October 5, 2015

Could be the Most Important News Story of the Year

  12:21 pm

The Trans-Pacific Partnership has been approved by the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam

The United States and 11 other Pacific Rim countries have reached a deal on the most sweeping trade liberalization pact in a generation but the accord on Monday faced initial skepticism in the U.S. Congress.

In a deal that could reshape industries and influence everything from the price of cheese to the cost of cancer treatments, the 12 countries will cut trade barriers and set common standards. Details of the pact were emerging in statements by officials after days of marathon negotiations in Atlanta.

The Trans-Pacific Partnership would affect 40 percent of the world economy and stand as a legacy-defining achievement for U.S. President Barack Obama, if it is ratified by Congress. Lawmakers in other TPP countries must also approve the deal.

This is not an issue that divides neatly only a partisan basis. Both parties have protectionist and free-trade wings.


September 12, 2015

UK Labour: It’s Corbyn in a Landslide

  3:32 pm

Two weeks ago we published this item as a heads-up to R4ers on Britain’s Labour Party leadership election. The question at the time was whether Labour would choose to commit suicide.

The answer came through loud and clear: Yes, enthusiastically. Corbyn won with 60% of the vote against three other, more experienced choices. At the outset of the campaign, London’s bookies had him at 200-1.

You might want to revisit the earlier item for some background. It includes a link to a good Foreign Policy piece as well as a video of a discussion from Financial Times.

For the election results, we have this from BBC (HT: Vulgar Specialist); WSJ tells us:

Jeremy Corbyn, a leftist former union organizer, was elected the leader of the U.K.’s Labour Party on Saturday, a result that signals a more socialist direction for the country’s main opposition and could herald a realignment of British politics.

The 66-year-old lawmaker, long on the margins of British politics, secured a convincing victory with 59.5% of votes, winning 170,955 more than his closest rival. Mr. Corbyn’s antiausterity, antiwar and egalitarian message energized thousands of grass-roots supporters who had become disillusioned with the party.

Mr. Corbyn will now have to try to unite a party that is deeply divided, a situation laid bare by infighting during the leadership contest. Following the party’s crushing defeat in May’s general election, Labour members and politicians have battled over whether to tack left or claim the center ground in the footsteps of former Prime Minister Tony Blair, who led the government between 1997 and 2007.

Immediately after the results were announced, several of Labour’s senior politicians said they were stepping down, a reflection of the challenge Mr. Corbyn faces in holding his party together.

Time calls Corbyn’s win a “wail of despair” by the party and describes Corbyn thus:

He calls Hamas and Hizballah his “friends” and favors removing Queen Elizabeth from her throne. He spent years supporting Sinn Fein and the Irish Republican Army and thinks Argentina should be granted a role in the government of the British-controled Falkland Islands. He blames Russia’s invasion of Ukraine on NATO and takes a skeptical view of Britain’s membership in the European Union. A quarter of his supporters believe the world is controlled by a “secretive elite.”


September 9, 2015

September 5, 2015

Will UK Leave the EU?

  8:59 pm

The immigration crisis in Europe has reached a point where it might impact the UK’s willingness to stay in the EU.

Daily Mail

This poll shows only a narrow 51-49 for leaving, but that’s quite a change.

The ‘in’ camp has been consistently ahead in ten polls since May. In 2000, at the height of pro-European Tony Blair’s premiership, one survey showed support for staying in the EU at 62 per cent, with only 38 in favour of pulling out.

Looks like Cameron and Merkel have been talking smack to each other.

The survey also found strong backing for David Cameron’s stance in standing up to German Chancellor Angela Merkel, who wants the UK to take in a greater share of migrants.

Growing public support to cut all ties with Brussels came as it was revealed the Prime Minister told Merkel to her face: ‘I could walk away from the EU.’

At a private dinner in Downing Street, Merkel accused him of being ‘too forceful’ in demanding concessions from the rest of the EU. That was why ‘we all hate you and isolate you,’ she said.


August 30, 2015

The Rise of Jeremy Corbyn

  11:50 am

In the Anne Applebaum piece I cited yesterday, she briefly mentions a similar phenomenon taking place in the UK that most of us have paid little attention to – the British Labour Party’s suicidal fascination with extreme leftist Jeremy Corbyn, who seems likely to become the party leader and thus the party’s next candidate for Prime Minister.

Foreign Policy goes into depth on Corbyn and the disaster he would be for Labour (a wipeout of epic proportions, following closely on the wipeout they just suffered, adding up to long-term minority status).

What happens when the joke candidate wins? What happens when that guy, who was only permitted to take part in the election thanks to the indulgence of his parliamentary colleagues, who never intended to support him, ends up running away with the contest? For once, my friends, in this summer of absurdity these are not questions about Donald’s Trump’s improbable rise to political prominence. They are, instead, the questions haunting the British Labour Party.

Labour, still reeling from a calamitous performance in May’s general election, appears set to make Jeremy Corbyn, a veteran left-winger from north London who has never held a ministerial position, the party’s next leader. This will surprise Corbyn as much as it will astonish the rest of Britain — for the simple reason that few people, including perhaps Corbyn himself, ever thought he could win.

Here’s a discussion of the situation from Financial Times.


August 20, 2015

Voodoo Economics, Trump Style

  1:20 pm

To quote from a recent Wall Street Journal article, entitled Trump’s Defective Economics:

“To hear Donald Trump tell it, China is run by a cabal of geniuses who outsmarted the United States last week by cutting the purchasing power of their fellow Chinese citizens with a devaluation of the yuan,

Trump: They’re KILLING us. Now they’re going to take more jobs….I mean it’s RIDICULOUS!”

So, what sparked these histrionics? China let its currency slip 2% against the dollar. Donald’s notion is that the Chinese and Japanese and other nations that devalue their currencies are wealthier and more competitive every time they debase their currency, and, concomitantly, we’re weaker. China, in Trump’s view, gets away with this master stroke because “they have no fear of us.” The implication is that they couldn’t get away with anything this dastardly if HE, The Donald, was in charge.

Let’s analyze this. In fairness, there have been many protectionists before him using the same arguments, and devaluation is definitely a form of protectionism. If you weaken your currency, citizens in your country lose purchasing power and can no longer afford to buy as many better quality goods from other countries. Lowering the value of your money is the equivalent of slapping on a higher tariff on imported goods. It diminishes trade and deprives your citizens of goods that they could otherwise afford to buy.

In other words, when you devalue your currency you move to impoverish your citizens. If devaluation worked to make your country stronger, Argentina would be the economic power house of the world economy and not the economic basket case it is.

Of course, his idea is that the weaker your currency, the cheaper your exports, and the more you export the more jobs are created in your export industries and that stokes the economy and everybody’s happy.

Let’s look at how that would play out if the U.S. devalued the dollar. Right now we have a strong dollar, meaning that it’s appreciating vis a vis most other currencies. King Dollar, as Larry Kudlow terms it, means we are still the major reserve currency on the planet. So central banks around the world keep mass quantities of dollars on hand to store value and use to support international trade and buttress their own currencies if there’s a run on them. Also, many private citizens hold dollars to make sure they have a stable supply of savings; money that they can use when necessary; money that others will take in payment no matter what the circumstances are.

When we send dollars abroad to be used for these purposes we get paid in real money in return. This is money we can use to buy things with. In other words, we send them paper to put in vaults or stuff in mattresses and they send us goods and services. You can’t beat a deal like that. But if our currency were to get shaky, i.e., were to get devalued, foreign banks and other citizens will send those goods and services to other countries to use their paper as a reserve currency.

The problem with Trump’s policy of beggar thy neighbor, something that’s been Trump’s life work, is that eventually you run out of neighbors to beggar. Hence the consensus view of economists that the Smoot Hawley Tariff was a major cause of The Great Depression.  Some say THE major cause.

What we need to work our way out of deficit and job problem is growth, preferably 4% or more a year growth, and, to quote Larry Kudlow: “Trump’s agenda of trade protectionism, dollar devaluation, and immigrant deportation is completely anti-growth.”

The economy is completely globalized. The United States has to compete in the global market for capital and labor. Trump’s policies don’t fit. To grow our economy, we need to trade, maintain a strong dollar, and build a new legal immigration system.

Trump, the economic illiterate, is the wrong man for the job.


August 5, 2015

Wednesday Open Thread (Grexit Follow-up Edition)

  7:00 am

This is an Open Thread: Yada, yada, yada …

Conversation starter: Most Europeans Want Greece Gone

YouGov polls show that a) Most Europeans would like to see Greece out of the Eurozone; and b) Most think they will be gone in five years.

The question asked in the poll was “Would you prefer Greece to leave or stay part of the Eurozone?” and although Germans unsurprisingly feel most negative towards Greece, a majority in all countries polled disapproved of the recent bailout deal, and would prefer the debt-ridden country to leave the common currency.



July 29, 2015

Wednesday Open Thread (Rouble Collapse Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: To continue on our economic scare-stories theme this week, today we’ll visit Russia. This is from a Financial Times newsletter, so you may not be able to access it unless you’re registered with FT (reg is free for the level of access I have).

The Russian rouble fell past Rbs60 to the dollar for the first time since March this morning. The dollar has climbed by 1.4 per cent against the rouble today, according to Bloomberg data.

The rouble is the world’s second worst performing currency in the last three months. But it could have a lot further to fall, writes Joel Lewin.

Rather ominously, Commerzbank strategists warn:

The rouble weakness almost reminds us of December last year when the currency was at risk of collapse.

Back then the currency fell to a record low of almost Rbs80 per dollar, and the odds are stacked heavily against it once more.

Clearly, the oil price has a lot to do with this. The price of Russia’s lifeblood, Brent crude is down 1 per cent again today, and has slumped 20 per cent since the start of May.

Western sanctions and the weak currency have hit confidence. Retail sales fell 9.4 per cent in the second quarter and the economy more than likely fell into recession, contracting as much as 5 per cent.

To fight this, the Central Bank of Russia would ideally cut rates hard from the current level of 11.5 per cent when it meets this Friday, but analysts reckon the weakening currency is tying its hands, forcing it to move relatively slowly. Analysts expect a snip of 50bp.

Commerzbank strategists write:

Continued currency weakness is the last thing the Russian central bank needs at present. It has been fighting high levels of inflation (caused by the rouble depreciation at the end of last year) and as a result raised interest rates. As the situation seemed to improve at the beginning of the year it lowered interest rates notably. Further cuts are expected. Should the rouble remain under pressure thus fuelling inflation again these plans would be at risk.

BNP Paribas FX strategists write:

in its last monetary policy council statement in mid-June, the CBR warned that “the potential of monetary policy easing [would] be limited by inflation risks in the next few months”. Recent developments appear to justify these concerns.

the CBR’s growth assessment is likely to remain rather gloomy. June real sector indicators showed some stabilisation, but, in our view, it is too early to state conclusively that growth is close to bottoming out


This graph is Roubles per dollar over the past ninety days.



July 28, 2015

Tuesday Open Thread (Chinese Stock Market Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: As of a few weeks ago, it looked like the Chinese government had managed to revitalize their collapsing market. Then yesterday, the stuff again hit the fan.

First, the basic facts from The Globe & Mail:

Chinese shares slid more than 8 per cent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing’s efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June. […]

The CSI300 index of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 per cent to 3,818.73 points, while the Shanghai Composite Index lost 8.5 per cent to 3,725.56 points.

China’s market gyrations have stoked fears among global investors about the broader health of the world’s second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low.

Then, Financial Times offers their advice, which is pretty much that the government should keep its hands off.

Worse, the behaviour of the stock market has scotched the idea that China’s rulers are relaxed about ceding control to market forces. The apparent blessing they bestowed on the boom, and the efforts they made to provide a floor to prices, suggest the market is dictated more by the whims of the state than by anything objectively economic. The government — via the Securities Association of China — even appeared to signal a target for the Shanghai Composite of 4,500.

Having appeared to backstop the market, there will be a price to pay should Beijing now step away. By some estimates, more than RMB3.5trn ($564bn) of debt is linked to speculation on shares. A few more days like Monday and the damage to household balance sheets could take a heavy toll on the economy.

But the greatest harm would be psychological. Having for so long appeared able to steer the economy where they wanted, China’s leadership would be forced to concede a clear limit to its powers. This could deal a severe blow to economic confidence at a time when the economy is already slowing.

Nevertheless, concede it must. There is no way to tell in advance how much the authorities must buy to stabilise share prices. Investor confidence premised wholly on state support vanishes as soon as the government stops buying. In the meantime, the longer that the market is at risk of haphazard interventions, the more that the planned shift towards market-based finance is set back. Restrictions on trading have already served to annoy international investors, and undermined efforts to turn the renminbi into an international reserve currency.

Finally, CNNMoney looks at how the US could be affected.

The fear is that China will pull other major economies — including the U.S. — down with it. That would be scary given how slowly the global economy is currently growing and how little ammo governments have left to jump start business.

“We need all the growth we can get. A slowdown in China wouldn’t help,” said David Joy, chief market strategist at Ameriprise Financial.

Ways China’s problems could hurt the US economy:

1. Trade slowdown: Foreign trade is the most direct link between the U.S. and China. Over the next two years, U.S.-China trade is projected to surpass U.S.-Canada trade as the largest in the world, according to State Street Global Advisors.

But if China slows drastically, it will lose its appetite for foreign products, including those made in America. […]

2. American business hit: Pockets of the U.S. stock market are exposed to China’s troubles. That’s because 40% of the revenue generated by S&P 500 companies comes from overseas. […]

3. China’s coming financial crisis? China’s economic growth has partially been fueled by an explosion of debt. Now that its economy is slowing, there are concerns about toxic loans could trigger a financial crisis there that could spread around the globe — much like what happened in 2008 with bad U.S. mortgages.

“A financial panic…could potentially plunge the world into recession, particularly if it spread throughout Asia,” said George Hoguet, global investment strategist at State Street Global Advisors.


July 27, 2015

Monday Open Thread (Return of the Greeks Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: In case you thought the Greek economic clown show was over – nope, it rolls on and on.

Reports out of Athens are that the left wing of the ruling party tried to execute a seizure of the Bank of Greece’s reserves, a deal with Russia, and a return to the drachma.

From Reuters:

Some members of Greece’s leftist government wanted to raid central bank reserves and hack taxpayer accounts to prepare a return to the drachma, according to reports on Sunday that highlighted the chaos in the ruling Syriza party.

It is not clear how seriously the plans, attributed to former Energy Minister Panagiotis Lafazanis and former Finance Minister Yanis Varoufakis, were considered by the government and both ministers were sacked earlier this month. However the reports have been seized on by opposition parties who have demanded an explanation. […]

In an interview with Sunday’s edition of the RealNews daily, Panagiotis Lafazanis, the hardline former energy minister who lost his job after rebelling over the bailout plans, said he had urged the government to tap the reserves of the Bank of Greece in defiance of the European Central Bank.

Lafazanis, leader of a hardline faction in the ruling Syriza party that has argued for a return to the drachma, said the move would have allowed pensions and public sector wages to be paid if Greece were forced out of the euro.

“The main reason for that was for the Greek economy and Greek people to survive, which is the utmost duty every government has under the constitution,” he said.

Financial Times adds in re Russia (quoted from Forbes):

Mr Lafazanis visited Moscow three times as Mr Tsipras’s envoy after Syriza came to power in January. In return for signing up to a new gas pipeline project, he hoped for at least €5bn in prepayments of gas transit fees, according to people briefed on the initiative. But the Russians rejected the deal the week before the EU summit.

“It was all a fantasy,” said a senior Greek banker. “The Left Platform’s dreams of free gas and a Russian-backed drachma have crumbled away.”

Forbes goes on to note that it is questionable at best that the pipeline will ever be built, anyway.

I’m glad the Greeks are back — they’re so entertaining.



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