Ask most central bankers why a little inflation is a good thing, and they’ll give you some combination of these three reasons:
- Rising prices encourage businesses and consumers to spend more now in the hope of saving money in the future
- It’s easier for companies to cut real wages by giving people raises below inflation than it is to cut their pay
- Finally, and most importantly, it helps central banks push real interest rates low enough to get economies out of recessions
A horribly-fonted chart from Ashmore Investment showing the development of local-currency emerging market fixed income debt…
Just in case the point has not been hammered home over the last few years, or even the last few days, here’s a chart showing how quickly and dramatically the external debt imbalances got out of hand in the eurozone:
Or, is Germany right to worry about inflation?
A theory to chew over… Read more
Under-promise then under-deliver. Then watch markets tank. That’s the prognosis for the G20 summit, courtesy of Capital Economics’ crystal ball.
After poo-pooing suggestions Bric nations will ride to the eurozone’s rescue or take constructive measures to resolve global imbalances, the research house made what we think is a sensible prediction on Wednesday: Read more
An exasperated Michael Pettis always makes for an enlightening Michael Pettis column.
This time he trains his eye on the possible implications of the recent announcements by China that this time it means what it says about diversifying its reserve holdings out of USD assets. Sure. Read more
The official Chinese PMI for July came in at 50.7 — another month-on-month decline — although it was not as high as expected. In fact, it suggests we could be seeing signs of a soft landing in China.
The HSBC/Markit PMI, meanwhile, came in with a contractionary figure — 49.3 — though, not as sharp a fall as the flash estimate of 48.9 out last week. Read more
Title shamelessly stolen from Chris Cook, who’s applied the term to the IEA’s “easing” of tight oil markets by releasing reserves.
What we refer to though is the direct depression of bond yields, via the sheer weight of petrodollars (for example Saudi Arabia’s gigantic foreign assets) recycled into buying those bonds. Read more
The Bank for International Settlements has warned that global growth must slow to address global imbalances, saying there is little to no slack left for rapid non-inflationary expansion, the FT reports. BIS in its annual report said that monetary policy should be quickly brought back to normal and countries should act urgently to close budget deficits. The tough recommendations from BIS – the international organisation which came closest to predicting the 2008-09 financial and economic crisis – came despite signs of weakening economic momentum this year. The BIS report, however, warned policymakers not to expect a normal recovery because much of the pre-crisis growth had been unsustainable and capacity will have been destroyed for ever, particularly in finance and construction.The BIS view is closest to that of the ECB but runs counter to that of the Fed, its largest member central bank, which made it clear last week that its interest rates would remain extremely low for an “extended period”.
Kevin Gaynor at Nomura — long-standing side-kick to Bob ‘The Bear’ Janjuah — has had an epiphany.
The crisis didn’t begin in the subprime fuelled mid-naughties. Read more
The markets are all a-flutter with news of China’s ‘shock’ trade deficit.
The People’s Republic posted a deficit of $7.3bn in February, its biggest in seven years, according to Reuters. Initial reaction was swift, with Asian stocks tumbling. Read more
Lorenzo Bini Smaghi, European Central Bank executive board member, has made a beautifully coherent argument for the need for a global independent central bank.
In a speech made on March 4 (via the Bank of International Settlements), he points out: Read more
World trade has regained the levels it reached before the financial crisis, driven by rapidly rising emerging-market exports and imports, research suggests, the FT says. A monthly measure of trade compiled by the Bureau for Economic Policy Analysis, a Dutch research institute, shows that the volume of world goods traded surged by 15.1 per cent last year after contracting by 13 per cent in 2009. Strong December data capped robust growth in the fourth quarter. Trade imbalances, which shrank during the crisis, have started opening again as import demand from rich nations has recovered.
The world’s leading finance ministers and central bankers overcame Chinese objections at the weekend to strike a compromise deal meant as a first step towards tackling global economic imbalance, the FT says. France secured agreement at a Paris summit of the G20 group of countries on indicators that would be monitored to avert future economic crises. But China successfully blocked greater scrutiny of its massive foreign exchange reserves and the use of exchange rates as an indicator. FT Alphaville notes that Bank of England governor, Mervyn King, has outlined his own views on global imbalances.
Here’s a chart to ponder as regulators continue their forensics of the financial crisis:
Ben Bernanke took his moveable feast of easy money to Paris on Friday — but Mohamed El-Erian is not pleased with what the Fed Chairman had to say.
You can find out why over on FT Tilt — for free and without registration (but you know, if you want to sign up…). Read more
From BNP Paribas’ FX team on Thursday — an update on Europe’s current account:
China’s trade surplus fell last month to its lowest level since April 2010, as commodity prices pushed China’s imports close to record levels, reports the FT. The trade surplus fell from $13.1bn in December to $6.5bn in January, a reduction likely to be welcomed in Beijing ahead of the meeting of G20 finance ministers in Paris later this week.
Michael Pettis has a blunt way of describing the China predicament, after Friday saw the People’s Bank raise required reserve ratios for the seventh time over the past year, in an effort to rein in inflation and curb lending by the country’s banks.
In a sentence, it’s “damned if you do and damned if you don’t.” The issue, says the Shenyin Wanguo Securities analyst and all ’round China expert, is that high or just persistent inflation creates “an almost unsolvable problem for the PBoC. Read more
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. …
Unbalanced, and thus blisteringly honest.
Fred Goodwin, “Mr Macro” strategist at Nomura, unplugged: Read more
What does this chart mean to you?
Blink and you may have missed it.
But last Friday, Ben Bernanke probably made his most important speech since his ‘helicopter money‘ talk almost eight years ago. Read more
Independent Strategy have never been ones to mince words.
On Friday they’ve tackled the thorny issue of currency wars and global imbalances. It’s a topical debate given that US Treasury secretary Tim Geithner suggested earlier this week that G20 members (ahem, China) restrict their current account surpluses to no more than 4 per cent of GDP, to help alleviate certain unevenness. Read more
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, an adviser to the Chinese central bank has told the FT. Li Daokui said the debate had moved from the “surface issue” of nominal exchange rates to “talking about the substance of rebalancing world trade” following the weekend’s G20 summit in South Korea. The comments suggest Chinese support is building for US proposals for setting limits on current account surpluses and deficits at around 4 per cent of GDP, which were dismissed by developed-world export economies at the summit.
Here’s an interesting promo for the new book by UBS senior economic adviser, George Magnus.
To drum up a bit of attention for ‘Uprising: Will Emerging Markets Shape or Shake the World Economy?’ the Swiss bank has released a selection of internal emails between UBS economists (that would be Paul Donovan and Magnus, for the most part) on the future role of government-owned infrastructure banks; which for the record, Magnus thinks are needed to soothe global imbalances before they reach breaking point. Read more
Now for some upside to ‘the crisis upon us.’
Here’s a bold vision of the post-G20 international order, courtesy of Morgan Stanley’s inflationista-inclined analysts — meet the QE-20. Read more
A global currency war rages, China slaps tariffs on US poultry, and the US Congress considers punitive measures related to the USD-RMB peg — suffice to say that complications related to global imbalances won’t be resolved anytime soon.
But let’s look at the long term. Economists John Burger, Veronica Warnock, and Francies Warnock have written a new paper bolstering the case that the development of local-currency bond markets in emerging economies would be extremely helpful. Read more
Thursday’s US trade report from the Census Bureau brought some welcome news, though it’s probably best not to get too excited just yet.
Exports resumed growing again after a slight dip in June, while imports declined by $4.2bn. Overall the deficit declined to $42.8bn from the $49.8bn reported in June. Read more
The US trade deficit numbers were released today (pdf), but most of what you need to know is in this chart from Calculated Risk: