I wrote this ten days ago. Seems the plan is still the same as before the McCain interruption. Its main impact in the short term is to bring confidence to the financial market and may support a bounce. But, the bounce won't last very long. The economic crisis is coming soon. The US economy may contract by 2-5% in 2009. As the economy contracts, highly leveraged businesses in the real economy will get into trouble. Their debts will be in trouble also. It may lead to a PE industry crisis. Cheers. Andy
Plan B is no silver bullet
The US government has rushed out a barrage of measures, the so-called Plan B, to save its financial system. The measures include (1) establishing a government entity to take over $700 billion bad assets off the balance sheets of financial institutions (the figure excludes nearly $300 billion for bailing out AIG, Fannie Mae and Freddie Mac), (2) guaranteeing $3.4 trillion deposits in money market funds, and (3) banning short selling of nearly 800 financial stocks temporarily. The measures have revived markets. But, the euphoria may be short-lived. Plan B won't stop a gut wrenching recession-2% or more contraction for the US economy in 2009. In the longer term, the US still has to figure out how to pay for the losses, decrease leverage in the real and financial economy, and find a non debt-driven growth model. This is not just a crisis of confidence. The fundamentals are deteriorating fast. Plan B can't halt that trend.
The bankruptcy of Lehman Brothers triggered the financial tsunami that has forced the government's hand to rush out Plan B. It has struggled to hold the system together since the crisis began one year ago. It has dealt with the crisis piecemeal. When Bear Stearns collapsed, it persuaded JP Morgan to 'buy' it with $30 billion from the Fed as incentive. When Fannie Mae and Freddie Mac collapsed, it took them over. It tried for the longest time to persuade Lehman Brothers and Merrill Lynch to save themselves. The failing financial institutions took time to find the best deals for themselves, usually about keeping their bosses in elevated positions. Out of frustration over the slow pace of their self-rescue efforts, the government decided to 'kill a chicken and show it to the monkeys' and let Lehman fail. But, it didn't let AIG fail and took it over, i.e., putting government credit behind its bad assets, because AIG was viewed as a monkey.
But, the Lehman bankruptcy deeply scarred the financial market already in a fragile mental state. Institutional investors like pension funds or mutual funds became deeply concerned who they should be doing businesses with. They were ready to move their funds out of any Wall Street firm that was rumored to be failing. The withdrawal of their funds would bleed the highly levered Wall Street firms to death. This is why short sellers attacked Goldman Sachs and Morgan Stanley soon after the Lehman failure. The sinking share prices of the two giants sent everyone scurrying for cover. It felt like the end of the Wall Street. Indeed, if the government had not taken actions, the US's financial system would have collapsed.
Ironically, the Wall Street gave birth to the short sellers, or hedge funds, after the tech burst in 2000 to juice up their businesses. These hedge funds have grown enormously and now manage about $2 trillion. They have become big enough to take on the Wall Street. Like a modern day Oedipus play, they have come to slay their parents and take their kingdom. While the government measures have held them off for now. This drama is far from over. The Wall Street firms are staffed with corporate warriors who succeed by sucking up to their bosses, while hedge funds have attracted the brightest and the most ruthless. The battle is unevenly matched. Without government help, the Wall Street is doomed. Like Teutonic Warriors perched on hills overlooking Rome, they can't wait to sack the opulent and corrupt establishment.
Pundits and government officials have heaped praises on Hank Paulson and Ben Bernanke for their handling of the crisis. I disagree. They have failed to understand the nature of the crisis. This is the collapsing of Greenspan's debt empire. The financial system is a house of cards on an unprecedented scale. The establishment cannot be saved. The aristocrats on Wall Street have been making billions every year by mixing debts with debts. They call them derivatives. The government cannot prop them up. There was nothing but air inside. The financial system that comes out of the crisis has to be very different. They should have seized all the failing financial institutions (i.e., most non banks and hundreds of banks), wiped out equity holders and debt holders, send debt peddlers to jail, bring down the leverage quickly, and attract foreign capital to recapitalize a much smaller but viable financial system. Instead, they hoped the people who made the bubble to solve the problems for them.
Let me launch a broadside on the Wall Street big wigs. Most of them have already been fired but walked away with millions as golden handshakes. Hopefully, justice will eventually catch up with them, and those who have destroyed so much would end up in maximum prison. The survivors still don't believe that their successes were a bubble phenomenon and psychologically biased towards preserving their empires. In a bubble, people who succeed are daring but not necessarily smart. But, successes make them believe otherwise. That is what brings them to a tragic ending. They are not capable of understanding the mess they have created. This is why the government's attempt for these people to rescue themselves would never work.
The delaying tactic by the government was due to the political considerations on the ongoing presidential election. A government bailout would expose the economic mismanagement of the past, which would diminish the chances of the Republican Candidate, John McCain, in November. Now the market has forced the government's hand. The rescue probably has killed McCain's chance to be the next president.
How would Plan B play out? I think it merely brings temporary relief. As investors imagine that the government takes over bad assets, they think they can forget about it and everyone can resume 'normal' life. This naïve view won't last. Who would pay for the losses? Wouldn't the government go after shareholders and creditors? Could taxpayers who are losing their homes have the money to cover the losses? Could the government whose debts stand at $10 trillion borrow more to pay the bill?
After covering the losses embedded in the bad assets, the US economy is still over levered. It takes an enormous amount of money to recapitalize the US economy. The US's non-financial sector debt rose to 226% of GDP in 2007 from183% ten years before, and the financial sector debt surged to 114% of GDP from 64% during the same period. The real economy may need 40% of GDP in extra equity or $5.5 trillion, equivalent to one third of the US's stock market capitalization. Even if Americans tighten belts and raise savings to boost their equity capital, the process would be too long for financial markets to feel comfortable today. The US may need foreign capital at least for half of the needed amount.
The US's financial sector may have to decrease leverage by $5-8 trillion. A significant portion of that are bad assets. The total reported losses have already amounted over $400 billion. New losses would far exceed that amount. As the total losses could be similar to the total amount of capital in the US's financial system before the crisis began, the US may have to let foreigners be majority owners of its big financial institutions. In the fund raising of the past year, the US's financial institutions sold minority stakes to sovereign wealth funds around the world. Without any control over these institutions, they of course are resentful of the terrible losses that they have suffered. In future fund raisings, the US's financial institutions may have to sell controlling stakes to foreigners.
The solution to America's crisis must involve the countries that own $10 trillion in foreign exchange reserves. The US economy is undercapitalized. An internal solution is usually one form of debt replaced with another. The current proposals fall into this category. When the shell game runs out of options, printing money is the only way out. That will eventually lead to dollar collapsing and hyperinflation in the US economy. The world should come together to prevent such a tragic ending. Countries with big foreign exchange reserves like China, Japan, Kuwait, Saudi Arabia, UAE, etc., should sit down with the US government to find a way to recapitalize its economy. They should swap their dollar assets in debt instruments like treasuries for equity assets like stocks.
The world has a vested interest in ensuring an orderly resolution to the US's crisis. If the US prints money to solve its problems, it will lead to the destruction of everyone's wealth in dollar assets and a global depression of unimaginable proportion. Rising leverage in the US has driven the demand growth in the global economy in the past decade. It has led to large US trade deficits and surging foreign exchange reserves among its trading partners. The foreign exchange reserves have been recycled back into the US's debt instruments, reinforcing its leverage-driven demand growth. Hence, the high foreign exchange reserves of its trading partners and the excessive leverage of the US economy are two sides of the same coin. It is hard to imagine that the solution wouldn't require both sides to participate.
The US needs to change its policy towards foreign investments. Its xenophobia over investments from non-western countries is a major barrier to the solution. Remember CNOOC's attempted takeover of Unocal and the forced sale of the US ports by Dubai Ports World. If the US can successfully make a debt-equity swap for its economy, the equity providers have to be Asian countries or oil exporters who Americans are not used to as owners. But, there are no other solutions. The US needs to become more like the UK in treating foreign ownership.
While the above proposal is a win-win for the world, the odds for its implementation are quite low. The United States still has an unrealistic view of itself. Its domestic politics is insular and xenophobic. Even tough the US is the largest debtor in the world it behaves like the largest creditor. Americans may need much more hardship to change their attitude.
The US's unwillingness to accept capital from non-western countries may push it down the path of printing money. The Fed can purchase whatever papers the Federal government issues to cover the losses in the bad asset disposal. It will lead to high inflation. When foreigners dump their dollar assets, the dollar would crash, the US may experience hyperinflation and economic chaos.
To protect themselves against such a scenario, foreign governments should switch their treasury holdings into stocks that preserve value better during inflation. Despite their sharp decline in recent months, the US's stocks are fairly valued, not dirt cheap. They may well decline in the coming months in a recessionary environment. But, they are better value than treasuries now. Central banks should put wealth preservation ahead of all other considerations.
Ironically, if foreigners switch from treasuries into stocks, it will ease the equity capital shortage in the US economy and discourage money printing by the Fed by pushing up treasury yields. Maybe, foreigners can save America even if it doesn't want to.
While the financial crisis is still far from over, the economic crisis is already around the corner. Rising leverage has supported the US's consumption led growth for the past decade. A significant portion of the US's aggregate demand is kept afloat by the bubble. As the bubble bursts, that part of the demand would vanish. The coming recession could be the most severe in fifty years. The US's economy could contract by 2% or more in 2009.
Many would be skeptical of this view. When the crisis happened one year ago, everyone worried about the worst. But, the US economy has not contracted. Many attribute it to the US's good export performance on 30% dollar devaluation. But, that is not the most important factor. The US economy has not decreased its leverage. The US's non-financial sector debt rose to $32.4 trillion by mid-2008 from 30.4 one year ago, and the financial sector debt to $16.5 trillion from 15.0 during the same period. The calm in the economy and financial system was sustained by increasing debts to cover up the bad debt problem.
The market has forced the issue now. Like Asian economies in 1998, the US has to deleverage . It means no loans for sustaining a big chunk of the existing consumption. It means acceleration in property price decline. These two factors would cause significant economic contraction. The knock-on effect will work through rising employment. The unemployment could rise above 8% in 2009, which would amplify the economic contraction. Asian financial markets collapsed in 1997, and their economies followed in 1998. The US is repeating the experience.
Beyond the economic collapse next year, the recovery beyond would be quite anemic. Asian economies recovered quickly in 1999 from export boom as they devalued their currencies and the global economy was good. The same would not happen to the US. Europe and Japan have weak domestic demand due to their aging problem. Emerging markets are not big enough to support the US recovery. The odds are that the US would stay flattish for years to come.
Governments around the world are implementing measures to boost financial markets. Their effects won't last for long. The world has experienced enormous prosperity since the fall of the Berlin Wall that discredited one form of economic management. The globalization since has boosted productivity by increasing division of labor across the world. But, a significant part of the prosperity was due to the debt bubble. Indeed, during the bubble, the Davos crowd-the globalization establishment heaped praises on financial capitalism led by Wall Street. That model is now discredited. We are moving towards a different world. It may not be as glitzy as the past one but could be better for average working men and woman. The transition, however, would be painful.
Tuesday, September 30, 2008
Monday, September 22, 2008
Global Hard Landing
The US government is setting up an RTC-like organization to purchase bad assets from financial institutions for warehousing and disposing overtime. This is a step in the right direction. Market may feel good for a couple of weeks, which is how long this bounce would last, in my view. Details of the rescue may unsettle investors. The government may purchase the bad assets at very low prices. Many financial institutions still wouldn't be viable after the forced write-downs. The government may seek deals with them like with AIG, which would be hugely dilutive for existing investors. This is a bounce to sell into.
Apart from the short-lived bounce, there is little upside to stay in the market. While the financial crisis is far from over, the economic crisis is already around the corner. The US is heading for a hard landing. A significant part of the US consumption is kept afloat by the credit bubble. As the bubble collapses, the credit for consumption dries up, the US's economy will likely contract by 2-5%. 1997 for Asia is 2008 for America, 1998 for Asia 2009 for America.
Europe and Japan are already contracting. Their recession will likely last through 2009. They have little domestic demand strength and have always been export-driven. Their weakness will feed back into the US. It has benefited from strong exports in 1H08. The export support vanishes just as its credit crisis hits its consumers. The downward spiral is just beginning.
The risk for a hard landing in China is rising and fast. China's exports, 40% of GDP in nominal value and probably 25% of GDP in value added, may decline in 2009 for the first time in three decades. China was small enough and cheap enough to grow its exports regardless of global demand through market share gains. But, China is now the largest exporter in the world. Market share gain couldn't offset downward trend anymore.
China's property bubble is bursting. The fuel for the bubble was the export income and hot money inflow. Both sources are contracting. The property market is probably heading for a hard landing. The property burst will have a large effect on industry. Demand for auto and white goods won't grow much, may even decline.
Retail sales would do ok. Wages are rising at good speed due to better balance between demand and supply in labor market. But, China's consumption is only 40% of GDP. Even if it grows 10%, it contributes four percentage points to GDP growth. But, the income effect from slowdown or contraction in exports and property should have a meaningful effect on household income. 10% growth is clearly optimistic.
I believe that the government will initiate a fiscal stimulus package. The third plenum of the 17th Party Congress will convene next month. It could bring a consensus on the need for stimulus. The content is unpredictable. I want the package to address liquidity problem at local governments, redistribute income to farmers by raising prices for food products, and accelerate infrastructure projects. I would be surprised that the package can add more than 2 percentage points to growth. It could only be a cushion on the way down, not sustain high growth rate.
No matter how we look at production, demand, or income angles, China's growth rate next year would be significantly lower than in 2008. In 1998, electricity consumption contracted for two quarters. I wouldn't be surprised that the same happens next year.
With Europe and Japan contracting, the US is heading for a hard landing, and China possibly heading for a hard landing, market can hardly perform in the foreseeable future. If global recovery, probably a mild one, is possible in 2010, markets may perform only by mid-2009.
I remain bullish on energy and gold in the current environment. A cartel of rich men works. The OPEC is that now. It didn't work in the 1990s because they were poor and everyone cheated to gain income. They have no incentives to produce more in an environment of declining price. They can't even spend the money they have earned and don't need new money. Gold is a play on easy monetary policy. All major economies have negative real interest rates. The situation would only worse in 2009. Gold is a currency substitute. When currency supplies surge like now, it should appreciate too.
We live in interesting times. This is the end of the Greenspan bubble. Finance has led the global economy in the past two decades, because Greenspan's liquidity made Wall Street very big relative to real economy. It was a debt bubble in the derivative dress. The future will be very different. In 1989, socialism was discredited. In 2008, financial capitalism is discredited. The world would be different in future. In what form we don't yet know. via
Apart from the short-lived bounce, there is little upside to stay in the market. While the financial crisis is far from over, the economic crisis is already around the corner. The US is heading for a hard landing. A significant part of the US consumption is kept afloat by the credit bubble. As the bubble collapses, the credit for consumption dries up, the US's economy will likely contract by 2-5%. 1997 for Asia is 2008 for America, 1998 for Asia 2009 for America.
Europe and Japan are already contracting. Their recession will likely last through 2009. They have little domestic demand strength and have always been export-driven. Their weakness will feed back into the US. It has benefited from strong exports in 1H08. The export support vanishes just as its credit crisis hits its consumers. The downward spiral is just beginning.
The risk for a hard landing in China is rising and fast. China's exports, 40% of GDP in nominal value and probably 25% of GDP in value added, may decline in 2009 for the first time in three decades. China was small enough and cheap enough to grow its exports regardless of global demand through market share gains. But, China is now the largest exporter in the world. Market share gain couldn't offset downward trend anymore.
China's property bubble is bursting. The fuel for the bubble was the export income and hot money inflow. Both sources are contracting. The property market is probably heading for a hard landing. The property burst will have a large effect on industry. Demand for auto and white goods won't grow much, may even decline.
Retail sales would do ok. Wages are rising at good speed due to better balance between demand and supply in labor market. But, China's consumption is only 40% of GDP. Even if it grows 10%, it contributes four percentage points to GDP growth. But, the income effect from slowdown or contraction in exports and property should have a meaningful effect on household income. 10% growth is clearly optimistic.
I believe that the government will initiate a fiscal stimulus package. The third plenum of the 17th Party Congress will convene next month. It could bring a consensus on the need for stimulus. The content is unpredictable. I want the package to address liquidity problem at local governments, redistribute income to farmers by raising prices for food products, and accelerate infrastructure projects. I would be surprised that the package can add more than 2 percentage points to growth. It could only be a cushion on the way down, not sustain high growth rate.
No matter how we look at production, demand, or income angles, China's growth rate next year would be significantly lower than in 2008. In 1998, electricity consumption contracted for two quarters. I wouldn't be surprised that the same happens next year.
With Europe and Japan contracting, the US is heading for a hard landing, and China possibly heading for a hard landing, market can hardly perform in the foreseeable future. If global recovery, probably a mild one, is possible in 2010, markets may perform only by mid-2009.
I remain bullish on energy and gold in the current environment. A cartel of rich men works. The OPEC is that now. It didn't work in the 1990s because they were poor and everyone cheated to gain income. They have no incentives to produce more in an environment of declining price. They can't even spend the money they have earned and don't need new money. Gold is a play on easy monetary policy. All major economies have negative real interest rates. The situation would only worse in 2009. Gold is a currency substitute. When currency supplies surge like now, it should appreciate too.
We live in interesting times. This is the end of the Greenspan bubble. Finance has led the global economy in the past two decades, because Greenspan's liquidity made Wall Street very big relative to real economy. It was a debt bubble in the derivative dress. The future will be very different. In 1989, socialism was discredited. In 2008, financial capitalism is discredited. The world would be different in future. In what form we don't yet know. via
Tuesday, September 16, 2008
Obama or McCain: The dollar will weaken
The US is muddling through in its handling of the crisis. That makes the election outcome potentially very important. 15 years ago, Japan cut interest rate to zero to stabilze bankrupt financial institutions and boost fiscal stimulus to stabilize demand. That led to a 'lost' decade, which allowed businesses and banks to slowly recover their viability. It was actually slow transfer of government money to corporate balance sheet. The equilibrium, however, was made possible by the big trade surplus, i.e., high savings rate, which kept interest rate low depiste high fiscal deficit and yen strong despite zero interes rate.
The US runs 5% of GDP in current account. The government debt level is already too high. Japanese solution is not viable. The only remaining weapon is the dollar. The US can print dollar and share the burden with the world. I think the new administration will use it aggressively. The equilibrium for the US over the next few years is likely negative real interest rate, high inflation, and weak dollar. What upsets the equilibrium is a potential bond market collapse. So, as long as the treasury yield remains low, the US has no incentive to keep dollar strong. Only when central banks dump treasuries that the US would change its policy.
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The US presidential election is entering its final weeks. Both Democrats and Republicans had their conventions and crowned their candidates. Some analysts call the election the most important since 1980. The comparison is certainly apt. The US was facing a foreign policy crisis as Iranian Revolutionary Guards held the US embassy staff hostages and surging oil price caused stagflation. But, today's problems are more intractable. Today's symptoms of stagflation and foreign policy crisis reflect deeper structural problems. The costs of healthcare and social security are the bombs that may explode the US economy. The US property-cum-credit bubble results from the desire to maintain living standard higher than what fundamentals could support. The bursting of the bubble should make the US face reality. But, it is not. The response, so far, is denial. Then current administration is using the central bank to lend to failing financial institutions to keep them alive. Unless political changes lead to a different approach, the US will likely stagnate like Japan before and with inflation.
The takeover of Fannie Mae and Freddie Mac is the latest example of the US's muddling through strategy. It is a bailout and not a bailout. The Treasury promises that it would bring back market confidence in the two institutions, implying government guarantee for their credit. But, it promises no costs to taxpayers, i.e., no bailout. It is hoping that the market would believe the former and start to give them easy money again, which leads to more money for the mortgage market, which might revive the property market, which would reverse the losses. What a marvelous scheme! But, it wouldn't work. The bubble is burst. A little trick like this wouldn't stitch the bubble together again.
The policies that Democrats and Republicans have promised in their campaigns are not really addressing the fundamental problems. One US politician recently asked me at a brainstorming seminar what a foreigner like me thought the US should do. I opined that the US should spend less and produce more. That was taken as a surprise. The policy circle was talking up another fiscal stimulus package then. People who are deep in a situation often fail to see the big picture. The US has got into the current situation from spending too much money. How could the problem be solved by spending more? Unfortunately, both parties are promising more money for healthcare, education, bailouts for delinquent mortgage borrowers, and tax cuts, exactly opposite to what the US should do.
As stagflation takes hold, the US will become much more defensive towards globalization. For a starter, we should forget another global accord on increasing trade. The Doha Round has failed due to opposition from developing countries. The next US government wouldn't look at it kindly, i.e., Doha is truly dead. Further, the US may back away from the existing free trade arrangements. One of the Clinton Administration's big accomplishments was getting the North America Free Trade Agreement ('NAFTA') that introduced free trade among Canada, Mexico and the US. NAFTA became a dirty word during the primaries of both parties. Bill Clinton's wife, Hilary Clinton, opposed it. Obama opposed it. The Republican nominee, John McCain, still defended free trade, even though the Republican Party is more ambivalent towards it. While there is still some uncertainty over the outcome of the presidential election, the outcome for the congressional elections is not; the Republicans will become a diminished minority in the Congress. The direction on free trade is clearly backwards.
I am not suggesting there would be differences between the two. Obama is a traditional liberal in favor of middle and low income classes, while a Republican one would continue tax cuts that favor the rich. This is a traditional battle line between the two parties. For the masses, an Obama administration is preferable. They have fared poorly in the past decade and are losers during rapid globalization. The asset bubble postponed their hardship by allowing them to borrow against rising home values and run up credit card debts. As the bubble bursts, the chicken is coming home to roost. At the same time, gasoline price has tripled. If their mind is clear, they wouldn't vote for the Republican candidate.
In a traditional democracy, politics of economic interests boils down to two sides that represent labor and capital. The competition boils down to tax and welfare. Market competition allocates income in a certain way. It is an efficient outcome in some sense. But, skewered income distribution may reinforce itself and lead to a vicious cycle. For example, children born to poor families may not get proper education and will get low income when they grow up. Hence, income redistribution can improve dynamic efficiency. On the other hand, a prosperous society cannot tolerate abject poverty for a significant share of the society. Hence, income redistribution to some extent is desirable for those who pay taxes.
The above standard case for income redistribution is often overwhelmed by the need for social justice. In many countries, probably most, rich people preserve and expand their wealth by controlling the government policy, i.e., skewered income distribution is due to social injustice rather than market force. Hence, income redistribution through tax policy is quite justified economically and morally.
Thus, labor party should prevail in a democracy. But, ruling party usually becomes entrenched and inefficient after being in power for a long time, changing to the other side can clean up the government. For example, the Labor Party in the UK has been in power for too long. The UK voters are ready to drive it out of power and bring back the conservatives.
The non-economic issues are unusually important in the US politics. Social values or cultural issues drive many voters, especially the energetic ones. Abortion rights and gun ownership are the most potent ones. Immigration and race are also highly divisive. These 'value' voters have grouped with tax cutters in the Republicans in the past two decades. As the 'value' voters are a small minority but are the most motivated, a Republican candidate must pass their tests or else. George W. Bush personifies what the Republican Party is. He is a born-again-Christian, the most powerful religious movement in the US, and a businessman in favor of low taxes. John McCain is in favor of low taxes but was at odds with the 'value' voters on key value issues. He lost the contest against George Bush in 2000 for that reason and has methodically changed his positions to secure the support of the Party's 'value' faction. He picked his vice presidential candidate for that reason.
The presence of the ''value' voters gives the Republican Party more chances to win than on economic issues alone. Most value investors are not economically well off. They tend to be white, live in small towns, poorly educated, own guns, and have many children. They don' have much in common with tax cutters who live in big cities, own businesses and/or substantial financial assets. McCain's choice of Vice President, Sarah Palin, is in the 'value' category. The choice served to energize the 'value' voters for McCain.
The alliance between the tax cutters and 'value' voters is not enough to win the election for McCain. They are still the minority and can win through their energy and passivity of the majority. The Democrats represent the majority. But the majorities are passive. Many don't register to vote. They think that their votes don't make a difference. The Republicans count on their passivity to win elections. But, the current election is quite different.
Obama is black. It has motivated the black community that has the lowest voting tendency. Also, Obama has connected with youth who usually have low turnout. Their increased participation will make a difference. The presidential elections in the past two decades were won or lost on thin margins. Rising turnouts usually favor the Democrats. Obama's ability to do that is a big plus.
Also, the economy is plummeting. A typical blue-collar worker makes under $2,000 after tax per month. He used to spend $120 per month on gasoline but now spends $500. His food bill was $600 per month but has risen to $900. On the other hand, healthcare insurance is $400 per month. His wage is not rising. Even if this person keeps his job, he is under enormous pressure to make ends meet. He is not in a position to support a family. Even though many of such voters like Hilary Clinton better, it is too much for them to vote for McCain who favors tax cuts for the rich.
An energetic minority like the Republican Party can control a country when the economy is in reasonable shape and the majority is not motivated to act. Today's situation is clearly different. The Republican Party has brought the US to its ruinous situation on both foreign policy and economy today. If the American voters choose the Republican Party again, they clearly deserve what's happening to them.
Despite the terrible record that the Republican Party is running on, the polls show a tight race between Obama and McCain. Obama's race and inexperience are often quoted as factors. Certainly, the election outcome is still open. The Democrats are likely to win the Congress big, which may give voters a reason to give the Whitehouse to the Republicans to prevent power concentration. However, a split government will lead to political gridlock, which is very bad for solving big problems. The current crisis requires a unified government. I suspect that the election outcome would not be as close as the polls indicate.
Politically, Barak Obama is a miracle. He announced his candidacy on February 10, 2007. At the time, he had been a senator for two years and was a state legislator, a part time job for seven years before. His executive experience is limited to his years as a community organizer in poor black neighborhoods in Chicago. His inexperience made his candidacy improbable. Seventeen months later, he has won the Democratic Party's nomination and is poised to win the general election for the presidency in November.
Obama belongs to the African American minority. No major country has voluntarily picked a leader from a minority in modern history. Combining his minority status with his inexperience, someone like him wouldn't have a chance in any other country. His rise reflects the dynamism of the US's political system and the risk taking appetite of its voters. Indeed, when a country is in so much trouble, it doesn't make sense to pick anyone from the establishment. Someone out of the establishment is by definition inexperienced. In a well functioning system, a leader gives directions, doesn't engage in detailed executions. The risk with someone like Obama is actually a lot less than it appears.
Regardless of who wins, it would be extremely difficult to turn the economy around. The US has been living in a debt bubble. There are many reasons for that. Greenspan was probably most responsible. He leaned towards easing during his 18 year reign at the Fed, didn't rigorously regulate derivatives, and tolerated sub prime surge. We can blame greed. Wall Street concocted complex products with assumed, not real reduction in risk and sold them to credulous but equally greedy investors. But, the bubble-conducive environment wouldn't necessarily lead to a bubble unless American households were eager to borrow. Why did they borrow and spend beyond their means for so many years?
The root cause was that many, possibly the majority, of Americans tried to defend their living standard during the rapid pace of globalization that decreased their earnings power. Economic theory says free trade is almost always beneficial for every economy, i.e., making pie bigger for every participating economy. However, how the pie divides within an economy changes with trade. There are absolute losers in free trade. The theory says that redistribution in each economy would make everyone better off. This is where politics comes in. How successful the political process goes depends on how quickly the pie expands and if the system is flexible and responsive. America's economy hasn't been expanding fast, but income distribution has. The Gini coefficient for income distribution rose to 0.469 in 2005 from 0.428 in 1990. It has probably ticked up significantly. The sharp rise in the Gini coefficient suggests declining living standard for a significant share of the population.
Rapid inflation of healthcare cost has played a more important role than globalization in raising inequality. The US's healthcare cost has surpassed 16% of GDP or twice as high as one quarter century ago. The high cost of healthcare imposes harsher burden on low income than high income groups as low income households pay bigger share of their income for healthcare. This is the reason that 15% of the US's population doesn't have insurance, because they can't afford it. Indeed, adjusting for healthcare cost, the median income for the US's middle class has been stagnant in real terms for the past decade.
The headwinds from globalization and healthcare made it difficult for an average American family to raise living standard from income growth. But, Americans still believed in ever rising living standard. Debts borrowed against overvalued properties served to support the fiction that everyone was better off. Indeed, the bubble boosted economic growth rate and made rising living standard more real. The giveaway was the large trade deficit and rising foreign debt. This is where financial 'innovations' came in; they understated risk through diversification and/or dynamic hedging and decreased equity capital for debt funding. Of course, all things are correlated in a crisis and diversification does add value, and dynamic hedging stops working exactly when you need it.
In addition to the financial crisis and the healthcare crisis, a social security crisis is looming. The baby boomers are retiring. The social security system is a pay-as-you-go system, i.e., one's contributions have not been saved but spent on someone else. The system generates 'surplus', when more people are joining the labor force than retiring. The reverse is also true. The shortfall of the system is estimated between 2-3 times GDP. The US government may be technically bankrupt. The next government has to do something about it.
What are Obama and McCain are offering for the crushing problems like financial crisis, skyrocketing healthcare cost, and bursting social security system? Not a lot. The few that they offer don't solve but may compound the problems. Both have supported financial bailouts. The Bush administration has just taken over Fannie Mae and Freddie Mac to stabilize the mortgage market and to probably boost McCain's election chance. But the government said it wouldn't cost taxpayers. They are still waiting for a miracle. Many financial institutions are kept alive by the Fed. They threaten to become zombies like in Japan during the 1990s.
On healthcare care, for example, every candidate is trying to widen the insurance coverage with government spending, but not cutting cost. While widening coverage improves social justice, it will compound the healthcare crisis in the coming years. The US's healthcare cost to GDP ratio is increasing by 0.25% per annum. The proposed programs will accelerate the trend. With healthcare cost escalating like that, the US economy cannot regain dynamism.
On social security, the Republicans want to privatize, i.e., suggesting to retirees to gamble in the stock market to make up for the shortfall. The Democrats want to tax the high income groups to boost their contributions. Neither is talking about cutting benefits, which is the only solution. The age to qualify, for example, has to be raised from the current 63. Otherwise, the government is burst.
The US economy is facing the biggest crisis since the Great Depression. It requires considerable sacrifice to solve. But politicians are talking the other way and promise more goodies. What gives? The dollar. Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay for the full cost. Eventually, foreigners will realize this and run. This game stops working when the dollar free-falls. via
The US runs 5% of GDP in current account. The government debt level is already too high. Japanese solution is not viable. The only remaining weapon is the dollar. The US can print dollar and share the burden with the world. I think the new administration will use it aggressively. The equilibrium for the US over the next few years is likely negative real interest rate, high inflation, and weak dollar. What upsets the equilibrium is a potential bond market collapse. So, as long as the treasury yield remains low, the US has no incentive to keep dollar strong. Only when central banks dump treasuries that the US would change its policy.
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The US presidential election is entering its final weeks. Both Democrats and Republicans had their conventions and crowned their candidates. Some analysts call the election the most important since 1980. The comparison is certainly apt. The US was facing a foreign policy crisis as Iranian Revolutionary Guards held the US embassy staff hostages and surging oil price caused stagflation. But, today's problems are more intractable. Today's symptoms of stagflation and foreign policy crisis reflect deeper structural problems. The costs of healthcare and social security are the bombs that may explode the US economy. The US property-cum-credit bubble results from the desire to maintain living standard higher than what fundamentals could support. The bursting of the bubble should make the US face reality. But, it is not. The response, so far, is denial. Then current administration is using the central bank to lend to failing financial institutions to keep them alive. Unless political changes lead to a different approach, the US will likely stagnate like Japan before and with inflation.
The takeover of Fannie Mae and Freddie Mac is the latest example of the US's muddling through strategy. It is a bailout and not a bailout. The Treasury promises that it would bring back market confidence in the two institutions, implying government guarantee for their credit. But, it promises no costs to taxpayers, i.e., no bailout. It is hoping that the market would believe the former and start to give them easy money again, which leads to more money for the mortgage market, which might revive the property market, which would reverse the losses. What a marvelous scheme! But, it wouldn't work. The bubble is burst. A little trick like this wouldn't stitch the bubble together again.
The policies that Democrats and Republicans have promised in their campaigns are not really addressing the fundamental problems. One US politician recently asked me at a brainstorming seminar what a foreigner like me thought the US should do. I opined that the US should spend less and produce more. That was taken as a surprise. The policy circle was talking up another fiscal stimulus package then. People who are deep in a situation often fail to see the big picture. The US has got into the current situation from spending too much money. How could the problem be solved by spending more? Unfortunately, both parties are promising more money for healthcare, education, bailouts for delinquent mortgage borrowers, and tax cuts, exactly opposite to what the US should do.
As stagflation takes hold, the US will become much more defensive towards globalization. For a starter, we should forget another global accord on increasing trade. The Doha Round has failed due to opposition from developing countries. The next US government wouldn't look at it kindly, i.e., Doha is truly dead. Further, the US may back away from the existing free trade arrangements. One of the Clinton Administration's big accomplishments was getting the North America Free Trade Agreement ('NAFTA') that introduced free trade among Canada, Mexico and the US. NAFTA became a dirty word during the primaries of both parties. Bill Clinton's wife, Hilary Clinton, opposed it. Obama opposed it. The Republican nominee, John McCain, still defended free trade, even though the Republican Party is more ambivalent towards it. While there is still some uncertainty over the outcome of the presidential election, the outcome for the congressional elections is not; the Republicans will become a diminished minority in the Congress. The direction on free trade is clearly backwards.
I am not suggesting there would be differences between the two. Obama is a traditional liberal in favor of middle and low income classes, while a Republican one would continue tax cuts that favor the rich. This is a traditional battle line between the two parties. For the masses, an Obama administration is preferable. They have fared poorly in the past decade and are losers during rapid globalization. The asset bubble postponed their hardship by allowing them to borrow against rising home values and run up credit card debts. As the bubble bursts, the chicken is coming home to roost. At the same time, gasoline price has tripled. If their mind is clear, they wouldn't vote for the Republican candidate.
In a traditional democracy, politics of economic interests boils down to two sides that represent labor and capital. The competition boils down to tax and welfare. Market competition allocates income in a certain way. It is an efficient outcome in some sense. But, skewered income distribution may reinforce itself and lead to a vicious cycle. For example, children born to poor families may not get proper education and will get low income when they grow up. Hence, income redistribution can improve dynamic efficiency. On the other hand, a prosperous society cannot tolerate abject poverty for a significant share of the society. Hence, income redistribution to some extent is desirable for those who pay taxes.
The above standard case for income redistribution is often overwhelmed by the need for social justice. In many countries, probably most, rich people preserve and expand their wealth by controlling the government policy, i.e., skewered income distribution is due to social injustice rather than market force. Hence, income redistribution through tax policy is quite justified economically and morally.
Thus, labor party should prevail in a democracy. But, ruling party usually becomes entrenched and inefficient after being in power for a long time, changing to the other side can clean up the government. For example, the Labor Party in the UK has been in power for too long. The UK voters are ready to drive it out of power and bring back the conservatives.
The non-economic issues are unusually important in the US politics. Social values or cultural issues drive many voters, especially the energetic ones. Abortion rights and gun ownership are the most potent ones. Immigration and race are also highly divisive. These 'value' voters have grouped with tax cutters in the Republicans in the past two decades. As the 'value' voters are a small minority but are the most motivated, a Republican candidate must pass their tests or else. George W. Bush personifies what the Republican Party is. He is a born-again-Christian, the most powerful religious movement in the US, and a businessman in favor of low taxes. John McCain is in favor of low taxes but was at odds with the 'value' voters on key value issues. He lost the contest against George Bush in 2000 for that reason and has methodically changed his positions to secure the support of the Party's 'value' faction. He picked his vice presidential candidate for that reason.
The presence of the ''value' voters gives the Republican Party more chances to win than on economic issues alone. Most value investors are not economically well off. They tend to be white, live in small towns, poorly educated, own guns, and have many children. They don' have much in common with tax cutters who live in big cities, own businesses and/or substantial financial assets. McCain's choice of Vice President, Sarah Palin, is in the 'value' category. The choice served to energize the 'value' voters for McCain.
The alliance between the tax cutters and 'value' voters is not enough to win the election for McCain. They are still the minority and can win through their energy and passivity of the majority. The Democrats represent the majority. But the majorities are passive. Many don't register to vote. They think that their votes don't make a difference. The Republicans count on their passivity to win elections. But, the current election is quite different.
Obama is black. It has motivated the black community that has the lowest voting tendency. Also, Obama has connected with youth who usually have low turnout. Their increased participation will make a difference. The presidential elections in the past two decades were won or lost on thin margins. Rising turnouts usually favor the Democrats. Obama's ability to do that is a big plus.
Also, the economy is plummeting. A typical blue-collar worker makes under $2,000 after tax per month. He used to spend $120 per month on gasoline but now spends $500. His food bill was $600 per month but has risen to $900. On the other hand, healthcare insurance is $400 per month. His wage is not rising. Even if this person keeps his job, he is under enormous pressure to make ends meet. He is not in a position to support a family. Even though many of such voters like Hilary Clinton better, it is too much for them to vote for McCain who favors tax cuts for the rich.
An energetic minority like the Republican Party can control a country when the economy is in reasonable shape and the majority is not motivated to act. Today's situation is clearly different. The Republican Party has brought the US to its ruinous situation on both foreign policy and economy today. If the American voters choose the Republican Party again, they clearly deserve what's happening to them.
Despite the terrible record that the Republican Party is running on, the polls show a tight race between Obama and McCain. Obama's race and inexperience are often quoted as factors. Certainly, the election outcome is still open. The Democrats are likely to win the Congress big, which may give voters a reason to give the Whitehouse to the Republicans to prevent power concentration. However, a split government will lead to political gridlock, which is very bad for solving big problems. The current crisis requires a unified government. I suspect that the election outcome would not be as close as the polls indicate.
Politically, Barak Obama is a miracle. He announced his candidacy on February 10, 2007. At the time, he had been a senator for two years and was a state legislator, a part time job for seven years before. His executive experience is limited to his years as a community organizer in poor black neighborhoods in Chicago. His inexperience made his candidacy improbable. Seventeen months later, he has won the Democratic Party's nomination and is poised to win the general election for the presidency in November.
Obama belongs to the African American minority. No major country has voluntarily picked a leader from a minority in modern history. Combining his minority status with his inexperience, someone like him wouldn't have a chance in any other country. His rise reflects the dynamism of the US's political system and the risk taking appetite of its voters. Indeed, when a country is in so much trouble, it doesn't make sense to pick anyone from the establishment. Someone out of the establishment is by definition inexperienced. In a well functioning system, a leader gives directions, doesn't engage in detailed executions. The risk with someone like Obama is actually a lot less than it appears.
Regardless of who wins, it would be extremely difficult to turn the economy around. The US has been living in a debt bubble. There are many reasons for that. Greenspan was probably most responsible. He leaned towards easing during his 18 year reign at the Fed, didn't rigorously regulate derivatives, and tolerated sub prime surge. We can blame greed. Wall Street concocted complex products with assumed, not real reduction in risk and sold them to credulous but equally greedy investors. But, the bubble-conducive environment wouldn't necessarily lead to a bubble unless American households were eager to borrow. Why did they borrow and spend beyond their means for so many years?
The root cause was that many, possibly the majority, of Americans tried to defend their living standard during the rapid pace of globalization that decreased their earnings power. Economic theory says free trade is almost always beneficial for every economy, i.e., making pie bigger for every participating economy. However, how the pie divides within an economy changes with trade. There are absolute losers in free trade. The theory says that redistribution in each economy would make everyone better off. This is where politics comes in. How successful the political process goes depends on how quickly the pie expands and if the system is flexible and responsive. America's economy hasn't been expanding fast, but income distribution has. The Gini coefficient for income distribution rose to 0.469 in 2005 from 0.428 in 1990. It has probably ticked up significantly. The sharp rise in the Gini coefficient suggests declining living standard for a significant share of the population.
Rapid inflation of healthcare cost has played a more important role than globalization in raising inequality. The US's healthcare cost has surpassed 16% of GDP or twice as high as one quarter century ago. The high cost of healthcare imposes harsher burden on low income than high income groups as low income households pay bigger share of their income for healthcare. This is the reason that 15% of the US's population doesn't have insurance, because they can't afford it. Indeed, adjusting for healthcare cost, the median income for the US's middle class has been stagnant in real terms for the past decade.
The headwinds from globalization and healthcare made it difficult for an average American family to raise living standard from income growth. But, Americans still believed in ever rising living standard. Debts borrowed against overvalued properties served to support the fiction that everyone was better off. Indeed, the bubble boosted economic growth rate and made rising living standard more real. The giveaway was the large trade deficit and rising foreign debt. This is where financial 'innovations' came in; they understated risk through diversification and/or dynamic hedging and decreased equity capital for debt funding. Of course, all things are correlated in a crisis and diversification does add value, and dynamic hedging stops working exactly when you need it.
In addition to the financial crisis and the healthcare crisis, a social security crisis is looming. The baby boomers are retiring. The social security system is a pay-as-you-go system, i.e., one's contributions have not been saved but spent on someone else. The system generates 'surplus', when more people are joining the labor force than retiring. The reverse is also true. The shortfall of the system is estimated between 2-3 times GDP. The US government may be technically bankrupt. The next government has to do something about it.
What are Obama and McCain are offering for the crushing problems like financial crisis, skyrocketing healthcare cost, and bursting social security system? Not a lot. The few that they offer don't solve but may compound the problems. Both have supported financial bailouts. The Bush administration has just taken over Fannie Mae and Freddie Mac to stabilize the mortgage market and to probably boost McCain's election chance. But the government said it wouldn't cost taxpayers. They are still waiting for a miracle. Many financial institutions are kept alive by the Fed. They threaten to become zombies like in Japan during the 1990s.
On healthcare care, for example, every candidate is trying to widen the insurance coverage with government spending, but not cutting cost. While widening coverage improves social justice, it will compound the healthcare crisis in the coming years. The US's healthcare cost to GDP ratio is increasing by 0.25% per annum. The proposed programs will accelerate the trend. With healthcare cost escalating like that, the US economy cannot regain dynamism.
On social security, the Republicans want to privatize, i.e., suggesting to retirees to gamble in the stock market to make up for the shortfall. The Democrats want to tax the high income groups to boost their contributions. Neither is talking about cutting benefits, which is the only solution. The age to qualify, for example, has to be raised from the current 63. Otherwise, the government is burst.
The US economy is facing the biggest crisis since the Great Depression. It requires considerable sacrifice to solve. But politicians are talking the other way and promise more goodies. What gives? The dollar. Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay for the full cost. Eventually, foreigners will realize this and run. This game stops working when the dollar free-falls. via
Is Uncle Sam embracing market again?
The US government is trying to draw a line at Lehman on bailouts. If it sticks with its new attitude, it marks the beginning of a financial storm. The one-year long crisis has been slow motion, because there hasn't been deleveraging. The financial sector debt rose from $14.8 trillion in 2Q07 to $15.9 trillion in 1Q08. A normal financial crisis means deleveraging in the financial system. The US gov guarantee has allowed the failing financial institutions to hold onto their assets at fictitious valuation. If deleveraging really happens in the US, we must ask three questions: liquidity for unwinding Lehman, re-pricing of risk assets, and a severe economic downturn.
The market storm now is really about liquidity worry over unwinding $600 bn of Lehman's assets and possibly AIG's too. I don't think that the unwinding will take down everyone. The Fed has expanded its role of the lender of the last resort so much that it is hard to see that liquidity problems could bring down the system like one century ago. But, the fear factor will stick with us.
Asset repricing will cast doubts on solvency of several financial institutions. If Lehman sells its CDO's and other toxic assets, the prices will be market prices, possibly quite close to zero. That could force other institutions to mark to market. How many institutions would fail? We don't know. Also, $70 trillion CDS's out there need to be repriced. If Lehman bondholders take a steep haircut, it could break the phalanx of financial institutions that are locked together by the market.
Asset re-pricing would have a big effect on the economy. Cheap credit has fueled the US's consumption. Credit has been cheap because the Fed has been easy and Wall Street has created hard-to-understand products to under-price the risk. The re-pricing means a big reduction in credit to the US's households. The US economy could go through what happened in Asia one decade ago: 4-5% contraction in GDP.
The US's financial system as a whole may have negative equity, I believe. If its leverage assets depreciate 10%, it doesn't have equity anymore. The US's financial system is too leveraged to sustain a significant drop in asset prices. The financial sector's leverage is 137% of GDP compared in 2007 to 100% five years ago and 70% ten years ago. We can argue if leverage should go back to 100% or 70%. The figure is probably between the two. The amount of deleveraging, hence, is over $6 trillion, ten times Lehman's unwinding. That much deleveraging could mean a major reduction in asset prices. But, the US's financial system is too leveraged to sustain a major reduction in asset prices. It may mean the whole financial system is bankrupt.
There are two ways to deal with a financial crisis. The right approach is to let market clear and establish liquid market for bad assets. Markets and economies bottom quickly. That is what happened in Asia ten years ago. The alternative is to hoard bad assets and to allow financial institutions recover slowly from accumulating profits to offset the hidden losses. So far, the US has been on the second path like Japan 15 years ago. The difference is that the US has inflation and Japan deflation due to the US's trade deficit or low savings rate.
Allowing Lehman to fail seems to indicate that the US government wants a market solution. I'm not convinced. The amount of deleveraging is too big for market to swallow. The US gov may be back to the bailout circuit again. Would they let AIG fail? If they bail out AIG, we are back to where it was.
The bottom line: the only solution for the US is to print money to cover up liquidity problems at financial institutions and let them sort out their losses overtime. The market implications are sell dollar, buy gold.
The market storm now is really about liquidity worry over unwinding $600 bn of Lehman's assets and possibly AIG's too. I don't think that the unwinding will take down everyone. The Fed has expanded its role of the lender of the last resort so much that it is hard to see that liquidity problems could bring down the system like one century ago. But, the fear factor will stick with us.
Asset repricing will cast doubts on solvency of several financial institutions. If Lehman sells its CDO's and other toxic assets, the prices will be market prices, possibly quite close to zero. That could force other institutions to mark to market. How many institutions would fail? We don't know. Also, $70 trillion CDS's out there need to be repriced. If Lehman bondholders take a steep haircut, it could break the phalanx of financial institutions that are locked together by the market.
Asset re-pricing would have a big effect on the economy. Cheap credit has fueled the US's consumption. Credit has been cheap because the Fed has been easy and Wall Street has created hard-to-understand products to under-price the risk. The re-pricing means a big reduction in credit to the US's households. The US economy could go through what happened in Asia one decade ago: 4-5% contraction in GDP.
The US's financial system as a whole may have negative equity, I believe. If its leverage assets depreciate 10%, it doesn't have equity anymore. The US's financial system is too leveraged to sustain a significant drop in asset prices. The financial sector's leverage is 137% of GDP compared in 2007 to 100% five years ago and 70% ten years ago. We can argue if leverage should go back to 100% or 70%. The figure is probably between the two. The amount of deleveraging, hence, is over $6 trillion, ten times Lehman's unwinding. That much deleveraging could mean a major reduction in asset prices. But, the US's financial system is too leveraged to sustain a major reduction in asset prices. It may mean the whole financial system is bankrupt.
There are two ways to deal with a financial crisis. The right approach is to let market clear and establish liquid market for bad assets. Markets and economies bottom quickly. That is what happened in Asia ten years ago. The alternative is to hoard bad assets and to allow financial institutions recover slowly from accumulating profits to offset the hidden losses. So far, the US has been on the second path like Japan 15 years ago. The difference is that the US has inflation and Japan deflation due to the US's trade deficit or low savings rate.
Allowing Lehman to fail seems to indicate that the US government wants a market solution. I'm not convinced. The amount of deleveraging is too big for market to swallow. The US gov may be back to the bailout circuit again. Would they let AIG fail? If they bail out AIG, we are back to where it was.
The bottom line: the only solution for the US is to print money to cover up liquidity problems at financial institutions and let them sort out their losses overtime. The market implications are sell dollar, buy gold.
Monday, July 28, 2008
Q3 inflation expected to fall deeper
After a slowdown in the past months, China's consumer price index (CPI) growth is expected to fall further during the third quarter, according to a survey among 17 institutions, Shanghai Securities News reported on Monday.
Released by Peking University's China Center for Economic Research, the survey included estimations of 17 financial and social institutions such as China International Capital Corporation, HSBC, Citibank, etc.
According to these institutions, the nation's inflation pressure will continue to ease during the third quarter of this year. The weighed average of their forecasts on third-quarter CPI growth was 6.1 percent year-on-year. The lowest estimation, which came from the State Information Center and Galaxy Securities, was only 5.6 percent, much lower than the record of past months.
China's CPI grew 7.8 percent during the second quarter and 7.9 percent during the first half, according to official statistics released earlier this month.
A declining future of CPI also lowers analysts' tightening expectations, as only four out of 17 institutions anticipated one interest rate hike of 27 basis points during the third quarter. The other 13 believed the central bank would leave the rate unchanged.
In addition, 12 institutions thought the nation's third quarter GDP would grow at a slower pace than second quarter's 10.2 percent. Four believed the gauge would be the same. Chinese Academy of Social Sciences, which expected the GDP to grow 10.7 percent during the third quarter, became the only institution surveyed to see a GDP rebound.
The Chinese economy is likely to maintain stable and fast growth this year, as fundamental forces shoring up the economic engine remain unchanged, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday.
But how to draw a delicate balance between inflation control and economic growth has now become a crucial job for the government. According to a political bureau meeting of the Communist Party of China Central Committee last Friday, policymakers will maintain the consistency of the macro-control policies, while increasing flexibility in the second half and carefully deciding the targets of macro-control measures.
Released by Peking University's China Center for Economic Research, the survey included estimations of 17 financial and social institutions such as China International Capital Corporation, HSBC, Citibank, etc.
According to these institutions, the nation's inflation pressure will continue to ease during the third quarter of this year. The weighed average of their forecasts on third-quarter CPI growth was 6.1 percent year-on-year. The lowest estimation, which came from the State Information Center and Galaxy Securities, was only 5.6 percent, much lower than the record of past months.
China's CPI grew 7.8 percent during the second quarter and 7.9 percent during the first half, according to official statistics released earlier this month.
A declining future of CPI also lowers analysts' tightening expectations, as only four out of 17 institutions anticipated one interest rate hike of 27 basis points during the third quarter. The other 13 believed the central bank would leave the rate unchanged.
In addition, 12 institutions thought the nation's third quarter GDP would grow at a slower pace than second quarter's 10.2 percent. Four believed the gauge would be the same. Chinese Academy of Social Sciences, which expected the GDP to grow 10.7 percent during the third quarter, became the only institution surveyed to see a GDP rebound.
The Chinese economy is likely to maintain stable and fast growth this year, as fundamental forces shoring up the economic engine remain unchanged, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday.
But how to draw a delicate balance between inflation control and economic growth has now become a crucial job for the government. According to a political bureau meeting of the Communist Party of China Central Committee last Friday, policymakers will maintain the consistency of the macro-control policies, while increasing flexibility in the second half and carefully deciding the targets of macro-control measures.
Macao's unemployment rate stays below 3% for 10 months
MACAO, July 28 (Xinhua) -- Macao's unemployment rate stayed below three percent from September last year to June 2008, according to an Employment Survey released on Monday by the Statistics and Census Service (DSEC) of the Special Administration Region (SAR).
The survey showed that the unemployment rate for the second quarter of 2008 was 2.8 percent, down by 0.2 percentage point year-on-year, while the underemployment rate slightly increased by 0.6 percentage point year-on-year.
Local total labour force was 330,000 in the period, with labour force participation rate standing at 70.5 percent, up by 1.8 percentage points year-on-year, according to the survey.
The unemployed population was 9,100, with 600 (6.2 percent of the total) searching for their first job, an increase of 2.3 percentage points over the previous period of March to May 2008, it said.
In addition, the unemployment rate of local residents (excluding non-resident workers) stood at 3.4 percent for the period of April to June this year, and the respective labour force participation rate was 64.1 percent, said the survey.
Macao, a city with an area of 28.6 square km, has a population of 530,000.
The survey showed that the unemployment rate for the second quarter of 2008 was 2.8 percent, down by 0.2 percentage point year-on-year, while the underemployment rate slightly increased by 0.6 percentage point year-on-year.
Local total labour force was 330,000 in the period, with labour force participation rate standing at 70.5 percent, up by 1.8 percentage points year-on-year, according to the survey.
The unemployed population was 9,100, with 600 (6.2 percent of the total) searching for their first job, an increase of 2.3 percentage points over the previous period of March to May 2008, it said.
In addition, the unemployment rate of local residents (excluding non-resident workers) stood at 3.4 percent for the period of April to June this year, and the respective labour force participation rate was 64.1 percent, said the survey.
Macao, a city with an area of 28.6 square km, has a population of 530,000.
Foreigners applaud China's relaxation of overseas publications during Olympics
BEIJING, July 28 (Xinhua) -- China has lifted the ban on foreign publications as the Olympics draws near, which foreigners praise as the country's open manner toward media freedom.
"It offers a chance for us to have various information from overseas, and also helps the Olympic reporting," said Nobuyuki Oguma with Japan's Kyodo News, who stopped to buy Japanese newspaper Yomiuri Shimbun at a newsstand at the media village.
About one hundred overseas newspapers and magazines started sale on July 21 at news kiosks located in areas catering to athletes and international media covering the Olympics.
The publications are mainly from the United States, Britain, Germany, France, Japan, the Republic of Korea, Hong Kong and Taiwan. Some of them, such as the U.S.-based New York Times, The Washington Post and Italy-based La Gazzetta dello Sport first went on sale in China.
Britain's tabloid newspaper The Sun are seen on sale at the media villages and the Main Press Center (MPC).
"It is quite convenient for foreigners to buy overseas newspapers and magazines in hotels, villages as well as the Main Press Center," said Stephen Mccormack, press manager assistant with the Beijing Organizing Committee for the Olympic Games.
In the MPC news kiosk, manager Yang Xiu told Xinhua that many foreign journalists drop at the kiosk everyday to buy their favorite. Hong Kong's South China Morning Post and the U.S. International Herald Tribune were among the best sellers.
In the Huiyuan Media Village where some 1,000 Chinese and overseas reporters are accommodated, kiosk organizers are aiming for same-day delivery of newspapers.
"Some big news agencies have reserved The Wall Street Journal, Financial Times and USA Today in our kiosk. We deliver the newspapers to the MPC for them everyday," Yang Zheng, manager of the kiosk, said excitedly.
Chinese journalists also show interest in overseas publications. "A Chinese reporter has reserved the August 4 edition of Time Asia magazine, the cover of which features Chinese star Liu Xiang," said Zhang.
Providing foreign newspapers and magazines during the Olympics is an international practice and also part of China's commitment to the Games, according to the China National Publication Import and Export Corp. (CNPIEC).
The CNPIEC signed an agreement with the Beijing Organizing Committee of the 29th Olympic Games to supply foreign publications to the newsstands in Olympic venues and distribute them promptly. All the newsstands will run about 15 hours a day till the Paralympics ends.
"It offers a chance for us to have various information from overseas, and also helps the Olympic reporting," said Nobuyuki Oguma with Japan's Kyodo News, who stopped to buy Japanese newspaper Yomiuri Shimbun at a newsstand at the media village.
About one hundred overseas newspapers and magazines started sale on July 21 at news kiosks located in areas catering to athletes and international media covering the Olympics.
The publications are mainly from the United States, Britain, Germany, France, Japan, the Republic of Korea, Hong Kong and Taiwan. Some of them, such as the U.S.-based New York Times, The Washington Post and Italy-based La Gazzetta dello Sport first went on sale in China.
Britain's tabloid newspaper The Sun are seen on sale at the media villages and the Main Press Center (MPC).
"It is quite convenient for foreigners to buy overseas newspapers and magazines in hotels, villages as well as the Main Press Center," said Stephen Mccormack, press manager assistant with the Beijing Organizing Committee for the Olympic Games.
In the MPC news kiosk, manager Yang Xiu told Xinhua that many foreign journalists drop at the kiosk everyday to buy their favorite. Hong Kong's South China Morning Post and the U.S. International Herald Tribune were among the best sellers.
In the Huiyuan Media Village where some 1,000 Chinese and overseas reporters are accommodated, kiosk organizers are aiming for same-day delivery of newspapers.
"Some big news agencies have reserved The Wall Street Journal, Financial Times and USA Today in our kiosk. We deliver the newspapers to the MPC for them everyday," Yang Zheng, manager of the kiosk, said excitedly.
Chinese journalists also show interest in overseas publications. "A Chinese reporter has reserved the August 4 edition of Time Asia magazine, the cover of which features Chinese star Liu Xiang," said Zhang.
Providing foreign newspapers and magazines during the Olympics is an international practice and also part of China's commitment to the Games, according to the China National Publication Import and Export Corp. (CNPIEC).
The CNPIEC signed an agreement with the Beijing Organizing Committee of the 29th Olympic Games to supply foreign publications to the newsstands in Olympic venues and distribute them promptly. All the newsstands will run about 15 hours a day till the Paralympics ends.
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