Posts Tagged ‘us’

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China is being accused of starting a new currency war. The People’s Bank of China has devalued the Chinese currency three times in three days. Politicians on Capitol Hill can barely conceal their ire. There is even talk that both the Fed and Bank of England will hike interest rates as a result. Yet for all that, it may simply be that China is doing what both the IMF and Washington have been calling for it to do for years.

China wants its currency, the yuan, or the renminbi, to be part of the basket of currencies that make-up the IMF’s Special Drawing Rights, or SDR.  For this to happen, the IMF says that the yuan must be allowed to trade freely on the open markets. China say that this is precisely what it is doing.

There was a time when China manipulated its currency, keeping its value artificially low. To achieve this, the government went out and bought western bonds, especially US government bonds. This in turn pushed up on the value of those bonds, causing their yields to fall. It’s an important point that often gets overlooked. Some criticise the Fed’s polices over the years, but truth be told in the long term, it is not central banks which determine interest rates, but movements of money which in turn can be changed by deep forces at play.  China’s policy of maintaining a cheap currency was a major factor in creating low interest rates for much of this century. And while the cheap yuan theoretically led to lower US exports, US borrowing was partly funded by China, and at exceptionally low interest rates.

It is just that the yuan is no longer cheap.  It hasn’t been for some time. If the yuan really was allowed to trade freely, it would surely fall in value. Washington can scream with fury, but China is gradually moving towards a position that the US has wanted it to occupy for years.

After the first devaluation, the IMF said “The new mechanism for determining the central parity of the Renminbi announced by the PBC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate. The exact impact will depend on how the new mechanism is implemented in practice. Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets. We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years. Regarding the ongoing review of the IMF’s SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.”

Some say the timing is cynical, because China has devalued in the same week that saw weak data on industrial production investment and retail sales. That may be right, but so what. China is simply doing what the IMF has recommended, but chosen the most fortuitous moment. What’s wrong with that?

file9961251406222Oil has fallen again in recent weeks. This week, West Texas Intermediate oil has been hovering at just a dollar or two above the year low. Meanwhile, a report from the National Institute of Economics and Social Research (NIESR) has predicted that 2015 will be the worst year for the global economy since 2008. It shouldn’t be like that. With oil as cheap as it is, the economy should be booming.  So this all begs the question, “why?” Is there some rather worrying underlying reason for the weakness in the global economy?

At the time of writing (6 August 2015, 6.45 am) West Texas Intermediate oil is trading at $45.17. To put that in context, just over a year ago it was trading at $104. Brent crude oil is just shy of $50. One day, black gold will probably go back over $100. Maybe, one day it will even pass the 2008 peak, when it went close to $150, but this day is not likely to be any time soon.   The oil cycle moves slowly. Investment in oil has dropped drastically, new projects have been shelved. It will be several years before these developments show up in rising oil prices, though.

There are winners and losers from cheaper oil. Apologies if this sounds like a lesson from the University of the Bleeding Obvious, but cheaper oil benefits its consumers and hits its producers. So in theory the effect of falling oil prices on the global economy should be neutral. It is just that on the whole, oil consumers have a much lower savings ratio that oil producers. A fall in the oil price distributes income from high savers to high spenders. Given that we are in a time when there is a chronic shortage of demand worldwide, this should be good news.

As an aside, there is another not commonly understood potential side effect of cheaper oil. Ask yourself this question, why are interest rates so low? That is to say, what is the real reason? Forget central bankers, they move with the tide. The main reason why rates are so low is because worldwide there is a shortage of demand and a savings glut.  Back in the noughties this savings glut funded consumer spending in the West, creating a bubble which burst in 2008. Since then it has been funding surging government debt, and maybe sharp rises in debt in emerging markets.  McKinsey has said that global debt has risen by $57 trillion since 2007. The savings glut made this possible. There are many reason for this, and many of these reasons have not gone away. But at least one driver of low interest rates, the rise in savings coming out of oil producers, has gone into reverse.  

Returning to the global economy in 2015, earlier this week NIESR projected that “The world economy will grow by 3 per cent in 2015 – the slowest rate since the crisis – and 3.5 per cent in 2016.” So that is odd. The price of oil has fallen by a half, and the global economy is weak. Something is wrong.

There are two ways looking at this. You can look at individual countries, one at a time, or you can look for some deeper underlying cause.

The US has a bad start to the year because of an exceptionally cold winter in the north east of the country. This had a knock-on effect worldwide. The UK, it appears, got caught up in it all with falling exports to the US dragging down on growth.  

By its standards, the Eurozone had a good first half of this year, this despite Greek woe. But then again, this is the Eurozone, and the key phrase here is “by its standards.”  The only other region in the world that puts in such a continuously poor performance is Japan.

The world’s second largest economy, China, has slowed fast. There is more than one reason. For one thing, China sits on a mounting debt pile, with local government especially badly exposed.  This is beginning to hurt. For another thing, the Chinese government is trying to re-engineer the shape of the Chinese economy, shifting it from investment and savings led, to consumption led. This is a good thing, but the transformation is hurting

Russia’s problem are well documented. It is clear that it has lost out big time to the falling oil price. Brazil has suffered from a wider fall in commodity prices, but like Russia, there were deep structural problems with the economy anyway.

So pick it apart, there is a reason for the slow growth. Even so, I can’t help but feel that the overall performance of the global economy, given how weak oil and other commodity prices are, is very disappointing. You could respond by saying that I have mixed up cause and effect. You could say that oil has fallen in price because global demand is low. But I would respond to that by saying at least part of the reason for the fall in the oil price has been the revolution in fracking and previous surges in oil investment. The rise of renewables are taking a toll, too.  I don’t accept that I have got things the wrong way round.

So what are the possible underlying drivers at work? There are to theories to explain what is happening, there is the Robert Gordon ‘innovation is slowing’ theory, and the Larry Summers Secular Stagnation theory. I will look at these theories in more depth in a few days.

Google Glass

Back in August 2001 the Boston Consulting Group issued a report with a pretty startling conclusion. It concerned what it sees as a great shift in manufacturing away from China, as many companies return their manufacturing plants to the US. And now it has emerged that Google is to make its goggles – products that may yet prove to be one of the most significant releases of the decade – in the US; in fact, in Silicon Valley. “China’s overwhelming manufacturing cost advantage over the US is shrinking fast. Within five years…Rising Chinese wages, higher U.S. productivity, weaker dollar, and other factors will virtually close the gap between the U.S. and China for many goods consumed in North America,” or so said Boston Consulting in August 2011.

See: Boston Consulting, Made in America again

In April 2012 Boston Consulting’s survey found: “More than a third of US based manufacturing executives at companies with sales greater than $1 billion are planning to bring back production to the United States from China or are considering it.” See: this Boston Consulting press release
Last November another Boston survey found that “more than 80 per cent of US consumers and, perhaps more surprisingly, more than 60 per cent of Chinese consumers say that they are willing to pay more for products labelled ‘Made in USA’ than for those labelled ‘Made in China’. See: this release

Now it has emerged that Google is planning to have its Project Glass – that’s those glasses which will enable wearers to access the Internet, and indeed film everything they are looking at, just about all the time – made in the US.

Then again, we are not exactly talking Foxconn scale manufacturing here. The glasses will sell for around $1,500 and Google is planning production in the low thousands. Given those facts, you can see the benefits of making the product in America.

Presumably the mark-up on manufacturing is so large that it makes little difference if a few dollars can be shaved off the cost by making the product in China. Presumably, Google also feels that for products as complex and important as its goggles, it needs to be close to the point of manufacture.

One can also presume that in due course the price will fall, fall some more and then fall again – so much that these glasses, or products of that type, will eventually sell for prices low enough to give them a mass market appeal. Only time will tell where the products will then be made.

©2013 Investment and Business News.

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Bear in mind that while the disadvantages of single currencies are clear, they do offer massive and pretty obvious advantages too.

Back in the 1930s, the problem of protectionism was rife. Mercantile policies in which each and every country tried to outdo everyone else by exporting more and importing less created the conditions for a world war. In 1944, Keynes and most of the great and the good in the economic world congregated at Bretton Woods in the US. Keynes was the star of the show. He was after all a very clever man, and he proposed a system of international exchange, in which surplus countries were pretty much forced to buy more from deficit countries. His plan was rejected largely because the US contingent felt that this too clever by half Brit, who no one else really understood, had come up with wheeze designed to help one of the world’s largest deficit countries – the UK – and punish the world’s biggest surplus country – the US.

We got the IMF, World Bank and the Bretton Woods system of monetary exchange as compromises. It is a shame, because if Keynes’ plan had been accepted, the global crisis of 2008 may never have happened, and actually the US – which today is the biggest deficit country in history – would have eventually done very  well out of it.

Keynes’ rather selfish next move was to die. In death he attained a kind of demigod status, but by then it was too late. The course of history was set.

But within the euro area itself, Keynes’ ideas could be adopted. If they were, it is possible that the problems of imbalances could be solved, and the euro could survive.

In sport, no one wants to see every competition end in a draw, but for the game of international trade, a high score draw for exports and imports for each and every country may well prove to be the result we all need.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Barack Obama has told tales. So fed up is he with China and its trade policies that he has told teacher, or the World Trade Organisation.
He said: “Today, my administration is launching new action against China – this one against illegal subsidies that encourage companies to ship auto-parts manufacturing jobs overseas….Those subsidies directly harm working men and women on the assembly line in Ohio and Michigan and across the Midwest. It’s not right; it’s against the rules; and we will not let it stand.”

And then he stuck his tongue out.

But sitting next to him in class was a jeering Mitt Romney.

“President Obama has spent 43 months failing to confront China’s unfair trade practices,” said the man who hopes to be the next US president. He added: “I will not wait until the last months of my presidency to stand up to China, or do so only when votes are at stake. From Day One, I will pursue a comprehensive strategy to confront China’s unfair trade practices and ensure a level playing field where our businesses can compete and win.”

And he then stuck his tongue out at Obama.

China is used to it. When election season comes round, it knows that the boys and girls who want to live in the White House can gain lots of playground support through China bashing. And boasting about how they are going to do it.

It is just that the US is being a tad hypocritical; after all its own trade policies are not exactly the paragon of fairness.

A reaction against free trade remains one of the single biggest risks to the global economy. After all, the last Depression led to protectionism, followed by something else. What was that now? Oh yes, that’s right, World War 2.

For as long as it’s just talk, the anti-China rhetoric may not matter, but one of these days the US will have a president who actually carries out his pre-election promises. That will be a great day for democracy, and an awful day for world peace.