NATO war crimes

One of the Qaddafi sons, age 29, and three grandchildren, all under 12, were killed today in a NATO air strike that was clearly targeting a civilian residence. This is a war crime under the Geneva Convention.

US deficit 10.8% of GDP: Highest in the world

You may not have seen the IMF report released yesterday that noted that the US will have a budget deficit of 10.8% this year, the largest of any advanced country. Also interesting, the report stated that debt/GDP of the advanced economies will exceed 100% this year for the first time since WWII and will continue to rise through 2016 at which time debt/gdp will be 107%, 38 percentage points above the level that existed at the beginning of the debt crisis. Japan and the US have the greatest refinancing risk, at 56% and 29% of GDP respectively in 2011.

An historian looking at these numbers one hundred year hence would probably see them as the obvious precursors of hyperinflation and default. He may also find it curious that some major countries exposed themselves to so much refinancing risk for such a small reduction in interest cost.

Student debt exceeds credit card debt!

According to today's NYT, student debt topped credit card debt for the first time last year and will reach $1 trillion this year.

US Budget projections: all are bad

Government Shutdown: What's at stake.

We won't know what we're missing until it's gone. (George Tooker's "Government Bureau")

Will Obama show up if the govt furloughs non-essential personnel?

One of the interesting aspects of a government shutdown is that "non-essential" personnel are furloughed and non-essential functions cease. This is not, in fact, a bad thing. To balance the budget, this is exactly what is required.

India, Brazil and Japan have had bad 1st quarter markets

Feeble recovery in the USA

From today's New York Times

"The average workweek, too, was unchanged, at 34.3 hours, and average hourly earnings remained static. Such indicators point to an economy with much slack demand, hints of deflation and little upward pressure on wages. Real earnings, the Brookings Institution noted on Friday, have fallen 1.1 percent in the last year."

Gross finds US monetary and fiscal policy Gross

David Glen brings the following Bloomberg article to our attention:

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing U.S. debt burden.

The U.S. has unrecorded debt of $75 trillion, or close to 500 percent of gross domestic product, counting what it owes on its bonds plus obligations for Social Security, Medicare and Medicaid, Gross wrote in his monthly investment outlook. The U.S. will experience inflation, currency devaluation and low-to- negative interest rates after accounting for consumer-price gains if it doesn’t reform its entitlement programs, he said.

Pimco “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”

The comment echoes Warren Buffett, the billionaire investor who recommended avoiding long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will drop. Treasuries have handed investors a 0.1 percent loss this quarter, adding to a 2.7 percent decline in the final three months of 2010, based on Bank of America Merrill Lynch data.

President Barack Obama’s government has increased the U.S. publicly traded debt to a record $9.05 trillion, leading Gross to compare the nation to Greece, which had its credit ratings cut two steps by Standard & Poor’s on March 29.

“We are out-Greeking the Greeks,” he wrote.

Inflation Risk

Gross said in an interview March 11 that he eliminated government-related debt from his Total Return Fund because investors aren’t being adequately compensated for the risk of quickening inflation.

Buffett has shortened the maturities of Omaha, Nebraska- based Berkshire Hathaway Inc.’s bond holdings as the Federal Reserve eased monetary policy to stimulate the economy, according to regulatory filings.

“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire, said March 25 in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

Alternative energy still not practical

Will Portugal become Brazil's colony?

From today's Globe and Mail of Toronto:

'“Yes, Brazil could help Portugal, just as Portugal helped Brazil economically,” Brazilian President Dilma Rousseff declared during an official visit to the European country.

'And her popular predecessor, Luiz Inacio Lula da Silva, who is also in Portugal (as is Prince Charles, who apparently made no mention of the debt crisis), flatly told officials to forget about relying on the European Union or the International Monetary Fund – which the government repeatedly says it has no intention of doing anyway.

'A bailout from either or both sources would come with even more austerity measures attached than the beleaguered economy could tolerate.

'“The IMF won't resolve Portugal's problem, like it didn't solve Brazil's,” Mr. Lula said, referring to an IMF intervention in the late 1990s. “Whenever the IMF tried to take care of countries' debts, it created more problems than solutions.'

High School must be challenging in Portugal

Wall Street Journal March 25, 2011: "Just 28% of the Portuguese population between 25 and 64 has completed high school. The figure is 85% in Germany, 91% in the Czech Republic and 89% in the U.S"

42% of Japanese heads of household over 60 years of age

Prof. Marvin Zonis of the University of Chicago notes:

From my Annual Forecast, dated December 7, 2011:

“The population began to shrink in 2005 and the new data from the 2010 census will be released in February 2011. It will show an accelerating decline in the number of Japanese. What will increase is the number of households headed by people 60 years of age or older. In 1990, Japan claimed 10.2 million such households. In 2011, watch for the number to leap to 21.2 million households, likely comprising a full 42 percent of all households.

“Why does this matter? Because, while households headed by ‘oldsters’ own some 80 percent of all household assets, Japan’s low interest rates have devastated the income generated by those assets. (The interest rates are low, of course, because of the quantitative easing instituted by the central bank.) The result is that those households have largely stopped spending. But because
consumption is about 60 percent of the GDP, there has been little to drive the economy besides exports.

The "new Europe" might just work. Will the new rules transform Europe into Germany?

From the EUobserver:

"EUOBSERVER / FEATURE - After months of often bitter back-room negotiations, European finance ministers have finally given the green light to a radical new centralised EU oversight of national budgeting processes and, broader still, of all economic policies - both of countries that use the single currency and those that do not.

The unprecedented shift in powers to the bloc from member-state parliaments, heavily limiting what is known in the jargon as "policy space", or the ability of countries to write their own laws, was saluted by EU economics chief Olli Rehn.

"Today the EU member states are endorsing the basic thrust of the six legislative proposals by the commission," he told reporters after ministers had given their approval to what European decision-makers have dubbed the 'Six Pack'."

Full article:

http://euobserver.com/9/31993/?rk=1

A flock of black swans

An insurance executive in today's New York Times:


“What makes today’s natural disaster so extraordinary is that four of the five costliest earthquakes and tsunamis in the past 30 years have occurred within the past 13 months,” said Robert Hartwig, president of the institute, citing two big quakes in New Zealand and one in Chile along with the disaster in Japan."

Are we in a cluster of black swan events?

Robert Schiller's dire prediction

"The end of the world was predicted to take place at the end of 2012. This would be the day of reckoning for mankind. Well, at the rate things are going right now, it seems like this deadly package has checked in a little too early. Robert Shiller, the economist who predicted the subprime housing crisis has another dire prediction. He issues a warning that the Japanese quake and the tsunami could reach a global scale. This could shake stocks across the globe and set the markets up for a crash within days. "

If Europe agrees to the German/French proposals, the euro crisis will go away

From today's New York Times:

Germany is calling for several measures: raising retirement ages to reduce the burden on pension funds, ending the linking of wages to increases in the cost of living, committing to debt reduction and submitting to a level of budget scrutiny that was until recently considered anathema — and is still viewed by many as a step too far>

The growing threat of alphabetism

Alphabetism: "Excessive reliance upon the alphabet or alphabetic structures."

Example, from today's article in the New York Times about mass murderer Jarod Laughner:

"He also said that Mr. Loughner had increasing trouble interacting in social settings — during one party, for instance, Mr. Loughner retreated upstairs alone to a room and was found reading a dictionary."

Reminds me of the WH Auden couplet:

"I'm afraid there's many a bespectacled sod
Prefers the British Museum to God."

Be on guard for such behavior!

Central bank gold holdings still very low

Rogoff expects currency chaos in 2011

01-04-2011 16:17


Armageddon can wait

By Kenneth Rogoff

CAMBRIDGE ― Where are global currencies headed in 2011? After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole.

And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead ― but that this won’t spell the end of the economic recovery, much less the end of the world.

Let’s start by acknowledging that the modern system of floating exchange rates has, on the whole, acquitted itself remarkably well. True, given complex risk factors and idiosyncratic policy preferences, it has been particularly challenging of late to divine the logic underlying big exchange-rate swings. For example, even though the United States was at the heart of the financial crisis, the dollar initially soared.

But, even if exchange rates work in mysterious ways, their cushioning effect is undeniable. The sharp depreciation of the euro after the crisis helped sustain German exports, thereby keeping the eurozone afloat.

Emerging markets’ currencies also collapsed, even in economies with huge foreign-exchange reserves and relatively little debt. Since then, most emerging-market currencies have rebounded sharply. In hindsight, these exchange-rate swings mirrored the initial collapse and subsequent rebound in global trade, helping to mitigate the recession.

By contrast, the financial crisis was hardly an advertisement for expanding the scope of fixed exchange rates. The eurozone’s peripheral countries, including Greece, Portugal, Ireland, and Spain, found themselves pinned to the mast of the common currency, unable to gain competitiveness through exchange-rate depreciation.

The intellectual father of the euro, Columbia University’s Robert Mundell, once famously opined that the optimal number of currencies in the world is an odd number, preferably less than three. It is hard to see why right now.

Perhaps when we have one world government, it will make sense to have one world currency. But, even setting aside the equilibrating benefits of flexible currencies, the prospect of a single, omnipotent central bank is not particularly appealing. Witness the vitriol and hysteria that accompanied the U.S. Federal Reserve’s policy of so-called “quantitative easing.” Imagine the panic that would have ensued in a world where gold, storable commodities, and art were the only ways for investors to flee from the dollar.

But the continuing success of the floating exchange-rate system does not imply a smooth ride in 2011. For starters, we can certainly expect a continuation of the so-called currency wars, in which countries strive to keep their exchange rates from appreciating too rapidly and choking off exports. Asian governments will probably gradually “lose” their battle in this war in 2011, allowing their currencies to appreciate in the face of inflationary pressures and threats of trade retaliation.

As for currency collapse, the most prominent candidate has to be the euro. In an ideal world, Europe would deal with its excessive debt burdens through a restructuring of Greek, Irish, and Portuguese liabilities, as well as municipal and bank debt in Spain. At the same time, these countries would regain export competiveness through massive wage reductions.

For now, however, European policymakers seem to prefer to keep escalating the size of bridge loans to the periphery, not wanting to acknowledge that private markets will ultimately require a more durable and sustainable solution. No risk factor is more dangerous for a currency than policymakers’ refusal to face fiscal realities; until European officials do, the euro remains vulnerable.

The dollar, on the other hand, looks like a safer bet in 2011. For one thing, its purchasing power is already scraping along at a fairly low level globally ― indeed, near an all-time low, according to the Fed’s broad dollar exchange-rate index. Thus, normal re-equilibration to “purchasing power parity” should give the dollar slight upward momentum.

Of course, some believe that the Fed’s mass purchases of U.S. debt poses an even bigger risk than Europe’s sovereign debt crisis. Perhaps, but most students of monetary policy view quantitative easing as the textbook policy for pulling an economy out of a zero-interest-rate “liquidity trap,” thereby preventing the onset of a sustained deflation, which would exacerbate debt burdens.

As for China’s renminbi, it is still supported by a highly political exchange-rate regime. Eventually, China’s rapid growth will have to be reflected in a significant rise in its currency, its domestic price level, or in both. But, in 2011, most of the equilibration will likely take place through inflation.

Finally, currency chaos is the safest bet of all, with sharp and unpredictable swings in floating exchange rates around the world. During the mid-2000s, there was a brief window when some argued that currencies had become more stable as a corollary of the “Great Moderation” in macroeconomic activity.

Nobody is saying that now. The floating exchange-rate system works surprisingly well, but currency volatility and unpredictability look likely to remain an enduring constant in 2011 and beyond.

Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF. For more stories, visit Project Syndicate (www.project-syndicate.org).

Paradigm shift: Now they're worrying about the US economy overheating!

This morning's Wall Street Journal has an article with the title "Investors' Forecast: Sunny With Chance of Overheating." Too hot is described as economic growth of 4%, which isn't that hot in today's world. But still, it is a paradigm shift.

http://online.wsj.com/article/SB10001424052748703384504576055950354533470.html?mod=ITP_pageone_0&mg=com-wsj