Say "Goodbye!" Pre-crisis trend

There is a pleasant myth of the business cycle. All of this - only the fluctuations around the underlying trend. Production during the boom was even higher sustainable level. During a recession, this figure was below the level. The budget deficit in a phase of decline can be and should be offset by surpluses accumulated in the boom years. Regardless of whether optimistic or pessimistic you are tuned in the context of stabilization policies, they exist in their own sphere and economic policies can focus on measures of "supply side".

Unfortunately, this is quite symmetrical image belied by the facts. There is a widespread view that the damage caused during a recession, associated with the financial crisis, tends to be twice as much during the traditional recession. More important is the conclusion that most of the losses in production during the recession is permanent and that the economy will never return to its old trend line. These findings have been demonstrated in some detail by the late Christopher Dow (Christopher Dow) in his study "The primary recession," which was published in 1998. Although some research has been thorough and fundamental, with today's macro-economy has little correlated. Latest world economic outlook the IMF has already appeared, however, have something to accuse him, it concerns the fourth chapter, which, unfortunately, only available on the Internet.

The authors of the report, the IMF estimated that the output from the financial crisis remains at 10% below trend in the medium term, which is defined as seven years. Of course, this average with a tolerance on both sides. In Chile, since 1981 and in Mexico, since 1994, output grew much faster than the previous trend, whereas after 1997 in Japan, growth has stagnated for many years. Average score may exaggerate the impression of sustained loss of production capacities. This may be due to prolonged effects of the recession, which would require more than seven years to completely disappear. UK Treasury provides a permanent loss in the economy of 5% of GDP.

Countries that are currently in the midst of a banking crisis, in the amount accounted for half of real GDP of all developed countries. This is equivalent to the GDP of about $ 40,000 bn (€ 27,050 bn, £ 24,440 bn) for the year. If we apply the 5% underestimation in terms of production, the future hole in the world economy of up to $ 2,000 billion, that is little consolation, because, according to the IMF, the economy, which allow for counter-cyclical fiscal and monetary stimulus in the short term to mitigate the slowdown in the aftermath of the crisis, as tend to experience less decline in the medium term. "

Interestingly enough, these studies show a possible return to pre-crisis growth rate with a lower level. I can not help but notice that it is a very convenient result for the politicians, because they are blamed for the causes of the crisis, and the output of the recovery phase is intended to be the return of new, even lower trend, resulting in them will be difficult to clearly blame insufficient growth .

A detailed analysis of the IMF suggests that the higher structural unemployment, slower accumulation of capital and lower productivity growth played an important role in explaining long-term decline in output since the financial crisis. National Institute of Great Britain primarily emphasizes a high price for risk, which may increase the actual cost of capital, resulting in higher commissions for the purchase of shares on the stock market.

But I'm not quite sure. Based on the vision of Keynes, which is set out in the last few chapters of his general theory, there is a persistent tendency for savings in connection with the natural excess of investment opportunities and, therefore, full employment is achieved, in rare cases, such as wartime or at the peak of the boom. According to this analysis, no need to explain the loss in production during the collapse, but unstable, high levels that preceded it. That is why Keynes advocated the preservation of low interest rates in order to alleviate the stagnant trend. This picture is not possible in the postwar decades, but may come into its own now, with the emergence of chronic surpluses of Asian economies.

If China and other countries are chronic "savers" who can be "sverhzaemschikami? Over the years they have been consumers of "Anglo-Saxon" model of the economy. But even if there was no banking crisis, sooner or later they would have to face the prudential limits of their debt levels as a result, only the public authorities will take out loans. The proposals enunciated kinds of money can cause dissatisfaction of the authorities that they do so on their own. But the right approach may be at St. Augustine: "It will make me virtuous, but not now" - where "not now", which is still a very long time.

The Financial Times
October 29

CBR should inflation

Financial Analyst FxPro Alexander Kuptsikevich: On Thursday, the board of directors of Bank of Russia decided to lower the refinancing rate by half a percentage point to 9,5%. As stated in the declaration, such a decision in the first place "stimulates the activity of the credit of the banking sector. This means that the Bank intends to continue to struggle with the strengthening of the ruble, using not only the purchase of currency on the market.

One reason for the deepest recession in Russia served as a huge amount of foreign loans. If the situation gets out of control the central bank may apply the effective action only in respect of its own currency. During the fall, economic activity is an objective measure of the depreciation of the currency, but in our circumstances (and an even greater extent in the countries of Central and Eastern Europe), this policy simply increases the volume of bad debts.

One solution to the Central Bank has been a significant limitation on the issuance of new loans in foreign currency. But in the long term, not long-term use of protective barriers. Another option is to bring monetary policy in conformity with what is observed in the creditor countries, of course, subject to Russian realities. As is evident from the statement of the Central Bank, this is the ultimate goal of policy. The stakes for business in the 14-18%% APR prohibitively large, they consume a significant portion of the profit only to debt servicing. And in this case slowing of inflation favors the monetary authorities. Following its decline in the Bank can cut rates, making them more acceptable to companies originating loans in rubles.

Inflation may slow down for two reasons: a weak activity in the country and the strengthening of the ruble against other currencies for external reasons. But strengthening of the ruble has many other negative effects (pressure on Russia's companies and the growth of speculative interest rate). With great probability it can be said that the chosen course for further narrowing the interest rate differential between Russia and other countries with a gradual weakening of the screws on lending in foreign currency. While these restrictions still look reasonable.

On hand in this case will deter the growth of energy prices. Such a trivial move for oil-exporting countries suddenly began to move and some representatives OPEK.Pri such developments in the coming years we will not talk about the windfall from oil and curbing the growth rate of the ruble and inflation.

In the short term, the ruble may still continue to rise for this week to 28.80 on news of the strengthening of economic activity in the world and the development antidollarovyh sentiment. New highs for oil can also strengthen the value of the ruble to a basket, today it has updated at least since the beginning of the year, referring to 35,33 p. As a result, increases the likelihood of further reductions in rates and falling inflation, but it is unlikely to create jobs and stimulate business activity.

Oil prices and bank profitability

Bank balances oil-exporting economies have suffered in recent times. This column offers the first empirical evidence that links the price of oil to the activities of banks in these economies. It suggests that the simple observation of the price of oil can indicate the macro-prudential regulation in these countries and to mitigate pro-cyclicality of bank lending.

The recent financial crisis and a sharp drop in oil prices hit the economy of exporting countries in the Middle East and North Africa (MENA). Export revenues to the government and financial balances fell sharply, reducing GDP growth and asset prices / real estate, which has made tensions both in the corporate and the banking balance sheet, loan growth in the private sector has deteriorated substantially. In some countries, governments were forced to intervene in the domestic financial sector to guarantee deposits, maintaining liquidity, capital injections or asset purchases (using state features, such as sovereign wealth funds), as indicators of financial sector deteriorated. In particular, banks that provide a lot of credit for the purchase of real estate and other tangible assets have suffered the heaviest losses due to falling prices of these them.

Given the dependence on oil exports, the relationship between the price of black gold, and the efficiency of the banking system, the stability of the whole system is interesting from the standpoint not only of the current crisis, but also the previous cycles oil booms. Do the prices of oil on the efficiency of the banking system, and, if so, through what channels? Or still no direct link between oil prices and banks, if we have a view of macroeconomic and bank-specific factors? Are there any differences between commercial, investment and Islamic banks? What was the impact of the global financial crisis on the profitability of banks and the relationship with oil prices

The influence of oil prices on the efficiency of banks
• Oil prices affect the economy through direct and indirect channels. Shocks in oil prices may affect the profitability of banks directly via an increase in non-oil lending, business activity or excess liquidity in the banking system.

• Indirectly, the prospects for oil revenues affect the budget since oil revenues make up the largest part of external and government revenues in the MENA. This, in turn, affects the corporate and bank profitability through the provision of credit to the private sector.

• Another indirect channel is connected with the expectations and the general sentiment in the business in the country. Rising oil prices may lead to an increase in domestic demand, which will provide feedback to a large bank credibility, lending and interest rates.

• On the part of aggregate demand, production capacity of the country can also be expanded to include new public and private investment, fueled by high oil prices, driving the growth rate even further.

Similar effects were evident during the pre-crisis boom (IMF, 2009). Between 2005 and 2008, supported by high prices for oil-exporting countries have participated in major investment programs to diversify the national economy and development of human capital. Financial institutions receive a handsome profit and seemed to be resilient, having sufficient capital to low-performing loans.

What does the literature?
In general, the study of profitability of banks cover a wide range of countries and regions, and in the banking literature is that profitability depends on the particular bank and macroeconomic factors. From the standpoint of the bank - specific factors, such as credit risk, liquidity, size, efficiency and ownership, has been found, are the main factors determining the effectiveness of the Bank (Molyneux and Thornton, 1992, Miller and Noulas, 1997, Demirguc-Kunt and Huizinga, 2000). Profitability of banks can also be very constant, (Athanasoglu et al, 2008) that permits a certain level of concentration and market power in the banking industry of both capital and manufacturing markets.

In terms of macroeconomic variables, researchers found a link between inflation, interest rates and profitability, as well as with business cycles and bank efficiency (Demirguc-Kunt and Huizinga, 2000; Flamini et al, 2009). Banks usually have the ability to adjust interest rates if the (expected) inflation increases, which can provide feedback to higher revenues and profits. Communication from Council of the Gulf Cooperation (GCC) may be somewhat different, since the exchange rate pegged to the dollar, and this means that inflation is imported from abroad (bearing in mind that monetary policy aims at maintaining the course).

Empirical academic literature on the differences in commercial and Islamic banks are very rare and mostly affect the financial stability (Cihak and Hesse, 2008), without considering its relationship with the oil - the main source of revenue for oil-exporting countries. Conceptually, the fact that Islamic banks often tend to finance their bonds, bypassing the Sharia-compliant deposits and higher oil prices due to higher liquidity and, consequently, the influx of deposits, which contribute to lending, so a positive correlation between oil prices and bank performance for Islamic banks seems quite likely. Oil prices have fallen from their peak of $ 140 per barrel and reduced liquidity not only struck by the Islamic banks but also for their traditional partners, so that the differential impact is not obvious a priori. One would expect that the investment banks with their typical model of wholesale trade and more potent effect than the rules and other Islamic banks suffer from liquidity shortage.

New proof
In Poghosyan and Hesse (2009), we empirically examine the relationship between shocks to oil prices and bank performance in MENA countries (Algeria, Bahrain, Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, UAE and Yemen), using banking data for the period 1994-2008 and dynamic management techniques. To our knowledge, no research clearly affects the exporting country and bank efficiency. Inclusion of changes in oil prices and turmoil, as the system variables, in this context is the innovation and the use of different definitions for shocks ensures reliable results. As the business model of commercial, investment and Islamic banks were likely to show differences, we also investigate the influence of banking expertise to its profitability. Our data suggest that oil prices affect the banking profitability indirectly, through macro-channels. In particular, the main macro-channels serve as fiscal relations, inflation, and (in part) the real growth of GDP. In terms of differences in the types of banks, we see that investment banks are at highest impact and most sensitive to oil price shocks, which are caused by its buoyancy, costs, trade and income received during the price peak, and also supported by extra-related Oil liquidity that is included in the financial system. However, this result should be interpreted with some caution, since we are not responsible for the real estate prices (due to lack of data), which could have a significant impact on the profitability of commercial and Islamic banks. Moreover, given the heterogeneity of data on bank balance sheets, we can not fully grasp the relationship between the type of bank and oil price shocks. We also found preliminary evidence that the global financial crisis has reduced the positive impact on the connection between the jumps in oil prices and the profitability of banks. In terms of bank-specific variables, greater liquidity and efficiency, capitalized banks have higher profits and maintain it for some time.

Implications of policy
Our results have interesting political implications, since they provide the first evidence of the importance of systemic jumps in oil prices for banking efficiency in the exporting countries. We had presumed evidence of this relationship, but they have not been verified empirically. In particular, these results indicate that the oil price shocks can be used for the purposes of macro-prudential regulation in the countries of MENA, as oil prices tracked more easily than using conventional measures of business cycle (such as the deviation of GDP from its potential level). For example, the capitalization of the bank's relationship with the shock to oil prices could help alleviate the pro-cyclical bank lending and allow banks to use their bag, created during the boom period, in order to ensure that lending during recessions.

Authors Heiko Hesse, IMF economist for the Middle East and Central Asia, and Tigran Poghosyan, an economist at the IMF.

VoxEU.com
October 27

Food will never be so cheap again

Cleaning biofuel plants in the U.S. set new records on the use of grain for each month since May. Almost a third of U.S. corn harvest will be directed to the production of ethanol engines, which is 12% of the crop worldwide.

World grain reserves declined from 4 kneading in 2000 to 2.6 months, even though two unprecedented harvest in North America. China's reserves are at 30-year low. Asian stocks of rice are close to dangerous levels.

Agricultural products have suffered greatly because of reflyatsionnogo rally in metals, oil and everything else. Dylan Grice of Socialite General sees a "ground floor" price.

Wheat has fallen 70% since 2008. Corn fell by half. Prodkty agriculture were in Comma delimited within the last 6 months. This divergence within the commodity areas untenable, given the relationship of ethanol and petroleum.

For investors who want to cash in on a congested Rally - (The transport index of Wall Street and Russell 2000 have collapsed last week) is a great chance to cheaply pouchavstvovat in history, which later becomes an essential part of our lives.

Barack Obama has not walked away from Bush's policies on biofuels, in spite of food riots in several poor countries in the past year and a moratorium. A subsidy of 45 cents per gallon remains in force.

This motivation is strategic in nature. United States with enormous speed away from imported energy and will not be held hostage to oil again demagoguery, as well as not going to tolerate insults from countries that can not feed themselves. Beijing students, who laughed at the U.S. Treasury Tim Geitner (Tim Geithner) is hardly a good laugh last, because the U.S. is an agricultural superpower and soon opponents will understand why this is so important.

World population is growing, adding "another Britain" every year. The trend will continue until mid-century. By this time we will have 2.4 billion extra mouths to feed, which will need to feed.

China and Southeast Asia switch to animal protein, as the welfare of these countries is growing rapidly, as it was in Korea in the recent past. Requires approximately 3-5 kg. feed grain to get 1 kg. meat.

The report of Standard Chartered "The end of cheap food" refers to the fact that North Africa and the Middle East have already exhausted the reserve stock. These regions imports 71% of its rice and 58% of corn, and water scarcity is not possible to raise productivity. The population is growing very rapidly, fingers crossed, we can say that they will have to focus on imports.

UN says that global productivity in agriculture must grow by 77%, which implies a doubling of the Green Revolution Norman Vorlaga (Norman Borlaug). It will be difficult. Growth of output per unit area in China has decreased from 3,1% a year in early 1960 to 0,9% over the last decade.

"We've all heard terrible stories: precious topsoil is weakened due to agriculture, clouds of dust, covering the Asian skies, burnt the land become deserts, rivers dry up," - says Grice.

Since 2000. China loses almost 1400 sq.. square miles because of the appearance of deserts. The urban fabric is the fertile land in the east. Water from the Himalayan glaciers decline. Yellow River was reduced to "trickle", it no longer reaches the sea 200 days a year.

Farmers draining vodonesuschie layers. Environmentalists Ma Yun (Ma Jun) spoke about the Chinese water crisis and the fact that they have drilled nearly 1000 meters down, to use not reloadable water supplies. Cereal crops Basin Besin depend on 70% of irrigation groundwater.

Water problems in China are not unique. North India also lives at the expense of the Himalayan snows. We can not depend on the fertilizer, as it leads to a "threat of phosphate.

Can be Malthusians in this matter. Gray food guru Jim Rogers (Jim Rogers) is confident that the world is approaching the period when in some parts of the world we can not get a meal or at what price. He advises young people to learn from the farmer, and not to receive MBA, if they want to make serious money.

Grice remains optimistic, believing that human ingenuity will save us. You can use the rally of agricultural commodities, ivestiruya in exchange traded funds (ETF), but it's too over-regulated against speculation on food. There are ancient taboo against the practice.

Or you can invest in biotechnology, fertilizers, and companies that will make money and help solve the problem. Monsanto, Syngenta and Potash - a very popular company, but traded at relatively high prices. Golden Agri-Resources, Yara, Agrium and Bunge - are the best estimates of the coefficients.

Kingsmill Bond at Troika Dialog in Moscow Council of the Baltic company Trigon Agri as a way to earn on this story on the Eurasian expanse. He advises Razguliay grain, and fertilizer producer Uralkali.

Strictly speaking, the world has enough land to feed everyone. In the era of Khrushchev's Soviet Union handled 240 million hectares of land. At the moment, this area is 207 million hectares. Three states that the use of know-how crops can be doubled and trebled in Russia in the Ukraine. African farms can come back to life with the help of land registries, allowing villagers to use their property as collateral for a loan.

None of this can be done at the click of his fingers. What seems indisputable - is the fact that the ratio IMPORT and export prices between countries and cities will return to the norms of the Middle Ages. Landowners will again barons.

The Telegraph
October 25

The Chinese disengagement

Representatives of the financial community tend to follow set of rules. When Fed chairman Ben Bernarke (Ben Bernanke) said about Asia, global imbalances and financial crisis, he did not directly criticize outrageous monetary policy in China.

But he never had: and all so read between the lines. Defiance of China poses a growing threat to the world economy. The only question now is how will react to this world and the United States in particular.

Here are some prerequisites: the value of currency in China, in contrast to, say, the British pound, is not determined by supply and demand. Instead, the Chinese government set the target rate by buying and selling their currencies on the foreign exchange market. Such a policy is possible due to a restriction on private investors to move funds within the country and beyond.

There is nothing wrong with such policies, especially given the fact that it is still a very poor country, the financial system which can easily be destabilized by volatile flows of "hot money". Indeed, such a system was very useful to China during the Asian financial crisis of the late 90s. The key question now is whether the target value of the yuan is reasonable.

Until about 2001 it was possible to argue that the price was reasonable: China's overall trade position was not too far from equilibrium. Since that time, however, the policy peg pairs yuan / dollar is becoming more and more bizarre. First of all, the dollar is declining, especially on the Euro, therefore, maintaining a fixed rate of the yuan / dollar, the Chinese officials, in fact, engaged in the devaluation of national currency in relation to all others. Meanwhile, increased productivity in the export industries of China, coupled with the actual devaluation has made it extremely cheap Chinese goods on world markets.

The result was a huge surplus in trade balance. If demand and supply was allowed to play a crucial role - it would have dramatically increased the value of Chinese currency. But Chinese authorities did not allow such a development. They kept the cost low by selling large amounts of currency, instead of acquiring huge holdings of foreign assets, mostly in dollars, at present, velchichina assets of approximately $ 2.1 trillion.

Many economists, including myself, believe that the consumer boom has helped inflate asset bubble in the housing sector, creating conditions for the global financial crisis. However, China still insists on maintaining a pair of yuan / dollar at a fixed level, even though the dollar is falling, which could cause even more harm to the present.

Although it was a lot of thinking about the sinking dollar, nevertheless, this reduction is actually a natural and desirable. The U.S. needs a weaker dollar to help reduce the trade deficit, and it turns out that the weak dollar as jittery investors, who were drawn to a safe U.S. government debt at the peak of the crisis, but has already begun to invest their money in other places.

But China kept its currency pegged to the dollar. This means that a country with a huge trade surplus and rapidly recovering economies in countries whose currency should rise in value, in fact, engaged in the devaluation.

This is particularly bad at the moment when the world economy remains deeply depressed because of inadequate aggregate demand. Continuing a policy of weak currencies, China grab part of the inadequacy of demand from other countries, which are detrimental to growth everywhere. The most affected are likely to work in other poor countries. In normal times I would have been one of the first who denied the allegation that China is stealing other people's work, but now it is a simple truth.

So what are we going to do?

American officials have been extremely careful about the problems associated with China, to such an extent that last week the Finance Ministry, expressing "concern" and speaking before Congress, announced that Cathay is NOT manipulating its currency. They're joking, right?

The fact is that at the moment this political correctness is irrelevant. Assume that the Chinese have begun to do what so afraid of Wall Street and Washington: began to sell part of their dollar reserves. In the present circumstances it may even help the U.S. economy, because such actions will make our exports more competitive.

The fact that some countries, especially Switzerland, tried to bolster their economies by selling their currency to the currency markets. United States, mainly for diplomatic reasons, can not do this, but if China decides to do so on our behalf, we will send them a thank you letter.

The fact that the world economy is still in a difficult position, policy toward "beggar-thy-neighbor" is not acceptable major players. But something must be done with the Chinese currency.

The New York Times
October 23

Strengthening of the ruble could become a problem

Financial Analyst FxPro Alexander Kuptsikevich: Today, the dollar fell below a mark of 29 rubles. The reason for this building served as the weakening U.S. currency, as well as skyrocketing oil prices to $ 81. Strengthening of the ruble could become a significant problem for the restoration of Russia's economy, and the authorities know about it.

A little over a year has passed since the Central Bank has used an arsenal of non-standard methods to support the ruble and a bailout of the banking system with smaller losses. In October, the Central Bank once again become actively replenish gold reserves to prevent excessive strengthening of the ruble. However, monetary authorities seem unable to take action to influence the market movement. Thus, following the decline of the dollar, which is clearly in favor of the States, and rising oil prices, domestic currency becomes more expensive.

Encourage the reduction of the ruble may be three factors:

Short-term, seasonal - often stops ruble strengthened after the 20's numbers before the end of the month, which is associated with the period of tax payments.

Short-term, foreign - as an adjustment to the growth sites. Already we see how willing investors are to get rid of the shares on bad data. They later redeemed, but short-term speculators clearly record profits before the publication of data on the level of U.S. GDP in the third quarter, which will be next week.

Long - Oil prices are unlikely to show an equally impressive dynamics due to high unemployment in the world, greater caution by financial institutions to use leverage, as well as banal impossibility increase export of petroleum products, that is, the further growth of revenues is limited.

As a result, a higher inflation rate in comparison with developed countries would put pressure on the ruble, but a very moderate pace of recovery in economic activity because of falling costs and a slowdown in lending may reinforce this trend. As a result, year-end pair dollar / ruble might revisit the region above 30, and next week "seasonal" decline in interest in the ruble may discard a pair of 29,10.

Down with the dollar

March 5 index value of the dollar against six other major currencies touched 89.11, its highest point this year. Since then, however, there is a steady falling dollar. Tuesday, October 20, for example, the dollar fell to 75.24, which was the lowest point in more than a year.

This is hardly a sign of collapse, and do not necessarily cause for concern. American exporters whose goods become more competitive abroad, quite pleased with the weak dollar. Domestic producers also benefit from the fact that competing imported goods become more expensive. European tourists, who can now buy more for their euro during shopping tours in the U.S., also benefited. However, long-term decline of the dollar enhances the sinister whisper in countries such as China and Russia, which hold a significant portion of their reserves in dollars and now have to think about how to translate them into another currency. Introduction Brazil 2% tax on inflows of portfolio securities - is direct evidence that other countries are nervous because of the fact that their currencies rise against the dollar.

Concerns about the dollar - the phenomenon is not new. Already long before the credit crunch, many worried that the collapse of the currency and Treasury bond yields jump accelerate the economic crisis, as well as foreigners refuse to finance the U.S. balance of payments deficit. Instead, it is the sub-prime mortgages and financial institutions with over-leveraged plunged the world into the worst recession since the Great Depression.

A recession, which reduced U.S. imports, as consumers tightened the belt tight, cut the trade imbalance by reducing the balance of payments deficit. Ironically, these processes were accompanied by new weakness of the dollar.

The simplest explanation is to reduce currency risk aversion. In the days when risky assets are falling - the dollar tends to increase. When risky assets are growing - on the contrary dollar falls. The dollar fell fairly steadily since March, just at a time when stock markets have enjoyed a phenomenal rally. Local investors were the U.S. to establish relations, returning funds to the country in 2008, when they feared the financial market conditions and to withdraw money abroad this summer, as they found that the world economy revives.

While risk aversion may be a factor, describing the U.S. as a "safe harbor" Still, this seems unlikely. Indeed, the weakness of basic nonmarket factors to revive a long bearish trend towards currency. Some refer to the U.S. budget deficit, which is expected to reach 13,5% of GDP this year. There is little confidence that the Obama administration plans to reduce it, and reform of health care can also be attributed to this.

But if foreign investors are so concerned about why the dollar's decline is not accompanied by a sharp increase in the yield on bonds? One reason may be that the Fed is buying so much debt during the year in the context of quantitative easing. This contributed to the retention of low profitability.

Maybe it works and a simple rule: supply and demand. Last year the market was in need of dollars, because investors have to meet their liquidity needs. This year, Quantitative easing (QE) creates a surplus of dollars (and pounds), and, thus, driven by both currencies down.

Using QE also creates problems for the Central Bank because they think about their exit strategy. Too early abandonment of this principle can lead to a sharp rise in bond yields, unless there is a sharp improvement in financial position. However, the continuation of QE may cause further weakness of the currency.

It is difficult to assume that U.S. authorities will try to take in order to support its currency, even if they wanted to. Low yield provides little support for the dollar. It is unlikely that the Fed will raise interest rates from almost zero in the next 12 months or so.

It is difficult to draw parallels with the history. The country, which is heavily in debt owed to foreigners, with the state budget deficit, which it creates, to move forward a little, now creates a vast amount of additional currency. Nevertheless, it is possible to maintain low interest rates. Ultimately, such a mechanism should collapse, thus creating a new currency, just as it happened in Bretton Woods in the 1940s.

Lack of probable alternative to the dollar means that, despite its declining value, its status as a world reserve currency is unlikely to be seriously threatened. But the system can be changed in other ways. A world where currencies are traded within the group or where foreign lenders require the U.S. to release some of the debt in other currencies, has all the capabilities to adapt to the decreasing dollar.

The Economist
October 20

A sterling crash is a godsend

Britain twice averted disaster over the past century, in a timely manner, if I may say so - he brought down the pound sterling. In both cases there was no apparent confidence that this recovery in the economy will last more than 10 years.

Commentators have told us in 1992 that exit from the European exchange rate mechanism will cause inflation. They underestimated the stagnation in the UK economy and the collapse of money supply M3. Cheap Asian exports, in any case, started to influence global commodity prices.

Thanks to him, made possible the low rate of inflation for 14 years, which was the longest period of uninterrupted growth in British history. The last stage has already been forged, driven by 120% increase in mortgage and tax thrust Gordon Brown for the loss of 5% of GDP, the cyclically adjusted. But the first decade, was indeed successful.

Error ERM (European exchange rate mechanism) was that it was not the exchange rate as such. What really mattered - so this limitation in monetary policy. It has forced us to import the German interest rates set for the suppression of the boom, while England faced a sharp decline in the real estate sector.

With today's events it has nothing in common, though, and should look at the forced departure of Britain from the "gold standard" in September 1931. That event was catastrophic, gold was the anchor currency of the Empire era.

Failure to reduce costs has led to the final denouement. Labor government had collapsed. Navy refused to set sail to protest against the reduction of pay. These events reported with headlines such as "rebellion. The Bolsheviks were singing "red flag" around campfires. Those who read the newspapers in New York, Berlin and Paris thought that the British Empire collapsed.

Keynes triumphed as the "giggling boy, who had just detonated fireworks under the feet of someone who is not fond of" - wrote Skildelsky. Treasury's fears about inflation were incorrect. This was followed by industrial expansion in Midllends. 1930's were rare a decade in which Britain far ahead of the U.S. and Europe for growth. Therefore, defeatist attitudes of France and not entrenched in Britain.

France was a mirror image. She had gold reserves, so as not to fall completely in spirit, but their use would signify the loss of resilience. Social spending increased every year. Pierre Laval has resorted to dictatorial powers in order to enforce its "500 deflationary decrees." Machine guns were deployed against the strikers in Toulon. By 1936 the country became neupravyalemoy, the Communists came to power in the Popular Front. Investors are rolling up their funds, France was forced to abandon gold, one way or another. By the time she was a broken nation.

Today, there are similar echoes in the borders of the euro area. Countries caught in the trap of debt deflation because of the excessively powerful currency or euro / "dirty" floating exchange rate, now faced with the trials of Laval. Latvia is more or less accurately reproduces the 500 decrees of deflation.

Greek conservatives have paid for trying to austerity. Greek Socialists won an impressive victory in the elections by promising voters castles in the air. Portugal also limps with a minority government after voters went to the Maoists and Trotskyists. The Romanian Government has collapsed after it was unable to reduce the amount of loans from the IMF.

Irish deflation has reached 6,5%. "We've never seen a fall in prices on such a scale: the illusion that money can not rise in its value - it is something that should be seriously reconsidered," - said the head of CB Patrick Honohen. Good luck.

In political terms, these countries are faced with the fact that traders are called "time decay". The longer it goes on - all the more aggravated the situation.

ECB President Jean-Claude Trichet, said this week that the euro was not created in order to become the world reserve currency. " - Too late, sir! China and support its exports, the country's foreign exchange reserves increased by $ 413 billion in the third quarter. Barclays Capital said that 63% of these assets are in euros and yen.

Thus, the euro is worth 10 yuan, or $ 1.49 against the dollar, as well as close to parity against the sterling. While Asian countries to maintain the desired level of their currencies in order to get their share of exports, this slow torture could continue, nazivisimo the state of affairs in the euro area. Euro is doomed to be strong, unfortunately for them, "- said HSBC strategist David Bloom.

This does not underestimate the gravity of the crisis in the UK. We are in a worse position today than in 1992 or 1931. Our budget deficit is 13% of GDP. We live on £ 175 billion a year beyond our capabilities.

Reduction sterling can be very expensive at this time, and can be run outflow of capital from the capital market. But the risk is in any case, whatever we did. My (unpopular) view is that the Bank of England had saved the country from depression due to the excess of the printing press, offering a market to sell sterling.

David Cameron was not supposed to question the strategy of the bank so easily. The only solution is to cut spending, as did Canada in the early 1990's, and to offset the impact, it prints as much money as necessary and as long as necessary. The biggest mistake would be repeated mild fiscal and monetary tightening, as it was in Japan in the first part of the lost decade, those actions led to gosudarsvtennomu debt of 215% of GDP. This path leads to death.

Collapsing currency does not look very attractive. Yet there is an iron rule: as soon as the economy of your country has become reckless, you must give the exchange rate correspond to reality. To deny this - then dig deeper and deeper hole for his nation.

The Telegraph
October 18

Indicator "risk-yield" begins to decline

Now watch for the results of Caterpillar, because they can cause movement in the stock markets

Strong financial results of Apple and TI earnings triggered growth in the stock markets. We are approaching our goal of an index S & P500 at 1121, however, the trend line with downward slope is the resistance and inhibits the growth of shares (today is the level of 1117). We recommend that a neutral strategy, and even sell in the case of growth of quotations.
What now are the speculators? At the high liquidity and good earnings reports. But whether these factors are incorporated in the price? S & P500 index in March rose by 65%, while credit spreads have reached the minimum values. In other words, the risk and the associated yield begin to decrease.
The text of the protocol RBA contained strong statements - "unwise" to keep rates low - which indicates a further tightening of policy. This supported the Australian dollar.

Saxo Bank

End of the line for the old monetary regime

What does the financial crisis in the context of monetary policy? The answer may seem obvious. Central banks have responded to the stalling of interbank markets with massive injections of liquidity. When they ran out of room to maneuver with a short-term rates, they have a direct impact on the money supply through quantitative easing. As conditions stabilized, the question arises: when and how to tighten policy, so as not to push an already fragile economy back into recession or not to allow another major round of inflation.

Specific solutions have been widely obsuzhdaemy, but has been relatively little discussion about the purpose or structure in tactics. Since 1970 in Britain and the rest of the world was very much a political and theoretical agreement is that monetary policy should focus on price stability. To achieve this goal, it should be conducted by an independent body that will haunt the explicit target for inflation (or money supply, as the immediate goal). The crisis has made political decisions more difficult, but not put the structure in question.

However, we can not say the same about financial regulation. In this issue has never been a similar agreement on the objectives or the political structure, and much of what has been achieved in this regard - just flew out the window. At the moment there is some agreement on the changes that must be done: to raise the requirements for capital, especially in trade, tighten supervision; to tighten control over liquidity will (probably), and limits on bank bonuses. We still lack a common coherent regulatory scheme, but no one pretends that we have it, and at the same time, it seems we have enough political will to implement tough new rules to regulate.

The contrast between the two areas of public policy debate - monetary policy and financial regulation - are striking. In practice they are closely intertwined.

One of the first conclusions on the financial regulation is that one piece of the puzzle is missing: "prudential makropolitichekaya" function. Lord Turner is highlighted in his report to the UK, as well as Jacques yes Larozer in his - for the EU. Someone has to monitor not the risks posed by specific agencies, and the systemic risks that arise from the behavior by a group of institutions. For example, such analysis can determine the risk associated with the extensive use of various channels of the banks or dangerous tendencies associated with the prices of assets such as housing or credit secured by securities.

Thus, in the new world order focus will be on a prudent macro policies. For these purposes, the EU created the European Council on systemic risk, which is headed by Jean-Claude Trichet of the ECB with Mervyn King as a representative.

The fact that these two goals are in a position of potential conflict is not new, but has been traditionally poorly lit in the past three decades. Alternatively, to which we shall return, is the recognition that monetary authorities should pursue the goals that are complex and not amenable to simple planning.

Top bankers have been very silent on this issue. They may prefer to somehow bring the matter to an end, rather than revise their functions. The old approach to politics has a number of positive features. If the work of CB may be narrowly defined, then the politically easier and more profitable to actually ensure operational independence. But if the goal of the Central Bank must be complex, requiring him, to seek a compromise between competing political objectives, then the politicians will be more difficult to stay away from the monetary control.

The Financial Times
October 15

A pittance, with No Appetite

Crowding lenders and borrowers are wary explain a decline in lending in the United States.

The worst times for the U.S. financial markets may be left behind, but the markets are still abnormal. Bill Dudley (Bill Dudley), head of the Federal Reserve of New York, aptly picked up these sentiments in a recent speech, bluntly called "a little better, but very far from the best." In a survey published this week, members of the National Association for Business Economics said that the markets will continue to hamper economic growth at least until mid-2010.

The main question for many is to be seen whether the lack of credit as a deterrent to the nascent U.S. recovery. As a sign of facilitation can be called a marked decrease in the use of special funds for the Federal Reserve to maintain liquidity and the central bank gradually nullified their purchases of assets. Securitization markets expands, approaching pre-crisis level of debt on credit cards and auto loans, but so far no improvement relate to the mortgage sector, which, as always, depends on public support.

Simultaneously, the total amount of credit falls. Bank lending expanded in the midst of the crisis, as the company beat the credit for a pre-agreed lines. But since then, volumes have fallen from $ 7.14 trillion. in May to $ 6.78 trillion. in September, with accelerating further decline in recent years. This decline is the reluctance to extend credit, or take them?

And in fact, and in the other. While credit losses rising, banks do not want to scatter money. However, some large banks have restored their position, largely due to robust capital markets. JPMorgan Chase said on Wednesday, 14 October, on a profit of $ 3.6 billion in the third quarter, a growth of nearly 7-fold compared with the same period in 2008. Others, including the still very shaky Citigroup, must submit reports in the near future. But smaller banks, in particular, continues unabated fears of loans granted to commercial facilities and construction, which, according to brokerage CLSA, they had to give about $ 1.5 trillion.

Last July the Fed survey of bank loan officers showed that the past continues to tighten security standards for all categories. At the same time, they have a record level of reserves stored in the Fed. Even those banks that are in good condition, may want to stay in the middle position because of the uncertainty regarding the requirements for capital and cover the accounting rules for off-balance sheet assets.

But the companies also try to take fewer credits, because they think twice before you lease or invest in the purchase of equipment. Demand for commercial and industrial "loans has fallen every quarter since mid-2006, according to a poll of creditors.

Such a synchronous decrease in demand and supply becomes visible in consumer lending. Annual rate of decline in August was 5.8%, which was the seventh consecutive month of decline, and the reduction could be even stronger if not for the imposition of "cash for old cars." Creditors rolled back, mainly because of the "revolving credit, such as credit cards, where they have more opportunities for reductions. In the past two years, lines of credit cards fell by $ 1.25 trillion. And the other $ 1.5 trillion. disappear by the end of 2010, as suggested by the analyst Meridit Whitney (Meredith Whitney.)

But borrowers also did not want to deal with credit. Overloaded households now save more and reduce the debt load, adjusting to the shock of knowing that the value of their assets fell by $ 11 trillion. Balance sheets need to be amended, but the consequences will be painful. Weak demand from consumers, whose spending accounts for two thirds of the economy - is the main obstacle, which will face the economy. Given that household debt is still at 120% of disposable income, reducing the leverage may continue for some time. Value above 100%, as a rule, is considered unacceptable. Rosenberg, David (David Rosenberg) from the investment firm Gluskin Sheff, argues that the United States are in the middle of the outstanding changes in consumer behavior with regard to loans and discretionary spending, and this is reflected in bond yields. What is typical: consumers reduce their debts, despite the fact that the tax program encourage them to do more shopping. Consumer spending in August was 1.3%.

Nevertheless, part of the economy can be seen in the ongoing credit crunch. Take corporate finance. Large public companies once again have relatively easy access to credit. Issue of corporate bonds shall, in accordance with a plan to rewrite the records this year, largely offsetting the fall in bank lending. "For the investment companies is almost as much as you can eat", - said Charles Himmelberg (Charles Himmelberg) from Goldman Sachs.

But only a quarter of registered companies in the United States could withdraw the bond market. Below them there are lots of small and medium-sized firms, which together employ 52% of employed U.S. population, and these firms are heavily dependent on banks. Ms. Whitney believes that small business owners are the primary users of credit cards and lines of its own capital, and now they face a serious credit crunch as these credit supports were dramatically upside down. We borrow much more complicated than it was at any other time since the early 1980's. Studies show that loans will be even more rare.

The same case is hardly helps that CIT - one of the largest creditors of small businesses in the U.S., ran aground. Since the company seems to go into bankruptcy, Jeff Peak (Jeff Peek) said Oct. 13 that at the end of the year he retires. And while corporate small fish could not count on substantial support from the taxpayers. During the year to September, only $ 9.3 billion of loans guaranteed by the Office for small businesses (government organization), although the pace only increased.

Not everyone thinks that the loans so very limited. Small business is hampered not so much the lack of credit, as lack of customers, says Bill Dankenbelrg (Bill Dunkelberg), chief economist at trade group National Federation of Independent Business (NFIB). In the latest study, NFIB, conducted in September among its members, only 4% see their main problem in the financing, the very same big problem according to 32% of respondents were weak sales. With this level of uncertainty on investment plans are at lowest level in 35 years. "Try to get loans, only those who are struggling to stay in business, not those who seek to develop it," - said Mr. Dankenbelrg.

He may be right, but when the recovery will seem more confident the company will again be applying for loans to increase inventory and buy new equipment. Mr. Dankenbelrg think that banks would be willing to help them. Others believe much less. Given that credit losses were unlikely to reach its peak point in 2010, and banks will continue to be broke, at least until 2011, this credit crunch may be yet to come.



Slim pickings, no appetite
The Economist
October 14

Wall Street Geniuses

"If you really want to know why the financial system almost collapsed in autumn 2008 - I can articulate why in one sentence."

I heard this from a man who was sitting at a distance of three or four chairs away from me in a little crowded bar in the city center, where I waited for another. "I must buy you a drink to hear it?" - I asked.

"Of course not," he said. "I am able to pay for their drinks. My $ 401,000 in a safe and sound. I went to the market 8 or 10 years ago, when I saw what was happening. "

He really looked like a man who can pay for their drinks in front of him at the bar, was a dry martini. It is well preserved: a gray-haired man, about the retirement age, wearing the same clothes he wore to the Ivy League campus in the late 50th or early 60's: tweed jacket, gray pants, a blue, button-down shirt, and Club tie, which, as it seemed from a distance, was decorated with a tiny Brussels sprouts.

"Well," - I said - "speak."

"The financial system almost collapsed," - he said - "because they are smart guys started to work on Wall Street." He took a sip martinis, and stared at the number of bottles behind the bar, as if a conversation was over. "But whether these are smart guys are the main reason?" - I asked.

He looked at me as a teacher of mathematics, looking at the student who, despite all the heroic efforts of teachers, was unable to learn the most basic principles of long division. "You are either much younger than it looks, or you have a bad memory," - he said. "One of the speakers at the 25th annual meeting said that according to his observations of the pupils, their earnings are inversely proportional to performance during training, such data were partly due to the fact that each one of the worst third-class performance to become a millionaire Wall Street.

I was thinking about his own band in college, about the same age. The best student was appointed a judge of the Federal Court of Appeals, with a very modest salary by the standards of Wall Street. Many students with such an impressive achievers become professors. I tried to imagine the future titans of Wall Street, dozing in the rear ranks during the "trivial things", such as geology, better known as "shake-up for the country bumpkin."

"It really sounds more or less true" - I said.

"Of course, this is true," he said. "Do not get me wrong: the guys in the worst third of the class, who went to work on Wall Street, had many excellent qualities. Most of them were very pleasant people. They created a good impression, and we now understand that, if judged by the standards, which appeared later, they were not really hungry, they just wanted a nice house in Greenwich, and, perhaps, a sailboat. Many of them were from families that have always worked on Wall Street and so they were accustomed to a good home in Greenwich. They do not feel the need to increase the total business, as they could earn the money needed for the second ocean yacht.

"So what happened?"

"I'll tell you what happened. Smart guys have to come to Wall Street. "

"Why?"

"I thought you never ask," he said, making a gesture eyebrows experienced bartender that he began to mix a new batch martini.

"Two things happened. First: the amount of money that can be done on Wall Street by hedge funds and stock investments, was simply shocking. At the same time, the college has become so expensive that even people from the intelligent, affluent families were forced to incur huge debts. So even smart kids went to Wall Street, perhaps trying to convince myself that a few years they will have enough money in order to be able to work professors, lawyers or anyone else, whoever they wanted to work most . That this is the essence of the stories on the percentage of graduates of Harvard University, who planned to go to work in the financial industry, or go to business school so that they could then work in it, and the geniuses at the Massachusetts Institute of Technology (MIT) and Caltech Institute (Caltech), instead of going to Master's in physics, also went to Wall Street in order to seek arbitration. "

"But you still have not told me exactly how this led to the financial crisis."

"Have you ever heard the word" derivatives "?" He asked. "You think our guys could invent, say, credit default swaps? Come on you! They could not cope with mathematics. "

"Why do I think that there is one more step in this scenario?" - I asked.

"Because he is. When the smart guys started their business, things that did not even exist at first, who ran the firms in which they worked? Our guys! The very worst third in the class! People who do not have the slightest idea of what a credit default swap. They all knew that they become fabulously wealthy and they enjoyed it immensely. These easy money ate their sense of proportion. "

"So it is the presence of smart guys on Wall Street led to the collapse."

"You got it," he said. "It took some time, but you got it."

The theory sounds too simple to be true, but skhodu I did not find flaws in it. I caught myself thinking about bankruptcy, if intently and think about the chaos that could sow the horde of smart guys in other industries. I saw these industries, which fall one after another, superintelligence. "I think I need a drink," I said.

He nodded at my glass and took another one of those gestures eyebrow bartender. "Please, let me entertain you," - he said.

The New York Times
October 13

For Britain - low interest rates and the weakening pound

With the advent of a more precise plan of the Conservative Party of Great Britain and slightly more predictable state of the economy of this country, it becomes possible to make assumptions about the future situation. Our latest economic forecast, which will be published later, reflects our average estimate compiled on the basis of stronger data and political development. In these circumstances, we expect the Conservative Party victory in the May elections with a substantial margin for the majority of seats in the cabinet. As a result, we see that monetary policy will receive a "powerful acceleration, while the fiscal experience a strong reversal.

We expect to reduce state spending by 80 billion pounds, increasing revenues from indirect taxes by 20 billion pounds and "return to the development of" package valued at 3 billion pounds. The good news for the Tories (Conservatives), it seems that their policy should work, the budget deficit fell to 2,5% of GDP before the end of the term Parliament, the economy has not fallen into recession, while unemployment will remain high and will grow gradually - but will start to decline in 2013.

The success of policies depends largely on maintaining a soft monetary policy - a combination of quantitative easing, and the base interest rate at 0.5%, at least until mid-2011 and will reduce the yield on 10-year state bonds to 2,5% in the next two years. This will lead to the continued weakening of the exchange rate of British currency - the pound will fall to 1.40 to the dollar and may temporarily reach parity with the euro, despite concern about the markets first signs of structural weakness of the euro.

Low interest rates and competitive pound in the end regains net exports, partly to restrain imports of industrial goods and investment, particularly in kommecheskuyu property. GDP growth from 2010 to 2014 the average will be slightly below 1.5% - not high, not much lower than in any other strategy. Following the recovery from recession in the second half of 2009, growth will return in 2010, but slowed again in 2011-2012 i.i, to the extent that the tax concessions to be abolished. In 2013-2014 GG growth will exceed 2,0% for the first time since 2007.

Naturally, there are risks. The biggest risk is that external factors and a weak pound could presage that inflation is too high in order to keep low interest rates. That is why the Tory strategy of the labor market is so important - "return to work" on the plan may be worth the money (we assume more than voiced in the press 600 million), but they are required to curb the growth of unemployment and maintaining downward pressure on inflation in the costs of business expenditures and as a consequence of the consumer price index.

But conservatives can legitimately argue that the risks of alternative scenarios is much higher - the risk that financial markets would refuse to finance the growth of debt burden and a wider economic crisis.

We believe that the plans of George Osborne (George Osborne, head of the Shadow, the opposition, the Cabinet of Ministry of Finance) is correct, but they largely depend on the situation in the world economy, on growth outside the United Kingdom and the maintenance of confidence in the markets.

The economics of George Osborne -
assume very low interest rates a weakish pound and falling bond yields,
center of economics and business research ltd (cebr)
October 6

Deficits and the Chinese Challenge

Debt can become a serious source of trouble for a superpower, if we remember what happened to the post-war Britain.

Sharp drop in the dollar over the past few weeks has led to considerable concern about the status of the United States as the dominant force in the global economy. With these fears are closely related to the constant concern about the rise of China and is traditionally difficult relations between Beijing and Washington.

Most people now realize that China has become the largest creditor owes this status to a greater extent, thanks to all heavily indebted U.S. government. China holds about a trillion dollars of U.S. Treasury state bonds, and invested more than $ 100 billion in private companies in the United States. Even though these facts are recognized, politicians and pundits continue to underestimate the consequences of these relations.

Consider the situation that occurred in 1946, when Britain turned penniless to the United States for a loan. For 30 years or more, the main cost item of Great Britain was linked to the growing power of Nazi Germany. Were under two wars, millions of lives were lost, and the British treasury badly depleted in the process. Britain has survived, but the costs were enormous.

Despite its global empire, armed forces, and enviable position in world trade, in early 1946 the British government was facing a serious risk of default on its financial obligations. So the British Government as well as many times in the previous decade, turned for help to the closest ally - the United States. Britain has asked the U.S. loan for $ 5 billion under the zero interest with repayment over 50 years. Such generous terms to date at the time were acceptable. To the surprise and shock the British, Washington refused them.

Unable to accept such an answer, Britain explained that if she did not receive those funds, then praviteltvo become insolvent. Americans in response to this suggested a number of conditions. They provide the UK $ 3.7 billion under 2% per annum, as well as the British government was obliged to adopt a plan of the Bretton Woods Agreement of 1944, which is the dollar, not the pound sterling became the main reserve currency, and the British pound makes freely convertible. Even more importantly, that Britain had to abandon their imperial preference, which meant the abandonment of duties and taxes on goods for the colonies and from them, for example, for India. These were not just financial sanctions, all together, this meant the end of the British Empire.

Within two years, the British withdrew from India and conducted the process of decolonization in Asia and Africa. Unable to compete with the U.S. in economic terms and are no longer being able to enjoy the benefits of colonial trade, the British armed forces have also begun the process of reduction, and trade declined sharply. Later, the British quickly moved away from its dominant position in the global market and has entered a phase of several decades of economic malaise. In 1980 Britain finally became a prosperous country, but it was only a shadow of the last flowering of economic power.

U.S. replaced Britain as the guardian of the West. As one British official Evelyn Shakburg at the end of 1940's "impossible not to realize that we are playing a secondary role." And this is exactly what they wanted the United States. Supporting Britain for decades, becoming a banker and manufacturer for the needs of the Second World War, the United States intended to end the British Empire. Request for a loan provided an excuse, but by the time the balance has switched sides and England have very little could be done to change something.

By 2030, if not before, China will probably overtake the U.S. economy in size, although, given its size per capita, China will remain a very poor society for many years to come. Trajectories may change, but the recent explosion of the U.S. financial system, only accelerated the growth of China.

Given the lesson of the end of the British Empire, it would be foolish to build the current policy with the hope that China would strike a blow before he replaced the U.S.. And while the current debt level manageable United States and, in fact, only binds the Chinese to the American economy in ways that may benefit both countries, in fact, if at the moment, these economic systems are linked, then it does not mean that these interests will be synchronous and in the future.

In this case, the British counterpart is also sobering. For decades, relations between Britain and the U.S. have been mutually beneficial, while Americans were outraged over the status of "junior partner". As the tension was low intensity, the British were fully focused on the immediate threat from Germany. But in the end, it is the U.S. dealt a devastating blow.

Americans have not had to deal with this economic competitor, after the UK more than half a century ago. USA today as unaccustomed to global economic competition, as were the British, while at its peak. United States often seem to be huge and unsuitable to the conditions of economic competition.

The only way to avoid the fate of England and solve the problem with China is to enhance economic life. This multi-year effort that must be done primarily through innovation, rather than legislatively. United States should modernize the domestic economy to be based on the global success of many American companies. United States should be oriented to the invention of new products and generate new ideas, rather than deal with the protection of corroded industries yesterday. Battles over health care and climate change - is a kind of cultural equivalent of the game, and he was fiddling, while Rome burns.

China is flourishing because he is hungry, dynamic, afraid of failure and is convinced that there must be a leading nation in the world. Is why the U.S. prospered a century ago. Today, by the way, hunger and dynamics seem to be the least obvious factors in the lives of Americans than the annoyance of the fact that the world does not want to negotiate with them.

The United States is in danger of assuming that because they are the dominant nation on the world stage - this fact will remain unchanged. All their actions - a way to repeat the fate of Britain.


By m-p Karabell (Karabell) by "Superohlazhdenie: how China and America became one of the world economy and why prosperity depends on it", recently published by Simon & Schuster.

The Wall Street Journal, October 12

The increase in retail sales spurred the New Zealand dollar

The increase in retail sales spurred the New Zealand dollar, but other currencies remained mostly motionless

In connection with national holidays in the United States and Canada yesterday for the currency market was relatively quiet. Most of the session, the dollar'd play the gains made in early Asian trading. In the absence of economic statistics, stock markets moved on to the next report revenue for the 3 quarter, and eventually the S & P closed near the new 12-month high.

Despite the retreat of the dollar, British pound is still brought up the rear, crushed projections of the Center of Economic and Business Research (CEBR) on interest rates and foreign exchange market. In addition, Prime Minister Gordon Brown reiterated the Government's intention to sell assets worth 16 billion pounds sterling, adding that if the complete program of increasing the money supply now, it will thwart the scenario of economic recovery.

Much of the activity in the Asian session took place at its first half, when New Zealand has published a brilliant performance in retail sales for August. Sales climbed out of negative territory (-0.5% in July) and showed a monthly increase of 1,1%. As these data indicate a steady economic recovery from the recession, it could make RBNZ to reconsider their views on interest rates or, at least, to stop insisting on the need for further rate cuts. New Zealand Dollar happily took this news and rushed forward against the U.S. dollar and Australian dollar.

Australian statistics on the one hand, brought a little disappointing. NAB business conditions index dropped to a mark 3, showing the first decline in 4 months, the index showed business confidence and the worst results - just minus 4 points. This decline was mainly due to the decline of profitability and deteriorating terms of trade, but it was partially offset by an increase of urgent orders and intentions to recruit staff. Despite the fact that such results are unlikely to cast doubt on the recent rise in interest rates, RBA (note that the published tomorrow, Westpac Consumer Confidence Index was compiled after a rate hike), traders are reminded what it means to analyze secondary data.

During the morning session, Asian markets slipped anti-risk tendencies, caused by an article in "Yonhap News", which stated that North Korea could continue firing rockets from the north-western coast after it made the day before five launches short-range missiles. Amid such geopolitical news demand for U.S. T-bills increased dramatically, and the yield on 10-year bond fell 4 basis points to 3,43%. However, the dollar / yen so far this news has not made the desired effect - at the time of publication of this review pair traded in the region around 90.

Pound received a short-term support from the RICS report on housing prices for September. According to the survey, house prices in Britain reached its highest level for almost 2,5 years, while representatives of RICS attributed the strengthening of prices rather lack of supply than an increase in demand. Ratio of average sales and stock of unsold properties rose from 27 to 29 - is the maximum figure recorded since December 2007. More statistical news: BRC reported that in September the growth rate of retail sales reached the highest level for the past 5 months as good weather and improved economic prospects stimulate confidence. As a result of the sale of similar goods rose by 2,8%, while total sales - by 4,9% compared with the previous year. However, the effect of these positive data for the pound was short-lived, and with the advent of anti-risk sentiment in the market rate of pound / dollar sank below the level of opening.

Today, of the European statistics published indices CPI and RPI from the UK, which may involve a little more attention to the players than the previous data, as well as any unplanned growth will help keep the pound from falling further. Also, pending the outcome of ZEW research institute in Germany and the EU, and on the North American session will be released price index for housing in Canada. Do not forget that on the approach the new portion of corporate reports for the 3 quarter, and the results can reverse the anti-risk scenario, which was played today in Asia.

Saxo Bank

We are on the side of risk

We positively assess the current situation and immediate prospects of the market of risky assets. Today, support for the stock market may have on the income statement «Philips».

Today we maintain bullish position on the risky assets in general, but expect that trade will be relatively quiet due to small number statistics. Europe opens in positive territory about 0,5%, after which we intend to use any kickbacks for purchases.
Company «Philips» can show better financial results than expected, and also beat projections for revenue. The result affects the reduction of costs, but revenues are still declining at a rate -19% y / y.
This week will be rich in terms of publication of corporate reports and macroeconomic statistics, but the start will be slow. Currently not scheduled any noteworthy releases (in the afternoon will speak Kruger (FRS)).

Saxo Bank

The Wall Street Journal: How the Fed can avoid another bubble

Central Bank to monitor the prices of assets, and quickly raise interest rates when decided that the time has come

Ben Bernanke and the Fed are facing a very difficult test in the coming years. Among them:

• Resistance to pressure of monetization of deficits, which eventually could lead to high inflation.
• Identify strategies for ending the massive monetary mitigation of last year.
• Support the independence of the Fed, which rose into question by direct or indirect rescue of financial institutions and the attempts of Congress to control the central bank.
• Properly pricing and risks of asset market bubbles under the Taylor rule, the basic guidelines used by central banks in setting interest rates.
• More effective monitoring and supervision of the financial system, in particular, as a regulator of "systemic risk".

The first two items are closely related. In order to prevent a sustained monetization of deficits that will lead to inflation, the Fed should designate the exit strategies of their non-traditional monetary incentives that were implemented since the end of 2008. If fiscal and monetary stimulus will be removed too early, there is the risk of deflation. If they are removed too late, we can finally get in the face of fiscal crisis and an inflationary recession or stagflation.

Fed does not control fiscal policy. But in order not to fall into a trap, when fiscal policy will force Fed to monetize the deficits in order to prevent the rise in the yield debt securities, the Fed must first declare that he would no longer buy Treasury securities.

With regard to the collapse of monetary easing, the Fed should draw conclusions from the fateful errors made after the 2001 recession. Then the central bank lowered interest rates too much and kept it low for too long. It also increases very slowly, there are signs of stabilization - a slight increase of 0,25% from summer 2004 to summer 2006, when it reached 5.25%. Normalization has taken two full years. This was a period of slow normalization, during which the housing, mortgage and credit bubbles are out of control. Learned a lesson: Going back to normal catch, do it quickly, or get ready for another dangerous bubble.

Of course, easier said than done. From 2002 to 2006 the Fed was moving slowly, due to the fact that recovery was lifeless, and because of the significant deflationary pressures. Now more severe recession: unemployment at 9.8%, and is expected to exceed 10%, and we are experiencing a real deflation. At the same time, the drive does not turn off support too quickly to be stronger, and with it the risk of another bubble and more. In fact, the sharp rise in share prices and commodity areas, and narrowing of credit spreads since March, partly due to the flow of global liquidity has spurred the assets and has already created inflation in assets.

In the conflict between economic growth and financial stability requires that monetary policy has remained free and independent, and it is critical that the observers and regulators of the banking sector acted more aggressively to prevent the development of the next bubble. In this case, they should quickly implement the reforms mentioned by the G20 - including a new bankruptcy regime for financial institutions deemed "too big to fall", a serious approach to the restriction of "systemic risk" and acceptable rules of reward and compensation for bankers and traders.

It will be difficult to define new concepts of system of regulation and the concept of "too big to fall". There is a very high risk that doing so, we will give implicit guarantee of large and complex financial institutions. There is also a long-term risk that the steps taken by Congress and regulators will distort the financial markets. Western financial institutions is currently very much dependent on support from the states, and some governments drove the rules and regulation for the maintenance of large financial institutions, which are now partly bought with taxpayers' money. In the future the government may demand from local financial institutions to increase lending in their own country, which will reduce their international operations. Creating a system of effective financial regulation - at the same time resisting the impulse to give benefits to local institutions - will be a real challenge for most countries, including the United States.

Eventually, when the federal funds rate will be at a normal level, to establish financial stability, will also require the inclusion of asset prices when deciding on monetary policy.

Fed's involvement in quasi-fiscal operations creates other difficulties. While the Fed is involved in maintaining financial stability and to prevent subsequent episodes of systemic risk, it would be difficult to exclude the feeling that the Fed - a lender of last resort for firms that are "too big to fall". Until now, a Pandora's box is open.

By preventing future distortion is a regime where "too big to fall" institutions will be more demanding in terms of equity capital: a bigger buffer of liquidity, lower leverage and lower involvement in risky and illiquid investments, if they deposit banks . They should be monitored by international observers and to be able to be closed in an orderly fashion in case of signs of bankruptcy.

The Fed is currently resisting pressure from the Treasury to revise its own device, without regard to the fact that it may deprive Fed independence. Control Structures of New York and other regional reserve banks allowed to be effectively controlled by major financial institutions last year, so that this situation should be reconsidered. While the intervention of Congress in the jurisdiction of the Fed - is a danger of his recent quasi-fiscal activity leads to review these rules.

Fed needs a large regulatory capacity. At the Fed has the power to regulate mortgage markets, but can not use that power to reduce the difference between the situation on Wall Street and the market where there is no interference. The regulation of mortgage markets requires a careful balance: short-term policy of containment to prevent further credit crisis, combined with the medium-term counter-cyclical policies to prevent the development of bubbles in the credit markets and assets.

Establishing financial stability - in addition to price stability and sustaining growth - is the direct role of the central bank. In pursuing this goal through the avoidance of distortions to the "too big to fall" of financial institutions and prevent bubbles in the coming years will certainly be one of the most difficult test to be faced by the Fed.

Authors: M r. Bremmer (Bremmer), president of Eurasia Group, co-author of "Fat Tail: The Power of Political Knowledge for strategic investment» ( "The Fat Tail: The Power of Political Knowledge for Strategic Investing", Oxford University Press, 2009). M-p. Roubini (Roubini) Professor of Economics at Stern School of Business at New York University and head of RGE Monitor.

The Wall Street Journal, October 5

Stock market is driven by expectations of earnings

Gold sets new historic record, but the expectations for inflation are relatively stable. USD TWI index close (0.7%) to break through the key support. It may coincide with a breakthrough level of 1.4844 on the euro / dollar.
Yesterday started a large-scale rally of stock markets, which continued at the Asia-Pacific session. However, some concern is the fact that high-yield corporate bonds (HYG) and investment grade corporate bonds (LQD), belonging to the category of stock index funds (ETF), not followed them.
Now follow the data on consumer lending, as they may provide yet another proof that the American consumer reduces the proportion of borrowed funds in its capital, which could jeopardize the recovery of domestic demand.
The British pound remained under pressure after disappointing data on total industrial production and production in the manufacturing sector.


Saxo Bank

Dollar again under pressure

Dollar again under pressure. There are rumors that the Gulf countries may refuse to use the dollar in transactions with oil.

At yesterday's session, the dollar declined against most major currencies, as the service sector on both sides of the Atlantic pleased good data: somewhere he was able to penetrate into the territory's economic recovery, but somewhere he has strengthened his position. In Europe, the PMI index in the services sector exceeded the forecast and amounted to 50.9, and in the UK - 55,3. However, in the center of attention was an American index ISM, which rose from 48.4 to 50.9. The index for the first time since August last year exceeded the boundary of the recession / recovery at 50.

Stock sites joyfully welcomed the statistics, noting that the first event of the growth over the past four sessions. However, on the currency front, the dollar was under pressure, as the proper always, when data showed the economic recovery. Even before the publication of data with comments on the currency markets were French Finance Minister Lagarde and European Central Bank President Trichet, who supported a strong dollar. A similar position was expressed Geithner, U.S. Treasury, but such rhetoric has had a limited effect on the market. The same goes for the morning of Minister of Finance of Japan Fujii, who mentioned that the weakness of the dollar was discussed at the Summit Group of Seven. "

In the early Asian session, while all attention was focused on the RBA unexpectedly in the British edition of "Independent" appeared an unusual article that stirred markets. The article said that Arab countries have entered into informal talks with China, Russia, Japan and France on how to replace the dollar in transactions with oil at the basket of currencies, which should include the yen, yuan, euro, gold, and a new unified currency which plans to introduce the Cooperation Council of Gulf countries. Despite the fact that to implement such plans no earlier than 2018, the currency markets have decided not to delay the sale of the dollar, especially given that in recent years and so he is not in demand. Recall that a similar market reaction, we have seen, when China, Brazil and India advocated the establishment of a new currency apart from the dollar.

Before announcing the decision the RBA markets chose to ignore the weak trade data for August, focusing on rates. By the way, the trade deficit remains high at-A $ 1.524 billion, a figure for July was revised to-A $ 1.783 billion was the main reason for the decrease in exports (the victim of a strengthening Australian dollar?).

But back to the meeting of the RBA. As a result, the RBA decided to raise rates by 25 bps from 3% to 3.25%, basing its decision on the fact that the world economy on the path to recovery and will continue to grow in 2010. Bank acknowledged that the Australian dollar is overvalued and that they take into account this fact when making decisions. They also noted strong growth in China and expressed the hope that the economic development of other trading partners will revert to trend in 2010.

Despite the fact that the market is basically sitting in the purchases of Australian, AUDUSD course after the decision was quickly 80 points, but at first was unable to break through to new highs in 2009, stood at 0.8844. However, the accompanying statement, RBA was permeated pro-inflationary sentiment - "probably fall in inflation will not be as strong as previously expected - and, ultimately, the course has updated yearly highs at 0.8875. Who is next on the waiting list for the rate increase? In the Asian region verbal hints to that experienced by South Korea and India, but in Europe are reluctant to make dramatic statements.

It is also worth noting that in the race Sellers dollar pound significantly lagged behind other major currencies, the reason why, perhaps, is the forthcoming meeting of the Committee on Monetary Policy Bank of England. Contrary to the RBA Bank of England is still very far from raising rates because economic growth and economic activity in the country can at best be called fragile. Without a doubt, in anticipation of the meeting will be walking the talk about increasing the money supply and lowering interest rates on bank reserves, under the influence of what a pound will continue to lag behind the market.

Today, Britain will put on the market the most important news of the day, namely prices from Halifax, the volume of production and production in the manufacturing industry. The North American region today will not be anything interesting, except for building permits and Ivey PMI index from Canada.

Saxo Bank

Bloomberg: Roubini believes that the Stocks rose "too much, too soon and too fast"

Professor at New York University's Nouriel Roubini (Nouriel Roubini), predicted the financial crisis, said that the stock and commodity markets may fall in coming months, as the pace of economic recovery may disappoint investors.

"Markets have grown too much, too soon and too fast" - Roubini said in an interview in Istanbul on October 3. "I see the risk of correction, especially as the markets realize that recovery is not rapid V-shaped recovery, but more like a form of U. Correction can occur in the fourth quarter of this year or first quarter of the forthcoming ".

Shares soared in price around the world in the preceding six months, as the reinforced expectations that the economy out of the deepest recession in 1930. S & P500 index rose by 51 percent from its 12-year low, reached in March, while the European index Dow Jones Stoxx 600 rose by 48 percent. Euphoria contrasts sharply with the cautious tone of representatives of Big Seven. They said that projections for future growth "remains fragile".

"The real economy is only the beginning of recovery, while markets are going your own way" - said Rubin. If the growth keep you waiting, "ultimately markets will go in the artwork and will adjust to more reasonable valuations. I see a growing gap between the way the contemporary situation on the markets and weaker economic activity.

"Lifeless" restoration

The International Monetary Fund predicted that the world economy will grow by 3,1% in 2010, thanks to growth in Asia, after a decrease of 1,1% this year. This is still a "lifeless" and "very weak", said Rubin.

The report that industrial production grew weaker than expectations, and unemployment rose to 26-year high, to put pressure on U.S. stocks, which fell last week. All this fueled concern that economic recovery will be slower than expected.

Cost companies in the S & P500, at 19 times earnings for the last year, according to Bloomberg. This is the highest level since 2004.

Improvements in the U.S. economy is probably much weaker than is reflected in the dynamics of the stock sites, increasing the risk adjustment in assets, said last month the Nobel laureate in economics Michael Spence (Michael Spence). Investors in the markets "overrated" stabilization and growth in the world's largest economy, said Spence.

Creating bubbles

With annual minimum On March 9, the world rally in assets added about 20.1 trillion. dollars to the cost of stock markets around the world. Governments around the world pumped nearly $ 2 trillion. of dollars in incentives, while central banks cut key interest rates to almost zero, in an effort to support growth.

"In the short term, we need monetary and fiscal stimulus to avoid a reversal and to prevent deflation, but now these easy money started to create bubbles in asset markets, commodities, and credit and emerging markets," - said Rubin. "Under the pretext of maintaining stable growth and prevent deflation, we can re-plant corn for the next cycle of financial instability.