Wednesday, January 19, 2011

Today's links

1--Fed Officials Signal Growth Pickup Won't Alter Bond Purchases, Bloomberg

Excerpt: Federal Reserve policy makers, who see unemployment falling too slowly for their liking, are giving no indication that signs of an accelerating recovery will dissuade them from carrying out record monetary-stimulus plans.

Fed Chairman Ben S. Bernanke said last week that “we see the economy strengthening,” and added, “you’re not going to reduce unemployment at the pace that we’d like it to.” Fed Bank of St. Louis President James Bullard said in an interview that while the U.S. outlook has improved, he wants to see more evidence before altering the Fed’s plan to buy $600 billion in Treasuries through June....

Yields on 10-year Treasuries increased to 3.33 percent yesterday from 2.57 percent on Nov. 3, when the Fed approved a second round of large-scale asset purchases in a bid to spur growth by keeping borrowing costs low. Bernanke last week said the increase in bond yields reflects an improved economic outlook, not a failure of the Fed’s program.

2--Hedge funds bet China is a bubble close to bursting, The Telegraph

Excerpt: The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”...

According to Corriente Advisors: “We expect the economic fallout from a slowdown of China’s unsustainable levels of credit and growth to be as extraordinary as China’s economic outperformance over the past decade.”

3--Top Fed Official: We Can't Speed Up Labor Market Recovery, Reuters

Excerpt: Monetary policy cannot speed up labor market healing or prevent asset price bubbles, and counting on it to do so may do more harm than good, a top U.S. Federal Reserve official said.

In a speech to be delivered in Santiago, Chile, on Monday, Philadelphia Federal Reserve Bank President Charles Plosser cautioned against relying too much on the central bank, and said its powers ought to be curbed to prevent abuse.

"I believe we have come to expect too much from monetary policy," he said in his prepared remarks. A copy was made available in Washington before the speech.

"Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less."...

He said the central bank, through some of its emergency lending programs set up during the depths of the financial crisis in 2008, had "crossed the Rubicon" into fiscal policy that should be the responsibility of Congress.

Those actions left the central bank vulnerable to political interference, he said, adding that it was likely the Fed would come under pressure in the future to "use its powers as a substitute for other fiscal decisions."

"This is a dangerous precedent, and we should seek means to prevent such future actions," he said.

The Dodd-Frank financial regulatory reforms, passed by Congress last year, set limits on the Fed's use of so-called section "13(3)" powers to make emergency loans in unusual and exigent circumstances to businesses that don't normally have the right to borrow from the central bank....Plosser has advocated eliminating those section 13(3) powers entirely, and said more restrictions were needed beyond the limits included in the Dodd-Frank reforms.

4--EU finance ministers call for increase in EFSF, Calculated Risk

Excerpt: From the Irish Times: EU ministers seek rescue fund boost

Euro zone finance ministers called today for an increase in the effective lending capacity of the union's rescue fund, but Germany said there was no urgency and it would be March before a firm plan was in place.
...
"There will not be results today, the market developments in the last week have, thank God, taken any urgency out of these discussions," [German finance minister Wolfgang Schaeuble] told reporters.

The expectation is the European Financial Stability Facility (EFSF) will eventually be increased from €440 billion to €700 billion. The European financial crisis is far from over ...

5---The broken heart of capitalism, Robert Peston, BBC


Excerpt: Has the banking system been fixed, been made safe, following the 2008 financial crisis, the worst since the 1930s?....Not yet, according to the regulators, central bankers, politicians and bankers I interviewed for a documentary that airs tonight at 2100GMT on BBC Two (Britain's Banks: Too big to save)....

what's required are reforms so that next time a big bank gets into trouble, all the pain and cost is heaped on the bank's creditors, investors and managers - with none falling on taxpayers.

How close are we to having achieved those fundamental changes, which would be necessary - according to Tucker (and he is not alone) - to fix capitalism?

Not very close, is the answer. It is not just about the amount of capital and liquid resources that banks are forced to hold, or the maturity of their debt (what we might call the Basel stuff).

It is also about the walls they may be forced to erect between their various financial activities. It is about bankruptcy procedures that apply uniformly in all the very many countries where global banks operate. It is about identifying which bits of banks are so vital to the functioning of the economy that they must always be removed from a troubled bank before they are seriously damaged. And it is about the sheer size and complexity of big banks.

There is, as yet, no international consensus on any of this, let alone a national consensus.

As I hope tonight's film makes clear, we are still living in a world and in a United Kingdom where a big bank that runs into difficulties would still be able to hold taxpayers and our economy to ransom.

6--China Goes to Nixon, Paul Krugman, New York Times

Excerpt: Right now, China is suffering from a classic case of inflationary undervaluation....

But the Chinese government refuses to contemplate a currency appreciation, in part because of the political power of exporters, in part because it now views defying US demands as a way of upholding national pride, in part because, I believe, there’s a lack of clear macroeconomic thinking in high places. Instead, China has been trying to keep a lid on inflation by limiting credit — not too successfully — and by imposing price controls.

So, when was the last time the US government tried to pursue an excessively expansionary macroeconomic policy, while using price controls to suppress inflation? During the Nixon years.

Yep: what we’re seeing right now is a case of China goes to Nixon. And it won’t end well.

7--Fed Labors to Get Its Message Out, Wall Street Journal

Excerpt: Mr. Bernanke has promoted more open discussion of policy issues, both inside the Fed and outside, in contrast to predecessors Alan Greenspan and Paul Volcker. Most Fed officials welcome that. But following stiff criticism, both domestically and internationally, to the new round of bond-buying—some of it fueled by public misgivings by some Fed officials, including Fed governor Kevin Warsh and some regional Fed bank presidents—the central bank is reviewing its communications practices....

"I think part of the challenge for the Fed is we're used to communicating with the markets because it's very important for us to make sure that we have the right impact on markets," Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said in a recent interview. "I'm not sure we're as gifted and talented at explaining for a broader set of Americans. Especially when you're doing something new, that kind of communication is very, very important."

8--The Financial Crisis, Interpreted, Econbrowser

Excerpt: Much of the popular, and scholarly, analysis of the crisis has focused on its financial aspects: the breakdown of financial markets, the malfunction of financial innovations, the failure of financial regulation...

Between 2001 and 2007 the United States borrowed from abroad between half a trillion and a trillion dollars every year. The aggregate amounts are hard to calculate, but probably come close to five trillion dollars and averaged about five percent of GDP per year – roughly similar to the percentages common in developing-country borrowing sprees. As capital flowed into the country, the American economy went down the well-worn path of other massive capital inflows. Large portions of the borrowed funds were spent on tradable goods, leading to a burgeoning of the country’s trade deficit, which roughly doubled. The remainder went to nontradable goods and services, leading to a substantial increase in their prices. Housing was only the most prominent nontradable that experienced this effect, but the phenomenon was much broader. Between 2002 and 2007, in fact, durable goods prices declined 13 percent in the United States, while services prices rose by 25 percent. Whatever may have been happening with the nominal exchange rate, this was the functional equivalent of a real appreciation, as relative prices shifted in favor of nontradables producers and against tradables producers.

Foreign borrowing allowed Americans to consume more than they produced, and to invest more than they saved. It allowed the U.S. government to spend more than it took in in taxes. It fueled a debt-financed expansion of consumption – of importables and of nontradables. The expansion became a boom, the boom became a bubble, and the bubble eventually burst.

9--$120 oil: The breaking point, Pragmatic Capitalism

Excerpt: According to Merrill Lynch’s Sabine Schels, a commodity analyst, the breaking point for the global economy is when the size of the energy sector hits 9%. With the sector currently at 7.8% Schels says the breaking point is $120 oil:

“Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis,” said Sabine Schels, a commodity analyst at Merrill Lynch.”It was in the 1980s and it was the same in 2008. Right now we are at about 7.8 percent and if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level.”

With oil trading at roughly $92 today this leaves us with a 30% cushion according to this analysis, however, strains will increase if prices should continue to gravitate towards that level.

The IEA’s Chief Economist, Fatih Birol says the issue is already increasingly similar to 2008:

“The ratio of countries’ oil import bills to GDP, a key measure of the cost of oil prices on economies, is close to levels last seen during the financial crisis in 2008, Mr Birol warned.If oil prices remain above $90/barrel for the rest of this year then the ratio for the European Union will be 2.1 per cent – close to the 2.2 per cent level it reached in 2008.”

Either way, with oil prices very strong before the seasonally strong summer season there is a good chance that higher oil and gas prices will continue to pose a very serious risk to the global economy. Ironically, a booming global economy might just be the fuel for oil and gas prices that tip the global economy back into malaise. Will surging inflation in the emerging markets expose the underlying deflationary risks that persist in the developed world?

10--Preparing for War with Russia? Washington To Rearm Georgia For New Conflicts, Rick Rozoff, Global Research

Excerpt: President George Bush supported Biden's call for $1 billion worth of non-military aid to Georgia, which at the time was remarked would "dwarf the 63 million dollars that Washington provided to Georgia last year. Excluding Iraq, the infusion would make Georgia one of the largest recipients of American foreign aid after Israel and Egypt." [5] Georgia has a population of 4.6 million, Egypt of 80 million.

Until now, however, the U.S. has been cautious about rebuilding and upgrading Georgia's military arsenal or at least acknowledging that it is doing so. If recent reports prove true, Georgia is to receive a large quantity of high-tech weapons from the U.S., including surface-to-air missile complexes, Stinger and other portable surface-to-air missiles, Javelin third generation guided missiles and Hellfire air-to-surface missiles, the latter two designed for penetrating armor....

Later in the month a NATO delegation inspected the Krtsanisi National Training Center and its Simulation Training Center - built by the U.S. - in Georgia (where U.S. Marines have trained Georgian soldiers and where three Georgian soldiers were killed and thirteen wounded in an explosion this month) as part of NATO Days events in the nation...

"The activation of the Georgian Defense Ministry, increased flights of Georgian drones near the borders of South Ossetia, as well as the
maniacal opposition to signing a non-aggression agreement give rise to the reasonable assumption of a newly designed bloody venture by Georgian authorities. " [15]

The official also stated that due to assistance from the U.S. and other NATO states the military-technical capacity of the Georgian armed forces currently exceeds that at the start of the war in 2008.

On November 16 the NATO Parliamentary Assembly met in Poland and passed a resolution referring to Abkhazia and South Ossetia as "occupied territories. "...

As a footnote, "In 2003, after a visit to Serbia to study peaceful revolution techniques, Bokeria helped bring Serb activists from the youth movement Otpor to Georgia to train students in the same techniques. As a result, the youth movement 'Kmara' was established, which played a leading role in the November 2003 Rose Revolution."...

Afterward, Robert Pszczel, the new director of the NATO Information Office in Moscow and formerly acting NATO Deputy Spokesman, confirmed that "NATO will continue its Eastward enlargement policy" and that "The NATO-Georgia Commission continues its work." [25]

In mid-December U.S. Deputy Defense Secretary Alexander Vershbow and Georgia's Vice Prime Minister and State Minister for Euro-Atlantic Integration Giorgi Baramidze met in Washington to plan Georgia's NATO accession. The Georgian official stated afterward that "Meeting with Vershbow is very important, as he is actively engaged in the issues of NATO enlargement, as well as personally ensuring Georgia's accession into the alliance." [26]

Never before have military forces from the world's two major nuclear powers been on opposing sides of a battle line during wartime.

By increasing the provision of sophisticated weaponry to Georgia, Washington is taunting Russia on its southern border and running the risk of a military conflict that may draw it into a direct confrontation with its main nuclear rival.
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