Monday, January 12, 2009

Daily Sources 1/12

1. Gabi Thesing and Jana Randow at Bloomberg report that European Central Bank president Jean-Claude Trichet said, "Globally we have the sentiment that 2010 will be the year of pickup, of significant pickup." Trichet made the remark in Basel, Switzerland, where he was chairing the Global Economy Meeting of bankers today. The US Federal Reserve chairman Ben Bernanke and People's Bank of China governor Zhou Xiaochuan attended the conference. The ECB will have a rate-setting meeting this Thursday in Frankfurt. Eurointelligence reports that according to the FT Deutschland nearly all German banks expect the ECB to cut its rate by 0.5% to 2%.

2. Jody Corcoran at the Irish Independent reports that in a survey 55% of Irish respondents were in favor of the Lisbon Treaty--which would create a tighter political union out of the EU--up 16% since the last survey was conducted in December.

3. David Jolly and Judy Dempsey at the New York Times report that a deal has been signed by Russia and Ukraine which should resolve the gas conflict. The EU will monitor the flow through Ukraine's pipeline system to be sure that no gas is being siphoned off by Naftgaz and in return Gazprom will restart supply. It could take as long as three days for flow to resume to Europe even after Gazprom reopens the spigot. It was not clear from the article whether EU observers were in place as of yet.

4. Ambrose Evans-Pritchard at the UK Telegraph writes that bond investors are betting that China and Japan will continue to purchase US Treasuries because Beijing and Tokyo must be sure that their currencies do not appreciate.
"This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.

Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year. "
Pritchard reports that James Montier at Société Générale has shown that going back to 1798 the only time that yields on US bonds has been this low was when they were set by the government during WWII.
"Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc."
These numbers seem extraordinary to me, but Pritchard argues that the monetary multiplier has fallen below zero, meaning that the US economy has fallen into a liquidity trap. He thinks the Fed will be successful in eventually reflating the economy, but that that will bring on the next crisis. Well worth reading in full, but, as "NDK" points out, it will be difficult for the US to unilaterally inflateL
"Unless the US miraculously becomes more efficient and productive, to avoid this scenario, the US must have a weakening real exchange rate (REER). Because currency pegs prevent revaluation, that means China and Japan must run higher inflation rates than the US. Twisting it around, in current conditions, the US cannot run a higher sustained inflation rate than China, Japan, and others.

The US must either:

i) Persuade China, Japan, and others to allow their currencies to appreciate dramatically so the US can abruptly default on some of its debt to them, and reduce their exports considerably;
ii) Persuade China, Japan, and others to allow high domestic inflation. If the US wanted 12% inflation domestically, it might ask for 16% or 17% inflation in China, if not a bit more;
iii) Do something crazy, like enact Smoot-Hawley Mark II and beat each other up at the WTO;
iv) Suffer through deflation."
Monetary economics is beyond my ken, but I would wonder how long Beijing could maintain a peg given especially inflationary policies in the US? Isn't the performance of the US dollar relative to the yen and the RMB now mostly just half a sort of faith in the US versus the rest of the world in terms of its commitment to capitalism and resilience and half the least horrible option?

5. Brad Setser at Follow the Money provides some analysis, plus graphs, of the trade slowdown in South Korea, Taiwan, and China. (He credits Paul Swartz at the CFR for help in drawing up the following, rather stark, graph:)

Key excerpt:
"The trajectory of this downturn looks much worse than the trajectory of the 2000 recession. That isn’t news. But it is still worth noting. Korea and Taiwan export a lot of electronics, so they were among the hardest hit by the tech bust.
It is striking that neither Taiwan nor Korean exports seem to have been impacted by the (modest) slowdown in US imports that started in 2006. They made up for slower export growth to the US – counting both their direct exports to the US and their indirect exports through China – with strong growth in their exports to Europe, China and the Gulf. ... No more ...."
Setser points out that China is facing a similar trade situation, except for that imports are falling far faster than exports. That would suggest a rather speedy collapse in demand from China which would be contributing to global contraction in trade. Brian Schwarz at Seeking Alpha reports that Mastercard Advisors recently published the results of a survey they conducted which show that of the Asian nations, Chinese consumers were actually the most willing to spend their earnings. You might be suspicious of the source of this news, of course, and the savings rates for all the Asian economies, according to the report, was still north of 50%.

Meanwhile, Li Yanping and Philip Lagerkranser at Bloomberg report that the chairman of the China Banking Regulatory Commission, Liu Mingkang, in Beijing and central bank governor Zhou Xiaochuan in Basel indicated that China may not meet its goal of 8% GDP growth in 2009. 8% is the official government goal as well as the number bandied about by analysts as the minimum growth achievable without significant civil unrest. Anything below 8% would mean that significantly fewer new jobs are being created than new entrants to the labor market. Tao Wang at UBS, however, has argued that China can absorb larger unemployment than the conventional wisdom would suggest. (see Daily Sources 1/8 #7) Meanwhile, Choe Sang-Hun at the New York Times reports that South Korean President Lee Myung-bak and Japanese Prime Minister Taro Aso have vowed to put aside their historical enmities in order to focus on cooperation in the face of the financial crisis.

6. Sophia Rodrigues at Platts reports that Citigroup has predicted that 1.3 mb/d of refining capacity will be added in the Asia Pacific in 2009. The largest of this has already come online in Jamnagar, India, or 580 kb/d, but four new refineries will also be added in China.
"Sinopec's 160 kb/d Fujian refinery; Sinopec's 140 kb/d Tianjin refinery; CNOOC Corp.'s 240 kb/d Huizhou refinery and PetroChina's 200 kb/d Dushanzi refinery."
Citigroup therefore predicts that Singapore refiners will see their margins be cut in half.
"All five projects are basically complete, said Citigroup, but full commercial start-ups are generally being delayed due to weak demand for oil products amid the broader global economic recession.
The new refining capacity is sophisticated, capable of handling sour and heavier crude streams, which should therefore reduce the differentials between more difficult crudes and sweet lights.

7. Reuters reports that the Abu Dhabi owned International Petroleum Investment Company (IPIC) has delayed plans for a 250 kb/d $5 billion refinery in Khalifa Point, Pakistan, and a 500 kb/d $6-7 billion refinery in Fujairah.

8. Peg Mackey and Simon Webb at Reuters reports that "industry sources" have told the journalists that Saudi Arabia has already cut oil production to 8 mb/d and that it plans to cut output by another 300 kb/d to 7.7 mb/d. In a separate Reuters story, Algerian oil minister Chakib Khelil indicated that Algiers has cut its output to 1.2 mb/d, their production allocation as per the December 17 meeting. Kate Dourian at Platts reports that Emmanuel Egbogah, special adviser to the Nigerian president on petroleum matters, told the media that Abuja has cut production by 160 kb/d, its share of the December cut, and is now producing 1.88 mb/d. However, Platts suspects that the Nigerian output target is closer to 1.704 mb/d.

9. In a very interesting story by Matthew Walter at Bloomberg, the Chavez Administration appears to be pursuing a de facto depreciation of the bolivar by limiting official dollar sales, thus forcing overseas travelers to buy on the black market. "Venezuelans need government authorization to get dollars at the official rate."

10. Fiona MacDonald at Bloomberg reports that Sheikh Mohammed Sabah Al-Salem Al-Sabah has been appointed the acting oil minister as the opposition party forced the Kuwaiti Prime Minister to resign. Sheikh Mohammed will also serve as Kuwait's foreign minister.

11. Hossein Jaseb and Parisa Hafezi at Reuters report that Ayatollah Mohammad Khatami, the Iranian reformist who won the presidency in 1997 and 2001, has said he might run for president again this year. He might prove slightly less difficult to deal with, and certainly he would be less likely to use nationalist fervor to garner political support than Ahmadinejad, but his election would not represent an about face by the theocracy. Khatami is a potential candidate because his Islamist credentials are nearly impeccable and supports Khomeini's theocratic notion of the "rule of the supreme jurisprudent." These forces are more conservative than the Western pundits usually makes them out to be. To wit, Ali Akbar Dareini at the Associated Press reported on Friday that the Supreme Leader (or, literally, the Leader of the Revolution) Ayatollah Ali Khamenei banned on Thursday volunteers who wanted to go to the Gaza strip to fight Isreal from leaving the country.

12. Griff Witte at the Washington Post reports that Tony Blair has told reporters that "the elements of an agreement" for a cease-fire are in place after negotiations he led in which both Hamas and Tel Eviv have taken part.

13. Sky Canaves at the China Journal reports that as of Friday Beijing had published a list of 33 web pages that had failed to remove "vulgar" content in a fashion deemed timely. One of the companies that has failed to do so is Google, and Ms. Canaves includes the text of Google's promise to abide by Beijing's dictates. It seems to me that Beijing may be willing to loosen controls on the flow of money, or even the flow of people and goods, but is unlikely to ever be comfortable with a free flow of ideas.

14. Nadia Rodova at Platts reports that a finance ministry official told the journalist that Moscow would likely cut the oil export tariff to $100/mt ($13.60/b) down from $119.10/mt ($16.30/b) starting February 1. Russia has begun resetting oil tariffs on a monthly basis as opposed to the old bi-monthly basis in response to the wild price swings of late. (The government likely does not trust the self-reporting required to charge a percentage of price.)

15. Simon Sebag Montefiore--the author of a biography of Stalin--has an op-ed in the New York Times today which argues that Russia is hobbled by the absence of a real functioning system for succession. The question of succession is key for stability, and is the key argument in favor of democracy, in the sense that a rule of law democracy has firmly established rules and procedures for selecting and installing successors to the current holders of political power. Montefiore argues that Russia has only had firm rules in place for 121 years of its entire history, as if that was a short period of time relative to the rest of the world's adoption of firm rules-based (mostly Salic Law it would seem) successions!

There are so many things that are suspicious about this piece that it is almost funny. To begin with, it holds up Chinese succession system as "shamelessly undemocratic and secretive--but firm and orderly"--and thus superior to a system enshrined in a Constitution publicly available to all and, as far as I can tell, abided by in every Russian Presidential election from 1996-2004. Sure, the Communists would likely have won in 1996 without the oligarchs' decision to put their money behind Yeltsin in the final hour and pervasive US election and marketing campaign consultants, but it does appear, that more or less, the results were honestly reported. The fact that the Medvedev Administration is seeking to change the Constitution by the rules for amendment iterated in that Constitution is used as evidence for Moscow flouting the rule of law!

I am not especially fond of the secretiveness of the political power process in Russia (or elsewhere) but the notion that the Kremlin, by appealing to the political process that has been iterated in black and white and at length, is demonstrating its perennial process of palace coups without recourse to any law but divine mandate is pure and utter nonsense.

I would also point out that Byzantium may have had a system of palace coups (divine mandate) for rule, but managed to last longer than nearly any other state in the history of the world. Our preference for ourselves is not particularly helpful for figuring out what's going on, even if you put it in print.

16. Sudeep Reddy at Real Time Economics reports that the Conference Board forecast that the US economy could lose 2 million more jobs in 2009 on top of the 2.6 million lost in 2008. "That would be about 60% higher than the average job losses over the past five recessions (roughly 2%)."

1 comment:

MC Shalom said...

Even The Right Monetary and Fiscal Policy Can't Get Us Out of the Depression

DIE ZEIT: Can the right monetary and fiscal policy keep the US out of a recession?

Alan Greenspan:

"Probably not. Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market.

Two to three decades, ago central banks were dominant throughout the maturity schedule.

Thus, the more important question is the direction of long-term real interest rates."

Alan Greenspan
The Great Irony of Success
© ZEIT online, 30.1.2008

If short-term risk-free interest rates are 0% doesn't it that mean that credit is worthless?

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.

We Need, Hence, to Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.

Exit Strategy out of Credit

A Specific Application of Employment, Interest and Money. [For my Fellows Economists]

Press release of my open letter to Chairman Ben S. Bernanke:

Chairman Ben S. Bernanke, Quantitative Easing Can't Work!

Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.