years successive governments have ‘bought’ the support of the religious right-wing fringe parties by funding their educational activities & the wishes of growing numbers of young Orthodox Jews who want to spend their life studying the Torah instead of working a living, thereby paing their way & making a more direct contribution to the common good. 


  • Senior US officials are meeting Israeli & Palestinian leaders this week, & lobbying more & more other countries, to try & head off the Palestinian plan to seek full UN membership during the UN General Assembly session starting September 19th. Washington fears such a move will further complicate its flagging efforts to bring the two back to the negotiating table from which the Palestinians walked away last year upon the expiry of Israel’s 10-months moratorium on settlement building in the occupied West Bank.
  • Last May Obama proposed the two sides resume talks based on the pre-1967 border (which Netanyahu rejected as unworkable, prompting Abbas to carry on with Plan B, UN recognition). State Department spokesperson Victoria Nuland said the US had made it clear (to the cash-strapped PA) that some US lawmakers were growing agitated over its UN plan, but had stopped short of saying US aid might be at risk : “We don’t threaten. But we are making sure ... they are hearing the voices in the Congress, which are getting increasingly loud on this subject” [a senior Republican lawmaker last week introduced a bill to cut off all US funding for any UN organization embracing an upgrade to the current Palestinian status (that of an observer without voting rights), which would be an extremely serious matter since it funds 22% of its core budget & 25% of its peacekeeping one].

At last report there was ample support for the Palestinian plan in the General Assembly. This would force the US to veto it in the Security Council (which the President likely would be just as happy not to have to do & which could have serious negative consequences for the US in many countries, and not just Arab and/or Muslim ones). Similarly, the Republican bill would likely have little problem getting through the House, since it is consistent with the Republican Party’s traditional isolationist bent & negative perception of the UN, and the Tea Party’s slash & burn approach to spending, but might have trouble passing through the Senate &, if it did, would be vetoed by this  President.   


  • Live on the Portuguese Radiotelevisao Portuguesa network on September 7th, President Ahmadinejad said Syrian President Bashar al-Assad should back away from his violent crackdown on protesters & enter into talks with them, saying : “A military solution is never the right solution ... Problems have to be dealt with through dialogue.”       

This is his principal ally talking (also see Luke 6:42 “You hypocrite, first take the log out of your own eye, and then you will see clearly to take out the speck that is in your brother’s eye”).  


  • The world’s leading oil exporter’s water challenges are growing as energy-intensive desalination erodes oil revenues (the Saline Water Conversion Corp. produces 3.36MM cubic metres of desalinated water per day, i.e. half the country’s daily use, at a cost of  US$2.2BN), & the Minister of Water & Power said in May that over US$131BN of new investment will be required in the next decade in the water & power sector. Per capita water usage in is 950 cubic metre, almost double the global per capita average (but only 60% of that in North America), & growing at a 7+% annual rate. Agriculture accounts for up to 90% of total water usage (vs. a global average of 69%), almost all of it from underground aquifers, some of which have been so drawn down that the water in them has become too salty to drink (most of the water pumped underground to maintain pressure in crude oil reservoirs today is sea water).
  • In 2008 Riyadh abandoned its ill-conceived plan to become self-sufficient in wheat only to have farmers start growing even more water-intensive fodder & palms. Agriculture is a politically sensitive issue since, while only a small portion of the Kingdom is suitable for cultivation, it is one of its primary hopes for development & new employment. Lack of water also poses an obstacle to its hopes to diversify its economy by developing its mining sector; for it too is a water-intensive industry - as one official of the state-owned Saudi Arabian Mining Co. puts it “the gold is there, but we don’t have water ... Water is as precious as gold.” (A truth the entire world is soon to become acquainted with).


The solution, of course, is simple : jack up the price of water to reflect its true economic value. But this will require even more adept political handing of the issue here than elsewhere in the world.  


(Forbes, Heather Struck) 

  • Last Sunday’s state election in Mecklenburg-Pomerania was the sixth this year in which Chancellor Merkel’s sort-of pro bail-out Christian-Democratic party lost votes. While support for its coalition partner in the state government, the Socialist Democratic Party, rose 5.5% to 35.7%, its support slid 5.7% to 23.1% (its worst showing in 21 years). And while the pro-capitalist Free Democrat Party slipped from 9.7% to 2.7% (thereby losing all its seats in the state parliament; for a party must have 5% voter support to get any seats), the Green Party gained 3.4% to 8.4%, thereby giving it a parliamentary presence in all German states.

Ms Merkel has alienated voters by giving the impression she has no clue on how to improve the slowing economy or how to prevent taxpayers’s money from being wasted on bailouts that don’t work. This is not good news for her ahead of next year’s federal election, nor for the Euro


(Reuters, John Foley) 

  • Nigeria’s central bank announced on September 6th it will invest 10% of its US$33BN in FX reserves in Yuan assets, and the Philippines & Hongkong have been talking about doing the same. While central banks, unlike ordinary investors, are allowed to invest in China’s interbank market on a case-by-case basis, as Malaysia was allowed to in 2010, China’s system of capital controls make it hard to see how holders of Yuan reserves could liquidate them quickly in a crisis (although Beijing likely would facilitate that).
  • Nigeria has ulterior motives. China is vitally interested in its oil & has signed a US$23BN agreement to build it three oil refineries. And foreign investment fell to a five-year low in 2010 due its hostile business climate, endemic corruption & the stalled oil sector reforms.
  • But it would be a mistake to read too much into this since, for the dollar to lose its status, would require a thousand more such cuts. But a trend is emerging.

It’s a good deal for Nigeria : it will earn a higher rate of interest & will benefit from any future appreciation of the Yuan. And Beijing, while it is doing its utmost to cut its own immense hoard of US dollar assets, likely expects that taking US$10BN-worth off Nigeria’s hands, an insignificant addition to its holdings of US$-denominated assets, will buy it invaluable goodwill in the most populous state in Sub-Sahara Africa.

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