By Chan Akya
Reality is often stranger than fiction. It is only much more so in financial matters. Who would have thought at the beginning of this year that a few deadbeats driving trucks in Arizona would spark the greatest financial crisis in recent history, aided and abetted by the very regulators who are (over) paid to stop such things from every happening? And that their actions would have consequences enough to dethrone many a Wall Street head and their lackeys, as well as threaten a multitude of regulators and in future, governments too? That the attempts at keeping these truckers in good financial health would unleash inflation across Asia and in turn threaten further economic calamities in the near future?
Given the unprecedented nature of recent events, it is necessary to invent a new word, which captures the emotive, urgent and contagious nature of the new disease at the heart of the global financial system, and for those reasons, I hereby coin the term "financialitis" to mean the unexpected and wide-ranging blow up of a country's financial system. The US, Germany and the UK have seen mild forms of Financialitis this year and yet are nowhere near a recovery point.
In an article earlier this year (Hobson's choice Asia Times Online, March 10, 2007), well before the onset of financialitis, I wrote about the inter-dependency between the US financial system and Asian savers that leads the latter to bail out the former and in turn heap on themselves the adverse results of financial losses as well as inflation. Over a period of time, the value of the assets being purchased by Asian central and commercial banks turned rather suspect indeed, leading to billions in investment losses ( The robbery of the century Asia Times Online, July 14, 2007). Interestingly, this led to a Hong Kong-based bank being downgraded earlier this month as rating agencies discovered material exposure to US assets in a lender that really shouldn't have had any based on its geography and expertise. That is just the one bank that got caught. I have no doubt that many others will slowly reveal the extent of their investment losses in months to come.
That opinion on the prevailing equilibrium, ie that Asians would quietly absorb losses and play for longer-term benefits accorded by keeping the American consumer above water, was soon shaken by the onset of jitters between major global banks, which refused to lend to each other (In gold we trust Asia Times Online, September 8, 2007). This proved the undoing of asset valuations, in turn pushing bank-borrowing costs through the roof, and in one extreme case sparking a bank run in the UK (Rocking the land of Poppins Asia Times Online, September 22, 2007). Despite a number of attempts to quell the costs of borrowing, such as ill-timed interest rate cuts by the US and UK central banks as well as freeing up of "discount-rate" borrowings over the counter, the crisis persists till today, with year-end financing still proving quite dear for many banks across the world.
SUVs, SIVs and SWFs
The effects of an over-consuming America on the world are best typified by the country's reliance on an outmoded transport system that places excessive emphasis on individuality at the expense of optimality. The emblematic vehicle is of course the SUV, which is neither sports nor utility and is perhaps responsible in large part for America's addiction to oil. Then again, the nature of US polity is such that its not the addict but rather the supplier who faces the stick ('Cracks' in credit Asia Times Online, August 25, 2007) and much the same has unfolded in the world of finance over the course of this year.
US officials, led by the Treasury secretary, have been busy trying to push through cosmetic improvements to financial assets, as shown by the Super-SIV program that has come to represent everything that is wrong with the US. SIVs, or special investment vehicles, are usually owned by banks or other "respectable" financial institutions and designed to gather funds at costs similar to that of banks from the wholesale market, mainly from vehicles called money-market funds. These funds in turn get deposits from the general public, who invest on the assumption that returns are slightly higher than what is available on bank deposits.
The SIVs in turn invest in illiquid assets that represent the toxic waste thrown out by US banks but are packaged to look more respectable than they actually are by the sleight of credit ratings provided by the very people who help design the investments (this is the point where readers should be saying "nice job if you can get it"). The reasons for this circuitous way of investing in dangerous assets is to create enough margins for all parties involved while providing legal protection to malignant financial engineers. US political observers term this "plausible deniability" and what it really means is that once a few sacrificial lambs have been offered up (Off with their heads Asia Times Online, November 6, 2007), ways will be found to resume business as usual.
Anyway, all these plans depended on the SIVs continuing to fund themselves in the market, which unfortunately was not to happen once summer doldrums hit the US and European financial systems. Soon enough, banks had to absorb the SIVs, which is the same as buying back exactly all the dangerous bombs you thought had been removed from your bunker last week, with the added problem that someone had probably removed a few fuses on the devices along the way out and back - as in because of the problems of the SIVs, it was no longer a secret that some of the assets held by these vehicles were toxic and probably worth a lot less than what they were bought for, and now that the sponsoring banks were consolidating the SIVs into their own balance sheets, they had to absorb such losses directly.
With that eventuality, major US and European banks had to announce revised loss expectations, and to make matters worse, also come clean on a whole host of other assets that were not even in trouble during the summer, such as corporate loans issued for purchasing other companies (so-called LBO facilities). All told, there are some estimated US$100 billion in new losses for just the major banks from various lines of activity, which at the conservative price earnings multiple of 10 times, would mean that a trillion or so dollars has been wiped out of the stock market valuations. Just the top three US commercial banks have lost over $150 billion in market value this year, while the top three investment banks have done better due mainly to the performance of one firm (Goldman Sachs), without which they are also down about $100 billion. In Europe, we are probably looking at over a quarter of a trillion US dollars in market capitalization wiped out, and that is before any financial crisis has hit the Europeans.
The UK has seen two consecutive months of property price declines already, and other European economies such as Spain and France are witnessing similar drops in their domestic property since the third quarter of this year. It seems only a matter of time before the Europeans catch the American disease of falling property prices, which will likely push their financial system into a deep crisis next year.
This is where the sovereign wealth funds (SWFs) have come into the picture. With share prices falling across the global financial system, the US and other governments have been "requesting" some degree of assistance from these funds, aimed at shoring up confidence in their financial system. This is what I predicted in Cracks in credit (see above), but it has happened even sooner than I expected - which of course means that the crisis in the US and European banking system is worse than what we have seen so far. This is of course delicious irony, as these very SWFs were targeted for stern lectures just in October this year (Dear dinosaurs Asia Times Online, October 20, 2007).
The SWFs will fail in their efforts to shore up investor confidence in US and European banks. Their share prices will decline further as more problems are discovered and global investors realize that the basic business model of many of these banks has been irreparably broken this year. Many will not survive in their current forms, necessitating costly (ie shareholder-dilutive) mergers. Then again, SWFs are usually in countries with poor or zero accountability to the general population - such as Singapore, China and the Middle East. Therefore, they will get away unscathed from such losses.
Asian impact
By and large, none of the above should matter to the average Asian borrower or saver. I mean, why exactly does a manufacturer in Fujian province need to care about the problems confronting bankrupt homeowners in California? In the old days, that logic would indeed hold but unfortunately it does not any more.
It is indeed true that any manufacturer or service provider in Asia can get enough funding from his local banks, but only so far as some conditions such as final maturity and currency are met. This is a problem for many manufacturers who attempt to create a natural hedge between their revenues and liabilities. Thus, an exporter who receives payment in US dollars would hate to see his liabilities denominated in Chinese yuan, as they keep increasing in value even as his income from selling widgets in the US declines.
To get a US dollar-denominated loan though, he must pay up similar to what a similar manufacturer in another country like Germany or Mexico or even the US would need to pay. This comparative cost is now enhanced by the credit crisis in the US and European financial systems.
The second path of impact for Asian borrowers is that as their local banks lose billions on the US financial system, their natural tendency to tighten up standards would likely cause hardships to the average borrower, either through lower credit limits or higher cost of borrowings. Asian banks, unlike their US and European counterparts, tend not to distribute their risk, which means the impact of localized losses can be quite high, in turn triggering a tightening in credit conditions.
Thirdly, it is now inevitable that Asian countries will loosen or abandon their pegs to the US dollar over the course of 2008. Their battle with inflation lost comprehensively, (Inflation - China's lost battle Asia Times Online, December 15, 2007) governments around the region have no choice but to get more aggressive on their monetary conditions, which cannot be accomplished when their currencies remain pegged to the US dollar.
When this happens, it is highly possible that even profitable exporters of goods and services in Asia will have to confront a crisis of confidence from lenders, who will fret about their ability to survive when the local currency gains sharply against the US dollar. This process of creative destruction is central to re-jigging Asian economies away from production towards consumption, but it will be painful nevertheless.
Welcome then, to the New Year, when the broken parts of the world will remain broken, while those that haven't yet succumbed will slowly get sucked into the maelstrom. Asians will come out of the New Year, ie approach 2009, stronger and more important than ever before, but there will be many a week and month in the interim when it certainly won't feel anything like it.
Saturday, December 22, 2007
China wages a cool war
By Olivia Chung
HONG KONG - The Chinese government, which spent 2007 trying to prevent the country's economy overheating, caught investors on the hop this week with the sixth interest rate rise of the year, adding to indications that it will intensify its efforts to cool the economy in the coming 12 months.
With effect from December 21, the one-year deposit rate was raised by 27 basis points to 4.14% , while the one-year lending rate was raised by 18 basis points to a nine-year high of 7.47%. These and other interest rate adjustments came as a surprise as previous rate increases were revealed on Fridays after the stock markets had closed or during weekends.
In another move to encourage depositors to keep their money in banks and not invest them in stock and the property markets, the People's Bank of China, the central bank, lowered the rate paid on money held in current accounts to 0.72% from 0.81%. A PBoC spokesperson said that the move was meant to encourage depositors to put their money in fixed deposits instead of current accounts, so that more money will stay in banks longer, instead of flowing into the asset markets.
The government's action followed the PBoC announcement on December 8 of the 10th and the largest increase in the reserve requirement ratio for banks this year, possibly presaging more aggressive macro-economic controls in the coming year.
With the latest 1% rise, the reserve requirement ratio for commercial banks reached a record high of 14.5%. That is, for every 100 yuan deposit they receive, they now have to put aside 14.5 yuan (US$13.50)in reserve, limiting the scope for lending. The central bank has raised the ratio nine times this year, the latest being a more aggressive rise than the 0.5 percentage point increases on previous occasions.
Jun Ma, chief economist of Greater China Head of China/Hong Kong Macro Strategy at Deutsche Bank Hong Kong, said in a research note after the announcement of the latest rate changes: "We think the PBoC will raise rates by one or two more times in the first half of next year, and will be on hold in the second half of next year, as inflation is likely to remain at or above 5% in the coming months but will likely fall towards to 4% or below in the second half of next year.
"The cumulative rate increases in 2008 [by up to 54 basis points for the one-year deposit rate] is likely to be much more modest than in 2007 [162bps]," he said.
The December 8 increase in the reserve requirement was in line with the policy principles set this month by the Central Economic Work Conference to tighten monetary policy in 2008 to curb "excessive liquidity" in the economy, or too much money in the market and people's pockets. The conference, convened at the end of each year to set policies for the coming 12 months, was attended by all members of the Politburo Standing Committee and senior party and government officials overseeing the country's economic affairs.
The conference set two main goals for 2008: to prevent the economy from overheating while keeping relatively high-speed growth, and to prevent structural prices rises from becoming entrenched inflation. The meeting pledged to shift its monetary policy from "prudent" - an approach it has followed for the past 10 years - to "tight", while continuing a prudent fiscal policy.
To attain the goals, China will act to curb money supply to curb investment and inflation while increasing government spending to boost domestic consumption, seeking to ensure the economy will not have a hard landing.
Therefore, while the central bank tightens the belt, the National Development and Reform Commission (NDRC), the country's top economic planning body, pledged that the government will increase its overall investment budget and continue to adjust investment structures.
NRDC head Ma Kai said after the Central Economic Work Conference that, following the "continuous and rapid" increase in tax and other revenues in recent years, China will mainly use its fiscal spending to improve people's livelihood and boost economic and social development in weak and backward areas. He didn't disclose specific figures for 2008, noting that the financial ministry is working at the budget.
China's fiscal revenue may expand by 27.23% to more than five trillion yuan this year, compared with 3.93 trillion yuan in 2006, according to Yao Jingyuan, chief economist with the National Bureau of Statistics. The forecast is lower than the 31.4% growth rate in the first three quarters, although Jia Kang, director of the Research Institute for Fiscal Science, under the Ministry of Finance, said earlier this month that this year's revenue might reach 5.1 trillion yuan, up 31% over last year.
The budget for government spending for 2007 reached 2.69 trillion yuan, up 14.4% year on year. Although the spending figures are lower than the indicated revenue, the government runs a deficit, which it has said will narrow to 245 billion yuan this year from 295 billion yuan in 2006.
Analysts say Ma Kai's remarks suggest the Chinese government will continue to have a budget deficit even as it increases its spending on social welfare, public health, education and other public services in addition to infrastructure projects.
Chen Jiagui, deputy dean of the Chinese Academy of Social Sciences (CASS), a top mainland think-tank, said at a press conference in early December that the economy was overheated, judging from the increase in fixed-asset investments, exports, consumer goods prices and housing prices as well as share prices.
"The economy has been in the fast lane, so it's not easy to slow down. Soaring food prices are spreading to other sectors. The pressure of serious inflation is accumulating," Chen said.
The latest and higher-than-usual rise in banks' deposit reserve ratio, expected to take about 400 billion yuan out of the banking system, indicates China will introduce more stringent policies to curb excessive bank lending, which starts usually at the beginning of a new year, Guo Tianyong, economist with the Central University of Finance and Economics, said.
China's economy is set to complete its fifth consecutive year of double-digit growth. CASS recently revised up to 11.6% its forecast for this year's gross domestic product expansion, from its forecast of 10.6% made in April. It also raised its prediction of consumer price index (CPI) growth for 2007, to 4.5% from 2.7%. The country's trade surplus would continue to expand next year, to $290 billion from this year's estimated $260 billion, the academy said.
China's trade surplus with the world for the first 11 months of this year hit $238 billion, far surpassing the $177.5 billion recorded for the whole of 2006. Even so, following government measures to adjust the country's trade balance, such as reducing or canceling export rebates for some products, the academy has adjusted earlier trade forecasts to show a pick-up in import growth and slowing rate of export growth.
CASS forecast that import growth rose in 2007 to 22.9% from 20.3% and export growth slowed to 20.5% from 25.1%. Last month, exports rose 22.8% year-on-year to $117.62 billion last month, while imports rose 25.3%, to $91.34 billion, bringing the trade surplus that month to $26.3 billion in November, compared with $27.05 billion in October.
CASS suggested that to further rein in economic growth the central government reduce fixed-asset investments - which it expects to rise 25.6% this year and 24.2% next year. Chen said the government may find it difficult to effectively implement a tight monetary policy as local authorities are reluctant to comply with instructions from the power center.
The swelling trade surplus helped the broadest measure of money supply, M2, including cash and all deposits, to increase 18.45% year on year to 39.98 trillion yuan in November, and the 10th straight month it has breached the central bank's annual target of 16%.
The increasing liquidity has led to fast investment growth and exacerbated price rises. In November, the CPI rose 6.9%. That is more than double the government's inflation target of 3% and is the biggest increase since 1996. Food prices, accounting for one-third of China's CPI, ballooned 18.2% year-on-year in November, compared with 17.6% in October.
Pork prices led the food price gains with a 56% increase, amid a supply shortage triggered by a pig cull following the outbreak of blue-ear disease. Local governments have been increasing subsidies for pig farmers to boost their profit margins and hopefully to lift the amount of pork available in the market. The NDRC forecast that the impact of the measures would be noticeable in the market from the second half of next year.
As they reel from rising cost of commodities including edible oil and vegetables, Chinese have also had to contend with an unstable supply of fuel. A diesel shortage was reported throughout China, from eastern Shanghai to southern Guangdong province and central Henan province to Beijing, with long queues seen at many gas stations. Retail fuel prices were raised by up to 10% from November 1, adding to the operating costs of train and bus companies.
To curb inflation, the central bank has raised the one-year benchmark interest rate paid on bank deposits to encourage savings. It has also cut to 5% the previous 20% tax on interest earned in savings deposits. Even so, growing inflation prompts some economists to argue that there is still room for interest rate increase.
"We think there will likely be 150-200 basis points [bp] additional increases in the reserve requirement ratio, further selling or issuance of special Ministry of Finance bonds and PBoC bills, one to two more rate hikes within the coming three to five months, and a slight acceleration of yuan appreciation to 6 to 7% versus the US dollar next year," Deutsche Bank's Jun Ma said in a research note on December 12.
In his note on the most recent rate changes, Ma wrote: "November CPI inflation reached a new high of 6.9% year-on-year, raising the urgency to contain inflation expectations." Larger increases for three-month and six-month deposit rates "were clearly attempts to discourage depositors from moving funds out of the banking system [due to higher inflation expectations].''
The PBoC changes effective December 21 included increases of 45 basis points in the three-month term deposit rate and a 36 basis point rise in the six-month rate.
"Although the reserve ratio requirement [RRR] was raised by a more aggressive one percentage point recently, it could be partly explained by the specific need to sterilize the liquidity injection from large sums of maturing PBoC bills and forthcoming withdrawal of significant fiscal deposits by year-end. Therefore, the RRR increase would not be a perfect substitute for the rate hike," he wrote.
Yi Xianrong, an economist with CASS, earlier said expected the central bank to increase interest rates soon, since negative real interest rates had created an excessive credit and asset bubble.
Despite the country's measures to rein in the real-estate boom, including tightening credit to developers and increasing supervision on land use, the country's larger cities have all reported rapid growth in housing prices this year. According to the NDRC, average housing price in the mainland's 70 large and medium-sized cities jumped 10.5% year-in-year in November compared with October's 9.5% growth rate and September's 8.9%, fueled by robust investment and demand. Investment in the real-estate market jumped 31.8% in the first 11 months of this year from 2006 to 2.16 trillion yuan, the NDRC reported.
Investment in the real-estate market jumped 31.4% in the first 10 months of this year from 2006 to 1.92 trillion yuan, the National Bureau of Statistics reported. About 1.37 trillion yuan was invested in residential property in the first 10 months, rising 33.7% from the same period last year.
Clement Luk, director and assistant general manager at Centaline (China) Property Consultant's Shanghai office, believed second-tier cities will remain the focus for property investors for 2008, due to higher profit margin.
"Since some second-tier cities such as Tianjin and Chengdu have been well explored, some property developers have shifted their focus to third-tier locations such as Zhuhai, Weizhou and Dongguan," he said. Luk expected more tightening policies, including increases in interest rates and mortgage deposits. The central bank and the China Banking Regulatory Commission on September 27 raised mortgage deposits to 40% for second homes.
Stock volatility
With limited investment channels in China other than the property sector, the stock market has become the most favored target to boost income over the past year, China's stock market, which gained 130% in 2006, continued to surge in the first 10 months of this year, with the Shanghai Composite Index hitting a record high of 6,124 on October 16.
The number of new A-share stock accounts opened daily reached about 350,000 at their peak in April. As the country's stock markets became more volatile in the second half, the number of new accounts opened per day dropped significantly, falling to 122,000 in the last week of November, 37% down on the previous month.
Hu Weitao, chief investment officer of Valuefinder Investment Management Co in Shenzhen, expected the market downturn seen since last October to continue amid possible tightening monetary policy and sagging investment confidence.
The mainland stocks markets have gained about 88% this year, but concerns among mainland authorities that a bubble had developed eased with a contraction of about 20% from record highs set in October.
In a December 11 China Strategy research note, Morgan Stanley economist Jerry Lou ruled out a bubble scenario for Chinese equities, following the investment house's US economist's call for a mild recession in the coming year and seemingly aggressive tightening efforts by the PBoC.
Lou remained bullish on HK-listed offshore China equities in 2008. "We think corporate China can handle the three challenges including: 1) a US recession and export slowdown; 2) domestic asset price deflation; 3) monetary tightening and austerity controls, well through 2008."
The Hong Kong stock market is becoming increasingly Sinicized and more sensitive to central government actions as more funds, legal and illegal, enter Hong Kong from China and a significant number of mainland companies list in the former British territory.
Even as international funds cashed out, Hong Kong's benchmark Hang Seng Index gained 33% this year to mid-December, helped by the central government announcement in late summer that it planned to allow individual mainland investors to purchase Hong Kong equities. When Premier Wen Jiabao later said the "through train" plan might be delayed, the index retreated 5.01% on November 5 to close at 28,942.32, the biggest fall since the September 11, 2001, terrorist attacks.
This increasing sensitivity to mainland events is raising concern among some investors that the Hong Kong market in the coming year will fluctuate like its more volatile mainland counterparts, particularly in relation to government measures.
"It's getting obvious that the Hang Seng Index is driven up by mainland enterprises," said Conita Hung, head of equity markets at Delta Asia Financials. "Given the more volatile nature of the H-share index, the local stock market benchmark is likely to experience large fluctuations," she said. H-share companies are Hong Kong-listed enterprises incorporated in the mainland and with their main businesses based there.
As the central government tries to come to grips with worsening inflation and increasing trade surpluses, some analysts argue that a quicker appreciation of the yuan would help on both counts, while others contend that a sudden rise in the Chinese currency's value compared with the US dollar would not serve the interests of either China or the US.
A fast appreciation of the yuan would mean that "China will lose its competitiveness as the factory of the world, which will cost China its bargaining power with developed countries on product prices", Zhang Tingbin, deputy chief editor of China Business News, said in a recent column. "Faced with the subprime mortgage crisis, the most important task for the US government is to try to maintain the stability of the macro environment and of the exchange rate of dollars."
It is almost certain that the Chinese government will continue its gradualist approach toward yuan revaluation, recognizing that a quick change in the country's exchange rate would hurt the country's export-oriented manufacturing industries, putting the jobs of millions of workers at risk.
However, as PBoC governor Zhou Xiaochuan said recently, China may allow the yuan to float in a more flexible range, suggesting the government may expand the trading range in the new year. The yuan closed at 7.3797 to the US dollar on December 11, on the eve of the third round of the Sino-US Strategic Economic Dialogue in Beijing, a high since its revaluation in the summer of 2005. The currency has strengthened about 5.5% this year.
As the Chinese economy continues to grow strongly, the potential impact of a possible recession in the US looms large. Zhou Zhenhua, director of the Shanghai municipal people's government development research center, said the impact of the US subprime mortgage crisis will gradually be felt through to 2010.
"The impact of the subprime mortgage crisis will spread to the developed countries like those in the European Union and weaken their economies, which eventually will slow down China's export market," he said.
Fan Gang, a member of the central bank's monetary policy committee, however, said losses from a probable decelerating US economy could be offset by gains from European countries and Japan. "Past experience shows that a slowdown of the US economy will lead to a fall in China's exports to the US. In fact, in the past five years, China's exports to the US have been on the decline [in relative terms], so we think the probable US recession will have a smaller impact than we had expected," he said.
Fan also objected to the idea of a quick appreciation in the yuan, saying it would trigger large speculative capital inflows and outflows that would harm China's economic growth and financial stability.
Olivia Chung is a senior Asia times Online reporter.
(Copyright 2007 Asia Times Online Ltd. All rights reserved. )
HONG KONG - The Chinese government, which spent 2007 trying to prevent the country's economy overheating, caught investors on the hop this week with the sixth interest rate rise of the year, adding to indications that it will intensify its efforts to cool the economy in the coming 12 months.
With effect from December 21, the one-year deposit rate was raised by 27 basis points to 4.14% , while the one-year lending rate was raised by 18 basis points to a nine-year high of 7.47%. These and other interest rate adjustments came as a surprise as previous rate increases were revealed on Fridays after the stock markets had closed or during weekends.
In another move to encourage depositors to keep their money in banks and not invest them in stock and the property markets, the People's Bank of China, the central bank, lowered the rate paid on money held in current accounts to 0.72% from 0.81%. A PBoC spokesperson said that the move was meant to encourage depositors to put their money in fixed deposits instead of current accounts, so that more money will stay in banks longer, instead of flowing into the asset markets.
The government's action followed the PBoC announcement on December 8 of the 10th and the largest increase in the reserve requirement ratio for banks this year, possibly presaging more aggressive macro-economic controls in the coming year.
With the latest 1% rise, the reserve requirement ratio for commercial banks reached a record high of 14.5%. That is, for every 100 yuan deposit they receive, they now have to put aside 14.5 yuan (US$13.50)in reserve, limiting the scope for lending. The central bank has raised the ratio nine times this year, the latest being a more aggressive rise than the 0.5 percentage point increases on previous occasions.
Jun Ma, chief economist of Greater China Head of China/Hong Kong Macro Strategy at Deutsche Bank Hong Kong, said in a research note after the announcement of the latest rate changes: "We think the PBoC will raise rates by one or two more times in the first half of next year, and will be on hold in the second half of next year, as inflation is likely to remain at or above 5% in the coming months but will likely fall towards to 4% or below in the second half of next year.
"The cumulative rate increases in 2008 [by up to 54 basis points for the one-year deposit rate] is likely to be much more modest than in 2007 [162bps]," he said.
The December 8 increase in the reserve requirement was in line with the policy principles set this month by the Central Economic Work Conference to tighten monetary policy in 2008 to curb "excessive liquidity" in the economy, or too much money in the market and people's pockets. The conference, convened at the end of each year to set policies for the coming 12 months, was attended by all members of the Politburo Standing Committee and senior party and government officials overseeing the country's economic affairs.
The conference set two main goals for 2008: to prevent the economy from overheating while keeping relatively high-speed growth, and to prevent structural prices rises from becoming entrenched inflation. The meeting pledged to shift its monetary policy from "prudent" - an approach it has followed for the past 10 years - to "tight", while continuing a prudent fiscal policy.
To attain the goals, China will act to curb money supply to curb investment and inflation while increasing government spending to boost domestic consumption, seeking to ensure the economy will not have a hard landing.
Therefore, while the central bank tightens the belt, the National Development and Reform Commission (NDRC), the country's top economic planning body, pledged that the government will increase its overall investment budget and continue to adjust investment structures.
NRDC head Ma Kai said after the Central Economic Work Conference that, following the "continuous and rapid" increase in tax and other revenues in recent years, China will mainly use its fiscal spending to improve people's livelihood and boost economic and social development in weak and backward areas. He didn't disclose specific figures for 2008, noting that the financial ministry is working at the budget.
China's fiscal revenue may expand by 27.23% to more than five trillion yuan this year, compared with 3.93 trillion yuan in 2006, according to Yao Jingyuan, chief economist with the National Bureau of Statistics. The forecast is lower than the 31.4% growth rate in the first three quarters, although Jia Kang, director of the Research Institute for Fiscal Science, under the Ministry of Finance, said earlier this month that this year's revenue might reach 5.1 trillion yuan, up 31% over last year.
The budget for government spending for 2007 reached 2.69 trillion yuan, up 14.4% year on year. Although the spending figures are lower than the indicated revenue, the government runs a deficit, which it has said will narrow to 245 billion yuan this year from 295 billion yuan in 2006.
Analysts say Ma Kai's remarks suggest the Chinese government will continue to have a budget deficit even as it increases its spending on social welfare, public health, education and other public services in addition to infrastructure projects.
Chen Jiagui, deputy dean of the Chinese Academy of Social Sciences (CASS), a top mainland think-tank, said at a press conference in early December that the economy was overheated, judging from the increase in fixed-asset investments, exports, consumer goods prices and housing prices as well as share prices.
"The economy has been in the fast lane, so it's not easy to slow down. Soaring food prices are spreading to other sectors. The pressure of serious inflation is accumulating," Chen said.
The latest and higher-than-usual rise in banks' deposit reserve ratio, expected to take about 400 billion yuan out of the banking system, indicates China will introduce more stringent policies to curb excessive bank lending, which starts usually at the beginning of a new year, Guo Tianyong, economist with the Central University of Finance and Economics, said.
China's economy is set to complete its fifth consecutive year of double-digit growth. CASS recently revised up to 11.6% its forecast for this year's gross domestic product expansion, from its forecast of 10.6% made in April. It also raised its prediction of consumer price index (CPI) growth for 2007, to 4.5% from 2.7%. The country's trade surplus would continue to expand next year, to $290 billion from this year's estimated $260 billion, the academy said.
China's trade surplus with the world for the first 11 months of this year hit $238 billion, far surpassing the $177.5 billion recorded for the whole of 2006. Even so, following government measures to adjust the country's trade balance, such as reducing or canceling export rebates for some products, the academy has adjusted earlier trade forecasts to show a pick-up in import growth and slowing rate of export growth.
CASS forecast that import growth rose in 2007 to 22.9% from 20.3% and export growth slowed to 20.5% from 25.1%. Last month, exports rose 22.8% year-on-year to $117.62 billion last month, while imports rose 25.3%, to $91.34 billion, bringing the trade surplus that month to $26.3 billion in November, compared with $27.05 billion in October.
CASS suggested that to further rein in economic growth the central government reduce fixed-asset investments - which it expects to rise 25.6% this year and 24.2% next year. Chen said the government may find it difficult to effectively implement a tight monetary policy as local authorities are reluctant to comply with instructions from the power center.
The swelling trade surplus helped the broadest measure of money supply, M2, including cash and all deposits, to increase 18.45% year on year to 39.98 trillion yuan in November, and the 10th straight month it has breached the central bank's annual target of 16%.
The increasing liquidity has led to fast investment growth and exacerbated price rises. In November, the CPI rose 6.9%. That is more than double the government's inflation target of 3% and is the biggest increase since 1996. Food prices, accounting for one-third of China's CPI, ballooned 18.2% year-on-year in November, compared with 17.6% in October.
Pork prices led the food price gains with a 56% increase, amid a supply shortage triggered by a pig cull following the outbreak of blue-ear disease. Local governments have been increasing subsidies for pig farmers to boost their profit margins and hopefully to lift the amount of pork available in the market. The NDRC forecast that the impact of the measures would be noticeable in the market from the second half of next year.
As they reel from rising cost of commodities including edible oil and vegetables, Chinese have also had to contend with an unstable supply of fuel. A diesel shortage was reported throughout China, from eastern Shanghai to southern Guangdong province and central Henan province to Beijing, with long queues seen at many gas stations. Retail fuel prices were raised by up to 10% from November 1, adding to the operating costs of train and bus companies.
To curb inflation, the central bank has raised the one-year benchmark interest rate paid on bank deposits to encourage savings. It has also cut to 5% the previous 20% tax on interest earned in savings deposits. Even so, growing inflation prompts some economists to argue that there is still room for interest rate increase.
"We think there will likely be 150-200 basis points [bp] additional increases in the reserve requirement ratio, further selling or issuance of special Ministry of Finance bonds and PBoC bills, one to two more rate hikes within the coming three to five months, and a slight acceleration of yuan appreciation to 6 to 7% versus the US dollar next year," Deutsche Bank's Jun Ma said in a research note on December 12.
In his note on the most recent rate changes, Ma wrote: "November CPI inflation reached a new high of 6.9% year-on-year, raising the urgency to contain inflation expectations." Larger increases for three-month and six-month deposit rates "were clearly attempts to discourage depositors from moving funds out of the banking system [due to higher inflation expectations].''
The PBoC changes effective December 21 included increases of 45 basis points in the three-month term deposit rate and a 36 basis point rise in the six-month rate.
"Although the reserve ratio requirement [RRR] was raised by a more aggressive one percentage point recently, it could be partly explained by the specific need to sterilize the liquidity injection from large sums of maturing PBoC bills and forthcoming withdrawal of significant fiscal deposits by year-end. Therefore, the RRR increase would not be a perfect substitute for the rate hike," he wrote.
Yi Xianrong, an economist with CASS, earlier said expected the central bank to increase interest rates soon, since negative real interest rates had created an excessive credit and asset bubble.
Despite the country's measures to rein in the real-estate boom, including tightening credit to developers and increasing supervision on land use, the country's larger cities have all reported rapid growth in housing prices this year. According to the NDRC, average housing price in the mainland's 70 large and medium-sized cities jumped 10.5% year-in-year in November compared with October's 9.5% growth rate and September's 8.9%, fueled by robust investment and demand. Investment in the real-estate market jumped 31.8% in the first 11 months of this year from 2006 to 2.16 trillion yuan, the NDRC reported.
Investment in the real-estate market jumped 31.4% in the first 10 months of this year from 2006 to 1.92 trillion yuan, the National Bureau of Statistics reported. About 1.37 trillion yuan was invested in residential property in the first 10 months, rising 33.7% from the same period last year.
Clement Luk, director and assistant general manager at Centaline (China) Property Consultant's Shanghai office, believed second-tier cities will remain the focus for property investors for 2008, due to higher profit margin.
"Since some second-tier cities such as Tianjin and Chengdu have been well explored, some property developers have shifted their focus to third-tier locations such as Zhuhai, Weizhou and Dongguan," he said. Luk expected more tightening policies, including increases in interest rates and mortgage deposits. The central bank and the China Banking Regulatory Commission on September 27 raised mortgage deposits to 40% for second homes.
Stock volatility
With limited investment channels in China other than the property sector, the stock market has become the most favored target to boost income over the past year, China's stock market, which gained 130% in 2006, continued to surge in the first 10 months of this year, with the Shanghai Composite Index hitting a record high of 6,124 on October 16.
The number of new A-share stock accounts opened daily reached about 350,000 at their peak in April. As the country's stock markets became more volatile in the second half, the number of new accounts opened per day dropped significantly, falling to 122,000 in the last week of November, 37% down on the previous month.
Hu Weitao, chief investment officer of Valuefinder Investment Management Co in Shenzhen, expected the market downturn seen since last October to continue amid possible tightening monetary policy and sagging investment confidence.
The mainland stocks markets have gained about 88% this year, but concerns among mainland authorities that a bubble had developed eased with a contraction of about 20% from record highs set in October.
In a December 11 China Strategy research note, Morgan Stanley economist Jerry Lou ruled out a bubble scenario for Chinese equities, following the investment house's US economist's call for a mild recession in the coming year and seemingly aggressive tightening efforts by the PBoC.
Lou remained bullish on HK-listed offshore China equities in 2008. "We think corporate China can handle the three challenges including: 1) a US recession and export slowdown; 2) domestic asset price deflation; 3) monetary tightening and austerity controls, well through 2008."
The Hong Kong stock market is becoming increasingly Sinicized and more sensitive to central government actions as more funds, legal and illegal, enter Hong Kong from China and a significant number of mainland companies list in the former British territory.
Even as international funds cashed out, Hong Kong's benchmark Hang Seng Index gained 33% this year to mid-December, helped by the central government announcement in late summer that it planned to allow individual mainland investors to purchase Hong Kong equities. When Premier Wen Jiabao later said the "through train" plan might be delayed, the index retreated 5.01% on November 5 to close at 28,942.32, the biggest fall since the September 11, 2001, terrorist attacks.
This increasing sensitivity to mainland events is raising concern among some investors that the Hong Kong market in the coming year will fluctuate like its more volatile mainland counterparts, particularly in relation to government measures.
"It's getting obvious that the Hang Seng Index is driven up by mainland enterprises," said Conita Hung, head of equity markets at Delta Asia Financials. "Given the more volatile nature of the H-share index, the local stock market benchmark is likely to experience large fluctuations," she said. H-share companies are Hong Kong-listed enterprises incorporated in the mainland and with their main businesses based there.
As the central government tries to come to grips with worsening inflation and increasing trade surpluses, some analysts argue that a quicker appreciation of the yuan would help on both counts, while others contend that a sudden rise in the Chinese currency's value compared with the US dollar would not serve the interests of either China or the US.
A fast appreciation of the yuan would mean that "China will lose its competitiveness as the factory of the world, which will cost China its bargaining power with developed countries on product prices", Zhang Tingbin, deputy chief editor of China Business News, said in a recent column. "Faced with the subprime mortgage crisis, the most important task for the US government is to try to maintain the stability of the macro environment and of the exchange rate of dollars."
It is almost certain that the Chinese government will continue its gradualist approach toward yuan revaluation, recognizing that a quick change in the country's exchange rate would hurt the country's export-oriented manufacturing industries, putting the jobs of millions of workers at risk.
However, as PBoC governor Zhou Xiaochuan said recently, China may allow the yuan to float in a more flexible range, suggesting the government may expand the trading range in the new year. The yuan closed at 7.3797 to the US dollar on December 11, on the eve of the third round of the Sino-US Strategic Economic Dialogue in Beijing, a high since its revaluation in the summer of 2005. The currency has strengthened about 5.5% this year.
As the Chinese economy continues to grow strongly, the potential impact of a possible recession in the US looms large. Zhou Zhenhua, director of the Shanghai municipal people's government development research center, said the impact of the US subprime mortgage crisis will gradually be felt through to 2010.
"The impact of the subprime mortgage crisis will spread to the developed countries like those in the European Union and weaken their economies, which eventually will slow down China's export market," he said.
Fan Gang, a member of the central bank's monetary policy committee, however, said losses from a probable decelerating US economy could be offset by gains from European countries and Japan. "Past experience shows that a slowdown of the US economy will lead to a fall in China's exports to the US. In fact, in the past five years, China's exports to the US have been on the decline [in relative terms], so we think the probable US recession will have a smaller impact than we had expected," he said.
Fan also objected to the idea of a quick appreciation in the yuan, saying it would trigger large speculative capital inflows and outflows that would harm China's economic growth and financial stability.
Olivia Chung is a senior Asia times Online reporter.
(Copyright 2007 Asia Times Online Ltd. All rights reserved. )
SE Asia offers haven from US turmoil
By Shawn W Crispin
BANGKOK - To decouple or not to decouple, that is the question that will loom over Southeast Asian economies and markets throughout 2008.
Global investors are bracing for the possibility of a US recession next year, an increasingly likely scenario as the staggering scale of the subprime housing loan crisis comes into clearer view. Many now wonder whether Southeast Asia's trade-geared economies, after decoupling to varying degrees from their historical reliance on US-destined exports, now represent a countercyclical shelter against the US's anticipated economic storm.
Asian markets, led by China and India but closely followed by many Southeast Asian economies, have this year provided a high-growth, high-return hedge against the financial doom and gloom emanating from the US. China's and India's stock markets were up in dollar terms around 175% and 66% year-on-year through the second week of December, while Indonesia, Singapore and Malaysia climbed 50%, 26% and 38%, according to official national statistics.
Markets across the region dipped slightly this week on revived concerns of a US recession, as investors uprooted capital to cover subprime-related losses in America. But while US capital markets are still major factors in determining Southeast Asia's economic performance, past strong correlations between US demand and regional export growth has weakened significantly in recent years. Demand in China, Europe and, to a lesser degree, the Middle East all buoyed regional exports this year, helping to fill the economic gap left by slackening US demand.
The great regional hope going forward is that China, where only around 30% of total gross domestic product (GDP) is derived from exports, will be able to sustain growth in Southeast Asia's more trade-geared economies. There are varying degrees of regional vulnerability to a US recession. Exports destined for the United States in 2006 accounting for nearly 20% of total GDP in Singapore and Malaysia, 13% in Vietnam, 9% in Thailand, 7% in the Philippines and less than 5% in Indonesia.
At the same time, there is growing statistical evidence that the region has in recent years decoupled significantly from the US's demand cycle and that a slowing US economy could accelerate that process. According to investment bank Credit Suisse, the percentage of Asia's exports (excluding China and Japan) to the US fell over the seven-year period spanning 2000-2006, dipping from 21% in 2000 to 15% in 2006. Regional exports to China, on the other hand, in 2006 accounted for 19% of the region's total, up from 13% in 2000.
The research forecasts that a 10% dip in US imports next year would, measuring first-round impacts, shave 0.9 percentage points off GDP growth in Singapore, 0.8 pp in Malaysia and the Philippines, 0.6 pp in Thailand, 0.2 pp in Indonesia, and 0.1 pp in Vietnam. Most importantly, China would see a mere 0.3 pp decline due to sliding US demand for Asian exports, according to Credit Suisse, which goes on to state that "there is no statistically significant relationship between China's growth rates and those of the US".
To be sure, China's growing consumption of Southeast Asian-produced goods is still partially linked to the US - through China's processing and re-exporting the region's intermediate goods to US markets. Yet some regional economists point to growing evidence that China is consuming rather than re-exporting a growing percentage of its Southeast Asian imports, crucially including electronics and raw materials.
Commodity plays
High global commodity prices and seemingly insatiable Chinese demand for raw materials have buoyed several Southeast Asian economies, including Thailand, Malaysia and Indonesia. In particular, natural resource-rich Indonesia has piggybacked on China's economic boom, offsetting the negative economic impacts of a decade-long de-industrialization process through ramping up energy and commodity exports.
Malaysia has profited from spiking global palm oil exports, Thailand from value-added foods, and Vietnam from food commodities. HSBC regional economist Fredric Neumann ventures that even if the US goes into recession, global commodity prices would not collapse due mainly to Chinese demand. "It represents the first time that the commodity price cycle is not directly linked to US demand," Neumann says. "That's where you've really seen a Southeast Asian decoupling [from the US]."
It wasn't that long ago that Southeast Asia was more widely associated with its 1997-98 financial and banking meltdowns, underperforming economies and poor corporate governance records. After 10 years of varying degrees of de-leveraging and corporate restructuring, the region's economies' robust growth rates and strong current account surpluses now seem comparatively sound vis-a-vis the US and its subprime loan problems.
Most governments in the region now have plenty of fiscal room to implement countercyclical spending policies to help cushion the potential blow of a US slowdown on their domestic economies. Credit Suisse notes that domestic demand is already growing strong in China, with overall GDP expanding 11.9% year-on-year in the second quarter of this year, and is now gathering pace in several Southeast Asian economies.
Rising bank loans, growing cement sales and falling interest rates are, counter-cyclical to the US, revving Indonesia's economy, where GDP is on pace to grow 6% this year and next, according to Credit Suisse. Malaysia, meanwhile, is taking aggressive steps to boost domestic demand, including a recent boost to civil servant salaries and a government decision to allow beginning next year the 5 million contributors to the Government Provident Fund to make early withdrawals for home financing purposes.
Singapore, whose percentage of total exports to the US has fallen by half from 20% in the mid-1990s to 10% today, continues to defy economic logic through its extraordinary domestic demand-led growth, including a go-go construction boom which has helped lift GDP growth to around 8% this year. The island state recently flexed its financial muscle when the state-run Government Investment Corporation paid US$10 billion for a 9% stake in subprime loan hit Swiss investment bank UBS, making it the financial institution's largest shareholder.
Even politically troubled, economically laggard, Thailand is showing new signs of consumer and investor confidence, spurred in part by the myriad populist spending pledges all political parties on the hustings have promised to implement if elected at the December 23 polls - though most economic analysts agree that a full economic recovery in Thailand depends on a smooth transition from military to democratic rule.
Some economists argue that for Southeast Asia's decoupling story to hold, Europe must continue to grow strongly and consume a growing share of the region's non-commodity exports. The appreciation of the euro vis-a-vis the dollar (on a trade-weighted basis at its lowest level since the 1960s) and some regional currencies would nominally support that trend. But Europe's banks are also highly exposed to the US's subprime problems, and should broad investor confidence collapse, all emerging markets, including Southeast Asia's, would likely see massive capital outflows.
Other analysts believe that sustained fast growth in China will save the day. HSBC's Neumann points to potential capital upsides for the region, as China is expected to invest as much as $200 billion of its qualified domestic institutional investor (QDII) outward investment program into Southeast Asia and South Korea. The economic forecast may be gloomy in the US, but for global investors looking for a countercyclical safe haven from a US recession, they could do worse than punting on Southeast Asia's slowly but surely decoupling economies.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be reached at swcrispin@atimes.com
BANGKOK - To decouple or not to decouple, that is the question that will loom over Southeast Asian economies and markets throughout 2008.
Global investors are bracing for the possibility of a US recession next year, an increasingly likely scenario as the staggering scale of the subprime housing loan crisis comes into clearer view. Many now wonder whether Southeast Asia's trade-geared economies, after decoupling to varying degrees from their historical reliance on US-destined exports, now represent a countercyclical shelter against the US's anticipated economic storm.
Asian markets, led by China and India but closely followed by many Southeast Asian economies, have this year provided a high-growth, high-return hedge against the financial doom and gloom emanating from the US. China's and India's stock markets were up in dollar terms around 175% and 66% year-on-year through the second week of December, while Indonesia, Singapore and Malaysia climbed 50%, 26% and 38%, according to official national statistics.
Markets across the region dipped slightly this week on revived concerns of a US recession, as investors uprooted capital to cover subprime-related losses in America. But while US capital markets are still major factors in determining Southeast Asia's economic performance, past strong correlations between US demand and regional export growth has weakened significantly in recent years. Demand in China, Europe and, to a lesser degree, the Middle East all buoyed regional exports this year, helping to fill the economic gap left by slackening US demand.
The great regional hope going forward is that China, where only around 30% of total gross domestic product (GDP) is derived from exports, will be able to sustain growth in Southeast Asia's more trade-geared economies. There are varying degrees of regional vulnerability to a US recession. Exports destined for the United States in 2006 accounting for nearly 20% of total GDP in Singapore and Malaysia, 13% in Vietnam, 9% in Thailand, 7% in the Philippines and less than 5% in Indonesia.
At the same time, there is growing statistical evidence that the region has in recent years decoupled significantly from the US's demand cycle and that a slowing US economy could accelerate that process. According to investment bank Credit Suisse, the percentage of Asia's exports (excluding China and Japan) to the US fell over the seven-year period spanning 2000-2006, dipping from 21% in 2000 to 15% in 2006. Regional exports to China, on the other hand, in 2006 accounted for 19% of the region's total, up from 13% in 2000.
The research forecasts that a 10% dip in US imports next year would, measuring first-round impacts, shave 0.9 percentage points off GDP growth in Singapore, 0.8 pp in Malaysia and the Philippines, 0.6 pp in Thailand, 0.2 pp in Indonesia, and 0.1 pp in Vietnam. Most importantly, China would see a mere 0.3 pp decline due to sliding US demand for Asian exports, according to Credit Suisse, which goes on to state that "there is no statistically significant relationship between China's growth rates and those of the US".
To be sure, China's growing consumption of Southeast Asian-produced goods is still partially linked to the US - through China's processing and re-exporting the region's intermediate goods to US markets. Yet some regional economists point to growing evidence that China is consuming rather than re-exporting a growing percentage of its Southeast Asian imports, crucially including electronics and raw materials.
Commodity plays
High global commodity prices and seemingly insatiable Chinese demand for raw materials have buoyed several Southeast Asian economies, including Thailand, Malaysia and Indonesia. In particular, natural resource-rich Indonesia has piggybacked on China's economic boom, offsetting the negative economic impacts of a decade-long de-industrialization process through ramping up energy and commodity exports.
Malaysia has profited from spiking global palm oil exports, Thailand from value-added foods, and Vietnam from food commodities. HSBC regional economist Fredric Neumann ventures that even if the US goes into recession, global commodity prices would not collapse due mainly to Chinese demand. "It represents the first time that the commodity price cycle is not directly linked to US demand," Neumann says. "That's where you've really seen a Southeast Asian decoupling [from the US]."
It wasn't that long ago that Southeast Asia was more widely associated with its 1997-98 financial and banking meltdowns, underperforming economies and poor corporate governance records. After 10 years of varying degrees of de-leveraging and corporate restructuring, the region's economies' robust growth rates and strong current account surpluses now seem comparatively sound vis-a-vis the US and its subprime loan problems.
Most governments in the region now have plenty of fiscal room to implement countercyclical spending policies to help cushion the potential blow of a US slowdown on their domestic economies. Credit Suisse notes that domestic demand is already growing strong in China, with overall GDP expanding 11.9% year-on-year in the second quarter of this year, and is now gathering pace in several Southeast Asian economies.
Rising bank loans, growing cement sales and falling interest rates are, counter-cyclical to the US, revving Indonesia's economy, where GDP is on pace to grow 6% this year and next, according to Credit Suisse. Malaysia, meanwhile, is taking aggressive steps to boost domestic demand, including a recent boost to civil servant salaries and a government decision to allow beginning next year the 5 million contributors to the Government Provident Fund to make early withdrawals for home financing purposes.
Singapore, whose percentage of total exports to the US has fallen by half from 20% in the mid-1990s to 10% today, continues to defy economic logic through its extraordinary domestic demand-led growth, including a go-go construction boom which has helped lift GDP growth to around 8% this year. The island state recently flexed its financial muscle when the state-run Government Investment Corporation paid US$10 billion for a 9% stake in subprime loan hit Swiss investment bank UBS, making it the financial institution's largest shareholder.
Even politically troubled, economically laggard, Thailand is showing new signs of consumer and investor confidence, spurred in part by the myriad populist spending pledges all political parties on the hustings have promised to implement if elected at the December 23 polls - though most economic analysts agree that a full economic recovery in Thailand depends on a smooth transition from military to democratic rule.
Some economists argue that for Southeast Asia's decoupling story to hold, Europe must continue to grow strongly and consume a growing share of the region's non-commodity exports. The appreciation of the euro vis-a-vis the dollar (on a trade-weighted basis at its lowest level since the 1960s) and some regional currencies would nominally support that trend. But Europe's banks are also highly exposed to the US's subprime problems, and should broad investor confidence collapse, all emerging markets, including Southeast Asia's, would likely see massive capital outflows.
Other analysts believe that sustained fast growth in China will save the day. HSBC's Neumann points to potential capital upsides for the region, as China is expected to invest as much as $200 billion of its qualified domestic institutional investor (QDII) outward investment program into Southeast Asia and South Korea. The economic forecast may be gloomy in the US, but for global investors looking for a countercyclical safe haven from a US recession, they could do worse than punting on Southeast Asia's slowly but surely decoupling economies.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be reached at swcrispin@atimes.com
Monday, December 17, 2007
Inflation - China's lost battle
By Chan Akya
"Inflation is always and everywhere a monetary phenomenon." Milton Friedman's eternal quote must be ringing around the corridors of power in Beijing, after official statistics showed a surge in inflation to 6.9% in November, the highest level recorded recently. Notably, it is not only food but also other items in the basket that are pushing up prices in China, which in the context of industrial overcapacity in most sectors, is saying something. The problem of inflation is more serious than corruption, according to a survey of young Chinese leaders.
While some factors such as a government-mandated increases in diesel prices helped to push up CPI in November, the overall trend of money supply staying out of control is unmistakable. Look at the diesel story for example: the government mandated a price increase in order to reduce demand, a strategy that seems to have failed completely, going by anecdotal evidence from Chinese refiners.
The fault lines go back to another piece of data from China for November, namely surging export surpluses, which hit US$26 billion for the month, another record. A simple way of understanding the picture is to follow the dollars, putting yourself in the shoes of an average manufacturer of widgets in Shenzhen.
Say this seller of widgets makes a profit of $1 per widget sold at $100 each (this is a common manufacturing margin in southern China), total sales of $1 billion for the month would equate to a profit of $10 million. The moment the money comes in, the People's Bank of China, or central bank, would provide him with about 7.5 billion yuan (US$1.017,000,000) or so (assuming some degree of forward selling), of which around 75 million yuan would represent the manufacturer's profits for the month. The other money would be used to repay bank loans, pay for raw materials, electricity, employees and all the good stuff.
Of these, say for example that the money going towards raw materials is around 500 million yuan, and that for wages is 300 million yuan. In any normal economy, the 75 million yuan profit margin (900 million yuan for the year) would represent the new addition of money to the economy, which would contribute to inflation. Not so in China, as we see below.
Typically over a period of a few months, the manufacturer would have set aside a large pool of money, say around 1 billion yuan because as the Chinese currency appreciates against the US dollar, his local income decreases. This 1 billion yuan is used to speculate on assets like shares and property, with the income used to supplement the 75 million yuan that is earned every month for selling widgets. Used on shares listed in Shenzhen this year, the 1 billion yuan would have returned more than five times as much, which is obviously an exceedingly large sum that adds to the country's surging demand for assets. Keep that as say 5 billion yuan in the bank for the year, over and above the 900 million yuan from manufacturing profits for the year.
Remember the 300 million yuan for wages: that money now is also going towards property and shares, as employees find their monthly wages are not enough to pay for the rising costs of groceries, fuel and rents, as well as all the other good stuff in life, like a Ferrari or two. That money fully deployed in stocks this year would have made 1.5 billion yuan, but lets not get greedy and call it 500 million yuan in profits for the employee crowd.
Then there is the matter of the 500 million yuan for raw materials, which is where the government thinks it exerts the greatest price controls. Well, that may be so for certain products but in many cases southern Chinese manufacturers claim that their suppliers squeeze them on prices by levying additional charges, as they themselves attempt to combat inflation. In any event, the suppliers have to use existing liquidity to invest in shares and property, which this year would have garnered them good returns of say 1 billion yuan.
As I wrote in a recent article (What' s Chinese for Ponzi? Asia Times Online, November 10, 2007), the sheer weight of money chasing the stock and property markets, combined with economic growth engendered by rising export surpluses, has allowed companies to prosper with new stock listings. Money made in the stock markets comes back to the consumption of pork (now every day rather than for Chinese New Year as some middle-aged Chinese remember it), cars (try driving in Shanghai) and other consumables. All this supports a new economy of goods made in China for domestic consumption only, albeit at steadily rising prices.
Most important to all this is the circular nature of the story - as consumption of various goods increase, the need to earn more through risky investments also increases. This produces an asset bubble that inflates with every rise in food and other prices across China.
The role of banks
Salient in all of the above is of course the small matter of the PBoC not knowing any of the characters involved above - the manufacturer, his employees or his suppliers. All that work gets done by the commercial banks, which interact with these folks. These banks obviously need to make more money than what government yields in China offer, so they are happy to make available various forms of lending to the public, including the lucrative area of unsecured lending such as credit cards. Anecdotal evidence shows that some investors are paying for their stock market accounts with credit cards, in an eerie throwback to what we saw during the dot-com bubble in the US at the end of the '90s.
Additionally, banks are also happy to extend lending to both the supplier and the manufacturer from above, as they build new offices for their expanding business empires - it is another matter that building new headquarters is one of the easiest ways of entering the commercial property market.
As the central bank attempts to mop up excess liquidity, it sells bonds to the banks, but takes the cash so received and makes it available for overnight liquidity to the same banks. In the context of the amounts described above, increased reserve requirements would only mop up around 50 million to 100 million yuan of the 7.5 billion yuan (received when the goods are sold in the United States) that is circulated, leaving all the rest available for banks to lend. More importantly, the profits made on stock markets - which we counted as 6.5 billion yuan above, would count as excess money in circulation, which hasn't been drained.
This is why the PBoC circulars on reserves are greeted with some degree of derision by investors in China, as the amounts involved pale in significance to what helps to bump up liquidity every month.
At the risk of oversimplification, the heart of the matter is the original $1 billion in widget exports. If China were to revalue its currency, it is quite likely that sales would decline, perhaps to $750 million, with concurrent declines in wages. It is to avoid any decline in wages that the Chinese government attempts to keep the yuan steady. However, in so doing, it has unleashed a massive asset price bubble that feeds domestic inflation.
Any revaluation would increase the purchasing power of today's rich Chinese. They would follow the Japanese in becoming the world's most visible tourists and also increase consumption of goods produced locally. The twin forces of consumption and tourism would probably more than offset the economic decline caused by lower exports.
Failing this recognition of reality, Chinese authorities can turn to the Buddha, as I recommended in a recent piece ( Ben, beef and the Buddha Asia Times Online, October 13, 2007). More time spent on teaching the people of China to reflect on a life without conspicuous consumption may help authorities fight the inflation battle more equitably. Somehow though I don't quite expect the strategy to be successful.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
"Inflation is always and everywhere a monetary phenomenon." Milton Friedman's eternal quote must be ringing around the corridors of power in Beijing, after official statistics showed a surge in inflation to 6.9% in November, the highest level recorded recently. Notably, it is not only food but also other items in the basket that are pushing up prices in China, which in the context of industrial overcapacity in most sectors, is saying something. The problem of inflation is more serious than corruption, according to a survey of young Chinese leaders.
While some factors such as a government-mandated increases in diesel prices helped to push up CPI in November, the overall trend of money supply staying out of control is unmistakable. Look at the diesel story for example: the government mandated a price increase in order to reduce demand, a strategy that seems to have failed completely, going by anecdotal evidence from Chinese refiners.
The fault lines go back to another piece of data from China for November, namely surging export surpluses, which hit US$26 billion for the month, another record. A simple way of understanding the picture is to follow the dollars, putting yourself in the shoes of an average manufacturer of widgets in Shenzhen.
Say this seller of widgets makes a profit of $1 per widget sold at $100 each (this is a common manufacturing margin in southern China), total sales of $1 billion for the month would equate to a profit of $10 million. The moment the money comes in, the People's Bank of China, or central bank, would provide him with about 7.5 billion yuan (US$1.017,000,000) or so (assuming some degree of forward selling), of which around 75 million yuan would represent the manufacturer's profits for the month. The other money would be used to repay bank loans, pay for raw materials, electricity, employees and all the good stuff.
Of these, say for example that the money going towards raw materials is around 500 million yuan, and that for wages is 300 million yuan. In any normal economy, the 75 million yuan profit margin (900 million yuan for the year) would represent the new addition of money to the economy, which would contribute to inflation. Not so in China, as we see below.
Typically over a period of a few months, the manufacturer would have set aside a large pool of money, say around 1 billion yuan because as the Chinese currency appreciates against the US dollar, his local income decreases. This 1 billion yuan is used to speculate on assets like shares and property, with the income used to supplement the 75 million yuan that is earned every month for selling widgets. Used on shares listed in Shenzhen this year, the 1 billion yuan would have returned more than five times as much, which is obviously an exceedingly large sum that adds to the country's surging demand for assets. Keep that as say 5 billion yuan in the bank for the year, over and above the 900 million yuan from manufacturing profits for the year.
Remember the 300 million yuan for wages: that money now is also going towards property and shares, as employees find their monthly wages are not enough to pay for the rising costs of groceries, fuel and rents, as well as all the other good stuff in life, like a Ferrari or two. That money fully deployed in stocks this year would have made 1.5 billion yuan, but lets not get greedy and call it 500 million yuan in profits for the employee crowd.
Then there is the matter of the 500 million yuan for raw materials, which is where the government thinks it exerts the greatest price controls. Well, that may be so for certain products but in many cases southern Chinese manufacturers claim that their suppliers squeeze them on prices by levying additional charges, as they themselves attempt to combat inflation. In any event, the suppliers have to use existing liquidity to invest in shares and property, which this year would have garnered them good returns of say 1 billion yuan.
As I wrote in a recent article (What' s Chinese for Ponzi? Asia Times Online, November 10, 2007), the sheer weight of money chasing the stock and property markets, combined with economic growth engendered by rising export surpluses, has allowed companies to prosper with new stock listings. Money made in the stock markets comes back to the consumption of pork (now every day rather than for Chinese New Year as some middle-aged Chinese remember it), cars (try driving in Shanghai) and other consumables. All this supports a new economy of goods made in China for domestic consumption only, albeit at steadily rising prices.
Most important to all this is the circular nature of the story - as consumption of various goods increase, the need to earn more through risky investments also increases. This produces an asset bubble that inflates with every rise in food and other prices across China.
The role of banks
Salient in all of the above is of course the small matter of the PBoC not knowing any of the characters involved above - the manufacturer, his employees or his suppliers. All that work gets done by the commercial banks, which interact with these folks. These banks obviously need to make more money than what government yields in China offer, so they are happy to make available various forms of lending to the public, including the lucrative area of unsecured lending such as credit cards. Anecdotal evidence shows that some investors are paying for their stock market accounts with credit cards, in an eerie throwback to what we saw during the dot-com bubble in the US at the end of the '90s.
Additionally, banks are also happy to extend lending to both the supplier and the manufacturer from above, as they build new offices for their expanding business empires - it is another matter that building new headquarters is one of the easiest ways of entering the commercial property market.
As the central bank attempts to mop up excess liquidity, it sells bonds to the banks, but takes the cash so received and makes it available for overnight liquidity to the same banks. In the context of the amounts described above, increased reserve requirements would only mop up around 50 million to 100 million yuan of the 7.5 billion yuan (received when the goods are sold in the United States) that is circulated, leaving all the rest available for banks to lend. More importantly, the profits made on stock markets - which we counted as 6.5 billion yuan above, would count as excess money in circulation, which hasn't been drained.
This is why the PBoC circulars on reserves are greeted with some degree of derision by investors in China, as the amounts involved pale in significance to what helps to bump up liquidity every month.
At the risk of oversimplification, the heart of the matter is the original $1 billion in widget exports. If China were to revalue its currency, it is quite likely that sales would decline, perhaps to $750 million, with concurrent declines in wages. It is to avoid any decline in wages that the Chinese government attempts to keep the yuan steady. However, in so doing, it has unleashed a massive asset price bubble that feeds domestic inflation.
Any revaluation would increase the purchasing power of today's rich Chinese. They would follow the Japanese in becoming the world's most visible tourists and also increase consumption of goods produced locally. The twin forces of consumption and tourism would probably more than offset the economic decline caused by lower exports.
Failing this recognition of reality, Chinese authorities can turn to the Buddha, as I recommended in a recent piece ( Ben, beef and the Buddha Asia Times Online, October 13, 2007). More time spent on teaching the people of China to reflect on a life without conspicuous consumption may help authorities fight the inflation battle more equitably. Somehow though I don't quite expect the strategy to be successful.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
Thursday, December 13, 2007
Bernanke's market honeymoon is over
By Julian Delasantellis
You hear them all the time next door. The loud, angry and obscene language. The sound of flying plates, pots and pans striking the cabinets and the floor. Doors slamming. Somebody getting in the car and speeding off. You know what that means - it’s the unmistakable sound of those volatile neighbors bickering again.
Tuesday saw another 300-point decline in the US Dow Jones Industrial Average. You know what that means. It’s the US Federal Reserve and the US financial markets bickering again.
For the fourth time since August 17, the US Federal Reserve Board has sliced short-term interest rates, part of the continuing effort to counter the negative economic effects of the subprime mortgage crisis. Tuesday’s move involved twin 25 basis point cuts in both the Federal Funds Target Rate, to 4.25%, and the Federal Funds Discount Rate, to 4.75%.
Yes, it seems like the honeymoon sure is over for the Fed and the markets. The markets were thrilled with the first easing move in this cycle, the 50-point cut in the discount rate on August 17. That sparked a 230-point rise in the Dow for that day, a 550-point rise for the following month. The surprise twin 50-point cuts in both the target and discount rates on September 18 were even more appreciated, driving the markets to all-time highs over 14,000 in early October.
The markets and the Fed were getting along swimmingly around then. The relationship was very clear and well defined; the markets, as interpreted by the implied cut probabilities of the Chicago Board of Trade’s Federal Funds futures contract, asked for cuts in interest rates, and the Fed gave them. The equity markets rose, Federal Reserve chairman Bernanke started to receive a bit of the economic savant accolade that former chairman Alan Greenspan had so long reveled in, and everybody seemed happy.
Then, as so frequently happens, one partner in the relationship changed. The Fed, as people used to say in the pre-feminist era, decided that it wanted to wear the pants in the family. In the days prior to the next Fed meeting on October 31, the Financial Times reported that some Fed board members were chafing under the apron strings of the financial markets that they wanted to be able to decide on the appropriate levels of short-term interest rates independent of the market’s dictates. (See my November 2 Asia Times Online article, Bernanke: Don't take me for granted, boys.')
The Fed did deliver another dual interest rate cut on October 31, but by then the markets were not looking at what the Fed was giving it but what it said it was going to give in the future. The markets read the statement that followed the meeting, and interpreted it to mean that they could expect few, if any, more interest rate cuts in the immediate future.
The markets also didn’t like Bernanke’s speech to the Cato Institute in Washington on November 14, in which he elaborated on a new framework for deciding whether to cut interest rates that seemed to severely limit the role of the markets in Fed decisionmaking. (See my November 17 article, Playing 'chicken' with the markets.) That, along with various early November statements from Fed officials proclaiming that, at least for now, the rate cuts were over, meant that the Fed had lots of explaining to do to the markets when it came home in mid-November.
''I’ll show him who’s boss,'' the markets fumed. From November 1 through 26, the Dow Jones Industrial Average lost 1,300 points, about 9% of its value; it was the worst month in the markets since 2002. By late November, the Fed was once again cooing and wooing the markets with the very sweet romantic affirmations that it knew they loved to hear - that it was willing to start the interest rate easing cycle once again. From late November to this Monday the Dow threw in an impressive, 1,100 point, 8.6% rally, to 13,800.
But, as Tuesday’s selloff proved, the markets wanted something more than what they found when the wrapping was removed from the Fed’s latest present. Evidently, they had wanted twin 50-point cuts, or at least a 25-point cut in the Federal Funds Target rate along with a 50-point cut in the discount rate. There was also probably not a lot of appreciation for the line in the Fed’s post-meeting statement that ''elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.''
In other words, I hope you like your present, Mrs Dow Jones. Don’t expect much more anytime soon.
The next move is up to the markets. If the selloff continues and accelerates back to the mid-August/late November lows in the mid 12,000s or lower, then the Fed will certainly cut again, maybe even before its next regularly scheduled meeting on January 31. However, if the selloff does not continue, or if the rally resumes, then Bernanke’s big gamble may just pay off. He may be able to accomplish something Alan Greenspan never could - that is, retake the policy initiative (grab back the pants) from the markets.
Whatever happens next, the Tuesday selloff proves just how fragile and illusory the surface normalcy that seems to have returned to the markets really is. Before the selloff, the Dow was only 470 points, one really good day, from the all-time highs of early October. Now, it seems that the entire market rebound from the summer panic lows was built on the presupposition that the Fed would cut, cut and cut again, with the speed, and in the quantity, that the market desires, and not one basis point less.
Tonight, I know I will sleep fitfully. I will awaken repeatedly through the night, rolling over and checking Bloomberg TV to see whether the Wall Street selloff has spread to the Asian and European equity markets. For those of us in the financial markets neighborhood, the fighting between the Fed and the markets actually is keeping us up all night.
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
You hear them all the time next door. The loud, angry and obscene language. The sound of flying plates, pots and pans striking the cabinets and the floor. Doors slamming. Somebody getting in the car and speeding off. You know what that means - it’s the unmistakable sound of those volatile neighbors bickering again.
Tuesday saw another 300-point decline in the US Dow Jones Industrial Average. You know what that means. It’s the US Federal Reserve and the US financial markets bickering again.
For the fourth time since August 17, the US Federal Reserve Board has sliced short-term interest rates, part of the continuing effort to counter the negative economic effects of the subprime mortgage crisis. Tuesday’s move involved twin 25 basis point cuts in both the Federal Funds Target Rate, to 4.25%, and the Federal Funds Discount Rate, to 4.75%.
Yes, it seems like the honeymoon sure is over for the Fed and the markets. The markets were thrilled with the first easing move in this cycle, the 50-point cut in the discount rate on August 17. That sparked a 230-point rise in the Dow for that day, a 550-point rise for the following month. The surprise twin 50-point cuts in both the target and discount rates on September 18 were even more appreciated, driving the markets to all-time highs over 14,000 in early October.
The markets and the Fed were getting along swimmingly around then. The relationship was very clear and well defined; the markets, as interpreted by the implied cut probabilities of the Chicago Board of Trade’s Federal Funds futures contract, asked for cuts in interest rates, and the Fed gave them. The equity markets rose, Federal Reserve chairman Bernanke started to receive a bit of the economic savant accolade that former chairman Alan Greenspan had so long reveled in, and everybody seemed happy.
Then, as so frequently happens, one partner in the relationship changed. The Fed, as people used to say in the pre-feminist era, decided that it wanted to wear the pants in the family. In the days prior to the next Fed meeting on October 31, the Financial Times reported that some Fed board members were chafing under the apron strings of the financial markets that they wanted to be able to decide on the appropriate levels of short-term interest rates independent of the market’s dictates. (See my November 2 Asia Times Online article, Bernanke: Don't take me for granted, boys.')
The Fed did deliver another dual interest rate cut on October 31, but by then the markets were not looking at what the Fed was giving it but what it said it was going to give in the future. The markets read the statement that followed the meeting, and interpreted it to mean that they could expect few, if any, more interest rate cuts in the immediate future.
The markets also didn’t like Bernanke’s speech to the Cato Institute in Washington on November 14, in which he elaborated on a new framework for deciding whether to cut interest rates that seemed to severely limit the role of the markets in Fed decisionmaking. (See my November 17 article, Playing 'chicken' with the markets.) That, along with various early November statements from Fed officials proclaiming that, at least for now, the rate cuts were over, meant that the Fed had lots of explaining to do to the markets when it came home in mid-November.
''I’ll show him who’s boss,'' the markets fumed. From November 1 through 26, the Dow Jones Industrial Average lost 1,300 points, about 9% of its value; it was the worst month in the markets since 2002. By late November, the Fed was once again cooing and wooing the markets with the very sweet romantic affirmations that it knew they loved to hear - that it was willing to start the interest rate easing cycle once again. From late November to this Monday the Dow threw in an impressive, 1,100 point, 8.6% rally, to 13,800.
But, as Tuesday’s selloff proved, the markets wanted something more than what they found when the wrapping was removed from the Fed’s latest present. Evidently, they had wanted twin 50-point cuts, or at least a 25-point cut in the Federal Funds Target rate along with a 50-point cut in the discount rate. There was also probably not a lot of appreciation for the line in the Fed’s post-meeting statement that ''elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.''
In other words, I hope you like your present, Mrs Dow Jones. Don’t expect much more anytime soon.
The next move is up to the markets. If the selloff continues and accelerates back to the mid-August/late November lows in the mid 12,000s or lower, then the Fed will certainly cut again, maybe even before its next regularly scheduled meeting on January 31. However, if the selloff does not continue, or if the rally resumes, then Bernanke’s big gamble may just pay off. He may be able to accomplish something Alan Greenspan never could - that is, retake the policy initiative (grab back the pants) from the markets.
Whatever happens next, the Tuesday selloff proves just how fragile and illusory the surface normalcy that seems to have returned to the markets really is. Before the selloff, the Dow was only 470 points, one really good day, from the all-time highs of early October. Now, it seems that the entire market rebound from the summer panic lows was built on the presupposition that the Fed would cut, cut and cut again, with the speed, and in the quantity, that the market desires, and not one basis point less.
Tonight, I know I will sleep fitfully. I will awaken repeatedly through the night, rolling over and checking Bloomberg TV to see whether the Wall Street selloff has spread to the Asian and European equity markets. For those of us in the financial markets neighborhood, the fighting between the Fed and the markets actually is keeping us up all night.
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
Wednesday, December 12, 2007
Bernanke's bad-choice moment
By Martin Hutchinson
This column has since 2000 been calling for the Federal Reserve to institute a policy of much tighter money. In a sense, events since August have justified it; old-fashioned consumer price inflation hasn't reappeared, but the beginnings of a gigantic global asset price deflation are appearing. At this point, sudden adoption of the Bear's Lair monetary policy, which would involve a Federal Funds rate in the 8-10% range, would cause a collapse in confidence and very likely a repeat of the United States' unhappy economic performance in 1931-33. So, given that the Fed is now starting from a place it should never have got to, what is the least painful trajectory from here?
There are two contrary tendencies to be fought. On the one hand, the housing market continues to melt down - house prices nationwide dropped 1.5% in the past month alone. That suggests that lower interest rates are needed to increase the affordability of housing for the marginal buyers and slow the decline in prices. On the other hand, the stock markets have continued strong, and commodity and energy prices have shot up further, producing the specter of US$100 oil. That suggests that lower interest rates may actually be making the economic problem worse, transferring all our wealth to unpleasant oil producing regimes.
The ongoing collapse in the subprime mortgage market indicates that the central rationale for interest rate policy has changed since August. If house prices continue to decline as they have in the last year - and there seems currently no reason whatever that they should not continue doing so - then more and more borrowers will find themselves with a larger mortgage liability than the value of their house asset. In itself this does not matter; if employment continues robust and the non-housing sectors of the economy continue to expand, then most of those borrowers will be able to continue making their mortgage payments. Eventually house prices will recover, or their outstanding mortgage balance will decline, and they will once more find themselves in a net asset position.
This would indicate that easy money was appropriate, but there are three problems with this. First, the decline in net worth among homeowners is likely to produce a negative "wealth effect" which will cut consumption and push the US economy into recession. Second, in reducing short term interest rates, the Fed may be "pushing on a string" and find itself unable to reduce the mortgage rates it is attempting to affect. Third, it risks reigniting inflation and it makes further rises in commodity and energy prices almost certain.
The opposite policy, of raising interest rates, would clearly now be damaging if carried out to extremes. Liquidity is disappearing from the US money market as structured investment vehicles are wound down and taken back onto bank balance sheets. The reduction of $400 billion in asset backed commercial paper outstanding since August is only one example of this. A sharp rise in interest rates runs the risk of a deflationary spiral of collapsing money supply such as occurred in the US in 1931-33, as bank after bank failed.
Fed chairman Ben Bernanke and the Federal Open Market Committee on December 11 seem likely to pursue their recent policy of a mild easing of money, lowering the Federal Funds rate by 0.25% or so. This will have little effect on house prices or on the availability of home mortgages. Both need to stabilize at much lower levels before the market clears. It will not lower rates in money markets as a whole; the London Interbank Offered Rate is currently trading at a thumping premium to the Federal Funds rate and will continue to do so.
It will also not lower US fixed rates; the 10-year Treasury bond is currently trading at a yield around of 4%, close to its historic lows and far below equilibrium real levels given the Fed's prolonged inability to reduce inflation below the 3-5%-4% range. It will however inject yet more liquidity into the world economy, which will force up the price of equities and other non-housing assets, as well as commodity prices and inflation in general.
This is undoubtedly what Wall Street wants; it is also likely to be largely satisfactory to Bernanke. Only one Fed chairman has lost his job through keeping interest rates too low - the unlucky G William Miller in 1979. However, in Miller's time inflation had already established a firm grip. Bernanke may reasonably feel that inflation remains sufficiently subdued that the problem can be ignored at least until after the 2008 election, now only 11 months away.
The dangers of a sharp rise in the Federal Funds rate do not apply to the modified policy of a mild rise in the rate, maybe to 6% in three steps between now and March. While this would make little difference to the housing market or to long term interest rates, it would deflate world stock markets and begin to mop up the excess liquidity that has distorted the world economy over the last decade. The private equity market would remain quiescent, hedge funds would find themselves generally loss-making, and the major US banks that have excessive exposure to subprime mortgages and other "Level 3" assets would be forced to come to terms with reality and start cleaning up their balance sheets.
More important, commodity and energy prices would start to deflate. If asked which would be most damaging to the US economy: an oil price of $120 combined with a Federal Funds rate of 3% or an oil price of $60 combined with a Federal Funds rate of 6%, almost all economists, even those wholly uncommitted to the Bear's Lair worldview, would confirm that the former combination is likely to be much more damaging.
The US payments deficit would be exacerbated, increasing the probability of a catastrophic decline in the dollar, while huge amounts of US consumer wealth would be diverted into the pockets of oil producing countries. These would either like Venezuela, Russia and Iran spend it on enhancing their dreams of world conquest or like Saudi Arabia, most of the Gulf States, Norway and Canada, save much of the increase, investing it in foreign exchange reserves and "rainy day funds" in general.
As John Maynard Keynes would have triumphantly pointed out (even a blind pig finds a truffle occasionally) the compulsive savers are much more damaging to the world economy than the megalomaniacs, provided the maniacs don't succeed. History has proven time and again that madmen with dreams of world conquest are thoroughly stimulative to economic activity, provided they are not permitted to achieve their goals. On the other hand a further increase in the world's savings rate, producing an additional "glut" of savings in sovereign wealth funds while impoverishing US, European and Japanese consumers, is likely to produce world recession in fairly short order, however stimulating it would be to asset prices and deal flow in the meantime.
But this choice between cheap money and even higher oil and commodity prices or moderately expensive money and oil and commodity prices deflated towards their normal levels is surely what we are faced with. A decline in the Federal Funds rate from 5.25% to 4.5% has produced a surge in the world oil price from about $70 in August to over $90. A further decline in the Federal Funds rate would cause a surge in world liquidity and a weakening of confidence in the dollar, which together would cause oil prices to soar.
Extrapolating from the trend since August, a 3% Federal Funds rate, perhaps in spring 2008, would be likely to lead to an oil price around $120 per barrel. Other commodity prices would likewise surge, gold would soar well over $1,000 and the euro would rise strongly against the dollar to above $1.60. I doubt very much whether Treasury bond yields would decline significantly, so the housing market would be largely unaffected and US house prices would continue to decline, with further consumers forced into mortgage difficulties by the rise in their costs of gasoline and heating oil.
Such an economy would be even more distorted than the current one. Essentially Bernanke would have provided yet more inflation for the world economic bubble, achieving little if any progress towards his goals of US economic recovery and house price stabilization, but ensuring a most unpleasant long term denouement. Chinese and US stocks would have risen further, more major companies would have been sold to sovereign wealth funds and more of America’s wealth would have been diverted from Main Street to Wall Street and through Wall Street to the Middle East.
Conversely, a reversal of policy, raising the Federal Funds rate back to 5% on Tuesday and announcing a goal, absent clear signs of a major downturn, of raising it further to 6% within the next few months would have the opposite effect. The monetary tightening would be far too small to affect the ongoing downturn in housing - in any case long term bond rates would be little affected. However oil prices would begin subsiding to their long term equilibrium level, probably now in the $50-$60 range. That would reduce US consumers' energy bills, giving them additional purchasing power to remain current on their mortgage payments.
This tighter money policy would strengthen the dollar, reducing the economic imbalances that a weak dollar has produced and increasing the willingness of central banks and other foreign investors to hold dollars. It would begin the messy process of deflation in the US, Chinese and other stock markets, bringing on the necessary price correction, but limiting the amount of innocent money that would be lost in a major crash.
It would reduce the resources available to Russia, Venezuela and Iran, immeasurably improving the world political environment and stabilizing wobbly "domino" political situations such as Ukraine, Colombia and Iraq. In the long run, it would produce a smaller and less painful US and global downturn, and would increase long term US wealth, as well as beginning the necessary rebalancing of wealth distribution between the overstuffed of Wall Street and the under-rewarded blue collar class.
The chance of Bernanke pursing this superior alternative? Approximately zero!
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.
This column has since 2000 been calling for the Federal Reserve to institute a policy of much tighter money. In a sense, events since August have justified it; old-fashioned consumer price inflation hasn't reappeared, but the beginnings of a gigantic global asset price deflation are appearing. At this point, sudden adoption of the Bear's Lair monetary policy, which would involve a Federal Funds rate in the 8-10% range, would cause a collapse in confidence and very likely a repeat of the United States' unhappy economic performance in 1931-33. So, given that the Fed is now starting from a place it should never have got to, what is the least painful trajectory from here?
There are two contrary tendencies to be fought. On the one hand, the housing market continues to melt down - house prices nationwide dropped 1.5% in the past month alone. That suggests that lower interest rates are needed to increase the affordability of housing for the marginal buyers and slow the decline in prices. On the other hand, the stock markets have continued strong, and commodity and energy prices have shot up further, producing the specter of US$100 oil. That suggests that lower interest rates may actually be making the economic problem worse, transferring all our wealth to unpleasant oil producing regimes.
The ongoing collapse in the subprime mortgage market indicates that the central rationale for interest rate policy has changed since August. If house prices continue to decline as they have in the last year - and there seems currently no reason whatever that they should not continue doing so - then more and more borrowers will find themselves with a larger mortgage liability than the value of their house asset. In itself this does not matter; if employment continues robust and the non-housing sectors of the economy continue to expand, then most of those borrowers will be able to continue making their mortgage payments. Eventually house prices will recover, or their outstanding mortgage balance will decline, and they will once more find themselves in a net asset position.
This would indicate that easy money was appropriate, but there are three problems with this. First, the decline in net worth among homeowners is likely to produce a negative "wealth effect" which will cut consumption and push the US economy into recession. Second, in reducing short term interest rates, the Fed may be "pushing on a string" and find itself unable to reduce the mortgage rates it is attempting to affect. Third, it risks reigniting inflation and it makes further rises in commodity and energy prices almost certain.
The opposite policy, of raising interest rates, would clearly now be damaging if carried out to extremes. Liquidity is disappearing from the US money market as structured investment vehicles are wound down and taken back onto bank balance sheets. The reduction of $400 billion in asset backed commercial paper outstanding since August is only one example of this. A sharp rise in interest rates runs the risk of a deflationary spiral of collapsing money supply such as occurred in the US in 1931-33, as bank after bank failed.
Fed chairman Ben Bernanke and the Federal Open Market Committee on December 11 seem likely to pursue their recent policy of a mild easing of money, lowering the Federal Funds rate by 0.25% or so. This will have little effect on house prices or on the availability of home mortgages. Both need to stabilize at much lower levels before the market clears. It will not lower rates in money markets as a whole; the London Interbank Offered Rate is currently trading at a thumping premium to the Federal Funds rate and will continue to do so.
It will also not lower US fixed rates; the 10-year Treasury bond is currently trading at a yield around of 4%, close to its historic lows and far below equilibrium real levels given the Fed's prolonged inability to reduce inflation below the 3-5%-4% range. It will however inject yet more liquidity into the world economy, which will force up the price of equities and other non-housing assets, as well as commodity prices and inflation in general.
This is undoubtedly what Wall Street wants; it is also likely to be largely satisfactory to Bernanke. Only one Fed chairman has lost his job through keeping interest rates too low - the unlucky G William Miller in 1979. However, in Miller's time inflation had already established a firm grip. Bernanke may reasonably feel that inflation remains sufficiently subdued that the problem can be ignored at least until after the 2008 election, now only 11 months away.
The dangers of a sharp rise in the Federal Funds rate do not apply to the modified policy of a mild rise in the rate, maybe to 6% in three steps between now and March. While this would make little difference to the housing market or to long term interest rates, it would deflate world stock markets and begin to mop up the excess liquidity that has distorted the world economy over the last decade. The private equity market would remain quiescent, hedge funds would find themselves generally loss-making, and the major US banks that have excessive exposure to subprime mortgages and other "Level 3" assets would be forced to come to terms with reality and start cleaning up their balance sheets.
More important, commodity and energy prices would start to deflate. If asked which would be most damaging to the US economy: an oil price of $120 combined with a Federal Funds rate of 3% or an oil price of $60 combined with a Federal Funds rate of 6%, almost all economists, even those wholly uncommitted to the Bear's Lair worldview, would confirm that the former combination is likely to be much more damaging.
The US payments deficit would be exacerbated, increasing the probability of a catastrophic decline in the dollar, while huge amounts of US consumer wealth would be diverted into the pockets of oil producing countries. These would either like Venezuela, Russia and Iran spend it on enhancing their dreams of world conquest or like Saudi Arabia, most of the Gulf States, Norway and Canada, save much of the increase, investing it in foreign exchange reserves and "rainy day funds" in general.
As John Maynard Keynes would have triumphantly pointed out (even a blind pig finds a truffle occasionally) the compulsive savers are much more damaging to the world economy than the megalomaniacs, provided the maniacs don't succeed. History has proven time and again that madmen with dreams of world conquest are thoroughly stimulative to economic activity, provided they are not permitted to achieve their goals. On the other hand a further increase in the world's savings rate, producing an additional "glut" of savings in sovereign wealth funds while impoverishing US, European and Japanese consumers, is likely to produce world recession in fairly short order, however stimulating it would be to asset prices and deal flow in the meantime.
But this choice between cheap money and even higher oil and commodity prices or moderately expensive money and oil and commodity prices deflated towards their normal levels is surely what we are faced with. A decline in the Federal Funds rate from 5.25% to 4.5% has produced a surge in the world oil price from about $70 in August to over $90. A further decline in the Federal Funds rate would cause a surge in world liquidity and a weakening of confidence in the dollar, which together would cause oil prices to soar.
Extrapolating from the trend since August, a 3% Federal Funds rate, perhaps in spring 2008, would be likely to lead to an oil price around $120 per barrel. Other commodity prices would likewise surge, gold would soar well over $1,000 and the euro would rise strongly against the dollar to above $1.60. I doubt very much whether Treasury bond yields would decline significantly, so the housing market would be largely unaffected and US house prices would continue to decline, with further consumers forced into mortgage difficulties by the rise in their costs of gasoline and heating oil.
Such an economy would be even more distorted than the current one. Essentially Bernanke would have provided yet more inflation for the world economic bubble, achieving little if any progress towards his goals of US economic recovery and house price stabilization, but ensuring a most unpleasant long term denouement. Chinese and US stocks would have risen further, more major companies would have been sold to sovereign wealth funds and more of America’s wealth would have been diverted from Main Street to Wall Street and through Wall Street to the Middle East.
Conversely, a reversal of policy, raising the Federal Funds rate back to 5% on Tuesday and announcing a goal, absent clear signs of a major downturn, of raising it further to 6% within the next few months would have the opposite effect. The monetary tightening would be far too small to affect the ongoing downturn in housing - in any case long term bond rates would be little affected. However oil prices would begin subsiding to their long term equilibrium level, probably now in the $50-$60 range. That would reduce US consumers' energy bills, giving them additional purchasing power to remain current on their mortgage payments.
This tighter money policy would strengthen the dollar, reducing the economic imbalances that a weak dollar has produced and increasing the willingness of central banks and other foreign investors to hold dollars. It would begin the messy process of deflation in the US, Chinese and other stock markets, bringing on the necessary price correction, but limiting the amount of innocent money that would be lost in a major crash.
It would reduce the resources available to Russia, Venezuela and Iran, immeasurably improving the world political environment and stabilizing wobbly "domino" political situations such as Ukraine, Colombia and Iraq. In the long run, it would produce a smaller and less painful US and global downturn, and would increase long term US wealth, as well as beginning the necessary rebalancing of wealth distribution between the overstuffed of Wall Street and the under-rewarded blue collar class.
The chance of Bernanke pursing this superior alternative? Approximately zero!
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.
Hope Now: Sorry, wrong number
By Julian Delasantellis
There's an old saying along the lines of "you never forget how to ride a bicycle". Perhaps that is true, but for the US government the aphorism requires some amendment.
After caring, coddling and cosseting the interests of America's richest and most powerful classes for decades, it is apparently true that the government has forgotten how to look after the interests of average middle-class and lower middle-class folks.
The evidence of this? Amid much fanfare, President George W Bush last week introduced the "Hope Now" initiative to help subprime mortgage borrowers threatened with impending foreclosure save their homes. Part of the initiative included a toll free phone number that imperiled homeowners could call, at any time of the day or night, to receive information that could help them begin the process of their salvation.
Bush gave out the number. The president's spinmeisters and media handlers probably planned this to make Bush seem more caring and considerate, more cognizant of, as the pollsters pose the question, the interests of "people like you". It might have worked - had the president not given out the wrong number.
On the surface of it, the program is almost redolent of a good government video in a secondary school civics class. A problem arises, and the government moves in the people's interest to solve it. In reality, when you actually go beyond the surface superficiality of the headlines, you find another principle of modern government these days. In the modern, media age, it's a lot more important to look like you're solving a problem than to actually solve it.
It sure seemed easy a couple of years ago. The essence of banking is to act as the financial intermediator for, and to make a profit from, bringing together people who have money to lend with people who want to borrow. Repeated Federal Reserve interest rate cuts, along with innovative financial "engineering" by Wall Street firms employing the best and brightest from America's business schools, had left the financial system drenched in funds seeking a high rate of return. Along with that you had millions of prospective home buyers seeking the ownership deed that they believed was the entry ticket to the American dream.
The only minor obstacles in the way of their shining dream were the minor factors that many could afford neither the price of the houses they wanted to buy nor the monthly payments of the mortgages they needed to finance them.
Subprime borrowing was the solution. Sure you can afford that house, the mortgage finance industry told the borrowers - 20% down payment for a house? That's an old fogey relic, like a lapel pin for a zoot suit or something. And if the interest payments on the mortgage are too high, well, we'll just sort of forget about the interest payments for the first couple of years or so. The initial rate for the first couple of years would be in the 5% or 6% zone, barely above the bank's cost of capital, then would rise, be "reset", to much higher rates, sometimes well over 10% for the final 28 years of the 30-year mortgage.
It was all rather like the US cable television or telephone companies that lure customers into buying their services with insanely low initial "teaser" charges, such as those that offer to send a swimsuit model to your house to do the dishes "for the first three months". As a result, Wall Street's surfeit of lendable capital put millions of people in homes that they were not destined to keep.
Everything would have been OK had home prices kept rising; had that continued, the buyers could have refinanced into more conventional, fixed-rate mortgages, with the increase in the home's value essentially acting as a downpayment. To update the old introductory economics slogan of "if wishes were horses beggars would ride free", add "and if home prices had kept on rising the subprime crisis would not be".
The media is chock full of stories indicating just how far and fast US house prices are falling. Depending on your metric, home price values have not fallen this fast since the late 90s, the early 90s or the early 70s; one real estate type, displaying that singular talent for hyperbole that signifies a truly gifted salesman, says that this is the worst US real estate market since the Great Depression of the 1930s.
One wonders if, as the subprime infection spreads to the British Isles' equally overheated real estate markets, whether we will see stories in the British press about how the real estate market there is at its worst since the Black Plague.
US home prices have stopped rising, so the subprime borrowers are now defenseless against the full punishing impact of the mortgage rate resets. A quarter of a million US homeowners are losing their homes every month through foreclosure, and, as subprime borrowers were taking out low "teaser" rates until early this year, without any outside intervention this phenomenon should continue to at least 2009.
After dismissing and belittling the crisis for most of the year, the Bush administration has attempted to get in front of the crisis, or at least to give the public impression of getting in front of the crisis, through the Hope Now initiative. Much like a medic in the trenches of World War I, Hope Now uses relentless triage logic to separate the subprime borrowers into three distinct classes.
Hope Now applies only to variable-rate mortgages taken out between the beginning of 2005 and the middle of this year. For most of that period, particularly on America's east and west coasts, the market's froth boiled up and over the cups of reason and logic like an overstirred latte, as irrational markets always do.
There are those who can't make the mortgage payments at the low, teaser rates. These unfortunates will not be assisted by Hope Now; they will return to their original destinies as lifelong renters. If you can make the payments now, and some god in the sky determines that you can handle the resets OK, you won't be helped by Hope Now either. Maybe you'll be able to refinance without government assistance; maybe you won't - you're on your own.
It's the third group, the ones who can handle the teaser rates but won't be able to do so with the higher rates, that Hope Now says it will help. The help to be proffered involves a freeze of up to five years on the higher interest rate reset. It is hoped that by then the subprime borrower will have accrued at least some measure of equity in his house, or have maybe saved or prepared in some way for the higher payments. Treasury Secretary Hank Paulson described the need for policy action in this way:
I want to help as many able homeowners as possible. To do that requires continuous learning. We must deepen our understanding of how many borrowers can be helped and the most effective mortgage solutions for them. As I have said before, this housing and mortgage market decline is still unfolding. Resetting ARM [adustable-rate mortgage] rates are one factor which will play out over the next 18 months. Declining home values will also significantly affect default rates going forward. We've also learned that default rates are far higher on mortgages made in 2006 and 2007, due to lax underwriting standards. We have work to do to understand how many of these borrowers are able to afford their homes.
As usual, the devil here resides in his familiar comfy abode, the details. The obvious point of contention is the question as to who will live and who will die, who will receive the Hope Now salvation, and who will be left exposed to the market's punishing gales.
For all the credit the popular press has bestowed onto Bush, Paulson and the administration over Hope Now, in reality, the government's role in the initiative is fairly limited.
What the government has done, in essence, is to provide the meeting room for what is called the "Hope Now Alliance", described by Paulson as "an alliance between counselors, servicers, investors, and other mortgage market participants. This alliance will maximize outreach efforts to homeowners in distress to help them stay in their homes and will create a unified, coordinated plan to reach and support as many homeowners as possible. The members of this alliance recognize that by working together, they will be more effective than by working independently."
What the Hope Now Alliance will do, according to Paulson, is to develop "methods, criteria and metrics that any industry participant can use to systematically evaluate borrowers' ability to pay resetting adjustable rate mortgages. For example, borrowers who are current on payments at the lower rate might be candidates for fast tracking into a refinance or a loan modification."
Basically speaking, the alliance hopes to examine each variable rate borrower, their income, their resources, their payment histories, and, most importantly, the most critical indicator of Godliness in modern-day America, their credit score, to determine if they will be granted the absolution of a reset freeze. Above 660, it's thought that you can handle the reset without assistance. Below, you supplicant yourself to the alliance and beg for relief.
Some of the problems here are obvious. If your credit score is too high but you still don't want to be subject to a reset, well, raising a credit score may be problematic, but lowering one is not. Like a Hollywood star told to gain weight for a part, all the star, or the borrower, has to do is to pig out, the star on sweets and treats, the borrower on spending and credit. This is the classic "moral hazard" problem in economics, where one economic actor in a system sees an incentive through acting in such a way that threatens the system as a whole.
Perhaps more central is the issue of the logistics of this process. It is thought that over 2 million US homeowners are going to be facing foreclosure over the next year; the early months of 2008 will see a particularly heavy storm of resets, as the teaser loans taken out in early 2006 come due.
Will the Hope Now Alliance be able to individually examine all the coming due mortgages in the relatively brief duration before the bankruptcy judge's gavel falls? It is said that the alliance is writing special software to be able to assess the worthiness of borrowers quickly en masse; one would hope that this software code is not being written by the same guys who wrote the software that greenlighted the subprime borrowers in the first place.
It is for this reason that many observers, including Paul Krugman of the New York Times, are advocating the eschewing of the mortgage triage framework to just reset everybody's rates.
This is not bleeding heart liberalism here. The argument is that the determination as to who will and who will not receive assistance will be so inherently slow and plodding that the foreclosure damage will have occurred before the help can arrive.
But the wholesale reset argument flies right in the face of the individualistic Protestant work ethic (or, in other words, plain old stinginess) of the US general public. Polling data indicate strong opposition to just about any initiative to aid the subprime borrowers.
"I pay my mortgage, why shouldn't they?" comes the argument from out of Middle America. The answer to that proud rhetorical inquiry is that if half the houses on his block get foreclosed, abandoned and boarded up, down the drain will go the value of Mr Independent's house as well. Since it can't be told in the 15 seconds or so that local American nightly news devotes to the financial matters, the rejoinder remains unspoken.
But there is another flaw in Hope Now, one that goes to the core of the process of housing finance in this country.
When first I wrote of the subprime crisis for ATol in early March, I noted that the housing finance industry in America had traveled a long way from that portrayed in the 1946 Frank Capra movie It's a Wonderful Life. There, old-fashioned mortgage banker George Bailey (Jimmy Stewart) could honestly plead to panicked depositors in his bank that "Your money's in Joe's house right next to yours. And in the Kennedy house, and Mrs Macklin's house, and a hundred others. Why, you're lending them the money to build, and then they're going to pay it back to you."
Not any more. These days mortgages are like more sausages, chopped up and remixed, seasoned and processed, bundled and tied up to become mortgage-backed securities, bond-like investments that investors use to earn higher interest rates than those available on Treasury securities.
If your mortgage is among the $2 trillion of those that have been thus "securitized" in the past decade, the monthly mortgage check you write to your bank does not stay with your bank, unless your bank has kept some of the mortgage paper for itself. Instead, it passes through the financial system, eventually arriving in the wallets of whoever bought your mortgage, now bundled with perhaps hundreds of others. In essence, you have borrowed your mortgage money from the owner of your mortgage paper, be he a private investor in Texas, a hedge fund in Connecticut, a public pension fund in California, or a sovereign wealth fund in the Middle East. The bank that you write your check to, called the mortgage servicer, is, in reality, just a middleman.
Looking down the roster of the Hope Now Alliance, you see a lot of mortgage servicers - Citigroup, Washington Mutual, Bank of America and others. It is hoped that the alliance will, after finding out who's been naughty with credit (they'll get help ) and who's been nice (they won't), alter the specified loan terms of the mortgages so that the rates won't be set higher.
Can they do that? Is it legal to do that? After all, the mortgage is, in reality, just an IOU between the borrower, the homeowner and the mortgage paper owner. The servicer occupies a middleman role much like a stockbroker; when you buy 100 shares of a stock, the broker is just performing a service for you, much like the servicer.
The American Securitization Forum, the trade group for the securitization industry, and a key component of the Hope Now Alliance, says it can unilaterally alter mortgage terms without lender consent.
"The ASF believes that this framework is consistent with the authority granted to a servicer to modify subprime mortgage loans in typical PSAs [pooling and servicing agreements].The ASF expects that the procedures in this framework will constitute standard and customary servicing procedures for subprime loans."
What if the owner of one of the mortgages whose interest rates are being frozen objects to the terms of his mortgage bond, his loan agreement with the borrower, being altered without his consent? The Hope Now program defenders say this won't happen, that the owners of the mortgages will agree to temporarily sacrifice a little so as to avoid the costs of the foreclosure process, typically, up to 30% of the original loan.
Maybe that's true. But, as most of the teaser rates were written to be barely profitable, or even non-profitable, now so that they could be insanely profitable following the reset, maybe someone will object. It will only take one cantankerous miserly old bugger to go into the US courts and get the reset freezes stayed, and the entire Hope Now infrastructure collapses and is disposed of into the courthouse paper recycling bins.
Interestingly, the ASF legal interpretation that servicers can act in the interests of lenders without their express consent has been recently been rejected by the US courts - in reverse.
It was in October that US Sixth District Court Judge Christopher Boyco, ruling from the bench in Cleveland, Ohio, stopped a mortgage servicer, Deutsche Bank, from foreclosing on 14 properties, saying that, as the mortgage servicer could not show an actual title to the homes being foreclosed, it had no standing to foreclose on them. In mid-November, another Federal judge, Thomas Rose, of Dayton, Ohio, did the same with 26 foreclosure motions submitted to him by mortgage servicers Citigroup, HSBC and others.
Have, in Tom Wolfe's famous moniker from The Bonfire of the Vanities, mortgage finance's Masters of the Universe been tripped up in their decades-long quest to transfer the wealth of America from the working to the capital-owning classes by something so mundane and pedestrian as to having to follow the law?
In the meantime, I feel sorriest for the subprime borrowers, once again led to believe the lies of the mortgage finance industry, once again betrayed. When they returned home from their second or third job last Thursday night, desperately trying to earn the money to keep their houses, they might have turned on the news, thought that there actually was hope, maybe even hope now.
But what they thought was hope turns out to be a fantasy, their American dream now a chimera slipping like illusionary sand through their grasp. In much the say way that Bush's "Mission Accomplished" speech on the USS Abraham Lincoln ushered in the worst fighting of the Iraq War, his Hope Now initiative, intended, designed and delivered to be nothing more than the Mission Accomplished moment of the subprime crisis, may very well usher in the worst of the foreclosures in 2008.
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
There's an old saying along the lines of "you never forget how to ride a bicycle". Perhaps that is true, but for the US government the aphorism requires some amendment.
After caring, coddling and cosseting the interests of America's richest and most powerful classes for decades, it is apparently true that the government has forgotten how to look after the interests of average middle-class and lower middle-class folks.
The evidence of this? Amid much fanfare, President George W Bush last week introduced the "Hope Now" initiative to help subprime mortgage borrowers threatened with impending foreclosure save their homes. Part of the initiative included a toll free phone number that imperiled homeowners could call, at any time of the day or night, to receive information that could help them begin the process of their salvation.
Bush gave out the number. The president's spinmeisters and media handlers probably planned this to make Bush seem more caring and considerate, more cognizant of, as the pollsters pose the question, the interests of "people like you". It might have worked - had the president not given out the wrong number.
On the surface of it, the program is almost redolent of a good government video in a secondary school civics class. A problem arises, and the government moves in the people's interest to solve it. In reality, when you actually go beyond the surface superficiality of the headlines, you find another principle of modern government these days. In the modern, media age, it's a lot more important to look like you're solving a problem than to actually solve it.
It sure seemed easy a couple of years ago. The essence of banking is to act as the financial intermediator for, and to make a profit from, bringing together people who have money to lend with people who want to borrow. Repeated Federal Reserve interest rate cuts, along with innovative financial "engineering" by Wall Street firms employing the best and brightest from America's business schools, had left the financial system drenched in funds seeking a high rate of return. Along with that you had millions of prospective home buyers seeking the ownership deed that they believed was the entry ticket to the American dream.
The only minor obstacles in the way of their shining dream were the minor factors that many could afford neither the price of the houses they wanted to buy nor the monthly payments of the mortgages they needed to finance them.
Subprime borrowing was the solution. Sure you can afford that house, the mortgage finance industry told the borrowers - 20% down payment for a house? That's an old fogey relic, like a lapel pin for a zoot suit or something. And if the interest payments on the mortgage are too high, well, we'll just sort of forget about the interest payments for the first couple of years or so. The initial rate for the first couple of years would be in the 5% or 6% zone, barely above the bank's cost of capital, then would rise, be "reset", to much higher rates, sometimes well over 10% for the final 28 years of the 30-year mortgage.
It was all rather like the US cable television or telephone companies that lure customers into buying their services with insanely low initial "teaser" charges, such as those that offer to send a swimsuit model to your house to do the dishes "for the first three months". As a result, Wall Street's surfeit of lendable capital put millions of people in homes that they were not destined to keep.
Everything would have been OK had home prices kept rising; had that continued, the buyers could have refinanced into more conventional, fixed-rate mortgages, with the increase in the home's value essentially acting as a downpayment. To update the old introductory economics slogan of "if wishes were horses beggars would ride free", add "and if home prices had kept on rising the subprime crisis would not be".
The media is chock full of stories indicating just how far and fast US house prices are falling. Depending on your metric, home price values have not fallen this fast since the late 90s, the early 90s or the early 70s; one real estate type, displaying that singular talent for hyperbole that signifies a truly gifted salesman, says that this is the worst US real estate market since the Great Depression of the 1930s.
One wonders if, as the subprime infection spreads to the British Isles' equally overheated real estate markets, whether we will see stories in the British press about how the real estate market there is at its worst since the Black Plague.
US home prices have stopped rising, so the subprime borrowers are now defenseless against the full punishing impact of the mortgage rate resets. A quarter of a million US homeowners are losing their homes every month through foreclosure, and, as subprime borrowers were taking out low "teaser" rates until early this year, without any outside intervention this phenomenon should continue to at least 2009.
After dismissing and belittling the crisis for most of the year, the Bush administration has attempted to get in front of the crisis, or at least to give the public impression of getting in front of the crisis, through the Hope Now initiative. Much like a medic in the trenches of World War I, Hope Now uses relentless triage logic to separate the subprime borrowers into three distinct classes.
Hope Now applies only to variable-rate mortgages taken out between the beginning of 2005 and the middle of this year. For most of that period, particularly on America's east and west coasts, the market's froth boiled up and over the cups of reason and logic like an overstirred latte, as irrational markets always do.
There are those who can't make the mortgage payments at the low, teaser rates. These unfortunates will not be assisted by Hope Now; they will return to their original destinies as lifelong renters. If you can make the payments now, and some god in the sky determines that you can handle the resets OK, you won't be helped by Hope Now either. Maybe you'll be able to refinance without government assistance; maybe you won't - you're on your own.
It's the third group, the ones who can handle the teaser rates but won't be able to do so with the higher rates, that Hope Now says it will help. The help to be proffered involves a freeze of up to five years on the higher interest rate reset. It is hoped that by then the subprime borrower will have accrued at least some measure of equity in his house, or have maybe saved or prepared in some way for the higher payments. Treasury Secretary Hank Paulson described the need for policy action in this way:
I want to help as many able homeowners as possible. To do that requires continuous learning. We must deepen our understanding of how many borrowers can be helped and the most effective mortgage solutions for them. As I have said before, this housing and mortgage market decline is still unfolding. Resetting ARM [adustable-rate mortgage] rates are one factor which will play out over the next 18 months. Declining home values will also significantly affect default rates going forward. We've also learned that default rates are far higher on mortgages made in 2006 and 2007, due to lax underwriting standards. We have work to do to understand how many of these borrowers are able to afford their homes.
As usual, the devil here resides in his familiar comfy abode, the details. The obvious point of contention is the question as to who will live and who will die, who will receive the Hope Now salvation, and who will be left exposed to the market's punishing gales.
For all the credit the popular press has bestowed onto Bush, Paulson and the administration over Hope Now, in reality, the government's role in the initiative is fairly limited.
What the government has done, in essence, is to provide the meeting room for what is called the "Hope Now Alliance", described by Paulson as "an alliance between counselors, servicers, investors, and other mortgage market participants. This alliance will maximize outreach efforts to homeowners in distress to help them stay in their homes and will create a unified, coordinated plan to reach and support as many homeowners as possible. The members of this alliance recognize that by working together, they will be more effective than by working independently."
What the Hope Now Alliance will do, according to Paulson, is to develop "methods, criteria and metrics that any industry participant can use to systematically evaluate borrowers' ability to pay resetting adjustable rate mortgages. For example, borrowers who are current on payments at the lower rate might be candidates for fast tracking into a refinance or a loan modification."
Basically speaking, the alliance hopes to examine each variable rate borrower, their income, their resources, their payment histories, and, most importantly, the most critical indicator of Godliness in modern-day America, their credit score, to determine if they will be granted the absolution of a reset freeze. Above 660, it's thought that you can handle the reset without assistance. Below, you supplicant yourself to the alliance and beg for relief.
Some of the problems here are obvious. If your credit score is too high but you still don't want to be subject to a reset, well, raising a credit score may be problematic, but lowering one is not. Like a Hollywood star told to gain weight for a part, all the star, or the borrower, has to do is to pig out, the star on sweets and treats, the borrower on spending and credit. This is the classic "moral hazard" problem in economics, where one economic actor in a system sees an incentive through acting in such a way that threatens the system as a whole.
Perhaps more central is the issue of the logistics of this process. It is thought that over 2 million US homeowners are going to be facing foreclosure over the next year; the early months of 2008 will see a particularly heavy storm of resets, as the teaser loans taken out in early 2006 come due.
Will the Hope Now Alliance be able to individually examine all the coming due mortgages in the relatively brief duration before the bankruptcy judge's gavel falls? It is said that the alliance is writing special software to be able to assess the worthiness of borrowers quickly en masse; one would hope that this software code is not being written by the same guys who wrote the software that greenlighted the subprime borrowers in the first place.
It is for this reason that many observers, including Paul Krugman of the New York Times, are advocating the eschewing of the mortgage triage framework to just reset everybody's rates.
This is not bleeding heart liberalism here. The argument is that the determination as to who will and who will not receive assistance will be so inherently slow and plodding that the foreclosure damage will have occurred before the help can arrive.
But the wholesale reset argument flies right in the face of the individualistic Protestant work ethic (or, in other words, plain old stinginess) of the US general public. Polling data indicate strong opposition to just about any initiative to aid the subprime borrowers.
"I pay my mortgage, why shouldn't they?" comes the argument from out of Middle America. The answer to that proud rhetorical inquiry is that if half the houses on his block get foreclosed, abandoned and boarded up, down the drain will go the value of Mr Independent's house as well. Since it can't be told in the 15 seconds or so that local American nightly news devotes to the financial matters, the rejoinder remains unspoken.
But there is another flaw in Hope Now, one that goes to the core of the process of housing finance in this country.
When first I wrote of the subprime crisis for ATol in early March, I noted that the housing finance industry in America had traveled a long way from that portrayed in the 1946 Frank Capra movie It's a Wonderful Life. There, old-fashioned mortgage banker George Bailey (Jimmy Stewart) could honestly plead to panicked depositors in his bank that "Your money's in Joe's house right next to yours. And in the Kennedy house, and Mrs Macklin's house, and a hundred others. Why, you're lending them the money to build, and then they're going to pay it back to you."
Not any more. These days mortgages are like more sausages, chopped up and remixed, seasoned and processed, bundled and tied up to become mortgage-backed securities, bond-like investments that investors use to earn higher interest rates than those available on Treasury securities.
If your mortgage is among the $2 trillion of those that have been thus "securitized" in the past decade, the monthly mortgage check you write to your bank does not stay with your bank, unless your bank has kept some of the mortgage paper for itself. Instead, it passes through the financial system, eventually arriving in the wallets of whoever bought your mortgage, now bundled with perhaps hundreds of others. In essence, you have borrowed your mortgage money from the owner of your mortgage paper, be he a private investor in Texas, a hedge fund in Connecticut, a public pension fund in California, or a sovereign wealth fund in the Middle East. The bank that you write your check to, called the mortgage servicer, is, in reality, just a middleman.
Looking down the roster of the Hope Now Alliance, you see a lot of mortgage servicers - Citigroup, Washington Mutual, Bank of America and others. It is hoped that the alliance will, after finding out who's been naughty with credit (they'll get help ) and who's been nice (they won't), alter the specified loan terms of the mortgages so that the rates won't be set higher.
Can they do that? Is it legal to do that? After all, the mortgage is, in reality, just an IOU between the borrower, the homeowner and the mortgage paper owner. The servicer occupies a middleman role much like a stockbroker; when you buy 100 shares of a stock, the broker is just performing a service for you, much like the servicer.
The American Securitization Forum, the trade group for the securitization industry, and a key component of the Hope Now Alliance, says it can unilaterally alter mortgage terms without lender consent.
"The ASF believes that this framework is consistent with the authority granted to a servicer to modify subprime mortgage loans in typical PSAs [pooling and servicing agreements].The ASF expects that the procedures in this framework will constitute standard and customary servicing procedures for subprime loans."
What if the owner of one of the mortgages whose interest rates are being frozen objects to the terms of his mortgage bond, his loan agreement with the borrower, being altered without his consent? The Hope Now program defenders say this won't happen, that the owners of the mortgages will agree to temporarily sacrifice a little so as to avoid the costs of the foreclosure process, typically, up to 30% of the original loan.
Maybe that's true. But, as most of the teaser rates were written to be barely profitable, or even non-profitable, now so that they could be insanely profitable following the reset, maybe someone will object. It will only take one cantankerous miserly old bugger to go into the US courts and get the reset freezes stayed, and the entire Hope Now infrastructure collapses and is disposed of into the courthouse paper recycling bins.
Interestingly, the ASF legal interpretation that servicers can act in the interests of lenders without their express consent has been recently been rejected by the US courts - in reverse.
It was in October that US Sixth District Court Judge Christopher Boyco, ruling from the bench in Cleveland, Ohio, stopped a mortgage servicer, Deutsche Bank, from foreclosing on 14 properties, saying that, as the mortgage servicer could not show an actual title to the homes being foreclosed, it had no standing to foreclose on them. In mid-November, another Federal judge, Thomas Rose, of Dayton, Ohio, did the same with 26 foreclosure motions submitted to him by mortgage servicers Citigroup, HSBC and others.
Have, in Tom Wolfe's famous moniker from The Bonfire of the Vanities, mortgage finance's Masters of the Universe been tripped up in their decades-long quest to transfer the wealth of America from the working to the capital-owning classes by something so mundane and pedestrian as to having to follow the law?
In the meantime, I feel sorriest for the subprime borrowers, once again led to believe the lies of the mortgage finance industry, once again betrayed. When they returned home from their second or third job last Thursday night, desperately trying to earn the money to keep their houses, they might have turned on the news, thought that there actually was hope, maybe even hope now.
But what they thought was hope turns out to be a fantasy, their American dream now a chimera slipping like illusionary sand through their grasp. In much the say way that Bush's "Mission Accomplished" speech on the USS Abraham Lincoln ushered in the worst fighting of the Iraq War, his Hope Now initiative, intended, designed and delivered to be nothing more than the Mission Accomplished moment of the subprime crisis, may very well usher in the worst of the foreclosures in 2008.
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
China eases markets before US meetings
BEIJING - China has underscored its intention to open up the country's financial markets by tripling the investment quota of qualified foreign institutional investors (QFII) from US$10 billion to $30 billion.
The announcement from the State Administration of Foreign Exchange (SAFE) came ahead of the 18th US-China Joint Commission on Commerce and Trade meeting on Tuesday and the third Sino-US Strategic Economic Dialogue, which opens on Wednesday. The Chinese government can expect to face further calls that it open up its markets more to overseas investors and take further action, such as letting it currency appreciate at a faster pace, to limit growth in its trade surplus. US Treasury Secretary Henry Paulson, Beijing for the talks, has argued strongly for faster appreciation of the yuan.
The QFII move also came out before the release on Tuesday of China's latest trade and inflation figures, which showed price increases accelerating to the quickest in 11 years and the trade surplus growing, adding further to domestic pressure on government to raise interest rates and let the currency appreciate faster.
Consumer prices rose 6.9% in November from a year earlier, faster then the 6.5% gain in country's main inflation measure in October, the statistics bureau said. The trade surplus climbed 14.7% to $26.3 billion in November from a year earlier, the customs bureau said today. The 11-month trade surplus with the US rose to $149.2 billion.
This was the second expansion of the QFII program, which allows foreign investors to trade in the yuan-denominated A shares while the Chinese currency remains not fully convertible. The country launched the QFII program in 2002 with a quota ceiling of $4 billion on a trial basis. The previous expansion, in 2005, was $6 billion. However, no foreign institutional investors have acquired any new quotas since February, when the then $10 billion quota was running low.
Shang Fulin, chairman of the China Securities Regulatory Commission, told reporters in October that raising the QFII quota was a common understanding reached at the second Sino-US Strategic Economic Dialogue. On the other hand, ahead of the Strategic Economic Dialogue, China has warned of "serious harm" to the bilateral economic and trade ties, if some legislative bills, now before the US Congress, are passed.
Finance Minister Xie Xuren said that it was "worrying" to see the rising trend of trade protectionism in the US. He was referring to more than 50 legislative bills concerning US economic and trade ties with China proposed by some US Congress members since the beginning of the year.
The SAFE said it would "decide the tempo" of quota issues in line with China's international payments and the development of the domestic stock market. "Eligible overseas medium- and long-term investment will be encouraged to invest in China's capital market," it said.
Reviewing the performance of QFII funds over the past five years, the SAFE said that the system had facilitated a transformation in Chinese investors' sophistication, improved risk management, strengthened the global clout of Chinese capital markets and helped optimize corporate governance. The number of QFIIs, described by the SAFE as "significant institutional investors," now totals 49. Their aggregate market capitalization was nearly 200 billion yuan (about $27.02 billion).
Industry analysts said the government had previously been reluctant to raise the QFII quota for fear of sparking currency appreciation and concern that the domestic stock markets were near bubble territory.
Separately from the SAFE announcement, Liu Mingkang, chairman of the China Banking Regulatory Commission, played down fears of the economy overheating in comments made at an annual conference sponsored by Caijing Magazine in Beijing Monday.
"The benchmark Shanghai index has more than tripled from 2003 to this November, which is still small compared with other BRIC [Brazil, Russia, India, China] nations. Russian stocks rose nearly 631%, Brazilian stocks 576% and Indian stocks 596%," he said.
To promote steady development of the financial markets, the SAFE also said that it would expand channels for local residents to invest abroad and raise the investment quota for qualified domestic institutional investors (QDII). The QDII program is designed to allow Chinese investors to trading in overseas shares as the yuan remains not fully convertible.
"We support more eligible local financial institutions being able to provide more diversified products for domestic investors, enhance their risk management and establish new advantages in global competition," said the SAFE in a statement.
As of end-September, all QDIIs - including banks, funds, insurers and securities dealers - had acquired investment quotas of $42.17 billion, with an actual outflow of $10.86 billion.
The benchmark yuan-US dollar exchange rate hit a new high of 7.3872 on November 27, for a cumulative appreciation of nearly 11% since China discontinued the peg to the greenback in July 2005.
Zhou Xiaochuan, governor of the People's Bank of China, or the central bank, said on November 18 that if necessary the nation would consider widening the yuan's floating band.
(Asia Pulse/Xinhua)
The announcement from the State Administration of Foreign Exchange (SAFE) came ahead of the 18th US-China Joint Commission on Commerce and Trade meeting on Tuesday and the third Sino-US Strategic Economic Dialogue, which opens on Wednesday. The Chinese government can expect to face further calls that it open up its markets more to overseas investors and take further action, such as letting it currency appreciate at a faster pace, to limit growth in its trade surplus. US Treasury Secretary Henry Paulson, Beijing for the talks, has argued strongly for faster appreciation of the yuan.
The QFII move also came out before the release on Tuesday of China's latest trade and inflation figures, which showed price increases accelerating to the quickest in 11 years and the trade surplus growing, adding further to domestic pressure on government to raise interest rates and let the currency appreciate faster.
Consumer prices rose 6.9% in November from a year earlier, faster then the 6.5% gain in country's main inflation measure in October, the statistics bureau said. The trade surplus climbed 14.7% to $26.3 billion in November from a year earlier, the customs bureau said today. The 11-month trade surplus with the US rose to $149.2 billion.
This was the second expansion of the QFII program, which allows foreign investors to trade in the yuan-denominated A shares while the Chinese currency remains not fully convertible. The country launched the QFII program in 2002 with a quota ceiling of $4 billion on a trial basis. The previous expansion, in 2005, was $6 billion. However, no foreign institutional investors have acquired any new quotas since February, when the then $10 billion quota was running low.
Shang Fulin, chairman of the China Securities Regulatory Commission, told reporters in October that raising the QFII quota was a common understanding reached at the second Sino-US Strategic Economic Dialogue. On the other hand, ahead of the Strategic Economic Dialogue, China has warned of "serious harm" to the bilateral economic and trade ties, if some legislative bills, now before the US Congress, are passed.
Finance Minister Xie Xuren said that it was "worrying" to see the rising trend of trade protectionism in the US. He was referring to more than 50 legislative bills concerning US economic and trade ties with China proposed by some US Congress members since the beginning of the year.
The SAFE said it would "decide the tempo" of quota issues in line with China's international payments and the development of the domestic stock market. "Eligible overseas medium- and long-term investment will be encouraged to invest in China's capital market," it said.
Reviewing the performance of QFII funds over the past five years, the SAFE said that the system had facilitated a transformation in Chinese investors' sophistication, improved risk management, strengthened the global clout of Chinese capital markets and helped optimize corporate governance. The number of QFIIs, described by the SAFE as "significant institutional investors," now totals 49. Their aggregate market capitalization was nearly 200 billion yuan (about $27.02 billion).
Industry analysts said the government had previously been reluctant to raise the QFII quota for fear of sparking currency appreciation and concern that the domestic stock markets were near bubble territory.
Separately from the SAFE announcement, Liu Mingkang, chairman of the China Banking Regulatory Commission, played down fears of the economy overheating in comments made at an annual conference sponsored by Caijing Magazine in Beijing Monday.
"The benchmark Shanghai index has more than tripled from 2003 to this November, which is still small compared with other BRIC [Brazil, Russia, India, China] nations. Russian stocks rose nearly 631%, Brazilian stocks 576% and Indian stocks 596%," he said.
To promote steady development of the financial markets, the SAFE also said that it would expand channels for local residents to invest abroad and raise the investment quota for qualified domestic institutional investors (QDII). The QDII program is designed to allow Chinese investors to trading in overseas shares as the yuan remains not fully convertible.
"We support more eligible local financial institutions being able to provide more diversified products for domestic investors, enhance their risk management and establish new advantages in global competition," said the SAFE in a statement.
As of end-September, all QDIIs - including banks, funds, insurers and securities dealers - had acquired investment quotas of $42.17 billion, with an actual outflow of $10.86 billion.
The benchmark yuan-US dollar exchange rate hit a new high of 7.3872 on November 27, for a cumulative appreciation of nearly 11% since China discontinued the peg to the greenback in July 2005.
Zhou Xiaochuan, governor of the People's Bank of China, or the central bank, said on November 18 that if necessary the nation would consider widening the yuan's floating band.
(Asia Pulse/Xinhua)
Monday, December 10, 2007
Osama's report
By Michael Scheuer
Even before the full text of Osama bin Laden's November 29 statement "To the European Peoples" [1] was available, Western officials and pundits were dismissing it as an "old tactic", "ridiculous", and as "Osama's new nonsense" [2].
While such conclusions probably are comforting to those making them, they are wrong. Bin Laden's message sounded a pitch-perfect note to the Europeans he addressed, was clearly and ominously threatening to those listeners and fortuitously coincided with a fresh reminder that Europe and America are vulnerable to radiological attacks by non-nation-state actors.
Historical context
As always, bin Laden's statement cannot be understood and assessed unless examined in the light of earlier statements and their impact. In this case, bin Laden's November 29 statement is part of the media-operations doctrine al-Qaeda put in place after the US-led invasion of Afghanistan in 2001 and augmented after the US-led invasion of Iraq in 2003. The doctrine has multiple goals, but the goal bin Laden was aiming for on November 29 is that of stripping away allies from the United States, particularly the nations involved in the occupations of Iraq or Afghanistan.
On November 21, 2002, bin Laden launched al-Qaeda's ally-stripping campaign by starkly telling "countries allied to the US" that "reciprocity [in war] is only fair". Appealing then, as now, over the heads of governments allied to the United States, bin Laden asked, "Why do your governments ally themselves to the criminal gang in the White House against the Muslims? Why did your governments ally themselves to the United States in this attack on Afghanistan, and I mention in particular Britain, France, Italy, Canada, Germany, and Australia?" Ending his message, bin Laden stressed to the "allied peoples" that their fate was in their own hands, "Just as you kill you are killed. Just as you bombard you are bombarded. Rejoice at the harm that is coming to you." [3]
Then, in April 2004, bin Laden narrowed this message to "our neighbors, north of the Mediterranean", offering the Europeans "a reconciliation initiative" because of "their positive reactions" - bin Laden was referring here to the Spanish voters' defeat of prime minister Jose Maria Aznar's government after the March 2004 train bombings in Madrid. In the 2004 statement, bin Laden offered the European people a truce, saying that "it is in both sides' interest to check the plans of those [European political leaders] who shed the blood of peoples for their narrow personal interest and subservience to the White House gang." Bin Laden told the Europeans:
I also offer a peace initiative ... whose essence is our commitment to stopping operations against every country that commits itself to not attacking Muslims or interfering in their affairs - including the US conspiracy on the greater Islamic world. This peace can be renewed once the period signed by the first government expires, and a second government is formed, with the consent of both parties. The peace will start with the departure of its last soldier from our country. The door of peace is open for three months [from] the date of announcing this statement. [4]
Not surprisingly, bin Laden's offer was denounced by the United States and harshly rejected by all European governments. The rejection was followed by two attacks on the London transportation system; the disruption of a plot in the UK to destroy ten passenger airliners over the Atlantic; the dismantling of al Qaeda related or inspired cells in Spain, Italy, the UK, Germany, and Denmark; the so-called "Doctors' plot" attacks against a popular London nightclub and Glasgow airport; and remarks by senior government officials in Britain, Germany, and Denmark that al-Qaeda is related in one way or another to Islamist terrorist networks and operational activities in their countries [5].
Current environment
Against this background, bin Laden's new message is another appeal "to the peoples of the states allied to America in the invasion of Afghanistan, and I mention specifically Europe". He again asks why European citizens have allowed Afghanistan to be "invaded without right by your unjust governments", who joined the US-led invasion and occupation. Bin Laden lays great stress on the number of Afghan civilians who have been killed by North Atlantic Treaty Organization (NATO)and US forces, thereby underscoring a growing criticism of the Afghan war by the European public, media and some politicians.
He also mocks the Europeans as "vassals" of the United States, noting that their politicians are lackeys who "are thronging the steps of the White House" and preventing US soldiers from "being held to account by European courts". Whatever the West thinks about bin Laden's words - especially his pot-calling-the-kettle-black condemnation of civilian casualties - there is no doubt that he has made a finely gauged assessment of Europe's rampant anti-American sentiment, as well as its decreasing official support for US policies in the Muslim world.
The continuing threat present in bin Laden's 29 November statement seems obvious, but, as noted above, several Western commentators have argued the message contains no threat. Bin Laden told Europeans "it is better for you to restrain your politicians" from supporting the United States and to instead have them "work diligently to remove oppression from the oppressed". The un-ally-yourselves-from-the-US-or-else nature of these words is apparent, especially given the rising tide of Islamism - rhetorical, politically active, and violent - that has occurred in Europe since bin Laden's 2004 truce offer was rejected .
Indeed, bin Laden's November 29 statement is also meant to inform Muslims that he is - as per the Prophet Mohammad's directions - giving the Europeans a second chance to avoid being attacked. Professor John Kelsay has recently written that according to sharia law, one warning to an enemy is sufficient, but the "renewal of the invitation would be a good thing but is not required. Commanders in the field have discretion in this matter". For his Muslim audience, bin Laden chose to do the "good thing" [6].
The unease in Europe caused by bin Laden's clear threat was augmented by last week's fortuitous - for al-Qaeda and its allies - reminder to Europeans that they live under a terrorist radiological/nuclear threat, primarily because nuclear materials and weapons in the Former Soviet Union have not been fully secured. On November 29, Slovak authorities arrested a Slovak, two Hungarians, and a Ukrainian for attempting to sell about a pound of uranium that apparently was acquired in Russia and which had been enriched sufficiently to be considered "weapons grade". While there was not enough material to make a nuclear device, there was plenty to build a radiological or "dirty" bomb [7].
Doing the math
When all is said and done, are Western politicians and commentators correct in suggesting bin Laden's most recent statement is really just "nonsense" and "ridiculous"? Looked at as an isolated statement this conclusion might be plausible. But in the overall context of the ally-stripping thrust of al-Qaeda's media doctrine, one must imagine that bin Laden and his lieutenants are well pleased with matters as they stand today, especially in Europe. Since 2002, President George W Bush's circle of foreign-leader supporters has thinned considerably; the UK's Tony Blair, Italy's Silvio Berlusconi, Italy's Jose Maria Aznar, and, most recently, Australia's John Howard have left the scene via election defeats or party leadership changes, all of which had much to do with the support of those gentlemen for US policy in Afghanistan and Iraq.
More troubling for the United States, the list of either long-gone or bound-for-home coalition members departing from Iraq and Afghanistan is even lengthier: Italy, Spain, South Korea, the Philippines, Japan, Australia, Poland, Thailand, Portugal, Norway, Singapore, Nicaragua, Honduras, the Dominican Republic, Hungary, Slovakia, Moldova, Ukraine, and New Zealand [8].
Given this withering of the US-led coalitions in Afghanistan and Iraq - an obvious success for al-Qaeda's ally-stripping campaign (even if that effort is only one of several causative factors) - one wonders how a senior US official could have said last week, "I think our NATO allies understand quite clearly what is at stake in Afghanistan as well as elsewhere around the world in fighting terrorism ... and I see no diminution in that level of commitment." [9] Clearly, bin Laden, al-Qaeda and their allies have seen what the senior US official missed.
Michael Scheuer served in the CIA for 22 years before resigning in 2004. He served as the chief of the bin Laden Unit at the Counterterrorist Center from 1996 to 1999. He is the once anonymous author of Imperial Hubris: Why the West is Losing the War on Terror and Through Our Enemies' Eyes: Osama bin Laden, Radical Islam, and the Future of America. Dr Scheuer is a senior fellow with The Jamestown Foundation.
Even before the full text of Osama bin Laden's November 29 statement "To the European Peoples" [1] was available, Western officials and pundits were dismissing it as an "old tactic", "ridiculous", and as "Osama's new nonsense" [2].
While such conclusions probably are comforting to those making them, they are wrong. Bin Laden's message sounded a pitch-perfect note to the Europeans he addressed, was clearly and ominously threatening to those listeners and fortuitously coincided with a fresh reminder that Europe and America are vulnerable to radiological attacks by non-nation-state actors.
Historical context
As always, bin Laden's statement cannot be understood and assessed unless examined in the light of earlier statements and their impact. In this case, bin Laden's November 29 statement is part of the media-operations doctrine al-Qaeda put in place after the US-led invasion of Afghanistan in 2001 and augmented after the US-led invasion of Iraq in 2003. The doctrine has multiple goals, but the goal bin Laden was aiming for on November 29 is that of stripping away allies from the United States, particularly the nations involved in the occupations of Iraq or Afghanistan.
On November 21, 2002, bin Laden launched al-Qaeda's ally-stripping campaign by starkly telling "countries allied to the US" that "reciprocity [in war] is only fair". Appealing then, as now, over the heads of governments allied to the United States, bin Laden asked, "Why do your governments ally themselves to the criminal gang in the White House against the Muslims? Why did your governments ally themselves to the United States in this attack on Afghanistan, and I mention in particular Britain, France, Italy, Canada, Germany, and Australia?" Ending his message, bin Laden stressed to the "allied peoples" that their fate was in their own hands, "Just as you kill you are killed. Just as you bombard you are bombarded. Rejoice at the harm that is coming to you." [3]
Then, in April 2004, bin Laden narrowed this message to "our neighbors, north of the Mediterranean", offering the Europeans "a reconciliation initiative" because of "their positive reactions" - bin Laden was referring here to the Spanish voters' defeat of prime minister Jose Maria Aznar's government after the March 2004 train bombings in Madrid. In the 2004 statement, bin Laden offered the European people a truce, saying that "it is in both sides' interest to check the plans of those [European political leaders] who shed the blood of peoples for their narrow personal interest and subservience to the White House gang." Bin Laden told the Europeans:
I also offer a peace initiative ... whose essence is our commitment to stopping operations against every country that commits itself to not attacking Muslims or interfering in their affairs - including the US conspiracy on the greater Islamic world. This peace can be renewed once the period signed by the first government expires, and a second government is formed, with the consent of both parties. The peace will start with the departure of its last soldier from our country. The door of peace is open for three months [from] the date of announcing this statement. [4]
Not surprisingly, bin Laden's offer was denounced by the United States and harshly rejected by all European governments. The rejection was followed by two attacks on the London transportation system; the disruption of a plot in the UK to destroy ten passenger airliners over the Atlantic; the dismantling of al Qaeda related or inspired cells in Spain, Italy, the UK, Germany, and Denmark; the so-called "Doctors' plot" attacks against a popular London nightclub and Glasgow airport; and remarks by senior government officials in Britain, Germany, and Denmark that al-Qaeda is related in one way or another to Islamist terrorist networks and operational activities in their countries [5].
Current environment
Against this background, bin Laden's new message is another appeal "to the peoples of the states allied to America in the invasion of Afghanistan, and I mention specifically Europe". He again asks why European citizens have allowed Afghanistan to be "invaded without right by your unjust governments", who joined the US-led invasion and occupation. Bin Laden lays great stress on the number of Afghan civilians who have been killed by North Atlantic Treaty Organization (NATO)and US forces, thereby underscoring a growing criticism of the Afghan war by the European public, media and some politicians.
He also mocks the Europeans as "vassals" of the United States, noting that their politicians are lackeys who "are thronging the steps of the White House" and preventing US soldiers from "being held to account by European courts". Whatever the West thinks about bin Laden's words - especially his pot-calling-the-kettle-black condemnation of civilian casualties - there is no doubt that he has made a finely gauged assessment of Europe's rampant anti-American sentiment, as well as its decreasing official support for US policies in the Muslim world.
The continuing threat present in bin Laden's 29 November statement seems obvious, but, as noted above, several Western commentators have argued the message contains no threat. Bin Laden told Europeans "it is better for you to restrain your politicians" from supporting the United States and to instead have them "work diligently to remove oppression from the oppressed". The un-ally-yourselves-from-the-US-or-else nature of these words is apparent, especially given the rising tide of Islamism - rhetorical, politically active, and violent - that has occurred in Europe since bin Laden's 2004 truce offer was rejected .
Indeed, bin Laden's November 29 statement is also meant to inform Muslims that he is - as per the Prophet Mohammad's directions - giving the Europeans a second chance to avoid being attacked. Professor John Kelsay has recently written that according to sharia law, one warning to an enemy is sufficient, but the "renewal of the invitation would be a good thing but is not required. Commanders in the field have discretion in this matter". For his Muslim audience, bin Laden chose to do the "good thing" [6].
The unease in Europe caused by bin Laden's clear threat was augmented by last week's fortuitous - for al-Qaeda and its allies - reminder to Europeans that they live under a terrorist radiological/nuclear threat, primarily because nuclear materials and weapons in the Former Soviet Union have not been fully secured. On November 29, Slovak authorities arrested a Slovak, two Hungarians, and a Ukrainian for attempting to sell about a pound of uranium that apparently was acquired in Russia and which had been enriched sufficiently to be considered "weapons grade". While there was not enough material to make a nuclear device, there was plenty to build a radiological or "dirty" bomb [7].
Doing the math
When all is said and done, are Western politicians and commentators correct in suggesting bin Laden's most recent statement is really just "nonsense" and "ridiculous"? Looked at as an isolated statement this conclusion might be plausible. But in the overall context of the ally-stripping thrust of al-Qaeda's media doctrine, one must imagine that bin Laden and his lieutenants are well pleased with matters as they stand today, especially in Europe. Since 2002, President George W Bush's circle of foreign-leader supporters has thinned considerably; the UK's Tony Blair, Italy's Silvio Berlusconi, Italy's Jose Maria Aznar, and, most recently, Australia's John Howard have left the scene via election defeats or party leadership changes, all of which had much to do with the support of those gentlemen for US policy in Afghanistan and Iraq.
More troubling for the United States, the list of either long-gone or bound-for-home coalition members departing from Iraq and Afghanistan is even lengthier: Italy, Spain, South Korea, the Philippines, Japan, Australia, Poland, Thailand, Portugal, Norway, Singapore, Nicaragua, Honduras, the Dominican Republic, Hungary, Slovakia, Moldova, Ukraine, and New Zealand [8].
Given this withering of the US-led coalitions in Afghanistan and Iraq - an obvious success for al-Qaeda's ally-stripping campaign (even if that effort is only one of several causative factors) - one wonders how a senior US official could have said last week, "I think our NATO allies understand quite clearly what is at stake in Afghanistan as well as elsewhere around the world in fighting terrorism ... and I see no diminution in that level of commitment." [9] Clearly, bin Laden, al-Qaeda and their allies have seen what the senior US official missed.
Michael Scheuer served in the CIA for 22 years before resigning in 2004. He served as the chief of the bin Laden Unit at the Counterterrorist Center from 1996 to 1999. He is the once anonymous author of Imperial Hubris: Why the West is Losing the War on Terror and Through Our Enemies' Eyes: Osama bin Laden, Radical Islam, and the Future of America. Dr Scheuer is a senior fellow with The Jamestown Foundation.
How central bankers could save the world
By Chan Akya
I am not sure what the climate change discussions in Bali are expected to achieve, besides imposing unnecessary hardships on Australians looking for cheap booze before the Christmas break. (I am usually inclined to accommodate such wishes with respect to the antipodeans, and their ejection of prime minister John Howard in recent elections has made them quite popular in Asia.)
If the intent of the conference was to reshape the global economy, then the assembled delegates have started completely the wrong way. Then again, these left-leaning do-gooders cannot be expected to get things right anyway.
Where I propose they start is in the halls of global central banks instead, for the biggest culprits of the global warming debate lie right there. To explain why I believe that is the case, readers can look at the following topics - consumption, negative goods and innovation. Once these are explained, it becomes easy to see what global central bankers should do.
Consumption
By and large, the world economy thrives on consumption and especially the American kind. The US economy supplies one in five dollars of global consumption. This, added to the second dollar supplied by Europe, is what pushes global warming.
The US economy doesn’t produce as much as it consumes, hence its significant current account deficit. The other deficit, namely budget, is merely a function of Dick Cheney lying through his teeth (dentures?) about pretty much everything the government does.
Going back to the current account deficit though, it represents the ''dream'' target of any Green. In actual carbon terms, the import of Asian products for example represents the carbon emissions of Asian countries as well as those of the global shipping industry. All told, various publications cite different figures but it would not be hazardous to assign some 30% of global emissions to the US current account deficit.
This is what the Greens miss completely - they count the emissions of China and India in the same league as those of the US and Europe, and that is wrong because a substantial portion of Asian emissions goes to the manufacture of goods consumed in the US.
In turn, what gets consumed in the US is also financed by Asia because Americans stopped saving from the time Carter stepped down. This is the billions of dollars in Asian central banks devoted to the purchase of US treasury bonds, as well as various ''highly rated'' securities. I have written often enough about how much money will be lost in Asia because of these bonds, and there is no need to repeat my arguments here.
To a large extent, the twin forces of a disingenuous Fed (euphemism for outright liars) and harmony-seeking Asian central banks (euphemism for dumb no-gooders who wouldn’t get a job flipping burgers if their uncles hadn’t made them the governors of the People's Bank of China or Bank of Japan or whatever) allow this circle of deficit-financed consumption to persist.
At the moment, with US consumer loans looking very risky indeed – this week for example reports showed sharply increased delinquency rates on auto loans in addition to the continued defaults on housing loans - Asian bankers are panicking about what to do with the billions of US securities on their books.
They have urged the US Fed to become more aggressive on interest rate cuts to help the US economy recover, in effect helping to perpetuate the cycle of global warming described above. In the face of rampant inflation, it makes sense for the US Fed to hike rates now and engineer a hard landing for the US economy. A few million Americans will be thrown out of work, but so what - they weren’t necessarily working on anything except selling each other inflated housing anyway.
A hard landing for the US economy will help cut global carbon emissions, by a factor of over 10%, so why not engineer it? This will also force Asian central banks to abandon their US dollar pegs (which is the main reason their incompetence can never be seen by the public) and actually try to manage inflation and growth in their own countries.
With a bulk of the world’s manufacturing now in Asia, a shift in consumption to the region would not be a bad thing, and anyway overall shipping emissions will decline because goods will be consumed closer to the point of manufacture.
Negative economic goods
The second aspect that the Greens miss out is the pricing of negative economic goods. The Greenspan Fed introduced some innovations in the calculation of inflation (and here I use the word innovation in the sense of lying) wherein the pricing of goods was adjusted for improvements in the product.
Thus, a medium-sized family car could well cost a couple of thousand dollars more than the last year’s model, but by incorporating metrics such as improved safety, higher engine capacity and bigger boot, the Fed could say that the price of the car actually fell for the year. This in turn meant that inflation was negative, which in turn allowed them to cut interest rates, boost consumption and all the stuff described above.
Think back though - if the world’s central banks can be urged to price negative economic goods into their calculation of inflation, they would have a completely different picture. In practice, the price of an average supermarket widget would have to be pushed up to highlight the effect of shipping it over from China, to the detriment of the global climate.
That alone can add some 10 percentage points to inflation calculations in the US and Europe, which should be sufficient to push these central banks from accommodative to restrictive in one step. The idea is hardly new as the US pioneered the pricing of negative economic goods with the tobacco industry. Just as smoking is bad for the lungs, driving cars and shipping dolls from China is bad for the environment. The reduction in living standards thus entailed should be reflected in the price of the product.
Innovation
There is an old joke from the dot-com era, wherein the computer industry makes light of the automobile industry. The computer nerds point out that if cars had evolved as quickly as computers in the nineties, the average automobile would drive like a Rolls Royce, be priced like a Hyundai and have the fuel economy of an electric car. The joke of course was in the response from the car industry, which said - yes, all that is technically possible, but if cars performed like computers, you would need to change your models every time the road markers were repainted, among other quibbles.
Whichever way you lean on the joke above, ie, sympathetic to the computer nerds or the automobile engineers, the fact of the matter is that innovation in the car industry has been extremely slow by the standards of modern science. I have written previously about the economics of the car industry, with the main point being that the intervention in the automobile industries of Europe and Japan by local governments is one of the main factors limiting innovation in the industry.
There are other industries, such as carbon capture, where the right dose of pricing – see the argument on negative economic goods above - would help push innovation that is currently stalled. Promising new technologies such as fuel cell stacks for homes, wind power for large industries and electric cars on the road are all stalled due to the limits on the economics of innovation.
Much as the global pharmaceutical industry refuses to research drugs for diseases that do not affect Americans and Europeans, research and development of alternative energy technologies will not take off until underlying economics are addressed. This is the most significant force that humanity possesses to offset global emissions, and yet there has been little to no progress.
Pricing money correctly
The price of money, much like anything else, can induce behavioral shifts. The problem of global warming is linked closely to the excessive deficit-financed consumption of the US, but equally the thoughtless pricing of negative economic goods in the process.
Global central banks have the responsibility as well as the ability to make a difference. The major central banks such as the US Fed, European Central Bank, Bank of Japan and Bank of England should be urged to change their inflation calculations to incorporate the effect of environmental damage wrought by various activities. This will help countries to change the mix of domestic production and consumption, through the rather blunt instrument of interest rate changes. These banks would for example look to raise rather than cut interest rates now, if these adjustments were made.
That would necessarily push the world into recession, but it will be a short one as innovation takes over and new products and technologies that come to the forefront will help reduce the carbon footprint of global industry.
The second aspect is to ensure that unnecessary restrictions on the pricing of currency rates are removed. China’s peg is not just bad for the global environment; it also encourages other countries in Asia and Latin America to maintain currency intervention well past anything required realistically.
The last change that is required is for the Greens to stop assembling in various exotic locations. Available technologies such as video conferencing and internet blogging are more than sufficient to get their points across to various government officials. Plus it would leave the cheap booze for the Australians, as demanded by nature.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
I am not sure what the climate change discussions in Bali are expected to achieve, besides imposing unnecessary hardships on Australians looking for cheap booze before the Christmas break. (I am usually inclined to accommodate such wishes with respect to the antipodeans, and their ejection of prime minister John Howard in recent elections has made them quite popular in Asia.)
If the intent of the conference was to reshape the global economy, then the assembled delegates have started completely the wrong way. Then again, these left-leaning do-gooders cannot be expected to get things right anyway.
Where I propose they start is in the halls of global central banks instead, for the biggest culprits of the global warming debate lie right there. To explain why I believe that is the case, readers can look at the following topics - consumption, negative goods and innovation. Once these are explained, it becomes easy to see what global central bankers should do.
Consumption
By and large, the world economy thrives on consumption and especially the American kind. The US economy supplies one in five dollars of global consumption. This, added to the second dollar supplied by Europe, is what pushes global warming.
The US economy doesn’t produce as much as it consumes, hence its significant current account deficit. The other deficit, namely budget, is merely a function of Dick Cheney lying through his teeth (dentures?) about pretty much everything the government does.
Going back to the current account deficit though, it represents the ''dream'' target of any Green. In actual carbon terms, the import of Asian products for example represents the carbon emissions of Asian countries as well as those of the global shipping industry. All told, various publications cite different figures but it would not be hazardous to assign some 30% of global emissions to the US current account deficit.
This is what the Greens miss completely - they count the emissions of China and India in the same league as those of the US and Europe, and that is wrong because a substantial portion of Asian emissions goes to the manufacture of goods consumed in the US.
In turn, what gets consumed in the US is also financed by Asia because Americans stopped saving from the time Carter stepped down. This is the billions of dollars in Asian central banks devoted to the purchase of US treasury bonds, as well as various ''highly rated'' securities. I have written often enough about how much money will be lost in Asia because of these bonds, and there is no need to repeat my arguments here.
To a large extent, the twin forces of a disingenuous Fed (euphemism for outright liars) and harmony-seeking Asian central banks (euphemism for dumb no-gooders who wouldn’t get a job flipping burgers if their uncles hadn’t made them the governors of the People's Bank of China or Bank of Japan or whatever) allow this circle of deficit-financed consumption to persist.
At the moment, with US consumer loans looking very risky indeed – this week for example reports showed sharply increased delinquency rates on auto loans in addition to the continued defaults on housing loans - Asian bankers are panicking about what to do with the billions of US securities on their books.
They have urged the US Fed to become more aggressive on interest rate cuts to help the US economy recover, in effect helping to perpetuate the cycle of global warming described above. In the face of rampant inflation, it makes sense for the US Fed to hike rates now and engineer a hard landing for the US economy. A few million Americans will be thrown out of work, but so what - they weren’t necessarily working on anything except selling each other inflated housing anyway.
A hard landing for the US economy will help cut global carbon emissions, by a factor of over 10%, so why not engineer it? This will also force Asian central banks to abandon their US dollar pegs (which is the main reason their incompetence can never be seen by the public) and actually try to manage inflation and growth in their own countries.
With a bulk of the world’s manufacturing now in Asia, a shift in consumption to the region would not be a bad thing, and anyway overall shipping emissions will decline because goods will be consumed closer to the point of manufacture.
Negative economic goods
The second aspect that the Greens miss out is the pricing of negative economic goods. The Greenspan Fed introduced some innovations in the calculation of inflation (and here I use the word innovation in the sense of lying) wherein the pricing of goods was adjusted for improvements in the product.
Thus, a medium-sized family car could well cost a couple of thousand dollars more than the last year’s model, but by incorporating metrics such as improved safety, higher engine capacity and bigger boot, the Fed could say that the price of the car actually fell for the year. This in turn meant that inflation was negative, which in turn allowed them to cut interest rates, boost consumption and all the stuff described above.
Think back though - if the world’s central banks can be urged to price negative economic goods into their calculation of inflation, they would have a completely different picture. In practice, the price of an average supermarket widget would have to be pushed up to highlight the effect of shipping it over from China, to the detriment of the global climate.
That alone can add some 10 percentage points to inflation calculations in the US and Europe, which should be sufficient to push these central banks from accommodative to restrictive in one step. The idea is hardly new as the US pioneered the pricing of negative economic goods with the tobacco industry. Just as smoking is bad for the lungs, driving cars and shipping dolls from China is bad for the environment. The reduction in living standards thus entailed should be reflected in the price of the product.
Innovation
There is an old joke from the dot-com era, wherein the computer industry makes light of the automobile industry. The computer nerds point out that if cars had evolved as quickly as computers in the nineties, the average automobile would drive like a Rolls Royce, be priced like a Hyundai and have the fuel economy of an electric car. The joke of course was in the response from the car industry, which said - yes, all that is technically possible, but if cars performed like computers, you would need to change your models every time the road markers were repainted, among other quibbles.
Whichever way you lean on the joke above, ie, sympathetic to the computer nerds or the automobile engineers, the fact of the matter is that innovation in the car industry has been extremely slow by the standards of modern science. I have written previously about the economics of the car industry, with the main point being that the intervention in the automobile industries of Europe and Japan by local governments is one of the main factors limiting innovation in the industry.
There are other industries, such as carbon capture, where the right dose of pricing – see the argument on negative economic goods above - would help push innovation that is currently stalled. Promising new technologies such as fuel cell stacks for homes, wind power for large industries and electric cars on the road are all stalled due to the limits on the economics of innovation.
Much as the global pharmaceutical industry refuses to research drugs for diseases that do not affect Americans and Europeans, research and development of alternative energy technologies will not take off until underlying economics are addressed. This is the most significant force that humanity possesses to offset global emissions, and yet there has been little to no progress.
Pricing money correctly
The price of money, much like anything else, can induce behavioral shifts. The problem of global warming is linked closely to the excessive deficit-financed consumption of the US, but equally the thoughtless pricing of negative economic goods in the process.
Global central banks have the responsibility as well as the ability to make a difference. The major central banks such as the US Fed, European Central Bank, Bank of Japan and Bank of England should be urged to change their inflation calculations to incorporate the effect of environmental damage wrought by various activities. This will help countries to change the mix of domestic production and consumption, through the rather blunt instrument of interest rate changes. These banks would for example look to raise rather than cut interest rates now, if these adjustments were made.
That would necessarily push the world into recession, but it will be a short one as innovation takes over and new products and technologies that come to the forefront will help reduce the carbon footprint of global industry.
The second aspect is to ensure that unnecessary restrictions on the pricing of currency rates are removed. China’s peg is not just bad for the global environment; it also encourages other countries in Asia and Latin America to maintain currency intervention well past anything required realistically.
The last change that is required is for the Greens to stop assembling in various exotic locations. Available technologies such as video conferencing and internet blogging are more than sufficient to get their points across to various government officials. Plus it would leave the cheap booze for the Australians, as demanded by nature.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
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