Global wage growth robust at 2.5% real in 2015 but varies considerably by region

India 4.7%, China 6.2% and Asia overall 3.5%. World 2.5%. Germany 2.5%. Africa 8%.
Low inflation is creating an illusion of stagnant salaries in some countries. In reality, wage growth is the best since 2008, but skewed toward Africa and Asia.
Lincoln

Strong dollar claims another victim

At a Xmas party this weekend, a small "middelstand" businessman here in Hingham, an OEM that provides metal plating to the US electronics and other industrial industries, who has been in this business for decades, said, "I always thought my business would be my retirement fund, because I could sell it. I can't sell it now; my customers are rapidly disappearing. Production is going offshore."

His business is fading like a cheap Chinese knock-off Star Wars Xlarge t-shirt worn by an out-of-shape American tourist at the Great Wall on a sunny day, there enjoying the momentary benefits of the strong dollar that may have eliminated his job by the time he returns stateside.

We need to manufacture more debt to offset these losses in the real economy. The Fed will buy this debt and hand us strong dollars in exchange. That way all will be well.

Prof. Summers says ZIRP should continue for the next decade.

In the FT this morning, Summers says:

". . . for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the 'secular stagnation' diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a 'savings glut'. Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade."

So I guess that may be it. It is interesting, and to me questionable, however, that financial repression and ZIRP are compatible with financial stability in the long run, as Prof. Summers may assume.

"Good fences make good neighbors"

Robert Frost wrote this in “Mending Fences,” and he also remarked that “Something there is that doesn’t love a wall. . . elves, maybe.”

The Weekend FT had an interesting article, “Hungary erects a border fence to plug migrant flow.” So far this year, 80,000 illegal immigrants have entered this country by crossing the border with Serbia, which is quite a lot for a small country about the same size as Indiana and with a population of less than 10 million, and declining fast. (Hungary’s population has been declining since the 1980 census; the net reproduction rate has dropped to 0.6 while the net death rate has remained stubbornly fixed at 1.0/capita.)

The Hungarians are a little paranoid. The country, which is 98% ethnic Hungarian, has not been a melting pot since the Treaty of Trianon in 1920 when it lost 64% of its territory and 30% of its ethnic Hungarian population, according to the article.

So the Hungarians are doing two things: 1. They are building a 175 km steel fence to seal the entire border with Serbia; the fence should be finished by November. 2. They are pushing as many of the migrants north into Austria and Slovakia as fast as possible.(Church groups are giving them sandwiches and water at the train stations.) (Final destination: Germany)

The Schengen Area with no border controls means that Austria and Slovenia have no way to stop the migration. (26 countries are members of the area, including all the main EU states, except Ireland and the UK, which have opted out. (Iceland has joined, but the North Atlantic provides an alternative border control.) Since the Schengen Area as designed can be no stronger than its weakest link with an external border, it seems reasonable to expect that Schengen’s days are numbered.

Migration is pulling the EU apart. It is making the idea of the EU unpopular with the populations of its member countries.

Here is a European poll taken at the end of last year:




http://www.europarl.europa.eu/pdf/eurobarometre/2015/major_change/eb_historical_deskresearch_en.pdf

This is a very serious matter that no amount of bombing can easily solve. (Mr. Cameron seems to think differently as I read this morning he has just asked the UK parliament for permission to bomb Syria.)

Chaos Theory: If a National Security Advisor flapped its tiny wings at the equator, could it trigger a storm that would break up the European Union?

Over the weekend, there was an article in the FT with the headline: “Renzi vents anger as migrant summit ends with modest accord.” The EU is being flooded with illegal immigrants, the great bulk coming through Libya to Italy, which got 170,000 last year. (50,000 in Sicily so far this year.) In addition, there are over 600,000 EU asylum applications annually. The problem is that while the EU will provide Italy with financial support, no other EU country wants to accept these people physically. Renzi said at last week’s migration summit, “If this is Europe, you can keep it.” The president of Lithuania told Renzi that that the immigrants are “your problem.”

It’s not only illegal immigration into the EU that is controversial but also migration among European states. The UK wants to negotiate its treaty relationships so that it can reduce or deny benefits to citizens of other EU countries. Both parties in the Danish election are saying they will re-establish border checks with Germany if elected. (Border checks were gradually abolished by the Schengen Agreement in 1985, which now includes 26 countries, including non-EU members Iceland, Norway and Switzerland.)

The problem arises from the fact that individual countries are responsible for policing their borders while the EU generally is theoretically responsible for welcoming the newcomers and supporting them financially. This is an example of a failure to apply the Public Interest Theory in economics. (As an example, Roger Coase asked, “Who should pay for the lighthouse?” Why devote a lot of resources to policing the borders if a failure to do so is not your problem?)

Here is where the butterfly effect comes in: The immediate crisis was triggered by the overthrow of Gaddafi in Libya as almost all the illegal migrants pass through the territory formerly known as Libya. (Now it has at least two governments and many other groups that don’t recognize either of them.) It costs migrants $200-$1,000 to get to Libya from West Africa or Somalia and another $200-$1,000 to get on a boat in Libya, according to the Economist. The boats issue distress calls once they clear the Libyan coast and migrants are either put on rubber rafts or left on board while the crews abandon ship. Then the Italians come and rescue them. There is a 5% chance of drowning, which are odds I would readily accept were I in the same situation.

The Libyan problem, in turn, arose from the elimination of Gaddafi. So why did we take out Gaddafi? The French and British wanted to do so for some reason, but they needed US support. The State Department was opposed and Obama was reluctant, but the big push came from Samantha Power at the National Security Council. Power was not an expert on Libya and probably didn’t know that the Benghazi freedom fighters represented a small religious faction and that the rest of Libyans would not support them. (This is not to detract, however, from her acknowledged expertise on LBGT rights and women’s issues, and she’s probably learned a lot about foreign policy now that she is ambassador to the UN.) We got the Russians and Chinese to acquiesce in a no-fly policy at the UN, but when it became clear that Gaddafi would be able to suppress the rebellion easily without air support, we bombed Libya back into the Stone Age, thus creating the present situation.

Another unforeseen consequence of the Libyan mistake is that Russia and China feel they were snookered in the UN and this has increased their reluctance to support us in Iran, Syria, and elsewhere.

Of course, knowing that a butterfly might cause a hurricane does not tell us whether it will or not. I guess the only lesson we can draw is that we should be very humble about our ability to predict the consequences of our and other’s actions.

But this is all past wind under the butterfly’s wings. Migration issues, including internal migration, are dividing the EU. Isn’t this a much bigger threat than Greece?

Are the Greeks the best decision-makers in Europe?

The FT recently reported that Greece’s suicide rate jumped 35% between 2010 and 2012, mostly due to older men and women. Unemployment is 26%, the highest in Europe. (Under 25 it is 40%.) 100,000 young people have gone abroad, which a lot in a country of 11 million with only 1 million between ages 15 and 25. Deaths exceed births by a wide margin. (11 deaths for every 8.8 births)

Clearly, the Greeks are not as happy and optimistic as they might be. But are they realistic?

When I work out at the gym, I like to listen to philosophy podcasts in order to get a good rhythm going. I download them from iTunes. (It’s interesting that philosophy podcasts seem to reflect national traits: Philosophy Bites out of the UK is eclectic while The History of Philosophy Without any Gaps out of Munich, now running at over 200 lectures, is massive and systematic. On the other hand, The Philosopher’s Zone from Australia is fun-filled and whimsical. (A recent Aussie episode dealt with the moral issues raised by Buffy the Vampire Slayer and the problem of evil. The philosophy department at Marquette University in Chicago apparently publishes a journal on the philosophical issues in the “Buffiverse.”)

Recently at the gym I was listening to Philosophy Bites and a philosophy prof at the University of Birmingham named Lisa Bortolotti (educated at Alma Mater Studiorum (Bologna), Kings College London, Oxford, Nat. Univ. of Australia), whose field is rationality.

She said that the untrained individual is bad at making rational judgments.

She cited the famous “Linda Problem” of Tversky and Kahneman:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable?

1. Linda is a bank teller.

2. Linda is a bank teller and is active in the feminist movement.

The great majority of people chose the second item as the more probable, while it is the first that is correct. (The probability of two things occurring in conjunction is always less than that of one of them occurring alone.) (How did you do? Everyone I have asked got it wrong.)

She also made the following interesting points:

1. Decisions are generally worse when we are told in advance that we will have to explain our reasons.

2. We assign higher probability to desired outcomes than is warranted by the facts.

3. The higher our self-esteem, the worse our forecasting ability.

4. Pessimists, especially those with low self-esteem bordering on clinical depression, make the best assessments of future probabilities.

Points 3 and 4 are important. One may conclude that the Greeks are being more realistic than other Eurozone members in their negotiations, which the Greeks believe to be futile.

More importantly, should we only listen to Greek forecasters?

Greece and the Art of the Deal

Last week the FT reported, under the headline “Resentment and a collapse of trust make last-ditch deal more difficult” (6/20, p.2), that one night, when the Brussels bureaucrats were burning the midnight oil waiting for the Greeks to fill out their very sketchy last-ditch proposal, the Hellenes were spotted strolling around the Sablon restaurant district recreating themselves. A couple of days ago, FT writer James Mackintosh added the following: “Another day, another missed deadline. Greece has finally jotted down a few rough notes, so eurozone leaders offered their least-favorite pupil yet another homework extension, hoping it will be turned into a deal this week.”

The Greek crisis provides superior entertainment in that it is both interesting and unimportant. It is clear, however, that the present Greek government is committed neither emotionally nor philosophically to a solution that is compatible with the Germanic requirements of a single currency.

I wonder what sort of solution we would want if we were Greek?

Greece: As John McEnroe used to say, “You cannot be serious.”

Last Friday I was in the Berkshire Hills in western Massachusetts helping one of my daughters and her husband build a yurt in which they intend to spend the summer, so I didn’t get around to reading the Friday FT until yesterday. On page 2 there was an article describing the differences between Greece and the creditors in five areas: 1. Primary Surplus, 2. Value Added Tax, 3. Pensions, 4. Labor Markets, 5. Privatizations.

It looks like Greece and the creditors differ mainly on VAT and Pensions, and on pensions they are heading in the same direction but Greece wants to go slow. On VAT, the creditors want two rates: 11% for essentials and 23% for everything else. This is pretty much the situation that already exists, but the Greek government wants a third, lower rate for very essential items: Medicines, books, magazines, newspapers and theater tickets would be taxed at only 6.5%. (Certain Greek islands would be exempt altogether.) Despite my deep respect for the classical Greek theater (think of Sophocles, Euripides, Aristophanes!), this special treatment, which would include showings of Frozen and the Die Hard series, struck me as odd.

The fundamental problem in Greece is that its official tax rates are punitive so everyone evades them. 26% for corporation doesn’t sound bad, but it’s universal like the US, and social security is 42% (26% for employers and 16% for employees, plus the 23% VAT on purchases.)

Maybe the Greeks would prefer a purely socialist system? I say stop bullying them and let them go.

Climate Change: Best Review's "Catastrophe Losses 2014"

The June issue of Best's Review has a folded, glossy insert suitable for framing (by actuaries, I suppose) named "Catastrophe Losses 2014, which present graphically the magnitude and costs of global catastrophes, both man-made and natural, since 1970. It consists of five panels and a map.

I have attached one of the panels whichs puts in perspective the unusual attention accorded to extreme weather these days. Best's shows that global catasrophe losses were well below average in 2014, which belie the impression I had developed before looking at the data.

The epigrammatic words of Sgt. Joe Friday come to mind: "Just the facts, ma'am."

This is not necessarily a good thing for property and casualty insurers however, as future losses could well return to normal and be greater than the level upon which they now base their rates.

It was also interesting that the data shows that 50% of global catastrophe losses of $34.7bn for insurance companies were in North American, with only 20% in Asia, where conditions tend to be more catastrophic. In this respect, we are still the clear leader.

Reinvigorated spirits in the Mysterious East?

Two bits of information caught my eye today: 1. House prices and sales are rising again in China. (slightly: +0.05% m/m, but no longer negative) 2. Capital spending in Japan rose 7.3% in Q1 (vs. 0.1% est.)

This adds to good reports from Europe in recent weeks. Could it be that, finally, prices and economies are re-accelerating?

FT this morning: "Weak rouble and sanctions breath life into Russian industry"

Well, it looks like we've taught them a lesson they won't soon forget with the sanctions.

The Russian economy contracted 1.9% in Q1, which is less than expected and Renaissance Capital has improved its outlook for 2015 from -4.3% to -3.5%. This less-than-dire result comes from the increased domestic manufacturing and food production. The FT says,"some parts of Russia's food sector are booming" following food import bans against EU producers. Georges Barbey, Laxness head in Russian, said,"I see a renaissance of Russian industry, a renaissance we've been waiting for for a long time."

Chinese, Turkish and South Korean manufacturers are being pushed out of the market.

We, and the oil price decline, gave the lemons and they are making lemonade.

Middle-aged Chinese women corset gold demand in Q1

Global gold demand dropped 1% in Q1 2015 while supply was unchanged at 1,093 tons (725 mine, 367 recycled.) Demand would have been up had not middle-aged Chinese woman curtailed their jewelry purchases, according to the FT. Instead, the ladies have been opening brokerage accounts to speculate in stocks. Just under 8 million brokerage accounts were opened in the first quarter in China, up 433% from a year ago.

I wish I had known this would happen on December 31. The Shanghai Composite has risen 33% since then and gold is more or less flat.

Please email me in June in advance of the 3rd quarter trends.

Kosovo: Now that they are independent, they are leaving.

5% of the population left this winter alone. The FT reported on p2 this morning:

This reminds me of the case of Surinam. It decided to cut ties with the Netherlands in 1975. (It was already an autonomous republic and a consitutuent of the Kingdom of Netherlands, like Netherlands itself.) Then, before the date, 1/3rd of the total population decamped for Amsterdam.


Be careful what you wish for.

American industry's grisly opponent: the dollar

Interesting article in the Economist: "Uneasy Rider - The world's toughest motor-bike maker meets a grisly opponent, the dollar"

The article describes the damage being done to Harley Davidson by the strong dollar. It's not just currency translation losses (below) but also competitive behavior, The article notes that HD's European and Japanese competitors have launched a price war and are taking market share away from Harley.

I wonder if this comes up in the TPP discussions?

Americans spending more than $50k/year on drugs up 63% in 2014 to $52 billion

This is stunning. The total cost of perscription drugs for patients spending more than $50k/year increased 63% in 2014 to $52 billion.

Will drug costs bankrupt us before we stop paying them?

Extract from Reuters article:

Number of Americans using $100,000 in medicines triples -Express Scripts

May 13 More than a half-million U.S. patients had medication costs in excess of $50,000 in 2014, an increase of 63 percent from the prior year, as doctors prescribed more expensive specialty drugs for diseases such as cancer and hepatitis C, according to an Express Scripts report released on Wednesday.

Of the estimated 575,000 Americans who used at least $50,000 in prescription medicines last year, about 139,000 used at least $100,000 worth of medication, nearly triple the 47,000 who hit that mark in 2013, the report said.

The total cost to health plans for U.S. patients with prescription drug expenses in excess of $50,000 was $52 billion in 2014,Express Scripts said in its report: "Super Spending: Trends in High-Cost Medication Use."

Economists Dr. Copper and Dr. Zinc are bullish

An article in today's FT galvanized my attention. Zinc has hit a 3-year high of $2,415/ton and a production deficit is expected this year. Since zinc is widely-used in construction (galvanized rebar) and manufacturing, maybe this portents a stronger global economy. (If so, Zn may deserve a PhD. in economics, honoris causa.)

Meanwhile, Dr. Copper, which still pretty cheap at $2.964/lb, is approaching the $3/lb level and has been rising for four months.

Of course, investment in new Cu and Zn production has been weak for several years. Perhaps prices reflect supply weakness mostly.

Should we be more positive about the global economic outlook?

Will the ending of the Zero Interest Rate policy produce a credit crisis?

The lead story in today's FT says quotes the Glaxo's CEO as saying that easy money has led drug companies to make bad investments. "It's a little bit reminiscent of the early 2000s where every bit of new scientific news was good and would be permanent and would lead to great value creation." The article notes that a record $460 bn of pharma deals have occurred since the beginning of 2014.

I suppose that a lot of this spending has been debt financed. If the assets aren't good, then debt service will become increasingly onerous as interest rates rise. This is another reason for the Fed to keep interest rates below the rate of inflation indefinitely.

Meanwhile, the head of the European Securities and Markets Authority (ESMA), Steven Maijoor, said yesterday that "The very historically unusual monetary policy is raising risks for the non-banking sector." He said investors and companies were investing to an excessive degree in illiquid assets in a search for returns due to the overvaluation of liquid stocks and bonds.

Every day that ZIRP persist makes more severe the subsequent credit crisis, n'est-ce pas

Chinese oil imports are steadily trending upward. Global demand is not the source of price volatility.

We already knew that supply/demand imbalances in the oil market are caused almost entirely by supply deviating from trend. The fifteen year chart of Chinese oil imports in today's FT illustrates this. Not even the great recession seems to have made much difference.

In fact, world oil demand seems to grow 1% or 2% a year, year after year.  The only declines in world consumption in the past 25 years were in 2008 (-0.78%) and 2008 (-1.25%).  The Chinese slowdown, which is real and which heralds a new, lower growth trajectory, won't affect the oil price very much.

Supply is the source of price volatility, and supply depends on production costs (in North America) and politics (in Saudi Arabia and environs.)

Has America become a mall. If so, will it remain one?

A friend sent me an article sounding the alarm that 6,000 big retail stores in the US would be closed in the coming months. He wondered why. I replied as follows:

"The amazing thing is the fact that we have so much retail space in the first place. Why has retail space per capita tripled (about) since the 1980's? Why has my town of Hingham gone from one to three supermarkets, each twice as large as the original one, resulting in 6x as much space, since then while the population has remained flat? Why does the US have over 3x as much retail space/person (46.6 sq.ft.) as Canada (13.0)? (And now we have the Interest and the the goods go directly from the warehouse to the doorstep.

I look forward to the day when the excess malls become corn fields.

Per Capita Retail Space Comparison

US:             46.6 square feet
India:          2.0 square feet
Mexico:      1.5 square feet
UK:            23.0 square feet
Canada:      13.0 square feet
Australia:    6.5 square feet"

If you have any thoughts on this matter, let's meet at the mall and talk about it.

The ECB is now calling the shots worldwide

Manufacturing is heading down in Asia and heading up in the Eurozone. The US and UK remain positive.

Europe is China’s largest export market. It looks like the weak Euro is having the logical effect on China and surrounding Asia. One may surmise that the euro-effect will prevent anyone in the world from raising interest rates until inflation fears emerge.



-CHINA: PMI was 48.9 in April (preliminary; they may decide to change it later)

–SOUTH KOREA: PMI was 48.8 in April from 49.2 in March.

–INDONESIA: PMI was 46.7 vs. 46.4 in March.

-JAPAN: PMI was 49.9 in April

–INDIA: PMI was 51.3 vs. 52.1 in March.

–EUROZONE: Flash PMI was 52.0 vs. 51.9 for mid-April flash reading and vs. 52.2 end-March.

–GERMANY: PMI was 52.1 vs. 51.9 for mid-April flash reading and vs. 52.8 end-March.

–FRANCE: PMI 48.0 vs. 48.4 for mid-April flash reading and vs. 48.8 end-March.

–ITALY: PMI 53.8 vs. 53.5 expected and 53.3 in March.

–SPAIN: PMI 54.2 vs. 54.3 in March.

-UNITED STATES: PMI 54.1 in April.

-UNITED KINGDOM: PMI 51.9 in April

Serbia becomes the 24th central bank to cut rates so far this year

From: www.centralbanknews.info

Serbia cuts rate 50 bps after IMF deal, lower risk premium

Posted: 12 Mar 2015 06:37 AM PDT

Serbia's central bank cut its key policy rate by 50 basis points to 7.50 percent, a move expected by many economists, and said further changes would continue to depend on international risks, along with changes in commodity prices, and how they impact inflation.

It is the first rate cut this year by the Bank of Serbia (NBS), which cut its rate by 150 basis points in 2014.

The central bank said last month's 1.2 billion euro stand-by agreement with the International Monetary Fund (IMF) along with consistent government budget cuts and structural reforms had helped raise the interest of investors in Serbia, resulting in a fall in the country's risk premium.

Together with inflationary expectations around the NBS' target, this had "opened up the room for monetary policy to contribute to long-term sustainable recovery of the domestic economy," NBS said.

Serbia's inflation rate rose to 0.8 percent in February from a historical low of 0.1 percent in January, mainly due to the comparison with an increase in value-added-tax, and the NBS expects inflation to return to its target range in the second half of 2015 due to its policy measures and the waning impact of low growth in administered prices and low commodity prices.

The NBS targets inflation at a midpoint of 4.5 percent in a range from 2.5 percent to 5.5 percent.

Serbia's Gross Domestic Product contracted by 1.8 percent in the fourth quarter of 2014 compared with the same 2013 quarter, the fourth consecutive quarter the economy has shrunk, but the central bank has said the economy is recovering and the impact of floods in May 2014 is wearing off.

South Korea becomes the 23rd central bank to cut rates so far this year

NYT:

"SOUTH KOREA: The Korean central bank cut its base rate by 0.25 percentage point to 1.75%.

"Falling manufacturing, electronics and car exports amid aggressive competition from Taiwanese, Chinese and Japanese rivals prompted the South Korean central bank to join a plethora of Asian banks in trimming interest rates. South Korean rates are now at record lows. (AM)"

I wonder if the Fed is still planning to raise rates?

Poland's Central Bank 22nd this year to cut rates

If the Fed raises rates this year, it (along with Brazil) may stand alone.  Meanwhile, the strong dollar is damaging US manufacturing and agriculture.

Wednesday, March 4, 2015

Poland cuts rate 50 bps as deflation deepens

    Poland's central bank cut its monetary policy reference rate by 50 basis points to 1.50 percent, a move that was largely expected following last month's guidance by the National Bank of Poland (NBP) that it did not rule out further rate cuts if deflation continued.
    The NBP's previous rate cut of 50 basis points was in October 2014 but since then the fall in consumer prices has deepened. Since the NBP embarked on a monetary easing cycle in November 2012, it has cut the benchmark rate by 325 points.
    Polish consumer price inflation fell to minus 1.3 percent in January from 1.0 percent in December, the seventh consecutive month of deflation.
    Inflation has now been below the NBP's target of 2.5 percent for 26 months and below the lower bound of its 1.5-3.5 percent tolerance range since February 2013.
    The NBP will later today issue a statement about its decision and is also due to update its inflation and growth forecasts.
    In addition to cutting the reference rate, the NBP also cut the deposit rate by 50 basis points to 0.50 percent, the lombard rate to 2.50 percent and the rediscount rate to 1.75 percent.
    This year's strength in Poland's zloty currency against the euro has been worrying Polish policy makers with Marek Belka, NBP governor, signaling that the central bank was keeping an eye on zloty and was likely to act if there was further appreciation.
    The zloty was quoted at 4.17 today, up 4.6 percent against the euro this year though slightly weaker than last week's close around 4.15 to the euro.

    Poland's Gross Domestic Product expanded by 0.7 percent in the fourth quarter from the third quarter for annual growth of 3.10 percent, down from 3.3 percent in the third quarter.
    On Tuesday Poland's Deputy Prime Minister Janusz Piechocinski told Reuters that the central bank should cut rates by more than 25 basis points, saying the country was in no risk of excessive credit growth and that there was "huge space here for such bold action."

    www.CentralBankNews.info

Thank God for Kyoto!

What would greenhouse gas production been without it.  (from yesterday's Financial Times)

India becomes the 21st central bank to cut rates this year.

Everyone is out of step with the Fed.  The strong dollar problem is intensifying.

From Reuters:

UPDATE 5-India's RBI surprises again with post-budget rate cut


Wed Mar 4, 2015 6:32am EST

* RBI cuts repo rate 25 basis points to 7.5 pct

* Second cut this year, embarked on easing cycle in January

* Both made outside of regular policy reviews, surprising markets

* Rajan says economic growth recovering steadily (Adds quotes from Rajan's teleconference)

By Rafael Nam and Neha Dasgupta

MUMBAI, March 4 (Reuters) - India's central bank unexpectedly lowered its policy rate for the second time this year on Wednesday, backing a government that is pushing to revive economic growth as inflation cools.

Although markets had broadly expected the Reserve Bank of India to reduce rates again after a cut in January, few had expected a move just days after the government unveiled a budget that took a slower path to lowering the fiscal deficit.

After cutting the policy repo rate by 25 basis points to 7.50 percent, RBI Governor Raghuram Rajan issued a statement citing his reasons for making the move a month before a scheduled policy review.

"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action," he said.

The RBI embarked on an easing cycle on Jan. 15 with a quarter percentage point reduction that had also caught market off guard by taking place outside of a scheduled review.



The benefits have still to pass through to borrowers, however, as commercial banks have been hesitant about lowering their lending rate

China becomes the 20th central bank to cut rates so far in 2015

So do we still believe that the US Federal Reserve will raise rates this year?

At least Angola is keeping its sang froid.

Reuters: 

Angola's central bank leaves key interest rate unchanged at 9.0 pct

Feb 13 (Reuters) - Angola's central bank left its benchmark lending rate unchanged at 9.0 percent on Friday, saying this was appropriate to maintain price stability in the oil-dependent economy.

The Bank of Angola has kept the rate unchanged in Africa's second-biggest producer since raising it by 25 basis points in October last year. (Reporting by Mfuneko Toyana; Editing by James Macharia)

Currency Wars: Sweden cuts rates. 17th central bank to cut this year.

"Sweden Adopts Negative Rate, Launches QE. Sweden’s central bank cut its main interest rate into negative territory for the first time and announced a bond-buying program, joining a widening group of central banks trying out unconventional measures to battle low inflation. The Riksbank, the world’s oldest central bank, lowered its benchmark rate to minus 0.1% from zero and said it would buy government bonds worth 10 billion Swedish kronor ($1.2 billion)"  (WSJ)

Honduras Central Bank Cuts rates: I think that it's the 16th central bank to do so in 2015. (and the year is only 6 weeks old)

Meanwhile, in Istanbul:

"(Bloomberg) -- Global finance chiefs dismissed speculation the world is sliding toward a 1930s-style round of currency devaluations, indicating their acceptance of the dollar’s recent surge and declines in the euro and the yen. As talks of finance ministers and central bankers from the Group of 20 got under way in Istanbul, U.S. and European officials said recent exchange-rate fluctuations mirrored trends in economies rather than outright efforts to secure a competitive advantage to boost growth."

Honduras central bank to cut interest rate to 6.75 pct

TEGUCIGALPA Sat Feb 7, 2015 1:04pm EST

Feb 7 (Reuters) - The central bank of Honduras will lower its benchmark interest rate on Monday to 6.75 percent, the first cut in nearly three years, in a move aimed at accelerating economic growth, the bank's president said on Saturday.

The 25 basis point rate cut will be the first since May 2012, and comes at a time when monthly inflation fell for the first time since late 2008.

"This decision is largely due to both internal and external conditions that encourage us to allow a gradual reduction of the benchmark interest rate so that the country's economy is reactivated," said Marlon Tabora, the central bank's president.

The economy of the Central American country grew by 3.1 percent last year, and is expected to expand between 2.5 and 3.5 percent in 2015.

The central bank said January inflation fell 0.39 percent due mostly to falling fuel prices, the first drop in average prices since November 2008 when inflation fell by 0.2 percent.

The bank added that it expects the government's fiscal deficit to fall by 3.4 percent in 2015.

Last year, the deficit reached 4.9 percent of gross domestic product. (Reporting by Gustavo Palencia; Writing by David Alire Garcia; Editing by Alexander Smith)

Is Europe's economy perking up? The PMI's today were better than expected

EUROPE: January services purchasing managers’ indexes

–EUROZONE was 52.7 against 52.2 forecast and from 51.6 in December.

–FRANCE was 49.4 agaisnt 49.5 forecast and from 50.6 in December.

–GERMANY was 54.0 against 52.7 forecast and from 52.1 in December.

–ITALY was 51.2 against 50.0 forecast and from 49.4 in December.

–SPAIN was 56.7 from 54.3 in December.

–U.K. was 57.2 against 56.5 forecast and from 55.8 in December.

Sovereigns are in a peck of trouble

Euromoney's sovereign risk index is rising. This is surprising because easy money usually reduces sovereign risk. Special factors also come into play, like commodity prices and politics (e.g. Ukraine and Venezuela.)

The strong dollar is the unmentioned culprit in this analysis as many of these countries have US$ debt coming due.

By the way, the Russian Central Bank has just cut interest rates, bringing to 14 the number of CB who have eased policy in January. Would it be better to describe this as an avalanche or a tidal wave?

Mind the Gap: Strong dollar hollows out US industry

Production will continue to move offshore.

Ronald McDonald says US$ overvalued against all major currencies

In July 2014, the US$ was still fairly valued against the GBP, the euro, the Aus$, and the Can$. Now, however the US$ is overvalued in relation to every signficant economy in the world save Brazil.

It is no surprise CAT reported bad earnings today. The currency effect produced revenue declines everywhere in the world outside of North America. We should expect the same in the future from other global companies.

US economy "totally different" from the others

Chinese official explains why they won't follow the US lead in monetary policy. (The US had apparently been suffering from "insufficient money supply.")

Bubble, Bubble bonds and bunds

Interesting price moves in Japan and Germany.

Latest IMF projections show good global growth

Gloom is widespread, but if the IMF is correct the world will do well in 2015 and 2016.

My nomination for the "Most Creative Use of a Fiat Currency" Award

Hats off to these two Indian shopkeepers.

The West Virginia Economic Miracle

Question:  Once everyone is on permanent disability, who will deliver the checks?

The only state where less than half its civilians work
By Steve Goldstein

Published: Jan 13, 2015 11:32 a.m. ET
Not shown: Alaska has a participation rate of 63.4%, and Hawaii has a participation rate of 59.4%.



WASHINGTON (MarketWatch) — West Virginia quietly passed the ignominious milestone of having less than half of its adult, civilian population in the workforce in November.

State data compiled by the Labor Department shows that West Virginia’s civilian labor participation rate has fallen to 49.8%, from 50% in October. The national rate in December was 62.7%.

The Mountain State is the only state in the history of the series, which goes back to 1976, to have fallen below 50%, though Mississippi at 50.8% isn’t far behind.

The troubles that have befallen West Virginia have been well publicized, notably the diminished demand for coal.

At 6.3%, West Virginia doesn’t have close to the worst state unemployment rate, with Mississippi, California and Rhode Island each having jobless rates above 7%, and 11 other states with unemployment rates in the 6% range that are worse. But it’s a state where many have given up trying to find a job. At 17.6%, West Virginia has the highest percentage of working-age people with disabilities, above the national average of 10.4%, according to 2012 data.

Beyond the troubled economic environment — and, in part, because of it — West Virginia also has an older population. At 41.9, West Virginia has the fourth-highest median age, according to Census Bureau data from 2013.

On the other end of the spectrum, the highest participation rate belongs to North Dakota, in the midst of a fracking revolution that has drawn workers to the state.
State Participation rate (%) Unemployment rate (%)
Alabama 52.2 6
Alaska 63.4 6.6
Arizona 55.5 6.8
Arkansas 53.9 5.8
California 58 7.2
Colorado 64.9 4.1
Connecticut 61.7 6.5
Delaware 57.8 6
District of Columbia 64.5 7.4
Florida 57 5.8
Georgia 57.6 7.2
Hawaii 59.4 4
Idaho 60.4 3.9
Illinois 60.7 6.4
Indiana 60 5.7
Iowa 67.4 4.3
Kansas 65 4.3
Kentucky 54.6 6
Louisiana 57.2 6.5
Maine 60.8 5.7
Maryland 62.2 5.6
Massachusetts 61.5 5.8
Michigan 56.2 6.7
Minnesota 67.3 3.7
Mississippi 50.8 7.3
Missouri 61.1 5.6
Montana 61.3 4.3
Nebraska 68.7 3.1
Nevada 57.9 6.9
New Hampshire 66.1 4.1
New Jersey 60 6.4
New Mexico 54.2 6.4
New York 56.7 5.9
North Carolina 56.6 5.8
North Dakota 69.5 2.7
Ohio 59.8 5
Oklahoma 57.9 4.4
Oregon 57.6 7
Pennsylvania 59 5.1
Rhode Island 60.2 7.1
South Carolina 54.5 6.7
South Dakota 67 3.3
Tennessee 54.6 6.8
Texas 61.8 4.9
Utah 65.4 3.6
Vermont 65.3 4.3
Virginia 62.5 5
Washington 59.5 6.2
West Virginia 49.8 6.3
Wisconsin 64.9 5.2
Wyoming 65.2 4.5





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How to manipulate your currency for fun and profit

California Dreaming

It is interesting that one third of California's population is now destitute enough to qualify for free health care under Medi-Cal. If my understanding is correct, this does not include those receiving subsidies but paying something.

It's a difficult situation. Our health care financing system was nonsensical before Obamacare and remains so.

This is in addition to the care for the elderly, which was not part of the reform. That system is collapsing as well.


Los Angeles Times: California budget ills

The wages of sin: Does the head of Belgium's central bank have the toughest job in the eurozone?

The rise in the dollar is another nail in the coffin of US manufacturing

The yen has dropped 50% against the dollar.  The euro and the pound are down 15%-20%.  Consumer spending is reviving in the US, the consumer will is buying more foreign manufactures.  (This chart is from Ed Guay of Wintonbury Risk Management.(