Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

all is back to normal on the economic front

by Jerome a Paris Tue Jun 2nd, 2009 at 06:11:04 AM EST


House prices rose by 1.2 per cent during April and May, according to Nationwide Building Society. It said that the increase was because of huge demand from buyers and a shortage of properties to choose from. Estate agents have reported that good-quality homes are in such short supply that gazumping -- when a buyer makes a higher offer than one already accepted by the seller -- is making a comeback in some areas.

The Times of London: Gazumping is back as house prices rise and buyers fight over fewer properties


The General Motors Corp. bankruptcy means months of shedding plants, brands, jobs and dealers just as the recession shows signs of abating. But part of the gamble is that it will prove to be better for the economy than the alternatives.

WSJ: Filing Has Potential to Lift Economy in Long Term



US real GDP is forecast by the International Monetary Fund to fall by 2.8 per cent this year and to stagnate next year. This is a far cry from the early 1930s, when real output collapsed by 30 per cent. So far this is a big recession, comparable in scale with 1973-1975. Nor has globalisation collapsed the way it did in the 1930s.

Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing - a doubling of the Fed's balance sheet since September - has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.

Niall Ferguson: How economists can misunderstand the crisis


Oil prices, which were less than $45 a barrel at the end of February, have jumped more than 45% in the past three months. The rally reflects a range of factors: a weakening dollar, fears of inflation and increased appetite for risk among investors. But the driving force appears to be the first glimmers of economic recovery. Confident that an economic rebound will yield stronger demand for oil, investors are rushing to get ahead of another surge in crude prices.

There have been some recent hints of firming demand. U.S. gasoline consumption has risen for two consecutive weeks, according to the Department of Energy's Energy Information Administration. Chinese crude-oil demand rose 3.9% in April over the previous year, according to Reuters. Ali Naimi, Saudi Arabia's oil minister, said last week that an economic recovery was "under way" and predicted oil could hit $75 a barrel by year's end.

WSJ: Investor Hopes for Rising Oil Demand Aren't Borne Out by Reality


where would China move its reserve holdings?  The other reserve currencies are generally considered to be the pound, the yen, and of course the euro.  Which one would you definitely prefer to the dollar these days?

Simon Johnson: Mr. Geithner Goes to China


"The banks want to go back to business as usual -- and then some. And they have a lot of audacity now that everyone has bailed them out," said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. "But we have to begin with the premise that Wall Street doesn't want transparency, because more transparency means less immediate profits."

(...)

"Special interests in the financial-services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform," Ms. Born, now a lawyer in private practice, said at the John F. Kennedy Library in Boston, where she received a Profile in Courage Award.

NYT: Even in Crisis, Banks Dig In for Fight Against Rules

So, let's see:

  • job losses at GM mean more profits down the road (finally, someone got us rid of these irksome gold-plated pensions and healtcare plans!);
  • oil prices are up again, as many bet that demand is growing again - and people warn of speculators driving things (but hey, we really hate speculators only when prices go down; on the way up, they demonstrate the American spirit and its undomitable optimism, right?);
  • the dollar is down again, but that's a good thing, as it signals the end of panic and flight-to-safety (because, as we all know, the only safety is in the dollar; eurozone focus on inflation is just a old-fashioned, nay, retarded, policy sure to lead, yet agian, to stagnation and decline);
  • any statistic that is not dismal is greeted as a sign that things are improving (even if it only means falling less fast as before rather than beginning to climb out) - witness the extravagant Times article about the real estate market in London (which is not as far down its fall as the US market...); in fact, it's not that big a recession, nothing like the Great Depression we were so quickly warned about - just an almost ordinary recession, in fact, and pretty much over;
  • we're back to normal discourse on taxes (cut, cut, cut) regulation (cut, cut, cut), government (evil, evil, evil) - as demonstrated in the most recent cover of the Economist, and, no surprise there, banks are about to get away with yet more "self-regulation" of the sectors that crashed. Hey, they're profitable once again, so all is well, right?

Or, sure, unemployment will keep on going up for a year or more - but that's already discounted. Don't you know that it's a lagging indicator (ie it gives you no new information on business, it's just a reflection of the recent past, so it's already taken into account by the markets and is no longer relevant)?

Never mind that 12% of mortgages are now delinquent. That basic, vital services are going to be cut across the board in California becausr tax hikes are "unpalatable." That savage investment cuts in the oil industry means that a supply crunch is highly likely in a couple of years at best. That the people that brought us the mess are still in charge, and keener to blame Asia's "savings glut" than 30 years of policies to crush wages and replace them by easy debt.

Enjoy the warm fuzzy feeling emanating from the "green shoots". Its likely to prove rather temporary. But please don't act angry or shocked. If $13 trillion of gifts to banks could not rock the political boat, what will?

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by Jerome a Paris (etg@eurotrib.com) on Mon Jun 1st, 2009 at 03:04:55 PM EST
In case my point was not obvious enough, see this comment in the thread. And in case you're still in doubt, go read gjonhsit's diary

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jun 1st, 2009 at 03:52:11 PM EST
[ Parent ]
Their independent auditors will make them evaluate their loan portfolio each quarter and prove the value of the assets and the loans will be adjusted to their net realizable value based on MTM accounting standards...

I'll have "wishful thinking" for 200, Alex.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 2nd, 2009 at 06:03:58 PM EST
[ Parent ]
I keep noting one tiny detail being omitted from the pollyanna reports: What will fuel the recovery?  Where are the affordable inputs, such as capital and raw materials?  And where will the demand come from, given that the entire planet is leveraged?

If there is nothing to create recovery, we are in for long-term stagnation, which, given continued concentration of wealth, means most people continue to lose ground.  Thus further eroding any chance for a recovery.  And creating further decline.  And making protectionism more likely.  Etc., etc., etc.

by rifek on Tue Jun 2nd, 2009 at 08:14:21 PM EST
[ Parent ]
I posted this

Eats Green Shoots and Leaves

on my blog last night,and it should appear on the Labour List blog later today, I think, in between the resignations.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jun 3rd, 2009 at 06:28:21 AM EST
[ Parent ]
Raw materials? If they are needed, they will be created through the sheer force of demand.

To be serious, I think we will see the economic history of the 19th century backwards. A series bubbles and crises, each ending on a lower level of total economic ouput.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Jun 3rd, 2009 at 10:11:33 AM EST
[ Parent ]
Our power rings better be in the mail.
by tjbuff (timhess@adelphia.net) on Wed Jun 3rd, 2009 at 10:59:28 AM EST
[ Parent ]
Well, perhaps we are seeing the results of what was discussed recently at the "Bilderberg" held recently in Greece---underwater financial institutions jawboning the gullible out of what is left of their money in the name of jawboning the world out of a depression.  I have seen Martin Wolf and unspecified representatives from the NYT mentioned as current or previous attendees. (I may or may not be able to find citations.) :-)

It seems as though the chief criterion for invitation is agreeing not to talk about specifics or describe information as having come from "Bilderberg" as opposed to agreeing with any of what was said.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 1st, 2009 at 06:16:05 PM EST
re "where would China move its reserve holdings?" How about buying real stuff with the money? Oh, like land and resources in Africa and South America via loans tied to oil and other commodities?

Or how about offshore windparks in Europe? Wouldn't it be a nice source of funding?

Definitely a better investment than US government bonds which will be depreciated and inflated away... Doesn't Tim G. even want the Chinese to appreciate the yuan on purpose (i.e. on purpose destruction of their savings)????

 

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 07:55:32 AM EST
Remember that the Bank of China is not accumulating reserves as an investment strategy ... its a side effect of keeping the currency discounted, which are necessary in part because Bretton Woods collapsed ... under the current system, a low-income country can only maintain stable exchange rates by pursuing heavily discounted exchange rates.

Investing in offshore windparks in Europe would work to maintain low exchange rates with the Euro, but buying resources in Africa and Latin America is not going to help very much with depressing the Yuan/Renminbi against the hard currencies.

Obviously, if the Chinese decide that the US$ has shifted from the category of hard currencies to the category of soft currencies, they'll switch from buying US$ to peg the exchange rate to buying US$ for the natural resources they want to buy from the US.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 09:35:18 AM EST
[ Parent ]
good point regarding the exchange rate system,, but there was talk not too long ago about diversifying their currency reserves (e.g. when the Euro was introduced), so I do think they have at least partially an investment view on their reserves, not just an exchange rate mechanism.

And if they want to /must purchase USD assets, then I think they should also invest in "real" stuff like perhaps wind farms (I presume they are not as polticially sensitive as when Cnooc tried to overtake Unocal).

Then build a huge HVDC line to China across the Pacific to transfer the electricity to China, because MWh are a more stable currency than the USD ;-))

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 11:23:44 AM EST
[ Parent ]
That is also trade driven ... when the EU overtook the US as their largest export market, pegging to the US$ was no longer the most sensible approach. So they shifted to the Singapore peg, pegging to a basket of currencies, without advertising either the peg or the make-up of the basket, which allows them to shift their peg without generating shock waves that would interfere with maintaining stable exchange rates.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 12:40:31 PM EST
[ Parent ]
Here's the data:

(from my diary on the "savings glut theory")

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Tue Jun 2nd, 2009 at 12:43:55 PM EST
[ Parent ]
The tricky thing about the Singapore peg is if you guess the composition and weights, you can do the composite exchange rate against the basket and see the peg as one or more straight lines (like the 1995/2005 period) ... until they change the composition.

But once you have three or four currencies in the basket that float against each other, the individual exchange rates start fluctuating simply due to internal movements within the basket.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 02:33:28 PM EST
[ Parent ]
what is the driving force behind which currencies I invest in? The gross or net amout I export to a country?

If it is gross, then I must buy assets in just about any currency.

If it is net, then I must only buy assets in the country I have the biggest trade surplus in (I believe this is what you mean?)

What I really wanted to say was that whatever currencies I must invest in as the central bank of China, I can still chose the asset class. If that is the case then something besides government bonds or quasi government bonds such as Freddie Mac and Fannie Mae might be the smarter choice, depending on what I think will happen regarding inflation, GDP growth etc.

When I buy government debt of a country which can do whatever it wants with its monetary base, I am betting that they are prudent and don't do anything stupid and preserve the value of the fiat money. And currently I would be worried about that.

I would rather invest, no sorry, lend, my savings to things which I might have more or real use of (e.g. natural resources, energy, arable land,...) or to governemnts where I can be sure that they don't screw me through inflation.

And with that in mind I would rather invest in EUR because the ECB is a lot harder to manipulate / armtwist and in control of (chose: wall street, main street, lobbyists, congress, elections, whatever) than the ecb.

So in the end I think the US goverment is going to have a tough time finding lenders (unless it is the Fed which will then only compound the whole problem of inflation and in the end hurt China again)...

If you spend too much, you're in debt and usually you have to pay it back. Or you're a government which can control money supply, then there's an easy way out, just watch out who you screw...

Migeru, I will give your saving glut story a thorough read. Maybe I will be smarter.

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 03:29:17 PM EST
[ Parent ]
sorry, I meant "...armtwist than the FED" (of course, and not the ECB!) Sorry
by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 03:45:02 PM EST
[ Parent ]
When I buy government debt of a country which can do whatever it wants with its monetary base, I am betting that they are prudent and don't do anything stupid and preserve the value of the fiat money. And currently I would be worried about that.

But if you invest in physical plant and resources, you have to worry about the government of that country taking them away from you.

Don't be fooled by the fact that the official American religion is worship of the free market - that's just bullcrap for public consumption. As soon as the wheels hit the rail, the free market goes out of the window if it's inconvenient.

Welcome to ET by the way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 2nd, 2009 at 06:21:50 PM EST
[ Parent ]
I was just thinking of hyperinflation. In Germany hyperfinlfation led to savings being destroyed, but anyone who had his savings (or better debt) in his house was ok. The government only expropriated savers, not owners of real stuff. Afterall, in most countries exporpiration by the government is illegal, inflation not.

An ex-colleague of mine in Munich had a grandfather who owned a whole street in Munich. During the height of the hyperinflation he sold it for many many millions. They actually found a whole chest full of money after he died tucked away in the basement. Everytime my colleague tells that story he gets really sad because today the rent would suffice to easily pay for anything he could ever dream of. So he is still working and paying off his house...

by crankykarsten (cranky (where?) gmx dot organisation) on Thu Jun 4th, 2009 at 09:27:10 AM EST
[ Parent ]
Well, the Wiemar hyperinflation is a story of an exceptionally dysfunctional society. But in the case of the US, there has been previous rounds of nationalisations - such as the gold expropriation during Roosevelt.

And those took stuff away from citizens, nevermind furriners who speak funny.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 4th, 2009 at 02:23:37 PM EST
[ Parent ]
Make sure to read the comment thread - on this blog they are often better than the diaries.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Tue Jun 2nd, 2009 at 06:21:57 PM EST
[ Parent ]
... one set of dollars used in capital transactions, another set of dollars used in current account transactions.

The sum total of the domestic currency used for financial investment into, foreign direct investment into receipt of incomes, and purchase of exports from a country is the sum total of domestic currency used for financial investment by, foreign direct investment by, payment of foreign incomes, and imports.

And for the main world currencies, over 90% of the transactions are the capital flows. So treating the exchange rates as being driven by trade flows is a gross oversimplification.

For the pegged currencies, what determines the exchange rate is that if total demand and supply for the currency results in an exchange rate "above the peg", new domestic currency is issued and used to purchase assets in the foreign exchange. Doing that "accumulates foreign exchange", but its a side effect.

If total demand for and supply of the currency results in an exchange rate "below the peg", existing foreign exchange reserves must be sold for domestic currency.

Since new domestic currency can be created, but existing foreign exchange must be used, an undervalued exchange rate is easier to maintain at a stable level than a neutral (or overvalued) exchange rate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 06:25:34 PM EST
[ Parent ]
re the land buying, they're already at it big time, see e.g. http://www.economist.com/opinion/displayStory.cfm?story_id=13697274
by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 11:25:10 AM EST
[ Parent ]
Once the mistletoe has killed it, the only way you can get the economy back from Hela is if everybody agrees that they like it.  If you don't join in, you're automatically Loki.
by tjbuff (timhess@adelphia.net) on Tue Jun 2nd, 2009 at 01:19:54 PM EST
It said that the increase was because of huge demand from buyers and a shortage of properties to choose from. Estate agents have reported that good-quality homes are in such short supply that gazumping -- when a buyer makes a higher offer than one already accepted by the seller -- is making a comeback in some areas.

Cue that Galbraith quote about incantation, organised reassurance and no-business meetings...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 2nd, 2009 at 06:06:33 PM EST


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