Category Archives: Exports

China

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RBS: China: Where is the slowdown?

Very good, tends to support some of my ongoing themes:

China will produce more of its own resources.

Higher rates don’t bring down demand, and probably increase it.
It’s the fiscal tightening, directly or indirectly, proactive or via auto stabilizers, that ultimately cause the tree to fall. (US budget went into small surplus in 1979, for example)

The inflation problem is severe enough for them to be using export unfriendly currency appreciation to fight it.

Hopefully it doesn’t all come apart in Q2!

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Warren’s latest presentation

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Attached is a copy of a presentation that Warren delivered yesterday in Montreal.

We were extremely well received and Warren was a huge hit, mixing a concoction of high dose monetary economic realities with real life experiences and anecdotes from his long and lustrous career as a market wizard. The presentation was scheduled for 45 minutes but turned into 1hr20 minutes including Q&A.

Presentation link here.

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Death by 1000 cuts: The economics of innocent subversion

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Even NY Fed Chief Bill Dudley, well aware of his role as a manager of expectations, is worried:

Dudley Headlines:

DUDLEY SAYS IMPORTANT NOT TO OVERREACT TO RISING INFLATION
DUDLEY ATTRIBUTES LOSS OF MOMENTUM TO RISING OIL PRICES
DUDLEY SAYS U.S. ECONOMY LOST SOME MOMENTUM IN PAST TWO MONTHS

Last I heard Congress agreed cut $38 billion in spending from this year’s budget as a ‘down payment’ on reducing the federal deficit.

Followed by every economic forecaster on Wall St. and Main St. reducing estimates for this years’s GDP by maybe 1/2% or more. (These are people who get paid to be right, and not to produce propaganda.)

I have no problem with cutting wasteful and unnecessary spending, but when we have this kind of shortage of aggregate demand said cuts would be more than matched with either tax cuts and/or other spending increases, to sustain aggregate demand.

(Aggregate demand is the total spending, private and public, that supports employment and output).

The proposals are now to get to work on more serious deficit reduction- maybe $5 trillion over the next 10 years, or about $500 billion or so per year.

Ask your favorite forecasters what that does to GDP. I’ll guess they’ll tell you it would be a proactive reduction of more than 3% per year. Plus multipliers. And maybe a 50% increase in unemployment as the output gap skyrockets from already insanely high levels.

In other words, maybe 10 years of negative growth, unless private sector (including non residents) spending somehow increases at least by that much.

For domestic sector spending to increase to fill what my mate Bill Mitchell likes to call the spending gap, there would need to be an increase in private sector debt (which is likewise measured as a drop in private sector savings).

With today’s credit conditions, I don’t see where that could possibly come from. Borrowing to spend on houses and cars- the traditional engine of consumer growth- rising to levels sufficient to close the output gap seems highly unlikely. Particularly when federal deficit reduction is cutting incomes and savings.

For the foreign sector (non residents) to fill that spending gap, the trade gap would have to somehow stop going up and suddenly drop down by that amount. Not impossible, but a very ugly process (for us)- massive decline in our real terms of trade, etc.- should that actually happen.

So why is this happening? Why are we drinking the hemlock?

Because both sides- Democrats and Republicans- have it all dead wrong.

They both agree the federal deficit is too large and is a dire threat to our well being.

When, in fact, the exact opposite is the case- the output gap/unemployment is telling us- screaming at us- that the federal deficit is too small, and that Congress should be arguing over whether they should cut taxes and/or increase spending.

(And throw in an energy policy, and fast, but that’s for another post).

But because they think we could be the next Greece and face a federal funding crisis, they continue to work to turn us into the next Japan with two lost decades- and worse.

It’s either ignorance or subversion, so let me take the liberty to again borrow from John Kenneth Galbraith and call it innocent subversion.

“The worst part is that, because both sides have no clue about the real functioning of the monetary system, they have both been hard at work misinforming the public. And, since they both watch and react to daily polling numbers, unless something is done, they will continue to react to the reflections of their own ignorance.”

Atty Donovan Hamm

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Inflation Slowing China’s Export Engine

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This is the force that ‘naturally’ brings the currency into line, and then can make it a lot weaker.

And the only way China knows to ‘fight it’ is probably with moves that will will result in a recession.

Inflation Slowing China’s Export Engine
Published: Sunday, 30 Jan 2011 | 10:46 PM ET

Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

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Obama and GE working together

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“For America to compete around the world, we need to export more goods around the world. That’s where the customers are. It’s that simple,” Obama said.

Yes, and only because he and our Congress are grossly overtaxing us for the size govt we have along with our current credit and trade conditions.

GE is a major exporter, and it should now be obvious that the exporters like GE are in control of policy, promoting their interests at the expense of the macro economy.

By fostering fear of being the next Greece, they continue to shepherd us into becoming the next Japan.

Obama all for creating jobs in India

By IANS

January 23 — Showcasing a new General Electric(GE) deal with India, U.S. President Barack Obama has called for a new effort to put the economy into job-creation “overdrive” by boosting American exports.

“For America to compete around the world, we need to export more goods around the world. That’s where the customers are. It’s that simple,” Obama said visiting the birthplace of GE founded by inventor Thomas Edison at Schenectady, New York. The Schenectady plant now makes power-generating turbines that the company markets globally, including a recent sale in India.

“We’re going back to Thomas Edison’s principles. We’re going to build stuff and invent stuff,” said Obama as he named General Electric CEO Jeffrey Immelt to head an advisory panel on job creation. The panel will be called the Council on Jobs and Competitiveness, a successor to the Economic Recovery Advisory Board that was chaired by former Federal Reserve Chairman Paul Volcker.

“The economy is in a different place” than two years ago, Obama told workers at Schenectady. But, though the economy is again growing after a deep recession, the President acknowledged that “it’s not growing fast enough yet.”

Obama held up exports as a core goal, arguing that for a decade the U.S. economy has relied too heavily on debt-financed consumption by its own citizens.

“As I was walking through the plant, you guys had put up some handy signs so I knew what I was looking at. And I noticed on all of them they said, this is going to Kuwait; this is going to India; this is going to Saudi Arabia.”

“That’s where the customers are, and we want to sell them products made here in America,” Obama said.

“That’s why I travelled to India a few months ago – and Jeff was there with us – where our businesses were able to reach agreement to export $10 billion in goods and services to India. And that’s going to lead to another 50,000 jobs here in the U.S.

“Part of the reason I wanted to come to this plant is because this plant is what that trip was all about. As part of the deal we struck in India, GE is going sell advanced turbines – the ones you guys make – to generate power at a plant in Samalkot, India.

“Most of you hadn’t heard of Samalkot, but now you need to know about it, because you’re going to be selling to Samalkot, India,” Obama said mentioning the small Andhra Pradesh pilgrim town, 165 km west of Visakhapatnam, at least four times.

“And that new business halfway around the world is going to help support more than 1,200 manufacturing jobs and more than 400 engineering jobs right here in this community-because of that sale,” he said amid repeated applause.

Obama said U.S. firms are “on track” to achieve his goal of doubling exports in a five-year period.

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German Economy Grew at Fastest Pace in Two Decades

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It’s been a long two decades, and 3.6% growth coming out of a 4.7% slump, slowing to 2% this year, isn’t anything to brag about.

And with the German dependency on exporting to the rest of Europe they’ll likely support continued ECB funding assistance.

The austerity measures, which make euro ‘harder to get’, combined with ECB funding assistance, which addresses default risk, also continue to fundamentally support a stronger euro.

And higher crude prices, which make dollars ‘easier to get’ off shore, work to both weaken the dollar and weaken US domestic demand.

German Economy Grew at Fastest Pace in Two Decades

By Christian Vits

Jan. 12 (Bloomberg) — Germany enjoyed its fastest economic expansion in two decades last year as booming exports spurred hiring and consumer spending.

Gross domestic product jumped 3.6 percent, the most since data for a reunified Germany began in 1992, after slumping 4.7 percent in 2009, the Federal Statistics Office in Wiesbaden said today. The figure was in line with the median forecast in a Bloomberg News survey of 28 economists. GDP probably rose 0.5 percent in the fourth quarter from the third, the statistics office said. The official fourth-quarter report is due on Feb. 15.

The Bundesbank expects Europe’s largest economy to expand 2 percent this year and 1.5 percent in 2012 as the sovereign debt crisis damps demand in the euro area, its main export market.

Germany’s Continental AG, the second-biggest tire maker in Europe, yesterday reported sales and earnings that beat its 2010 goals.

“The growth momentum continued into the first quarter and current forecasts might turn out to be too pessimistic,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “The German economy will likely have returned to its pre-crisis level in the third quarter.”

The euro traded at $1.3032 at 10:13 a.m. in Frankfurt, up from $1.3005 before the GDP report.

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Geithner’s Letter to G-20 on ‘External Imbalances’

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They’ve always been completely out of paradigm on domestic federal budgets. But this time around their ignorance has already been costly beyond imagination and looks to only get more so.

Geithner is just symptomatic of all that’s wrong with the mainstream’s understanding of monetary operations.

And I haven’t heard a single mainstream economist who’s got it right on the budget issue or the trade issue.

With the hawks and doves agreeing that federal deficits are a long term problem the obvious fundamental that imports are real benefits and exports real costs gets no consideration.

The trade war is a direct result of not understanding that domestic demand can always be continuously sustained by fiscal adjustments to the direct benefit of that economy.

The rest of the world’s desire to net export to us opens the door for unimagined US prosperity. With a full payroll tax (FICA) suspension we’d probably have enough domestic demand to buy all the goods and services we could produce at full employment plus all we wanted to buy from the rest of the world. And, if not, taxes could be lower still.

Geithner’s Letter to G-20 on ‘External Imbalances’: (Full Text)

Oct. 22 (Bloomberg) — The following is a reformatted
letter dated Oct. 20 from U.S. Treasury Secretary Timothy F.
Geithner to other officials in the Group of 20 industrial and
emerging economies. G-20 finance ministers and central bankers
are meeting today and tomorrow in Gyeongju, South Korea.

Dear G-20 Colleagues:

I am writing to offer some suggestions for our meeting later
this week. We are obviously at a moment where the world is
looking to the G-20 to provide a stronger commitment to work
together to address the major challenges to a sustainable global
recovery. I know that some of you will want to reserve any
substantive agreement until the November Leaders’ Summit, but I
think we should take advantage of the presence of the central
bank governors to try to reach agreement on the broad elements
this weekend, and put those in a report to our Leaders.

Building on Pittsburgh’s Framework for Strong, Sustainable, and
Balanced Growth and Toronto’s commitments on addressing
sovereign debt sustainability, here are three specific
suggestions designed to provide a stronger framework of
cooperation on international financial issues:

First, G-20 countries should commit to undertake policies
consistent with reducing external imbalances below a specified
share of GDP over the next few years, recognizing that some
exceptions may be required for countries that are structurally
large exporters of raw materials. This means that G-20 countries
running persistent deficits should boost national savings by
adopting credible medium-term fiscal targets consistent with
sustainable debt levels and by strengthening export performance.
Conversely, G-20 countries with persistent surpluses should
undertake structural, fiscal, and exchange rate policies to
boost domestic sources of growth and support global demand.
Since our current account balances depend on our own policy
choices as well as on the policies pursued by other G-20
countries, these commitments require a cooperative effort.

Second, to facilitate the orderly rebalancing of global demand,
G-20 countries should commit to refrain from exchange rate
policies designed to achieve competitive advantage by either
weakening their currency or preventing appreciation of an
undervalued currency. G-20 emerging market countries with
significantly undervalued currencies and adequate precautionary
reserves need to allow their exchange rates to adjust fully over
time to levels consistent with economic fundamentals. G-20
advanced countries will work to ensure against excessive
volatility and disorderly movements in exchange rates. Together
these actions should reduce the risk of excessive volatility in
capital flows for emerging economies that have flexible exchange
rates.

Third, the G-20 should call on the IMF to assume a special role
in monitoring progress on our commitments. The IMF should
publish a semiannual report assessing G-20 countries’ progress
toward the agreed objectives on external sustainability and the
consistency of countries’ exchange rate, capital account,
structural, and fiscal policies toward meeting those objectives.

With progress on these fronts, we should reach final agreement
on an ambitious package of reforms to strengthen the IMF’s
financial resources and its financial tools, and to reform the
governance structure to increase the voice and representation of
dynamic emerging economies.

Sincerely,

Timothy F. Geithner

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China Raises Lending, Deposit Rates as Inflation Accelerates

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A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China undergoes the transformation from employment growth via export led growth to employment growth via domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt. on the demand side, and rising costs of real investment on the supply side.
A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China
undergoes the transformation from employment growth from export led growth to employment growth through domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt on the demand side, and rising costs of real investment on the supply side.

Headlines:

China Raises Lending, Deposit Rates as Inflation Accelerates
Investors Should Cut China Property Stake, Gave Says
PBOC’s ‘Vicious Cycle’ Worsened by Fed, Yu Says: China Credit
China to Do More to Manage Inflation Expectations, Zhang Writes
World Bank Cuts East Asia Outlook, Warns on ‘Bubbles’
South Korean central bank looks to gold

China Raises Lending, Deposit Rates as Inflation Accelerates

October 19 (Bloomberg) — China raised its benchmark
lending and deposit rates for the first time since 2007 after
inflation accelerated to the fastest pace in 22 months.

The one-year deposit rate will increase to 2.5 percent
from 2.25 percent, effective tomorrow, the People’s Bank of
China said on its website today. The lending rate will
increase to 5.56 percent from 5.31 percent, it said.

China’s inflation quickened to 3.5 percent in August,
highlighting overheating risks that have prompted the
government to curb credit and clamp down on the real-estate
market this year. Higher interest rates may encourage inflows
of speculative capital from abroad, complicating management
of the fastest-growing major economy.

“Policy makers need to better anchor inflation
expectations by boosting real interest rates,” Liu Li-Gang,
a Hong Kong-based economist at Australia and New Zealand
Banking Group Ltd., said before today’s release.

China last raised benchmark rates in December 2007, with
central bank Deputy Governor Zhu Min saying on March 25 that
rates are a “heavy-duty weapon” and alternative measures
were working well.

Today’s move came after two surveys showed manufacturing
accelerated in September and input prices jumped, signaling
stabilizing growth and inflation pressures.

Global Recovery

“China would be wise to raise rates,” Dariusz
Kowalczyk, a Hong Kong-based senior economist at Credit
Agricole, said ahead of today’s announcement. “It has led
the global recovery and yet is one of only a few emerging
Asian nations that have not begun to reverse the steep rate
cuts orchestrated during the crisis.”

Chinese officials are grappling with the risk created by
last year’s record 9.59 trillion yuan ($1.4 trillion) credit
boom that fueled the nation’s comeback from the global
recession. China’s property prices in 70 cities rose 9.1
percent in September from a year earlier, according to the
statistics bureau.

China will speed up the introduction of a trial property
tax in some cities and then expand the levy to the whole
country, the government said Sept. 29, without giving a
timetable. The state also told commercial banks to stop
offering loans to buyers of third homes and extended a 30
percent down payment requirement to all first-home buyers.

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Trichet ‘Trapped’ by Banks’ Addiction to ECB Cash: Euro Credit

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Yes, as previously discussed, the ECB is now dictating terms and conditions to both the banking system and the national govts with regard to fiscal policy.

The fundamental structure of the eurozone includes no credible bank deposit insurance that now keeps the bank dependent on direct ECB funding. It also includes national govts that are in the position of being credit sensitive entities, much like the US states, only now with debt ratios far too high for their market status who are now directly or indirectly dependent on ECB support via bond purchases in the open market.

And there is no way out of this control for the banks or the national govts. There will be large deficits one way or another- through proactive fiscal expansion or through automatic stabilizers as attempts to reduce deficits only work to a point before they again weaken the economy to the point where the automatic stabilizers raise the deficits as the market forces ‘work’ to obtain needed accumulations of net euro financial assets.

This inescapable dependency has resulted in a not yet fully recognized shift of fiscal authority to the ECB, as they dictate terms and conditions that go with their support.

Yes, the ECB may complain about their new status, claim they are working to end it, etc. but somehow I suspect that deep down they relish it and announcements to the contrary are meant as disguise.

In the mean time, deficits did get large enough the ‘ugly way ‘in the last recession to now be supportive of modest growth. And even the 3% deficit target might be enough for muddling through with some support from private sector credit expansion which could be helpful for several years if conditions are right.

Also, dreams of net export expansion are likely to be largely frustrated as the conditions friendly to exports also drive the euro higher to the point where the desired increases don’t materialize. And the euro buying by the world’s export powers, though welcomed as helping finance the national govts., further supports the euro and dampens net exports.

Trichet `Trapped’ by Banks’ Addiction to ECB Cash: Euro Credit

By Gabi Thesing and Matthew Brown

October 7 (Bloomberg) — European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support.

Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years ago.

The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.

The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.

“The ECB is trapped and the exit door is blocked,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The state of credit markets is going to force them to stay in crisis mode for longer than some of them would like.”

The ECB’s 22-member Governing Council convenes today in Frankfurt. Policy makers will set the benchmark lending rate at a record low of 1 percent for an 18th month, according to all 52 economists in a Bloomberg News survey. That announcement is due at 1:45 p.m. and Trichet holds a press conference 45 minutes later.

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Non-Mfg ISM

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With a federal budget deficit still as large as it is, not all that much of a surprise.


Karim writes:

Nice upside surprise:

  • Orders and employment both up on the month; export orders up sharply (but not seasonally adjusted)



Sept Aug
Composite 53.2 51.5
Activity 52.8 54.4
Prices Paid 60.1 60.3
New Orders 54.9 52.4
Employment 50.2 48.2
Export orders 58.0 46.5
Imports 53.0 50.5
  • “General state of the business has not changed in the last three months. The market is still soft for new sales due to financing requirements.” (Construction)
  • “Business seems to be flat from last month.” (Finance & Insurance)
  • “Signs that the economy may be improving, but our sector is still flat or declining.” (Professional, Scientific & Technical Services)
  • “Business activity is generally stable — slightly better than last year.” (Accommodation & Food Services)
  • “Third quarter is looking profitable with improving confidence and expectations in the economy. Capital expenditures are being approved.” (Wholesale Trade)
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