Chinese workers flee expensive coastal regions for the interior.

The Pearl River Delta may be 900,000 short of workers, and the other coastal regions are similar. Increasing prices and stagnant wages are making it increasingly difficult for workers to remain on the coast and many are returning to the interior.

Significance: 1. Bottlenecks are developing in China’s state-controlled industrial sector. 2. Worker discontent is growing.

http://www.nytimes.com/2010/11/30/world/asia/30china.html

Industrial production growing rapidly across the globe

YOY in September 2010:

China: China: 13%, Japan 11%, Eurozone 9%, Brazil and Russia 6%, United States 5%. With the weak dollar, why is the US lagging? The answer may be anti-business government policies.

Factoid: The Mall of America has no vacant retail space for the first time in 18 years

Is this a retail recovery or the devil finding work for idle hands?

3rd quarter US corporate profits the highest ever (over 60 years)

Now at 11.2% of GDP. At a $1.7 trillion annual rate, corporate profits are ahead of 2007’s $1.5 trillion. The recession is over for the corporate sector.
http://www.nytimes.com/2010/11/24/business/economy/24econ.html

India's underground economy continues to thrive

India's underground economy has maintained a steady 50% size of the reported one for three decades and now totals $640 billion at the current exchange rate. (3x that at purchasing power parity.)

Source: LiveMint of India

China’s Achilles’ heal: Its industry is entirely state-owned and controlled.

The true private sector in China has actually shrunk in the past 10 years. The country is testing the economic limits of a socialist dictatorship. It is reasonable to expect it will eventually come to an impasse. From the WSJ, Nov. 17, 2010:

“According to China's Ministry of Finance, assets of all state enterprises in 2008 totaled about $6 trillion, equal to 133% of annual economic output that year. By comparison, total assets of the agency that controls government enterprises in France, whose dirigiste policies give it one of the biggest state sectors among major Western economies, were €539 billion ($686 billion) in 2008, about 28% of the size of France's economy.”

http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html?mod=ITP_pageone_0

Blood banks and bleeding

From today's NYT: Should the small countries let the banks go, as did Iceland?

Lincoln

“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”

"Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.

"Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50 percent of the economy. As long as housing prices continue to fall, these losses cannot be capped."

James Grant argues for a return to the gold standard

From today's New York Times:

"Gold is a metal made for monetary service. It is scarce (just 0.004 parts per million in the earth’s crust), pliable and easy on the eye. It has tended to hold its purchasing power over the years and centuries. You don’t consume it, as you do tin or copper. Somewhere, probably, in some coin or ingot, is the gold that adorned Cleopatra."

We will, I believe, return to the gold standard eventually. The process is already underway.

Lincoln

Chinese CPI dramatically understated over last 5 years, according to Beijing think tank

People are going hungry in increasing numbers in China. Be prepared for increased social unrest. Below is a report from Reuters. Lincoln


Inflation "under-statement" sparks row in China
Thu, Nov 11 2010
By Aileen Wang and Simon Rabinovitch

BEIJING (Reuters) - With price pressures on the rise in China, a rare public spat has broken out in government circles about whether the statistics agency is suppressing the full truth of how high inflation really is.

Many Chinese have long harboured suspicions about the quality of official inflation data, saying that it does not adequately capture soaring property prices or food costs.

But criticism took a curious turn this week when the Chinese Academy of Social Sciences, a top government think-tank in Beijing, published a research article arguing that the consumer price index had been under-stated by more than 7 percent over the past five years.
The National Bureau of Statistics, which regularly defends the quality of its output, swung into action.

"Obviously, the article's conclusion does not hold any water," Sheng Laiyun, NBS spokesman, told reporters.

The think-tank report found a gap between historical inflation figures and those that can be calculated based on the supposed weights assigned to the various components of the consumer price basket.

The inference was that the NBS might have been massaging reported data by changing weightings without informing the public.

"While only publishing the sub-indices of eight categories but not releasing changes in basket weightings, there is an opportunity to adjust the CPI figure," wrote Xu Qiyuan, author of the report.

"Justice," Chinese style

Zhao Lianhai, the parent of a child killed by contaminated milk who subsequently has campaigned for stricter food safety standards, has been sentenced to two and a half years in prison for "disrupting social harmony."

The message: No matter what happens, just keep smiling.

US says troops will remain in Afghanistan until at least end 2014

Suddenly dropping the 2011 withdrawal date, which has become "the beginning of a transition," Gates, Clinton and Mullen say that US troops will remain in Afghanistan "at least to the end of 2014." The White House says this is not a change in policy.

Does this change in policy have any relation to the recent Republican election gains?

http://www.nytimes.com/2010/11/11/world/asia/11military.html

The storm is coming! Take cover.

BEIJING, Nov. 9 (Xinhua) -- The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy.
Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the U.S. by one level to A+ from previous AA with "negative" outlook.
The Chinese rating agency said the downgrade reflected the U.S.'s deteriorating debt repayment capability and drastic decline of the U.S. government's intention of debt repayment.
"The serious defects in the U.S. economy will lead to long-term recession and fundamentally lower the national solvency," Dagong said in a report.
The Chinese rating agency said the Federal Reserve's new round of quantitative easing would further depreciate the U.S. dollar and was entirely counter to the interest of the creditors.
The Federal Reserve last week decided to buy 600 billion U.S. dollars of U.S. Treasury securities and other assets held by banks in a bid to inject fresh funds into the economy and bring down long-term interest rates.
"The credit crisis is far from over in the United States and the U.S. economy will be in a long-term recession," Dagong Global warned in the report, adding a weakening greenback will cripple U.S. capability to attract dollar capital reflow.
The Chinese rating agency said the Fed's move would not substantially reverse the trend of increasing the U.S. federal government's fiscal deficit and debt burden in the long term.
"In essence, the U.S. government's move to devalue the dollar indicates its solvency is on the brink of collapse," said the report.
Dagong Global noted the potential overall crisis in the world caused by the U.S. dollar's depreciation would increase the uncertainty of the U.S. recovery and the United States may face much unpredictable risks in solvency in the coming one to two years.
Founded in 1994, Dagong Global is a pioneer in creating credit rating standards on industries, regions and sovereignties in China, and is also leading the credit rating market in corporate bonds, financial bonds and structured financing bonds.

Chinese inflation getting out of control

Chinese consumers are suffering great pain from rising food and property prices, as indicated by the following excerpt from the Business Times of Singapore. Increasing the value of the renminbi would help.

"Published November 8, 2010

Chinese consumers feel pinch of inflation
Woes exacerbated as wage increases lag leaps in prices of food, property


By FELDA CHAY


(SINGAPORE) China's interest rate hike may have struck economists as unexpected, but it comes at a time when domestic consumers are becoming increasingly frustrated over soaring food and property prices, and it's not just those at the lower end of the economic spectrum.


'A normal meal in the financial district can now cost 20 to 30 yuan, and when they increase prices it can go up by 10 yuan at one time,' said a lawyer working in Shanghai's Lujiazui financial district, who declined to be named.

'Basic commodities such as pork and sugar are all selling out,' he said. And vegetable prices have soared and look nowhere close to returning to earth. 'For people who are used to buying vegetables at three jiao (30 cents) and it increases to eight jiao, it's a big deal.'

According to China's National Bureau of Statistics, prices of fresh vegetables shot up 19.2 per cent in August this year from a year earlier, and annual inflation rose to 3.6 per cent in September - a 23-month high. Pushing the index up were food prices, which were 8 per cent higher than a year earlier and make up one-third of the overall consumer price index.

What has worsened the problem is that wage increases for some have lagged leaps in the prices of basic commodities."

Wolfgang Schäuble on Bernanke's foible

The German finance ministry accuses the US of currency manipulation through quantitative easing (part deux). He is right; the US is consciously destroying the dollar's role as a reserve currency. This is both inevitable and necessary.

Wold Bank suggests that a return to the gold standard may be advisable

This from the FT on Saturday:

"Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank.

"Writing in the Financial Times, Robert Zoellick, the bank’s president since 2007, says a successor is needed to what he calls the “Bretton Woods II” system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.

"Mr Zoellick, a former US Treasury official, calls for a system that “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account”. He adds: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”

His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.

This week’s meeting of government heads in South Korea is likely to see yet more exchange rate conflict. A US plan for countries to sign up to current account targets has run into widespread opposition.

"Wolfgang Schäuble, Germany’s finance minister, has raised the temperature by describing the US economic model as being in “deep crisis” and criticising the US Federal Reserve’s decision to pump an extra $600bn into financial markets. “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank’s] printing press.”

Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.

The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank’s sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilising shifts of capital from one economy to another buttressed it."

“The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II,” Mr Zoellick writes. “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”