Category Archives: Russia

China’s ‘vital’ interests at stake over Greek crisis

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It’s more than China’s ‘vital interests’ as over their a loss of public funds from a Greek default could mean heads roll- literally- as there is a history of actual execution for failure and disgrace.

And note the past tense- China had helped by buying their debt.

Also, note the anecdotal signs of weakness, highlighted below:

Headlines:
China President Hu: Global Economic Recovery ‘Slow And Fragile’
China’s ‘vital’ interests at stake over Greek crisis
China Yuan Band Widening Would Have ‘Political’ Meaning Only
Consumer Spending Fades in China Economy After ‘Peak Days’
China economy faces over-tightening risk – government economist

China President Hu: Global Economic Recovery ‘Slow And Fragile’

June 17 (Dow Jones) — Chinese President Hu Jintao said Friday that the global economic recovery is still “slow and fragile” and is threatened by a resurgence of protectionism in various forms.

“There still exist some lagging effects of the financial crisis,” he said at a keynote speech at an investment forum in Russia.

Despite failing to agree on a landmark deal for gas supplies from Siberia, Hu was upbeat on the outlook for bilateral trade with Russia, which is rich in other natural resources crucial to China’s economic development.

Hu said he hopes to raise the level of annual bilateral trade between the two countries to $100 billion by 2015, and $200 billion by 2020, compared with $60 billion in 2010.

In 2009, Russia and China agreed in principle to construct two pipelines that would export natural gas from Siberia to China, but a final agreement has been held up due to persistent differences on gas pricing.

Late Thursday, the two sides failed to reach an agreement during last-minute talks at Gazprom headquarters in Moscow.

China’s ‘vital’ interests at stake over Greek crisis

June 17 (Guardian) — China’s “vital” interests are at stake if Europe cannot resolve its debt crisis, the Chinese foreign ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner.

At a media briefing ahead of Chinese premier Wen Jiabao’s visit to Europe next week, vice foreign minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade.

“Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us,” she said.

“China has consistently been quite concerned with the state of the European economy.”

Wen is due to visit Hungary, Britain and Germany late next week, just months after he visited France, Portugal and Spain and offered to help Europe overcome its debt woes.

With Greece on the verge of a debt default, investors will focus on whether China promises to buy even more debt from beleaguered European nations including Greece, and increase its investment in the region.

China is a natural prospective investor in European assets and government debt because it has $3.05 trillion (£1.9tn) in foreign currency reserves, the world’s largest.

With a quarter of the reserves estimated to be invested in euro-denominated assets, it is clearly in Beijing’s interest to help Europe survive its debt turmoil.

“We have supported other countries, especially European countries, in their efforts to surmount the financial crisis,” Fu said. “We have, for example, increased holdings of euro debt and promoted China-European Union trade.”

Beijing has said in the past that it has bought Greek debt, but has never revealed the size of its investment.

Since eurozone debt worries first rippled through markets last year, China has repeatedly said that it has confidence in the single-currency region.

“We have hoped to help eurozone countries in overcoming the crisis, and this is also a measure that is beneficial to China’s own economic development,” Fu said.

But mirroring deteriorating market confidence on Europe, China’s central bank published a report this week saying the economic bloc risked worsening its problems if it did not contain debt levels.

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thoughts on the euro

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So my story has been that while most thought QE was a bumper crop for the dollar- Fed printing money and flooding the system with liquidity and all that-

It was in fact a crop failure for the dollar, as evidenced by the Fed turning over $79 billion in QE profits (that would have otherwise gone to the economy) to the Tsy.

And because everyone thought it was a bumper crop, they all sold the heck out of dollars in all kinds of theaters and iterations, from outright selling of dollars, to buying of commodities and stocks and in general making all kinds of dollar ‘inflation bets.’

And then a few weeks ago Chairman Bernanke comes on tv and starts talking about how his policies are strong dollar policies, just as the dollar index hit its lows and within a day or so headed north.

At the time it seemed strange to me that he’d suddenly, out of nowhere, break silence on the dollar and make those kinds of strong dollar statements previously left to Treasury. Unless he had a pretty good idea the dollar would start going up.

And only a few days ago he again spoke about how his policies were strong dollar policies, and the dollar traded around a bit, but remained above the lows and then headed back up. Especially vs the euro.

And shortly after that we find out China had let maybe $200 billion in T bills run off since QE2 started, and while their dollar holdings didn’t fall, their reserve growth was allocated elsewhere, and, from market action, there were substantial allocations to the euro. This hunch was further supported by their earlier announcement that they would be buying Spanish bonds to ‘help them out’ as a Trojan horse to buy euro to support their exports to the euro zone.

So my story is maybe the T bill runoff thing was a shot across the Fed’s bow? China was in the news objecting to QE and demanding what they considered ‘sound money’ policy. So it would make sense, to let the Fed know they were serious, to do something like let their T bills run off and alter fx allocation ratios away from the dollar and toward the euro, all of which caused the dollar to sell off for several months. And with the implication, and maybe also in private conversation, that any more QE would mean outright selling of dollar reserves. And the Fed Chairman taking this to heart and with other FOMC members also objecting to more QE, and maybe even knowing that QE doesn’t do anything anyway apart from scaring global portfolio managers, including those in China and Russia, etc. out of dollars, maybe somehow reached an understanding with China, where China would return to ‘normal’ fx allocations and there would be no QE3? And the subsequent strong dollar speeches that followed had the knowledge behind them that China had returned to dollar financial asset accumulation, which would likely end the dollar slide and reverse it?

This also means the euro has lost this ‘extra’ support it’s ‘enjoyed’ for the prior several months, which means it’s all a lot worse for the euro than it is good for the dollar, as they have bigger fish to get deep fried than just the level of the currency. Seems the last thing they need now is for a major buyer of euro denominated debt to switch allocations to dollars.

And it also could be that this ‘extra’ euro debt buying has been delaying the euro crisis for the last several months as well. This means it’s all been propped up while getting worse down deep, which means if that support has now been pulled, it falls that much harder.

A lower euro also works to ‘inflate away’ euro zone national govt debt ratios, and currency depreciation in general as a market induced path to debt relief is a well known phenomena, though one the ECB is likely to fight to comply with its low inflation mandate. And fighting inflation means hiking interest rates, which, while initially helping some, actually work to increase national govt deficits and hurt their credit ratings, as well as further depress the euro.

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Funds Boost Bullish Commodity Bets on Global Growth Prospects

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Story behind prior post on China.

Not to forget that biofuels are burning up large % of our food as motor fuel.

Funds Boost Bullish Commodity Bets on Global Growth Prospects

By Yi Tian

June 6 (Bloomberg) — Funds boosted bets on rising commodity prices to the highest in four weeks, led by copper, amid signs that the global economic recovery will remain resilient and boost demand for raw materials.

Speculators raised their net-long positions in 18 commodities by 7.3 percent to 1.26 million futures and options contracts in the week ended May 31, government data compiled by Bloomberg show. That’s the highest since May 3. Copper holdings more than doubled. A measure of bullish agriculture bets also climbed as adverse global weather curbed crop production.

The Standard & Poor’s GSCI Spot Index rose for a fourth straight week as Chinese metal inventories plunged and droughts lingered in the Asian country and Europe, trimming prospects for wheat and cotton crops. The global recovery “is gaining strength,” the Group of Eight leaders said May 27 after a summit in Deauville, France. In the U.S., consumer sentiment rose to a three-month high in May, a private report showed last month.

“We are seeing a reasonable rate of growth in worldwide economic activity,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco. “The supply-demand associated with that growth, combined with a weaker dollar, probably explains the move into commodities.”

Copper prices have jumped 40 percent in the past year while wheat has surged 75 percent and corn has more than doubled amid increasing demand from China and other emerging economies. Raw materials have also gained as investors boosted holdings as an alternative to the dollar, which has slumped more than 6 percent this year against a six-currency basket.

$130 Million

Investors poured $130 million into commodity funds in the week ended June 1, the second straight increase, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous week had inflows of $702.8 million.

Managed-money funds and other large speculators boosted bullish bets on New York copper prices by 4,604 contracts to 7,304. The jump was the biggest since October 2009. Stockpiles of the metal monitored by Shanghai Futures Exchange have plunged 51 percent since mid-March.

“Destocking cannot continue indefinitely, and market participants will have to return to the market at the latest in the fourth quarter, if not for re-stocking then at least for spot purchases,” Bank of America Merrill Lynch said in a report last week.

Agriculture Bets

Speculators raised their net-long positions in 11 U.S. farm goods by 4.6 percent to 756,629 contracts as of May 31, the second straight increase. Holdings of wheat jumped 14 percent, and bets on a cotton rally gained up 12 percent, the most since August.

“It has basically been a year of the wrong weather at the wrong time, starting with the Russian droughts and then most recently excessive rains in the U.S.,” said Nic Johnson, who helps manage about $24 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. Agriculture “prices could move materially higher because of low inventories and if we have below-trend yields of crops like corn.”

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Geithner- U.S. Will Urge China to Boost Interest Rates

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Even more confused than the usual out of paradigm nonsense from Geithner highlighted below:

U.S. Will Urge China to Boost Interest Rates in Washington Talks

By Rebecca Christie and Ian Katz

May 9 (Bloomberg) — Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan.

Geithner will say China should relax controls on the financial system, give foreign banks and insurers more access and make it easier for investors to buy Chinese financial assets, said David Loevinger, the Treasury Department’s senior coordinator for China. Officials from both nations are meeting in Washington today and tomorrow as part of the annual Strategic and Economic Dialogue.

The US Treasury shamelessly fronting for the financial sector.

The U.S. is pushing for greater market access for financial firms as part of its broader effort to persuade China to ease the restrictions blamed for fueling global imbalances. U.S. officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March.

Budget Deficits

Chinese officials, for their part, blame record U.S. budget deficits for contributing to lopsided global flows of trade and investment. China held $1.15 trillion in Treasuries at the end of February, more than any other country. The U.S. trade deficit with China came to $18.8 billion in February.

Vice Finance Minister Zhu Guangyao said on May 6 that China is paying “close attention” to U.S. efforts to reduce its budget deficit, and his country will focus on improving the quality of itsexchange-rate mechanism.

Yes, China is chiming in on US fiscal policy and no one of political consequence believes they are wrong.

Geithner and Vice Premier Wang Qishan will meet alongside Secretary of State Hillary Clinton and State Councilor Dai Bingguo at this week’s meetings, which will draw about 30 top Chinese officials.

The Obama administration and U.S. lawmakers say China’s currency policy gives the nation’s exporters an unfair competitive advantage, costing U.S. jobs. Geithner is trying to convince Chinese officials that a stronger yuan has benefits for their economy.

‘Enhanced’ Ability

Geithner said last week that allowing the yuan to rise and making their financial system less dependent on government- controlled interest rates would give Chinese leaders an “enhanced” ability to damp inflation.

This just gets stupider and stupider with each out of paradigm iteration.

The Treasury argues that higher interest rates on deposits will also encourage consumer spending in China, another way to reduce imbalances.

Here he takes my position on monetary policy- depending on the institutional structure, higher rates add to aggregate demand via the income interest channels. But it’s totally confused in this context of fighting inflation, as higher demand adds to price pressures, and also adds to cost pressures via the cost of capital for businesses.

“We’re going to encourage China to move more quickly in lifting the ceiling on interest rates on bank deposits in order to put more money into Chinese consumers’ pockets,” Loevinger said at a briefing last week in Washington.

Investors are betting the yuan’s rise may be limited over the next 12 months. Twelve-month non-deliverable yuan forwards dropped 0.81 percent last week to 6.3520 per dollar on May 6, their biggest weekly loss of the year, on speculation that China won’t allow faster appreciation to reduce inflation.

Fundamentally, inflation and currency depreciation are pretty much the same thing. So ultimately inflation goes hand in hand with currency depreciation, as inflation removes the ability to ‘allow faster appreciation’.

17-Year High

The yuan closed little changed in Shanghai on May 6, ending a run of seven weekly gains that drove the currency to a 17-year high of 6.4892 on April 29, according to the China Foreign Exchange Trade System.

John Frisbie, president of the U.S.-China Business Council, said support for a stronger yuan among Chinese leaders has increased in the past year.

Yes, looks like inflation is bad enough in their view to throw their exporters under the bus via currency appreciation (for as long as it can last) in what looks like a desperation move.

“The strong hand has switched over to those who are saying that the exchange rate can help us fight inflation,” Frisbie said in a telephone interview. He said his group, whose members include companies such as Apple Inc. (AAPL), JPMorgan Chase & Co. (JPM) and Coca-Cola Co. (KO), wants China to resume opening its financial services sector to allow more foreign investment.

The American Chamber of Commerce in China said in a report last month that foreign banks play an “insignificant role” in China.

Foreign lenders’ market share in China has dropped since the government first opened the industry in December 2006. Banks such as New York-based Citigroup Inc. (C) and London-based HSBC Holdings Plc (HSBA) want to tap household and corporate savings that reached $10 trillion in January as China overtook Japan to become the world’s second-biggest economy.

Foxes into the hen house…

Foreign Exchange

The U.S. has delayed its semi-annual foreign-exchange report, which had been due on April 15, until after this week’s meetings. The previous report, due on Oct. 15, 2010, was released on Feb. 4 and declined to brand China a currency manipulator while saying the No. 2 U.S. trading partner has made “insufficient” progress on allowing the yuan to rise.

The yuan goes beyond the U.S. and China to become “a multilateral issue, in terms of the impact on Brazil, Korea, Thailand and India,” said Edwin Truman, a former Federal Reserve and Treasury official who is now a senior fellow at the Peterson Institute for International Economics.

‘Causing Trouble’

The “slow” appreciation of the yuan “relative to the dollar in an environment where the dollar is going down against other currencies is causing trouble for other countries and currencies,” Truman said.

Diplomats at the Strategic and Economic Dialogue also will discuss events in the Middle East, including military operations in Libya and the ramifications of the region’s popular uprisings.

Officials are likely to discuss efforts to revive six-party talks on North Korea’s nuclear program. Negotiations between the two Koreas, Russia, Japan, China and the U.S. stalled in December 2008 and tensions flared on the peninsula after North Korea’s Nov. 23 bombing of a South Korean island.

Yes, mistakenly believing we are dependent on China to fund our deficit spending has us kowtowing on human rights and nuclear weapons.

“We want to compare notes on where we stand with respect to North Korea, and we will be very clear on what our expectations are for moving forward,” Kurt Campbell, assistant secretary of state for East Asia, said on May 5.

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Goldman on monetary policy in the BRICs

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Excellent recap of what’s happening through the eyes of Wall St. in the BRICS.

To be noted:

The BRICS all seem to be fighting inflation, which means the problem is that bad.

Unfortunately, hiking rates via direct rate hikes, reserve requirement hikes, and the like, which they all are doing, add to aggregate demand through the interest income channels, making their inflations that much worse. (That’s the price of being out of paradigm, as reinforced by analysts who are also out of paradigm)

Some are using credit controls, which do slow demand, as does fiscal tightening which generally happens through automatic stabilizers that work through higher nominal growth, including reduced transfer payments and higher tax receipts.

In general, this type of thing tends to end with a very hard landing, which their equity markets may be starting to discount.

BRICs Monthly : 11/04 – Monetary Policy in the BRICs

Published April 28, 2011

The BRICs’ central banks rely on a variety of tools to adjust monetary policy. As output gaps have closed and inflation pressures have accelerated, policy stances in the BRICs have shifted meaningfully towards tightening. We expect policy to continue to tighten in the coming months via a combination of policy rate hikes, reserve ratio requirement hikes and other measures.

There is a large degree of variation in the stated goals of monetary policy and the tools used to achieve those goals, both among the BRICs and relative to the advanced economies. The BRICs (like many other emerging markets) rely more heavily on a broader set of tools than is typical in the developed world. These include several policy rates, reserve ratio requirements, open market operations and FX intervention. As a result, looking at the policy rate alone does not provide an accurate picture of the overall monetary policy stance.

Over the past year, BRICs’ policymakers have shifted from an accommodative policy stance (in response to the financial crisis) to tightening (in response to closing output gaps and rising inflation pressures). However, the unusual shape of the global recovery—in which most of the BRICs and other EMs have rebounded quickly, while the developed world has lagged behind—has brought about a shift in the way in which the BRICs have tightened monetary policy. This time around, most have relied less on policy rate hikes and more on alternative tools.

While the BRICs have tightened monetary policy meaningfully, we believe that more is on the way. We expect Brazil, India and Russia to hike their policy rate by another 125bp and China to hike by 25bp by end-2011. In addition, we expect further tightening through the exchange rate, the reserve requirement ratio and other measures.

Monetary Policy in the BRICs

There is a large degree of variation in the stated goals of monetary policy and the tools used to achieve those goals, both among the BRICs and relative to advanced countries. The BRICs (like many other EMs) rely more heavily on a broader set of tools than is typical in the developed world. Hence, looking at the policy rate alone does not provide an accurate picture of their monetary policy stance.

Brazil’s monetary policy framework has shifted dramatically over the past two decades. As it struggled against hyper- and high inflation in the early 1990s, the government first introduced a period of extremely high interest rates (over 50%) in 1994, and then transitioned in 1995 to a soft exchange rate peg accompanied by high and volatile interest rates. In 1999, Brazil shifted to its current inflation-targeting regime. The current inflation target is set at 4.5%, with a relatively wide band of +/- 2% and no repercussions if the target is missed (as it has been for the past three years). To this end, COPOM targets the SELIC interest rate (the overnight interbank rate).

China uses a more eclectic form of monetary policy that involves a range of players, objectives and instruments. The People’s Bank of China (PBoC) is the official implementer, but the central government often weighs heavily on the PBoC’s decisions. The Bank does not hold regular policy meetings and policy changes are typically released after the close of the local market without advance notice. The Monetary Policy Committee of the PBoC is an advisory body, which does not determine policy direction. Chinese monetary policy has an official quad mandate of growth, employment, inflation and a balanced external account. To achieve these goals, the PBoC uses a range of quantity- and price-based mechanisms, such that there is no single policy instrument that can be used as a main indicator of its monetary policy stance at any given time. Quantity-based tools include reserve requirement (RRR) changes and credit controls. Price-based tools include changes in the benchmark deposit and lending interest rates.

India’s monetary policy is conducted by the Reserve Bank of India (RBI), which has the dual mandate of price stability and the provision of credit to productive sectors to support growth. To this end, the RBI targets the interest rate corridor for overnight money market rates, with the reverse-repo rate as the floor and the repo rate as the ceiling. The RBI also utilises open market operations and two types of reserve ratio requirements (the cash reserve ratio and the statutory liquidity ratio).

In Russia, monetary policy is set by the Central Bank of Russia (CBR). Until recently, the CBR concentrated on exchange rate stability and allowed inflation to vary. Its main policy rates are the overnight deposit rate and the 1-week minimum repo rate, although these historically have played a subordinate role to FX intervention. The CBR also monitors liquidity through reserve requirements, FX interventions and open market operations.

Shift in BRICs’ Approach to Monetary Tightening

The unusual shape of the global recovery—in which most of the BRICs and other EMs have rebounded quickly, while the developed world has lagged—has brought about a shift in the way in which the BRICs have tightened monetary policy.

Policymakers in Brazil have been hesitant to raise rates as aggressively as they normally would in response to the current high-growth/high-inflation domestic cyclical picture, given their concern that this would attract greater capital inflows. Instead, they have increasingly relied on two alternative mechanisms to tighten the overall policy stance: (1) a gradual FX appreciation and (2) several ‘macro-prudential’ measures that slow the pace of new credit concessions, raise the cost and lengthen the maturity of new loans, and raise the tax on foreign fixed income inflows.

Over the recent cycle, Chinese policymakers have relied most heavily on explicit and implicit credit controls, including window guidance meetings and the Dynamic Differentiated RRR System (under which the PBoC imposes a differentiated RRR for some banks but removes it for others, if they have been following government lending controls). Frequent RRR hikes have generally not produced any net tightening, as they were counterbalanced by increased FX inflows and expiring central bank bills. Likewise, recent interest rate hikes have been an effective signalling device but have been too small in magnitude to have a large impact.

In India, the RBI has kept liquidity tight in order to pass policy rate hikes through to bank deposit and lending rates. However, excessively tight and volatile liquidity has caused overnight borrowing rates to fluctuate widely in recent months, such that market participants have focused more on liquidity than policy rate actions in determining the direction and magnitude of interest rates at the short end. In an effort to address this issue and increase transparency, the RBI has proposed shifting to a single policy rate target (the repo rate) while simultaneously improving its control over system-wide liquidity.

Russia has seen the largest change in its monetary policy framework since the onset of the financial crisis. The CBR has shifted towards more FX flexibility with a greater focus on inflation, with the goal of an eventual move towards an inflation targeting regime (although, as the CBR has highlighted, such a move would ultimately be a government decision, which is unlikely to be realised in the absence of a strong political will to make the change). To this end, the CBR has moved towards interest rates as its primary monetary policy tool, and has scaled down its presence in the FX markets. It now sterilizes most FX interventions so as not to impact money supply growth. It has also relied more heavily on reserve requirement changes in recent months, in an effort to signal tightening liquidity.

More Tightening to Come

While the BRICs have meaningfully tightened monetary policy via a variety of tools, we believe more is needed. Demand-driven inflationary pressures are picking up as output gaps close, contributing to an acceleration in core inflation. Moreover, the BRICs also face large food and energy price spikes, which are likely to continue to push up headline inflation at least through the summer. In addition, fiscal policy is not turning sufficiently contractionary, leaving the burden of tightening on monetary policymakers.

In Brazil, we expect five more SELIC hikes by 25bp per meeting and further macro-prudential measures. For China, we forecast at least one more rate hike (25bp in 2011Q2), further currency appreciation (6% annualised), liquidity absorption measures through RRR hikes and open market operations, and tight control over credit issuance. We have a much more hawkish view of India than consensus, where we now expect the RBI to hike policy rates by another 125bp in 2011. Russia’s CBR should hike deposit and repo rates by 150bp and 125bp respectively by end-2011.

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Russia Continues To Buy Gold

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Looks like QE scared Putin into buying gold:

Russia Continues To Buy Gold

By Rhiannon Hoyle

April 28 (Dow Jones) — Russia’s central bank is continuing to make steady gold purchases, while sales by signatories to the third Central Bank Gold Agreement meanwhile remain negligible, the World Gold Council said Thursday.

Russia added 8.2 metric tons of gold to its reserves between December and February–the most significant change in reserves reported by any country, the WGC said.

It appears to be continuing “its long-term program of gold accumulation,” with sustained buying primarily in the domestic market, the industry body added.

At the end of February the Russian central bank held 7.3% of its reserves in gold, at a total of 792.3 tons, according to data the WGC collected from the International Monetary Fund and other sources.

Sales of gold by CBGA signatories have meanwhile accounted for less than one ton so far during the second year of the agreement, which began in September, the WGC added. The agreement, which covers the gold sales of the Eurosystem central banks, Sweden and Switzerland from September 2009 to 2014, states that annual sales will not exceed 400 tons and total sales over the period will not exceed 2,000 tons.

Other substantial purchases between December and February included a reported 7-ton reserve increase in Bolivia, taking the country’s total holdings to 35.3 tons, or 15.1% of its overall reserves, the WGC said.

“While Bolivia has not made any public comment on this increase in gold holdings, it is very likely that the central bank has simply decided to restore its gold holdings relative to its growing foreign currency reserves, similar to other recent emerging market central bank purchases,” it noted.

The data was released in the council’s regular statistical update on gold reserves in the official sector.

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World Finance Chiefs Chastise US on Budget Gap

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So with the entire world completely wrong,
but nonetheless in charge,
seems a reasonable bet to assume weak demand and a too wide output gap/too high unemployment will continue indefinitely?

That is, fear of looming national solvency crisis (becoming the next Greece)
is causing the world to go, at best, the way of Japan, as the real risk remains deflation.

Not that there won’t be relative value shifts, particularly where there is pricing/monopoly power.
With crude oil the main concern.

The ignorance remains overwhelming, on monetary operation and trade policy, as well as fiscal policy, as highlighted below:

World Finance Chiefs Chastise US on Budget Gap

April 17 (Reuters) — World finance leaders Saturday chastised the United States for not doing enough to shrink its massive overspending and warned that budget strains in rich nations threaten the global recovery.

Finance ministers in Washington for semi-annual talks took sharper aim than in previous years at the United States’ $14 trillion debt.

While most of the criticism came from emerging market economies, some advanced nations joined the chorus.

Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.

“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector,” de Jager told the International Monetary Fund’s steering committee.“Debt dynamics in other advanced economies, including the United States, are of concern.”

The IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation’s economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.

Brazil’s finance minister, Guido Mantega, offered sharp words in a thinly veiled attack on the United States. “Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world,” he said.

The Group of 20 countries agreed on Friday to a plan that could put more pressure on the United States to fix its deficits as well as push other leading economies to address
their own shortcomings.

The IMF’s advisory panel on Saturday said issues of financial stability and sovereign debt stability must be addressed, saying in a communique that “credible actions are needed to accelerate progress.” It emphasized the need for fiscal consolidation in advanced economies while avoiding overheating in emerging economies.

The Obama administration and the U.S. Congress are locked in battle over how best to fix the deficit. Republicans are pushing for deep spending cuts as part of the argument over raising the nation’s $14.3 trillion debt limit, something which is needed to avoid an unprecedented U.S. debt default.

The Republican-led House on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.

President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said Thursday the Republican plan would create “a nation of potholes.” The White House is wary about cutting spending sharply while the economic recovery remains fragile.

Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed. “We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery,” he said.

Geithner was quick to say others whose policies contribute to global imbalances must change too, “especially those whose fundamentals call for greater exchange rate flexibility…”

The United States has repeatedly called for China to relax its limits on the yuan currency.

Yi Gang, a deputy governor of China’s central bank, called for “more rigorous” efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.

Russian Finance Minister Alexei Kudrin, taking aim at the U.S. Federal Reserve, said central banks that buy government debt to keep interest rates low were abetting fiscal profligacy.

The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to nearly $2.3 trillion.

Echoing Republican lawmakers and even some Fed officials, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central
bank’s independence.

“We observe this process with some wonderment, since it amounts to the monetization of those countries’ budget deficits,” Kudrin said.

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China, Russia quit dollar for transactions

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Doesn’t matter, though most everyone thinks it does.

What matter is what currency a nation saves in, not the numeraire for transactions.

So good this happened, so everyone can get past it and stop worrying about it.

China, Russia quit dollar

By Su Qiang and Li Xiaokun

November 24 (China Daily) — St. Petersburg, Russia – China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.
“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

“That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries,” he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.

The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.

Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China’s Tianwan nuclear power plant, the most advanced nuclear power complex in China.

Putin has called for boosting sales of natural resources – Russia’s main export – to China, but price has proven to be a sticking point.

Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia’s energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.

Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.

Wen’s trip follows Russian President Dmitry Medvedev’s three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world’s biggest energy producer with the largest energy consumer.

Wen said at the press conference that the partnership between Beijing and Moscow has “reached an unprecedented level” and pledged the two countries will “never become each other’s enemy”.

Over the past year, “our strategic cooperative partnership endured strenuous tests and reached an unprecedented level,” Wen said, adding the two nations are now more confident and determined to defend their mutual interests.

“China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power,” he said.

“The modernization of China will not affect other countries’ interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries.”

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a “fair and reasonable new order” in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.

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Gold Buying

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Looks like govts. are increasingly moving into gold.

Govts. can support prices for at least as long as they increase purchases geometrically, which, operationally they can do without limit. It’s a political decision.

To get all the gold they want, govts. have to out bid the private sector, and then maybe each other as well.

That means when govt buying slows down, if it ever does, prices then fall to the private sector’s bid.

With precious few non hoarding uses for gold it’s all waste of human endeavor and a waste of all the other real resources that go into gold mining and refining, etc. But it’s all a very small % of world expenditure of real resources.

Bottom line, it’s another example of govt. ‘interference’ creating a distortion, but in this case the real resources expended- land, labor, capital, energy- are relatively small as a % of total resource consumption, and since gold can’t be eaten and isn’t used for shelter and clothing (ok, some ornamentation) the high price probably alters too few lives for the worse for a political backlash.

However, central bankers stuck in mythical inflations expectations theory with regards to the cause of inflation could react and cause problems that wouldn’t otherwise be there. I doubt the Fed falls into that category, but it’s not impossible.

Russia Buys 16 percent Of Global Gold Production

According to the Russian Central Bank, Russian gold reserves just hiked 1.1 million ounces in May. Given global mining production is just 6.8 million ounces a month, this represents 16.1% of monthly global mining production.

This is the largest one month purchase of gold by the Russian Central Bank, which has been buying gold at a rate of 250,000 ounces a month for the past three years, and comes just as Putin is pushing for a single world currency and last week revealed the currency’s first proof coin.

At the same time as Russia is quadrupling its gold purchases, Saudi Arabia just announced that it has more than doubled its gold holdings from 143 tonnes in the first quarter of 2008 to 322.9 tonnes. That’s 241,000 ounces a month — eerily similar to Russia’s purchases.

And nobody quite knows what China is doing right now, but they ain’t sellers. Between 2003 and 2009, China’s central bank bought an average of 76 tons of gold a year (185,000 ounces a month). The likelihood of China slowing its purchases is close to nil. and the likelihood of China letting Russia and Saudi Arabia get the better of it is negligible at best. Even if China is purchasing just 250,000 ounces a month, that would mean just thee central banks are sucking up 24% of global gold mine production. In all likelihood, it’s much higher.

If this trend continues, it’s going to have other central banks jumping on the bandwagon to buy gold — just as they jumped on the bandwagon to sell it in the 1990s — and will have a similar impact on the price. But in the opposite direction!

Cheers,

Peter.

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Hanke on Greece

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Hate to criticize someone proposing a payroll tax holiday- darn that Lerner’s law!


A Big Bang for Greece

There is a way out of the debt trap for Athens.

By Stece H. Hanke

June 30 (WSJ) — How did Greece get into the death spiral that it’s in? Unfunded entitlements. In other words, promise somebody something, don’t come up with the financing for it, and pretty soon you find yourself in a fiscal/debt crisis.

Yes, happens to those who are not the issuer of their currency all the time, including those with fixed fx arrangements. EU members, US States, corporations, households, Russia when fixed to the dollar, Mexico when fixed to the dollar, etc.

But never with issuers of the currency. They can always make payments as desired.

This is where Greece ended up, and in February, the Greek government called in some outside advisers (Joseph Stiglitz for one), and the blame game began. Prime Minister Papandreou, who is also president of Socialist International, started blaming everyone. First, it was the speculators. Then he went on a tear against his own colleagues in the European Union. The Germans really got whacked­ according to Mr. Papandreou, they were a big cause of Greece’s troubles.

Never would have happened under the drachma. Just would have been the usual inflation and currency depreciation.

But Greece is a user of the euro, not the issuer like the ECB is.

Ironically, after blaming outsiders for all their problems, the Greeks have called in the foreign doctors. In this case it isn’t just the IMF, but also the EU politicians and bureaucrats who are involved. But this may ultimately be a case in which the doctors kill the patient.

The problem ended for Greece and the entire eu in general only after the ECB agreed to ‘write the check’ and started buying greek bonds.

There was no other way.

To address the moral hazard issue that comes with ECB support, the ECB insisted on the ‘terms and conditions’ to contain inflation possibilities

They haven’t started with what they should be doing, but with a standard IMF-type austerity program. The government has promised to cut public expenditures. It has also raised taxes. Unlike neighboring Bulgaria, which did exactly the right thing by refusing to increase its VAT, Greece has increased its VAT twice since the crisis.

What should Greece have done? It should have started with a Big Bang, doing a number of things simultaneously a la New Zealand. In 1984, New Zealand elected a Labor government after Robert Muldoon’s National Party governments had made a complete mess of the economy. The Muldoon governments introduced, over the course of almost a decade, a socialist-style system in New Zealand. Labor, under finance minister Roger Douglas, introduced structural reforms centered on deregulation and competitiveness. As a consequence, New Zealand had a massive economic revolution after the ’84 election. Greece should adopt a New Zealand-type Big Bang.

The NZ gov was the issuer of its own currency and therefore didn’t face the solvency problem Greece did. otherwise it would have been an entirely different story.

As part of its Big Bang, Greece should have begun by rescheduling its debt. But it also should have implemented a supply-side fiscal consolidation. That means cutting government expenditures, but also changing the tax regime.

Without the ECB writing the check, that would have resulted in a systemic collapse of the euro member national govts and the payments system in general.

With the ECB writing the check there are other options.

Right now, Greece has very onerous payroll taxes that are paid by employers and, ultimately, labor. As part of a Big Bang, Greece should eliminate the employer contribution to payroll taxes, which is currently 28% of wages (employees pay a further 16% rate directly).

With funding entirely dependent on the good will of the ECB, those decisions are up to the ECB, not Greece. If they cross the ECB they get cut off and again face default.

At the same time, Greece should make its VAT rates uniform. Right now, there are three VAT rates in Greece. This is typical in Europe. You have the regular VAT, a VAT that is reduced by 50% for other categories, and, finally, a super-reduced VAT. I would eliminate the reduced and super-reduced rates, and just have one, uniform rate for the VAT one set below the current top VAT rate of 23%.

If Greece did those two things, it would end up generating more revenue than it is generating right now. Even when based on a static, simple-minded analysis, that would put Greece ahead of the revenue game.

At the macro level for the EU it’s about the right fiscal balance needed to sustain growth and employment, which is probably a deficit higher than the growth rate. But at the micro level it’s about credit worthiness which means a deficit lower than the growth rate. So the members need to be tighter than the union needs to be. This requires a central govt/ECB that runs the needed deficits to make it all work efficiently. Much like the US states balance and the fed govt runs the deficits.

But more importantly, it would also substantially reduce its economy’s labor costs overnight. Employers’ social security contributions are about 7.8% of GDP. Eliminating the employer contribution would yield about a 22% reduction in the overall Greek wage bill as a percentage of GDP. This would make the Greek economy more competitive­ without the currency devaluation that some commentators claim is necessary. These changes would also, obviously, reduce consumption, increase savings, and reduce the level of debt in the country.

Allow me to make a comment about devaluation. There are some people who are wringing their hands and saying, “Well, the problem with Greece is that it put itself into a euro straitjacket and it can’t devalue the drachma anymore. So, Greece is in a trap. There’s nothing it can do!”

Yes, but note devaluing was never a policy tool. It was the consequence of policy. Today the consequence of the same policy is default rather than currency depreciation.

But there is something the Greeks can do. They can reduce the economy’s total labor cost by 22%, simply by eliminating the employer contribution to payroll taxes. To see what the size of a devaluation would have to be to generate a positive competitiveness shock of this magnitude, let’s assume that 50% of a devaluation would be passed through to the economy in the form of increased inflation­ reasonable assumption about a small, open economy like Greece’s.

In this case, Greece would have to have a 44% devaluation to be equivalent, in terms of competitiveness, to the positive shock that would accompany the elimination of the employer contribution to payroll taxes.

So, with the elimination of the employer contribution to the payroll tax, Greece would enhance its competitiveness. The enhancement would be equal to roughly a 44% devaluation. Moreover, the supply-side generated competitiveness would not be accompanied by the inflation and widespread private-sector bankruptcy that a devaluation would provoke.

Needless to say, neither Greece nor its international partners are contemplating a voluntary debt restructuring,

That would also require a restructuring of the banking system as the loss of capital would require some kind of adjustment as well.

let alone a supply-side Big Bang, which makes it more likely that Greece will remain stuck in a trap. But don’t let anyone tell you there’s nothing Greece could do. It’s not too late to change course. What’s more, other countries in Europe that are facing down a possible debt crisis could likewise try a similar approach­reschedule debt, cut taxes on labor to improve competitiveness and spur job creation, while raising some consumption taxes to keep the revenue coming in. There is a way out of the Greek trap.

Mr. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute in Washington, D.C. This article is adapted from remarks made at the Cato Institute’s Policy Forum, “Europe’s Economic Crisis and the Future of the Euro,” on May 11, 2010, Washington, D.C.

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