Interesting undercurrents at The Next Global Crisis panel at the World Economic Forum at Davos…
Check out the video at 1 hour 10 minutes.
You can see the comments of Zhu Min, the deputy governor of the People’s Bank of China (the Federal Reserve of China), as he gives some insight from his part of the world on the risks of the next global crisis.
Mr. Zhu raises the specter of “capital flows” as the real risk the global economy faces this year…
Because of very low US rates many financial institutions can borrow from the Federal Reserve or through their prime broker at extremely low interest rates and are engaged in the “dollar carry trade“…
Mr Zhu pegs the sum of the carry trade between $1 trillion to $1.9 trillion. This is much bigger than the Japanese yen carry trade of 10 years ago.
He goes on to say because of the $ carry trade all this money runs in and out of emerging market economies creating asset volatility… he is politely describing “global hot money” flows…
The Chinese central banker is implicitly condemning the damage that zero interest rates of the US Federal Reserve are causing in less advanced economies… it’s a form of inflation exporting… and it’s morally indefensible… and it could be the cause of the next global crisis…
The moderator asks Mr. Zhu about the yuan and its value… he argues that it is important that the yuan be a “stable” currency to counterbalance the extreme instability that can be created in Asian economies from the “global hot money flows”…
Barney Frank asks him to raise the value of the yuan…. hmm… those are sovereign decisions…
Rather than trying to influence the monetary policies of other nations I think we need to address the problem of the overly large and unstable financial sector in the United States…
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From Jesse’s Cafe American… a riff on President Obama propping up the banking system:
~~~ ” … The US is heading towards a double dip recession, and the next leg down may be more fundamentally damaging than before.
The reason for the decline will be the abject failure of the Obama Administration to address the roots of the problem, instead wasting trillions to prop up a banking system that is a useless distortion.
Worse than useless really, because it actually presents a huge negative influence by stifling the recovery, channeling funds to the crony capitalists and non-producing wealth extraction sector, who tax the people like feudal lords under license of a corrupt government.
So far, Obama has failed the people, but preserved the banks.
A source of his failure has been his weakness in listening to Larry Summers and Tim Geithner, the Rubin-Clinton wing of Democrats, who have well established their incompetence and inability to act at a level suitable to their positions. They are captive to special interests, locked into the ways of thinking that brought the world to the point of crisis.
In response to the next leg down, Bernanke will monetize debt at an even more furious and clever pace, perhaps in alliance with the Bank of England and Bank of Japan. The ECB resists, and all who balk will be chastised by the monied powers and their demimonde, the ratings agencies and global banks. This is modern warfare of a sort…”~~~
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The strongest is never strong enough to be always the master, unless he transforms strength into right, and obedience into duty.
Jean Jacques Rousseau, The Social Contract, 1762
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Tax on speculators urged
Tim Colebatch, The Age, February 6, 2010
A former deputy governor of the Reserve Bank [of Australia] has urged the federal government to consider taxing short-term capital inflows to stop them destabilising Australia’s economy.
Stephen Grenville, who retired from the RBA in 2001 to make way for present governor Glenn Stevens, has broken with economic orthodoxy to call on governments to discourage foreign speculators from parking their cash wherever short-term returns are highest.
In a paper published by the Lowy Institute, Dr Grenville takes aim at the ”carry trade”, in which foreign investors borrow cheaply where interest rates are low and invest the money where rates are high.
A classic example is companies borrowing in Japan to invest in Australia.
Dr Grenville said that while this could bring big profits to investors – 100 per cent profit for Japanese who parked their money in Australia from 2003 and 2007 – it could produce serious downsides for countries swamped with unwanted cash.
Among other things, he argues, it provides fuel for asset bubbles, undercuts monetary policy goals and pushes up the exchange rate. Such investors are also prone to abandoning ship abruptly, causing a foreign exchange crisis and adding to investment uncertainty, he says.
Brazil has imposed a 2 per cent tax on short-term capital inflows, primarily to stop them pushing up its exchange rate.
A higher exchange rate hurts local producers by making their products more expensive to foreign buyers, while making imports cheaper on domestic markets.
Australia, by contrast, has made itself a haven for such inflows, which help finance the current account deficit, allowing the nation to spend more than it earns.
But Dr Grenville warns that the problem is set to get worse. ”Now we have not just Japan, but low interest rates in the United States, United Kingdom and Europe”, he says. ”Those interest rates are not just low now, but are likely to stay low for some years, with the prospect of a slow US recovery.”
He urges governments to consider a ”Tobin tax” – a small levy on capital inflows to deter excessive flows – first proposed by US economist James Tobin to put ”sand in the wheels” of financial speculation.
The impact in Australia would be to lower the exchange rate, easing pressure on manufacturers, tourism operators and farmers, while making imports slightly more expensive.
It would benefit areas of the economy being put under most strain by the minerals boom.”~~~
Tobin tax in Riski,,,
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We’ve now lost 8.4 million jobs in this recession, and a vast majority of them are gone for good. The politicians are clambering aboard the jobs bandwagon, belatedly, but very few are telling the truth about the structural employment problems in the U.S. and the extremely heavy lift that is necessary to halt our declining living standards and get us back to an economy that is self-sustaining.
We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs.
Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”
Neither the politicians nor much of the mainstream media are spelling out the severity of these enormous structural problems or the sense of urgency needed to address them. Living standards are sinking in the United States, and there is no coherent vision or plan for reversing that ominous trend over the long term.
The conference was titled, “The Next American Economy: Transforming Energy and Infrastructure Investment.” It was put together by the Brookings Institution and Lazard, the investment banking advisory firm.
When Governor Rendell addressed the conference on Wednesday, he used words like “stunning” and “unbelievable” to describe what has happened to the nation’s infrastructure. His words echoed the warnings we’ve been hearing for years from the American Society of Civil Engineers, which tells us: “The broken water mains, gridlocked streets, crumbling dams and levees, and delayed flights that come from failing infrastructure have a negative impact on the checkbook and on the quality of life of each and every American.”
The conference was sparked by a sense of dismay over what has happened to the U.S. economy over the past several years and a feeling that constructive ideas about solutions were being smothered by an obsessive focus on the short-term in this society, and by the chronic dysfunction and hyperpartisanship in much of the government.
I was struck by the absence of grousing and finger-pointing at the conference and the emphasis on trying to develop new ways to establish an economy that is not based on financial flimflammery, that enhances America’s competitive position in the world, and that relieves us of the terrible burden of reliance on foreign energy sources.
I was also struck by the pervasive sense that if we don’t get our act together then the glory days of the go-go American economic empire will fade like the triumphs of an aging Hollywood star. One of the participants raised the very real possibility of Americans having to get used to living in an economy “that won’t be number one,” an economy that perhaps is more like Germany’s.
Rescuing the U.S. economy will require a commitment, and undoubtedly sacrifices, that need to start now. And it will require leadership that pulls together the best talents from all sectors of the society — not just business, not just government, but from everywhere.
Bruce Katz, the director of Brookings’ Metropolitan Policy Program, discussed some of the steps that need to be taken to remake an economy that has been thrown completely out of whack by frantic, debt-driven consumption, speculative bubbles, exotic financial instruments, and so on.
A new, saner, more sustainable economy will have to be more export-oriented, powered by cleaner fuels, bolstered by innovation that comes from a renewed focus on research and development, and committed to delivering a better-educated, more highly skilled work force.
Mr. Katz believes this is doable, but by no means easy. The nation’s infrastructure, he said, will have to “shift from 20th-century models of transport and energy transmission to rapid bus, ubiquitous broadband, congestion pricing, smart grid, high-speed rail and intelligent transport.”
New ways of financing such transformative changes will have to be developed, linking public and private capital, preferably through the creation of a national infrastructure bank, among other things. The nation’s political leaders and the public at large will have to grasp the difference between wasteful spending and crucial investments in the future.
It’s time for serious people to step forward and help lead on these critically important issues. Time is short.
http://www.nytimes.com/2010/02/06/opinion/06herbert.html?emc=eta1
THE world’s top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.
Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.
The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.
The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.
Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.
Australia’s ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.
Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng slumping 3.3 per cent.
The damage was also being felt by European markets last night with London’s FTSE 100 down sagging 1 per cent in early trade.
Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.
“This does feel like ’08 and ’07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisors chief executive Andrew Kaleel.
“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”
It wasn’t all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.
The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.
The outlook for global growth is likely to be a key theme of the high level central bank talks.
The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.
A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.
Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.
Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.
http://www.perthnow.com.au/business/secret-summit-of-top-bankers/story-e6frg2rl-1225827368391
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