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!
GLEANINGS VERSION
II
No. 426 - September
8th, 2011
GERMANY PUSHES
GREECE TO THE BRINK IN DANGEROUS BRINKMANSHIP
(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.
OPPOSITION TO EUROZONE
BAILOUT SPREADS (Dow Jones, Gordon Fairclough)
- 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).
NEW SIGNS OF EUROPEAN
SLUMP HITS MARKETS (G&M, Eric Reguly)
- 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.
STRONG COPPER PRICES
DEFY FEARS OF SLOWDOWN (G&M, Brenda Bouw)
- 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)
FED REPORT PAINTSPICTURE
OF SOFTENING ECONOMY
(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.
ISRAEL
‘SOCIAL PROTESTS’ RATTLE NETANYAHU GOVERNMENT
(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.
DIPLOMATIC CRISIS
BREWING OVER PALESTINIAN UN BID (Reuters)
- 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.
TALK WITH PROTESTERS,
IRAN URGES ASSAD (AP)
- 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”).
WATER DEMAND EATS
INTO SAUDI OIL WEALTH (Reuters, Reem Shamseddine)
- 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.
GERMAN ELECTIONS
MAY SET THE STAGE FOR POLITICAL SHIFT
(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.
NIGERIA’S MOVE
INTO YUAN ASSETS A BAD SIGN FOR GREENBACK
(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.
