Tuesday, October 12, 2010

Today's Best Reads

1--China Needs to Move Slowly on Yuan Revaluation, Michael Pettis, Bloomberg

Excerpt: The rapid contraction in China’s trade surplus in 2008 was a brutal experience. Although official gross-domestic-product figures understate the impact, private-sector estimates suggest GDP growth dropped from more than 10 percent in the first quarter of 2008 to close to zero a year later, before rebounding to more than 10 percent again in the first quarter of 2010.

This is an extraordinary amount of volatility, even for a developing country. Clearly the collapse in international trade had a big impact on Chinese growth. What’s more, in order for growth to rebound so sharply, Beijing had to engineer one of the biggest investment sprees in history.

Credit in 2009 was forced to grow by almost one-third of China’s GDP, most of which went to fuel spending in real-estate development, manufacturing and infrastructure. An unprecedented surge in investment, in other words, was needed to counter the effect of a contraction in the trade surplus.

Low Consumption

Given that China entered the crisis with perhaps the highest investment level ever recorded, it’s not hard to see why Wen is concerned. With household consumption at an astonishingly low 36 percent of GDP, a rising trade surplus and expanding investment are the main sources of China’s growth. But China is so over-reliant on investment that many say, correctly, that it already invests far too much for its level of development....The most sustainable way of rebalancing is to engineer an increase in household consumption. (Excellent summary of China's problems)

2--European Interbank Lending Conditions Deteriorate Fast Post Latest Liquidity Withdrawing LTRO Roll, zero hedge

Excerpt: ..."the market is making liquidity provisioning for European banks very costly, and a threshold may soon be passed when it is cheaper to borrow via the Fed's currency swap arrangement than approaching the interbank market, once again confirming that while the ECB is backstopping all the financial activity in Europe, it is the Fed which is on the hook should the ECB fail." (more trouble in euroland)

3--Jobless America threatens to bring us all down with it, Telegraph

Excerpt: The destructive trade and capital imbalances of the pre-crisis era are back, banking reform appears stuck in paralysing discord, public debt in many advanced economies remains firmly set on the road to ruin, and the spirit of international co-operation that saw nations come together to fight the crisis has largely disappeared.

This was not where we were meant to be in tackling the underlying causes of the crisis and returning the world to sustainable growth. Yet beneath this sense of frustration at lack of progress – and at international organisations such as the IMF and the G20 to bring it about - there is an underlying truth that's often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself.

4--Obama Bond Demand Insatiable as Japan Set to Pass China, Bloomberg

Excerpt: Japan added $55.3 billion of Treasuries this year, swelling its holdings 7.2 percent to $821 billion, Treasury data show. China, which overtook Japan in September 2008, cut its stake by $48.1 billion, or 5.4 percent, to $846.7 billion. Japan made its biggest purchase in 10 months in July, just after China cut its position by the most on record.

The purchases show no slowdown in demand for America’s debt, helping to limit rates on everything from corporate bonds to mortgages as global economic growth slows and the deficit expands to $1.4 trillion. Treasury yields average 1.31 percent, down from 5.21 percent at the start of the financial crisis in mid-2007, Bank of America Merrill Lynch index data show.

“The U.S. still has the confidence of investors,” said Carl Lantz, the head of interest-rate strategy in New York at Credit Suisse Group AG, one of 18 primary dealers of U.S. government securities that trade with the Federal Reserve. “When you’re a reserve manager, it’s not about return on investment, it’s return of investment.”

5--Wall Street Pay: A Record $144 Billion, Wall Street Journal

Excerpt: Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal.

About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey. Compensation was expected to rise at 26 of the 35 firms.

6--Fifteen months since recession’s official end, economy short 11.5 million jobs, Heidi Shierholtz, EPI

Excerpt: the labor market remains an estimated 8.1 million payroll jobs below where it was at the start of the recession in December 2007. This number includes both the 7.8 million jobs lost in the payroll data as currently published plus the announced preliminary benchmark revision of -366,000 jobs to last March’s employment level. And even this number understates the size of the gap in the labor market by failing to take into account the fact that simply to keep up with the growth in the working-age population, the labor market should have added around 3.4 million jobs since December 2007. This means the labor market is now roughly 11.5 million jobs below the level needed to restore the pre-recession unemployment rate (5.0% in December 2007). To get down to the pre-recession unemployment rate within five years, the labor market would have to add around 300,000 jobs every month for that entire period. In September, excluding changes in temporary Census hiring, the labor market lost 18,000.

The Congressional Budget Office estimates that without the American Recovery and Reinvestment Act of 2009, the unemployment rate would be up to 2 percentage points higher than it is right now, and we would have up to 5.2 million fewer full-time equivalent jobs. In other words, ARRA worked, but was never big enough given the scale of the crisis. With a deficit of 11.5 million jobs, a 9.6% unemployment rate, a private sector failing to provide robust job growth, and a recovery act now fading out, Congress and the Federal Reserve Board need to take action to stimulate the economy and create jobs.

7--Obama Calls the Question on Geithner, Robert Kuttner, Huffington Post

Excerpt: Thanks to Geithner's permissive accounting standards, the big banks have also been allowed to carry on their books at full value securities based on underwater mortgage loans -- securities that are really worth between 30 and 70 cents on the dollar. If the banks had to honestly account for their depressed market value, the banks' balance sheets would look even worse.

This is an exact repetition of what befell Japan in the 1990s -- a lost decade of economic growth caused by a financial collapse and the collusion of the government with the banks to pretend that all was rosy. Indeed, the US economy today is in far worse shape than Japan was, because all during that period Japan continued to be a major export power while the US today runs a huge trade deficit.

But Obama's veto of the foreclosure-streamlining bill calls the question on Geithner. We are now learning that a lot of the securities were not properly documented, which makes them worth even less.

If the foreclosure machinery is suddenly gummed up because the President has ruled out a quick fix that favors bankers, the banks may be forced to recognize what the junk on their balance sheets is really worth (not much). And the whole game of pretending that all is fine with the banks is in jeopardy.

8--Why Are China, India and Brazil Rebounding Faster Than the U.S.?, Wall Street Journal

Excerpt: They were in “a good initial position” with relatively low leverage, and thus didn’t get hit with the severe “balance sheet recession” that hit the U.S.

1 They hadn’t any complex securitized financial instruments.
2 They had built up large foreign-exchange reserves.
3 Their central banks responded, much as advanced countries’ central banks did, with speed and agility to the credit tightening.
4 Their economic managers displayed “a high degree of competence.”

9--"Don't Bet Against America," The FT's Martin Wolf Says, Tech Ticker

Excerpt: The FT’s U.S. managing editor, Gillian Tett (also featured in the interview) is more concerned about the drag the U.S. debt load plays, or could play, on the U.S. economy. The U.S. must rollover their debt about every 4-5 years, much more frequently than other developed nations, she notes.

“If anything ever happened that caused a short-term panic [in the Treasury market] the repercussions could potentially be quite significant,” she states.

Her other major concern is whether America can still attract investment away from emerging markets. Businesses are asking themselves “whether it makes sense to be building factories in America or building them oversees," Tett notes. "Some of the most profitable companies in America, some of the most dynamic, may not necessarily feel they have an incentive to invest in America.”

Until that changes, America’s future is still very much in question.

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