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Saturday, November 09, 2002


Despite the fact that central banking decisions are meant to be shielded from political pressures, the governing council of the ECB is inevitably coming under growing pressure, simply because the introduction of the Euro was a political, not an economic, decision, and the complexities of making it operational are not widely understood.

Many commentators criticise the bank suggesting that it is not sufficiently responsive to public opinion.(Obviously Duisenbergs obscurantism doesn't help here). In fact the opposite situation really would be a problem. Look at the difference between fiscal and monetary policy in the EU. Fiscal decisions are taken by politicians who are far more tied to public pressures and votes - ie they make decisions with a very short-term time horizon. What happens. You get to be on the 3% deficit ceiling before the problems even start, then when things get tough you cry foul, there is no flexibility (a la Prodi).

Duisenberg faces three tough problems. One is credibility - his, that of the bank, and that of the Euro. Two is really being able to measure consequences, as he says in the press release, uncertainty about the future is very high right now, and even if it weren't the capacity of the central bank to predict changes in inflation and unemployment is nowhere near as extensive as is popularly imagined. Three is the fact that the EU economies are far from homogenous.

If we start from the idea that what matters are real, not nominal interest rates. Then since Germany has 1% inflation (and dropping), the ECB rate of 3.25%represents a real rate of 2% - far two high. Spain, on the other hand, has an inflation rate of 3.5%, thus the real rate in Spain is -0.25%, ludicrously low for a country with a chronic inflation problem.

The present rate is bad for both countries. So what do you do, raise or lower, take your pick? Obviously depending on whether you're German or Spanish you may take a different view. And if you are Irish or Italian, or Dutch or French. Why, oh why, you may well ask, did anybody dream up the idea of the Euro in the first place? DW-World is of course German:

As the ECB keeps interest rates constant, Germany’s new economic Super Minster has renewed calls for the European Central Bank to help its flagging economy by cutting interest rates. Germany’s Minister for Economy and Labor, Wolfgang Clement, made an indirect call on Friday to the European Central Bank (ECB) to lower its interest rates after the bank decided to keep monetary policy constant for the 12th month in a row. Speaking at a forum of the Rationalization and Innovations Center for the German economy on Friday, Clement implied that the responsibility for German economic growth was not solely that of the German government and that the ECB should help by lowering interest rates in the eurozone. "In order to have a consistent policy for growth and employment [in Germany], others have to do their homework, too," Clement told attendees at the forum in Berlin. "The tariff policy or European monetary policy is part of that," he added.

Speaking to journalists in Berlin, the head of the Federation of German Trade Associations Michael Sommer joined the chorus of calls by German trade unions to put life back into Germany’s flagging economy. "How long will politicians in Europe stand by and watch while the ECB pursues an interest rate policy that does nothing for job creation?" Sommer asked. A cut would be good news for Germany, which has admitted it will exceed the 3 percent budget deficit allowed under the Growth and Stability Pact rules. Currently the country’s economic growth is crawling at some 0.3 percent. With unemployment figures at the four million mark and experts predicting no end in sight to Germany’s economic malaise, calls to change eurozone monetary policy are likely to grow louder every day.
Source: DW-WORLD.de

Of course a cut would be good news for a lot of hard-pressed German companies. But what if the price is sending Spain, Greece and Portugal, via an inflation straight jacket, down the road, recently trodden by Argentina, of stagflation and suffocation? Will the need to cut then have been so obvious?

According to the New York Times Chinese politics is on the move and the world's last major left-wing dictatorship, the Communist Party of China, has transformed itself. The only problem: China, for the NYT is now, arguably, the world's last major right-wing dictatorship. China as the paper concludes seems to be heading down the road of crony capitalism minus the democratic bit. As Stephen Roach is continually reminding us, China is the planet's last remaining growth engine. On one version the process of change itself will change China, but if it doesn't? I have to admit I have one recurring late-night deep-sweat sleepbreaker. It goes something like this. The US under the leadership of George W gets itself embroiled in one counter terrorism war after another, Afghanistan, Iraq, (Indonesia?) entering, but finding it difficult to exit, and then we wake up one morning to the news that China has decided it's time to assert its claim over Taiwan.

With the convening of the 16th Congress in its 81-year history, the party is rewriting its constitution to declare that it represents "advanced forces" — capitalists — as much as workers and peasants. Rich people have begun joining the party. A few may be invited to join its policy-making Central Committee. Jiang Zemin, the Communist Party chief who plans to retire after the Congress adjourns, has buried the last real pretenses of socialism. "All legitimate income, from work or not, should be protected," he told the party Congress on Friday. The old China defended the working class against the capital class. In the new China, Mr. Jiang said, "the fundamental interests of the people of the whole country are identical."

Foreigners have invested more money in China so far this year than anywhere else, including the United States. All that money is flowing because the party has used its near-absolute power to create favorable conditions for capitalists. Companies setting up factories in Guangdong or Shanghai can employ workers from the hinterlands, often paying them less than $100 a month for 12-hour days. Migrant laborers can stay in cities only so long as their employers need them; without urban residence permits, they have no local rights. The government does not allow independent unions. There is no collective bargaining.

Among wealthy nations, the United States is considered stingy when it comes to social benefits and health care spending. But by percentage of its economy, China makes the United States look profligate. In other words, it does not make rich people share their wealth. The gap between rich and poor has grown almost as fast as overall income, meaning that inequality is increasing nearly in lock step with the country's development. Other critics say that opening the party to businessmen will delay a needed political reckoning. "The economic elite love money, not democracy," wrote Kang Xiaoguang of the Chinese Academy of Social Sciences. Such views could be widespread, but it is hard to tell, since Mr. Jiang has closed the main leftist academic journals where criticism of his policies was being expressed, including the one that published Mr. Kang's essay. Mr. Jiang would not agree that his party has abandoned the poor. China, he argues, is still in the "primary stage of socialism." Later on, contradictions between the working and capitalist classes may become acute and the poor will vanquish the rich. But not in the primary stage, which could last 100 years.

China's Communist Party seems unable to escape the paradox of its continued existence. It has entered the 53rd year of uninterrupted rule, and has 66 million members. But in the party's careerist tradition, many new members are successful capitalists who joined — became Communists — to help themselves make more money. Communism, then, has become crony capitalism. The party is betting that this shift will help it create enough jobs to employ the millions of urban unemployed, as well as millions more among China's vast, impoverished rural population, many of whom are seeking better lives by moving to the cities and industrial zones. If this plan works, power will remain entirely with the Communist Party. It's a vision of China's future than appears to include everything but democracy.
Source: The New York Times


So Giscard d'Estaing has spelled it out, Turkey should not be considered for EU membership since it is just too different. In fact he went further by implying that Turkey must never be allowed to join the EU. The decisive factors: Turkey's Muslim character and high birth rate, the fact that it has "a different culture, a different approach, a different way of life". After all, Turkey's capital is not in Europe, 95% of its population are outside." Of course not everyone agrees. One British government spokesman is quoted as saying firmly: "Turkey is a European country that has every right to join if [it meets] the conditions." Whilst Pat Cox, the Irish president of the European parliament, limited himself to calling Mr Giscard's remarks "ill-advised" and "distinctly unhelpful".

Like Berlusconi's faux pas earlier this year, such comments are important not for their immediate impact, but for what they reveal about the way of thinking of an important part of Europe's political class. Europe is well, 'European'. The problem is that this European group of countries is not producing enough children to sustain itself economically, or to return the pension payments made as contributions by its now ageing population. As if to add insult to injury, Giscard cites as a negative, one of the very compelling arguments for considering Turkey (and other states with a high proportion of young people) as a candidate: its high birth rate. How long do we need to wait before it finally sinks in that there is such a thing as the demographic transition. That association with countries like Turkey and others with similar demographic characteristics (Morroco?) could be highly beneficial for both parties and that we are all in a process of change and discovery. To imagine that the Turkeys and Morrocos of today as immobile and stuck in some strange kind of time warp, is like imagining that the US would always be an insignificant British colony.

There has been much talk of the need for structural reform in Europe in recent years, but much of this talk has stopped short of recognising the most fundamental structural reform of all which is now knocking on Europe's doors: the reform of its own identity. European leaders, using the bandwagon philosophy of globalisation have been only too happy to try to instruct Third World leaders on how to change their countries for the better. Well I think the old British adage that those 'who live in glass houses shouldn't throw stones', would be advice that those same leaders would do well to heed. Europe needs to open itself. Accept that no-one is perfect, and that we are all in a process of change. Can Giscard imagine how France's own citizens of North African origin feel when he explains his view of Europe. The French, it seems, are very good at understanding the cultural differences the French have when applied to the Anglo Saxon world, but it also seems that some of them have a long way to go when it comes to recognising La Difference Culturelle in others.

Turkey's EU prospects have improved in recent months because of the long-awaited reforms introduced by the previous government on the death penalty, human rights and the Kurdish language. The US is pushing hard for its membership, because of its strategic location next to Iraq. But this week's election victory by the Justice and Development Party (AKP) has raised new concern about Islamist influence. No problems should exist in theory; the AKP leader, Recep Tayyip Erdogan, is pro-reform and pro-European and has made EU entry a high priority. In practice, however, the suspicion about the party found in the Turkish military establishment is widely shared in Brussels and elsewhere in the union. Mr Erdogan refused to overreact to Mr Giscard's comments. "Turkey is a member of the Council of Europe, an OECD member and a Nato member," he said.

The question of Turkish membership has long been a thorny issue for the EU. Turkey's help is badly needed to resolve the division of Cyprus before the island joins in 2004, and Ankara has to approve arrangements giving the EU's rapid reaction force access to Nato military assets. The European commission quickly distanced itself from Mr Giscard's comments and insisted that there had been no change to its view that Turkey - a candidate since 1999 - had to meet all necessary economic and political standards, including the key Copenhagen criteria on human rights, before negotiations could begin. "To say such a thing about such a country that is member of such bodies is nothing more than emotion." In a thinly veiled attack on Britain, Mr Giscard said that those who had pushed hardest for Turkish membership were "enemies of the EU".
Source: The Guardian

Friday, November 08, 2002


At a press conference yesterday Wim Duisenberg explained the decision of the governing council of the ECB as follows:

We have reviewed monetary, financial and economic developments and updated our assessment in the light of the information available. In view of the high uncertainty on future growth, and its implication for medium-term inflationary developments, the Governing Council has discussed extensively the arguments for and against a cut in the key ECB interest rates. The view has prevailed to keep interest rates unchanged. However, the Governing Council will monitor closely the downside risks to economic growth in the euro area.

However, for the time being, the main scenario for the euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. In fact, this expectation is consistent with all forecasts published by international organisations. Private forecasters, on the whole, also seem to share the same view. Moreover, financial markets have shown signs of stabilisation in recent weeks following a period of considerable turbulence. The expectation of an improvement in economic activity in the euro area is contingent on a recovery of growth in private consumption, supported by a reduction in actual and perceived inflation rates. This expectation is also based on a projected gradual recovery of the world economy and export growth which, together with the low level of interest rates, should help to strengthen investment.

Nevertheless, the uncertainty surrounding this scenario remains high. It is therefore very difficult, at this juncture, to predict the timing and strength of the economic upswing, both in the euro area and globally. Regarding fiscal policies in the euro area, may I expressly refer you to the Governing Council's statement of Thursday, 24 October on the Stability and Growth Pact. There is a strong consensus within the Governing Council that the principle of budgetary discipline enshrined in the Treaty and the Stability and Growth Pact are indispensable for Economic and Monetary Union and that the Stability and Growth Pact has been successful in promoting sound public finances and fiscal convergence, as well as in supporting the return to price stability. Moreover, the Pact is in the interest of the Member States.

May I also again urge governments to implement decisively the structural reform agenda, both within the area of fiscal expenditures and revenues and in labour and product markets. Such action is needed to enhance potential output growth over the medium term. At the same time, the prompt implementation of structural reforms would contribute towards strengthening confidence in the euro area and thereby support economic growth in the short term
Source: Press Release ECB

Now Duisenberg may have many hidden abilities, but one of them certainly isn't communicative capacity. His press conference responses are pretty revealing. [Question]: Mr. Duisenberg, I have never heard you say before in this forum that the ECB has discussed the arguments for and against cutting or raising rates. Are you going to start doing this more regularly in the future in your opening statements?..........[Duisenberg:] I do not know yet what we will say in the future. That depends on the circumstances in the future, but it is true that you have never heard me say that before. You have heard it for the first time today. What I will do in the future is up to the future.............. [Question] So, this may not be a permanent change in the way in which the ECB communicates?...... [Duisenberg] Not a permanent change. But, you are right, it is a change......[Question] if the ECB were to continue to stick strictly to its two pillar mandate and monetary rules such as the "Taylor rule", is it not the case that the ECB should, in fact, perhaps raise rates very soon, given the high rates of M3, ample liquidity, high core inflation prices, high service prices and the threat of higher oil prices?.........[Duisenberg] That is a very hypothetical question. If we were to stick to rules like the "Taylor rule", what would you do then? Well, we do not stick to rules like the "Taylor rule", so I prefer not to speculate........ [Question] I was wondering whether the public debate on the Stability and Growth Pact had any impact on the decision-making process this morning?.....[Duisenberg] Well, you would have to be a psychiatrist, because what you are actually asking is: to what extent did it have an impact on the minds of the individual members of the Governing Council. Certainly, it is a factor we perceive. But then let me say that the utterances and the discussions about the Stability and Growth Pact are very much a thing, I believe, of the past–, of the very recent past....................

Yes, I think, I've finally got it. The word is obscurantist. Like his fellow countryman Barcelona FC manager Louis Van Gaal, Duisenberg is clearly not comfortable in front of the cameras. I sympathise, but then I wouldn't take the job of Head of the ECB. One of the key characteristics of a good central banker is a capacity to handle and present information. In fact it is a virtue for a central banker that he keeps people guessing, the problem is, as others have noted, Duisenberg keeps us guessing because we have difficulty understanding what he is trying to say, and little sympathy with the way he says it. One source that is definitely not normally obscurantist or guarded in its comments is the Economist:

On November 6th, America’s Federal Reserve caught nearly everybody off guard by cutting interest rates by half a percentage point—twice the cut expected, bringing rates down to 1.25%, the lowest level since 1961. On the following day, the European Central Bank (ECB)—in charge of monetary policy for the 12 countries of the euro area, which share a currency and interest rates—left rates unchanged at 3.25%.

The ECB did consider making a cut. At a press conference after its decision, the ECB’s president, Wim Duisenberg, said the question had been discussed “intensively” at the meeting. He also expressed concern at the poor growth outlook for the euro area as a whole. In the end, though, said Mr Duisenberg, “the view prevailed that it would be wise to leave interest rates unchanged.” He also noted that the ECB does not think it is for monetary policy to stimulate economic growth.On the face of it the ECB’s stance is hard to understand. Partly it reflects the ECB’s single-minded focus on inflation—which is, after all, what its mandate requires. The bank has set its inflation target at 2% or less, and for a good part of the past two years, inflation in the euro area has been bumping up against, or even exceeding, that target. Inflation picked up in October, following a sharp rise in the money supply, which the ECB uses as a guide for future inflation. Critics reckon the ECB would do better to have a symmetrical inflation target, much like the Bank of England has: Britain’s central bank has to keep inflation within one percentage point either side of a central target, currently 2.5%. This more flexible approach would give the ECB more scope to cut rates when there was, as now, widespread concern about economic weakness.

A closer look at what the ECB has done, as opposed to what it has said, suggests it has, in practice, been ready to react to weak growth and to tolerate some overshooting of its inflation target. Behind Mr Duisenberg’s comment about the limitations of monetary policy lies real concern about the failure of many euro-area economies, and above all Germany, to tackle urgent structural reforms. The German labour market is much too rigid, making it expensive to hire workers and difficult to fire them. Mr Duisenberg and at least some of his colleagues (no details of ECB discussions are ever released) are worried that an interest-rate cut used as a substitute for, instead of an accompaniment to, economic reform will bring little long-term benefit. That is probably correct. In the short term, though, an increasing number of economists now think the ECB should do what it can to stimulate growth and reduce the impact of the current economic and political uncertainty.
Source: The Economist


The economist is again worried about the danger of Germany falling into a deflationary cycle. With reason I think, and even more so now the ECB has maintained interest rates unchanged for yet another month:

America does not yet have deflation. Still, its GDP deflator fell to 0.8% in the year to the third quarter; so long as the level of GDP remains below potential, inflation will keep falling. Deflation currently seems unlikely in Britain or the euro area as a whole, but Germany is at risk. German consumer prices have fallen at an annual rate of 0.4% over the past six months. More worryingly, Germany, unlike Japan in the early 1990s or America today, is not free to cut interest rates or run a looser fiscal policy. Interest rates are set by the ECB on the basis of economic conditions in the whole euro area, and budget deficits are limited by the European Union's stability pact. The risk of deflation may therefore be greater in Germany than in America.

Deflation is particularly deadly when an economy has lots of debt, because falling prices swell the real debt burden. In America and Germany, firms and households have borrowed heavily in recent years, lifting total debts of the non-financial private sector to 150% and 160% of GDP respectively. In the early 1990s Japan's debt burden was equivalent to almost 250% of GDP. Japanese firms are still much more in hock than those in America or Germany. On the other hand, American households look more vulnerable. Even at the peak of Japan's bubble, households remained big savers. Last year German households saved as much as 10% of their income; Americans saved only 1.5%.
America's demographics are more favourable than Japan's, where the population is both shrinking and ageing. A shrinking labour force implies a slower growth rate, future problems for financing public-sector pensions, and greater opposition to reform than in a more youthful country. Germany again appears similar to Japan. Its working-age population is expected to shrink by 0.2% a year over the next decade, compared with likely annual growth in America of around 1%. Our analysis suggests that Germany has more symptoms of the Japanese disease than America. America's bigger bubble infected its economy more severely; but its more flexible markets and institutions should now help it to adjust. For now, both countries remain in danger.
Source: The Economist

Tuesday, November 05, 2002

Andy Xie Argues Against Revaluation of the Yuan

The pressure for one of the world's currencies to move upwards is growing, especially since the fashionable direction is down. Absent any other leading contenders for the rising boat scenario, attention is now gradually shifting to China as the magnitude of what is happening there slowly sinks in. The always on-the-ball Andy Xie argues that the answer to this should be 'not yet', in the interest of Chinese and hence global stability.

RMB revaluation would worsen China's deflation and depress its domestic demand, in my view. With a large amount of surplus labor, China's competitiveness would be restored through a nominal wage decline. RMB appreciation wouldn't ease deflationary pressure elsewhere in East Asia at all. Instead, currency appreciation and wage declines in China would merely destabilize East Asia. A stable RMB is in the best interest of East Asia and the world., in my opinion.

Of course, China must allow the market to determine the value of its currency at some point. We believe this is possible only when China's capital account is mostly open. This wouldn't be possible, I believe, if China's financial sector remains state-controlled. China is adopting a gradualist approach toward financial reforms. It could be five years away before China's capital account becomes fully open, in my view.

China is outperforming other Asian economies in export. This isn't new. Between 1987-97 China's exports grew eight percentage points faster than Taiwan's and by 5.4 percentage points faster than Korea's (see Exhibit 1). This gap widened to 9.6 and 7.2 percentage points, respectively, between 1997-2001. What is taking place is perfectly consistent with comparative advantage. China is a latecomer to globalization and is growing faster to catch up.

Because trade has become so large in China's economy, global demand determines China's wages. If RMB appreciates, it would depress global demand for Chinese goods and, thus, labor. That would translate quickly into downward pressure on wages. Chinese wages measured in US dollars would decline to reflect global demand for Chinese labor. The exchange rate is simply not powerful enough to artificially prop up wages in China.
Source: Morgan Stanley Global Economic Forum

"China is simply mind blowing."

Stephen Roach is just back from China, and he's impressed. He's seen the future, and he thinks it works. As he concludes "The global response to China looms as one of the biggest unknowns in the macro equation. It could well be the most important test of all for the world’s greatest growth story".

China is continuing to have extraordinary success in separating itself from the rest of the pack.

China’s economic progress is evident on three fronts -- breadth, depth, and scale. In terms of breadth, it’s all about China’s gathering success in moving up the value chain. That’s true of the shifting composition of its exports -- away from consumer softgoods and into increasingly sophisticated electronics and other forms of information technology. Andy Xie has calculated that high technology goods have accounted for 42% of China’s export growth in the year ending August 2002. But it’s also true in the shifting mix of its aggregate demand -- especially the emphasis on domestic demand. China’s growth dynamic is still heavily dependent on exports -- this segment of the economy accounted for 54% of total GDP growth in the first half of 2002. There is growing recognition in the Chinese leadership that such external reliance is excessive and must now change.

As such, support to domestic demand is now very much the focus of Chinese macro policy. The trick, of course, is to pull it off. Infrastructure spending continues to play an important role in this regard, but there are also budding signs of an emerging consumer culture in China, as well. That stands in sharp contrast to what was evident 18 months ago. Nowhere was that more obvious than in Shenzhen -- Hong Kong’s twin city near the mouth of the Pearl River. We had a fascinating meeting with Shenzhen’s dynamic and relatively youthful mayor, Yu Youjin. He was as impressive as any politician in the West, and was filled with energy in describing the explosive growth of this 22-year old city that now has a population in excess of 7 million. Shenzhen is loaded with some of China’s most dynamic and exciting companies; we met with two of the most impressive ones -- Huawei Technologies and Ping An Insurance. But the statistic that stuck most in my mind was Shenzhen’s youth -- a population with an average age of 29, making it perhaps the youngest major city on the world today. The streets are alive with shops, movie theaters, and car dealerships; there is even a Sam’s Club. You get a real sense that the birth of the Chinese consumer is now taking place in Shenzhen.

In terms of depth, China’s progress is also unmistakable. Infrastructure lays the groundwork. It’s not just roads -- now some of the best in the world. It’s also the wiring of the Information Age. We visited the Suzhou New District (SND), an industrial development zone about two hours west of Shanghai by car that has only been in existence since 1990. The 52-square-kilometer area comes complete with its own fiber optic telecom grid. From Motorola and Dupont to Sony and Canon, some 614 foreign multinationals have set up business in the SND. We spent some time with Solectron, a leading electronics outsourcer, and learned first hand of the appeal of China. Due to the global IT slump, Solectron has pared its worldwide headcount by 30,000 over the past couple of years; however, its staffing in China is going the other way, led by a doubling of its current facilities in Suzhou.

Yet there’s more to infrastructure than just highways and telecom cables. It’s also about human capital -- scientists, engineers, and the development of a new managerial class. The Chinese are the first to concede they have a real problem on the management front: The legacy effects of a planned economy left a glaring hole in this key segment of the labor force. To get a better understanding of how China is attempting to overcome this problem, we spent part of the afternoon at one of China’s leading new business schools -- China Europe International Business School in the Pudong area of Shanghai. The briefing from the CEIBS administration was impressive, but the students said it all. Bright, inquisitive, well-informed, articulate, and energetic, they compared favorably with any we had run across in the West. China has been lagging in its investment in human capital. A recent paper by Nobel laureate James Heckman found that China’s public expenditures on education stood at just 2.5% of its GDP in 1995, less than half the 5.4% ratio in the US but not all that far from Japan’s 3.6% share. As efforts such as those at CEIBS expand, I believe there is nothing but upside to China’s potential on the human capital front. The combination of physical infrastructure, human capital, and new technologies speaks volumes to the ultimate arbiter of China’s depth -- productivity enhancement.
Source: Morgan Stanley Global Economic Forum

Monday, November 04, 2002

Germany mirroring Japan's problems

This interesting topic has been picked up by a fiancial editor at the Guardian of all places, although he still has twigged the possible importance of the common demographics:

Has Germany caught the Japanese disease? Is the world's third largest economy about to be trapped in the same spiral of deflation and stagnation that has bedevilled the second largest for the best part of a decade?
On the face of it, the signs do not look good. Germany has seen the same collapse in asset prices - the stock market and the east German commercial property sector - that did so much to put Japan on a downhill path.

Germany's two biggest publicly-listed banks, Deutsche Bank and HVB, are both under financial pressure, having recently reported third quarter losses. The third, Commerzbank, has hinted it may finish the year in the red. The reason is a combination of high costs (the cost income ratios of German banks are close to half as much again as their UK peers) and soaring provisions to cope with bad and doubtful debts. German banks just don't make big enough profits to ride out the problem of loans going bad as the economy stagnates. Cut to Japan, where the government has recently compromised on plans to tackle the bad debts of the banking system. Compromised as in bottled, that is, as the banks and their political backers forced the authorities to tone down an initial hard-nosed approach.

The snag for policy makers is that simultaneous problems with the economy and the banking system are self-reinforcing. As the economy deteriorates, more companies go bust, leaving the banks with more bad debts. That makes them more cautious about future lending, which means companies can't get the cash to invest, which means the economy slows, which means more bankruptcies... well, you get the idea. Many mittelstand companies are already reporting problems raising cash, either through more onerous conditions being attached to loans or through outright refusal. Lombard Street Research's Professor Tim Congdon, in a recent persuasive analysis of the problems besetting the two countries, notes the parallels between Germany and Japan - though he is cautious about jumping to conclusions too quickly. "The overall verdict has to be that the German banking system is in serious trouble," he says. "Germany may not have caught the Japanese disease, but it is vulnerable." Should we despair that two of the world's leading economic players are in such serious trouble, albeit one rather worse, to date, than the other? Maybe not. According to a US think tank last week, the answer to the Japanese problem is to be found in Silicon Valley. The Pacific Council on International Policy reckons the solution lies in harnessing foreign technical and entrepreneurial skills just as the Californian high-tech sector did. "The central role of foreigners in the Silicon Valley story is among the reasons some Japanese leaders are coming round to the idea of easing restrictions on immigrants," says Pete Wilson, head of the PCIP's task force and a former governor of California.
Source: The Guardian


On the back of the Microsoft settlement, most commentators, and most investors, have assumed that this is a big plus for Microsoft and profitability. But is it? As I pointed out yesterday, perhaps there is something that all these commentators just don't get (but Paul Andrews of the Seattle Times sort-of does):

"I see a possibility that the number of Linux users will create critical mass, but it's a long way off"

But there is that chance. And it exists largely because of the Microsoft settlement. Those who view the Justice Department settlement and Kollar-Kotelly's ruling as a slam-dunk for Microsoft have forgotten a key point: The settlement prohibits Microsoft from restricting computer makers' ability to "offer users the option of launching other operating systems from the basic input/output system or a non-Microsoft boot-loader." Microsoft's simple but brilliant sales practice of offering PC makers huge discounts if they installed MS-DOS (and, later, Windows) on each computer they sold was the bedrock on which the Microsoft monopoly was built. Today we're seeing cheap $199 PCs running Lindows and Lycoris (based in Redmond) — two Windowslike systems built on Linux — being sold on the shelves of Wal-Mart. At Fry's Electronics, a California computer chain, PCs with Thiz Linux are doing brisk business. Linux books and Web sites are thriving. Is this a revolution in the making? Nobody knows yet. But the process is reminiscent of the early days of personal computers, when a different monopoly known by three initials ruled the technology world. Users chafing under the restrictions of big, centralized computers were willing to devote time and effort to learning how to operate PCs. And then they showed their friends how. Pretty soon a movement took root. Monopolies are fought best through innovation. Technology watchers were outraged when the Reagan administration dropped the government's longstanding antitrust action against IBM. Given the green light, IBM went back to its monopolistic ways, threatening to squash upstarts like Compaq and Microsoft. It didn't work, partly because end-users hated IBM and what it stood for, partly because Microsoft offered an open world to developers. Today the Ze Ayalas of the world harbor similar enmity toward Microsoft. Their bandwagon is Linux and open-source software.

Linux may never threaten Microsoft's dominance. But that may not be the point. If all it does is provide an alternative to the Microsoft-bashers and Windows-haters of the world, and keep Microsoft honest enough to price its products reasonably while improving their quality, then the open-source movement will have accomplished far more than any government oversight or judicial remedy could ever hope for.
Source: The Seattle Times