Wow, This is Surprising

Now the cynics will say this US Labour Department report it isn't surprising at all, and ask me what the hell I am talking about, well I'll tell you, I had actually expected the momentum to continue for another couple of months before tapering off. This is relatively dramatic after the powering ahead of recent months. And of course, now the interest rate is really pinned down near ground level as far ahead as the eye can see. Looks like another bruising week ahead for the euro.

American employers barely took on any new workers in December, a disappointing government report on Friday showed, indicating the economic recovery has yet to translate into sustained jobs growth.
The unemployment rate fell to 5.7 percent, the lowest level in over a year and down from 5.9 percent in November. But this was largely due to people leaving the workforce, according to the Labor Department's report.


The number of workers on U.S. payrolls outside the farm sector in December increased by just 1,000, after a downwardly revised rise of 43,000 in November. It was the fifth consecutive monthly rise but was far worse than economist expectations of a rise of 130,000. The poor report will likely be a headache for President Bush (news - web sites) as he seeks re-election in November with the economy -- specifically job creation -- expected to be a key issue in the run-up to the vote. "This is a very disappointing jobs report," said John Person, head financial analyst, Infinity Brokerage Services, Chicago. "One component to prove that the economy is on a solid path to recovery is an increase in jobs." The dollar fell and U.S. Treasury bond prices rose after the report. The data will likely reinforce expectations that the U.S. Federal Reserve (news - web sites) will keep interest rates on hold at 45-year lows at its next policy meeting on Jan. 27-28, and for some time after that.


"The good news is that there is absolutely no pressure on the Fed to raise rates any time in the foreseeable future," said Edgar Peters, chief investment officer, Panagora Asset Management Inc. The jobless rate had been forecast to hold steady at 5.9 percent. The Labor Department, though, said there were 433,000 "discouraged" workers in December, who were not looking for work because they believed no jobs were available. Economists had been expecting a more robust rise, encouraged by a reasonable holiday shopping season and a drop in filings for jobless benefits in December. However, the report showed a 38,000 fall in hiring in the retail sector, which the department said was due to general merchandise stores taking on fewer workers than usual.


The troubled manufacturing sector failed to break its job-cutting trend, shedding 26,000 jobs in December, the 41st month of declines. Some economists, pointing to recent data suggesting a turnaround in manufacturing, had predicted factories would finally take on new workers in December. In another bad sign for job seekers, the number of hours worked per week dropped to 33.7 from 33.9 in November. The average work week had been expected to climb to 34.0 hours. Employers often increase the amount of hours worked by existing workers before taking on new hires. One bright spot in the report was hiring in construction, which was up 14,000. The building industry has boomed as low mortgage rates have fueled home buying.

Current Trends Are Unsustainable

Economist for Dean Steve Kyle had a post on the dollar as a reserve currency issue the other day, and I put up a couple of comments. In particular I was infuriated because I discovered inadvertently what I consider to be a scandalously irresponsible piece by Paul Krugman where he simply side-steps the whole question of the structural problem of having a given reserve currency in a continually changing world, and reduces it to a paying in dollars or paying in euros issue Steve subsequently wrote to me, and I am now posting his mail. He seems to have understood the problem, the danger is the hard landing, not the fact of the transition itself. There is a problem of 'money illusion' here: the US is obviously richer than most European economies, but not as much richer as they felt themselves to be. That was an illusion brought on by the exaggeratedly high value of the dollar, and that is the reason why Stephen Roach was constantly going on about the proprtion of global growth being due to the US economy, this was a kind of statistical illusion brought on by the reserve currency status, and if the US was not as rich, then India was not as poor, and the complicated unwinding of this illusion is where the problem is. Incidentally, like everyone else I've been watching US films for years, and it has alwasy puzzled me why, if they were so rich, the US worker didn't appear to be more different from the German one, why, for eample, the characters are forever in these two-bit diners which always seem so seedy, and why when you watch the people working you can't see more evidence of all that extra productivity being generated just in the way they work and the technology they use.

It is indeed a complicated set of issues, and I dont claim to have perfect understanding of what will happen, but that is precisely the problem. To make this clear, a couple of points:

1. I certainly dont agree with Krugman that the only problem is what bills drug dealers have in their pockets. That is small potatoes, though there ARE serious issues of psychology in the long run regarding which is the preferred currency to have in the world - an issue not limited to drug dealers. The issue is what happens on the way to that situation and it is this that makes me nervous.

2. It is this very uncertainty - we dont know what will happen - that is the most reckless part of this economic adventure of ours - that we can even be IMAGINING a global financial crisis brought on by the US is in itself a very scary thing.

3. We know that the current trends are unsustainable - The US government is spending money it doesnt have at the rate of half a trillion a year and climbing as far as the eye can see. We arent even spending the money on investment - it is going to guns, bombs, transfers, and tax breaks to people who, if they are like me, have put all available personal assets into Euro denominated instruments. Our current account more or less mirrors this, since private sector savings are negligible.

My fear (not yet a likelihood, but a visible and positive chance of occurence) is that we will suffer a very hard landing. At the moment foreign central banks seems to be soaking up a large share of what we are emitting. This cannot go on forever though, of course, there is no natural limit to the amount of their own currency these governments (China,
Japan, etc.) can print. Sooner or later, if the supply of dollars keeps growing and there is no reasonable expectation that this flow will cease (on the contrary, it seems to be scheduled to grow indefinitely) even central banks will stop buying dollar assets and the game will be over. What will happen then?

It is somewhat analogous to Triffin's dilemma backin the 50's and 60's - I wrote a paper touching on this a while ago, but the basic problem is more apparent today - How will the transition from a dollar standard (or gold as in Triffin's day) be managed?

You may be right that a deflationary scenario is better and will solve the problem of foreign banks' unwillingness to hold dollar reserves. Certainly they would remain happy if deflation raised the value of those reserves. But the real problem in this scenario is a major depression. And finding our debts to the rest of the world increased in
value while we are going through high interest rates (real rates are bound to be high in any deflationary scenario - perhaps very high) is a recipe for a depression along the lines of some of the adjustments suffered by e.g. Argentina within recent memory. It is one thing for Argentina to do this, but quite another for the US - Were we to lose, e.g. 20% of GDP in a very bad scenario, the consequences for the rest of the world would be pretty awful. (Again, I am not predicting this will happen but the fact that it is within the realm of possibility is not a good thing)

It is certainly the case that reasonable people from all of the important interested parties need to get around a table and figure this out. However, my estimate of the chances for this are much lower than yours. I DONT think that Alan Greenspan is the puppeteer here. Sure, he controls monetary policy, but the Administration cares ONLY about
political advantage. They neither know nor care what will happen beyond the next election. Just look at the caliber of the Treasury secretary now (and the one before) and compare them to Rubin. These guys simply dont
understand international finance. Not even a little bit. There is nobody in the White House who does either. Greg Mankiw certainly is no dummy, but he is out there making statements we all know he doesn't believe, so he is
obviously being a puppet, not a puppeteer.

What I hope is that nothing bad will happen before November and that sanity will return after that point. Even here, though, there is room for doubt. The Republicans (if they win) have demonstrated a complete lack of interest in or understanding of the need for responsible economic management. The Democrats (if they win) might do better but at the moment their posture is one of wanting to spend on DIFFERENT things but not LESS of them. And they will have a very hard time getting a repeal of the tax cuts through Congress, which is very likely to remain Republican (and
perhaps more so).

Well, that is all I have at the moment. - Feel free to post this on your site if you like - Perhaps we could continue the discussion there - I would be interested in hearing what others say. Also, you can look at stuff I have written in the past on my own website

By the way: note the "even central banks will stop buying dollar assets ", this is my endgame to, and if nothing is done before we get there the outcome may well not be pretty.

Incidentally: "a deflationary scenario is better". I'm not really saying this. I'm saying this is what we have. It may be relatively acceptable to those with savings (which is why political change is so slow in Japan, and always imagining that the impact in the equity markets and on the banks isn't too dramatic) but it won't be any fun for the young people who have just accumulated all that debt. There are lots of silly little details I would quibble about here, but in general I think Steve is talking a lot of sense.

Sock It To Me Juan

Probably you may have noticed that from time to tme I refer to Jaun Cole's Blog: Informed Comment. Actually if I want to know what's happening today on the Iraq front it's there that I normally go. I have in immense regard for the blog and the mind behind it. Well it looks like the post xmas atmosphere is leading more people than just me to reflect on where they are going. I could simply put the link, and over you would go, but I'm posting most of it because I agree so much with what he says, in particular the bit about "I dislike the kind of 'consistency' that is based on a black and white view of the world".

I've noticed that others in Blogistan are sometimes puzzled at where exactly I stand on matters. This puzzlement derives in part, I think, from the analytical nature of my enterprise here. I am not a politician. I am not running for office. Good analysis is not black and white. In politics, you are inconsistent if you say you are anti-Bush and then you praise him for something. But in a more dispassionate kind of analysis, it would be foolish to put forward the proposition that W. has done nothing right. Actually I thought many of his initial reactions to 9/11 were well considered, including the Afghanistan War and his determination not to allow Islam per se to be demonized (something he has been criticized for by the Neocons and the Christian Right). Politically, I am probably opposed to 90% of what he has done, including further skewing the tax structure toward the super-rich, gutting political rights with the Patriot Act, etc., etc.. But unlike a politician running against him, I am willing to admit the 10%.


1) I hate Saddam Hussein, the Baath Party, and everything they did to Iraq, including invading Iran, gassing the Kurds, invading Kuwait, and putting tens of thousands of Shiites in mass graves. Because of my friendships with Iraqi Shiites, I lived through the pogroms as they happened, and they got me in the gut. I also have Iranian friends who suffered from the Iran-Iraq War. One puzzled observer said I sounded like a war blogger when I started celebrating the US defeat of the Fedayee Saddam. Probably I did. I hate them. They were the SS of Iraq. Our brave men and women who are out there risking their lives to make sure the fascists can't harm anyone else deserve our praise and support.

2) Because of 1), I declined to come out in opposition to the war. As late as February, 2003, I thought it was still possible that the UN Security Council would authorize the war, which would have made it legitimate in my view. I now think that the terms of the Genocide Convention could have been effectively evoked to justify the war at the UN.

3) When the Bush administration dumped the UNSC and acted unilaterally, it put me in a difficult position. I felt the war lacked legitimacy in international law, thenceforth. Then when Rumsfeld, Wolfowitz and Feith grossly mismanaged the aftermath of the war (I have never, ever, seen such an amateurish, ineffective and frankly screwed up effort in a major foreign policy arena), I grew increasingly disgusted.

4) I think there is a 60% chance that the whole situation in Iraq will go south, and am therefore worried about the consequences.

5) I think the US owes the Iraqis. The US overthrew the Iraqi government and disbanded the Iraqi army, and therefore is responsible for putting the country on a sound footing before just walking away.

So, my position is that getting rid of Saddam was a good thing; and that US troops deserve credit for the efforts they are making to restore security and root out Baath remnants in Iraq; but at the same time, I believe the war was illegitimate in international law and contravened the UN Charter, and that many of the actions of the US in Iraq contravene the international law of occupation. In the end, I think the war was unwise and not justified by the arguments that Bush put forward. But now that it has been fought I want to hold the administration's feet to the fire about not creating a mess and just walking away from it. (That was tried in Afghanistan by Bush senior and it gave us the Taliban and al-Qaeda).

I was struck, when I spoke at MIT, by how one speaker stood up and made the CIA the fount of all evil. Well, I don't think there is any doubt that the CIA has done some bad things from time to time, from the 1953 Iranian coup to the overthrow of Allende, to the sorts of rogue operations that the Church Commission exposed in the 1970s. But the CIA was acting as an arm of the executive for the most part, so one might as well say that the elected presidents were responsible for a lot of bad things. After September 11, I can't tell you how glad I am we have a CIA, and how much I hope the field officers and analysts get up to speed on Arabic and radical Islamism, and are able to prevent further major acts of terrorism against innocent US citizens.

I'd never get elected to anything, even if I wanted to, because I dislike the kind of "consistency" that is based on a black and white view of the world. I think ethics and reasoned analysis require us to have a complex view of the world, not a simplistic one. And, I think ethics always requires us to balance competing and contradictory values (I agree in this with Isaiah Berlin).

"I now think that the terms of the Genocide Convention". I'm not a sufficient expert to judge, but I'd like to think that he was right on this one.

How to Position Myself?

Obviously I'm making no secret of the fact that I'm trying to decide what I think about the candidates in the coming US presidential elections. I think the issue of who is there in the White House from the end of 2004 onwards is an important question. Possibly one of the most important questions facing all of us. Not simply because the United States is a giant superpower, that has long been true. Rather I think it is important because we are going to be facing a set of relatively unique, and certainly novel problems on the global level, and we all need a US president who is focused on those problems, open to dialogue, and capable of gaining the confidence of the rest of the world. Now more than ever we need a coalition of the willing as we try to get to terms with a whole slew of problems which can really only be confronted on a global level: the nation state has, as it were, seen better days. Now given the global rebalancing which I think is taking place, by the time we get to 2008 I don't think the US will still be quite the exclusive super power it was in the late 1990's. The relation of forces is changing, and this can either be done the easy way, or the hard way. If it is done the hard way we might all have a lot to lose, both in the US itself, and in Europe, in China, in India, in Africa wherever.

Now casting around I've been struck by two candidates Clark and Dean: they are obviously both Democrats for the simple reason that we don't have an alterantive on the Republic side, the candidate will be George Bush, and it is the way that Bush has conducted himself internationally which makes me think we need a new US president in the first place. Probably my intellectual leanings are much more in the direction of the democrats, I mean I've had problems swallowing Nixon, I've had problems swallowing Reagan, and now I've got problems stomaching Bush: Harlod MacMillan and Edward Heath were never like this, to cite two more or less right of centre UK politicians who I have had a deal of respect for. Margaret Thatcher seems much nearer the type, but this is precisely the point: I found her bullying manner thoroughly repugnant, I will never forgive her for sinking the Belgrano, and I didn't notice her anti-terrorism hard line stance bringing any real progress in the North of Ireland.

So I wouldn't object in principle to a moderate, dialogue oriented, non-nationalistic republican US presidential candidate: it's just that there isn't one. I think if Colin Powell were standing a lot of us here in Europe would be right behind him. Indeed in my innocence and naievety I had hoped that Bush might have turned out to be something different. I mean 8 years of having the Democrats in power and it was time for a change. Any democracy needs this type of change, and I think in the end the interests of democracy should override the interests of party. But how wrong I was. Of course back then I hadn't heard the term 'neo-con', and why should I have, it's not really my area of interest. In fact it's my ability to get things so wrong here that leads me to try and stick to economic (and related) commentating: I may still get things wrong, but I've a lot more confidence in the validity of what I am saying. I think I have got something useful to say about economics, when it comes to politics I'm never entirely clear.

Take the Iraq war: those who were reading me back then will have noticed I kept my mouth meticulously shut. That wasn't because I didn't have opinions, but simply because I didn't have sufficient confidence in my opinions to voice them too loudly, and I didn't want what I am saying about demography, about which I am a damn sight more clear, to be tainted with my other more questionable 'opinions'. So it was only after the war that you probably realised I had reluctantly supported it. Only when I started in fact to make my own form of 'self criticism' for having got it wrong, or at least for having committed the error of allowing myself to accept Tony Blair's word at face value.

I mean I accepted that there may well have been non-conventional weapons of mass destruction in Iraq, and if that were the case, then I certainly didn't want to stand by and see one of our major cities simply taken off the map, so I felt we had no real alternative. Now I know that the intelligence was probably faulty (also I feel we were all probably sent up the gum tree by the Mohammed Attah/Prague connection, which it now appears may well have been a 'plant'). One of the factors we should probably all have taken much more into account was the immediate interest of certain key Iraqi exiles in provoking an invasion. Still, these are hard calls, and I am sure as hell glad that it is not my responsibility normally to make them. Which is why we need politicians - of whatever party - that we can respect and have confidence in. Which brings me back of course to the WMD's and how we decided to go into Iraq. If I had been told at the time that this was to take democracy at bayonett point (Napoleonic style) to the Iraquis I would never have agreed (more of this in a leter post).

So this brings me back to where I started: Dean and Clark. I have nothing whatsover against Clark, indeed in some ways having an ex-soldier in the White House might be just what is needed to help relax the atmosphere inside the US. But Dean is making more of an impression on me at the moment. All I new about Dean previously was that he favoured gay marriages (which is definitely a plus - oh yes, this may only appear a minor point in internal US politics, but it isn't at all: I don't see how a President who has any kind of second thoughts on the issue of condoms can hope to lead a campaign against AIDS in Africa, and this topic should be right at the top of the agenda for anyone who wants to consider themself any kind of widely respected world leader), and that he had been consistenly against the Iraq war.

On top of these facts people have tried to pour a whole lot of opinions, normally seeing what they wanted to see, depending on their perspective. Maybe the most damaging thing I've heard said is that he was flirting with protectionism: and maybe he was. But if you think about it for two seconds he really can't go down that road: if he wants a return to multilateralism and he wants to rebuild the bridges with America's real allies and reduce the fear in those like China who are not allies, but may not want to be enemies, then you just can't go down the protectionist road, that should be obvious.

In recent days our image of Dean seems to be changing. What we are seeing is a much more centrist Dean, more of a Jimmy Carter than a George McGoven (in fact I think I first read the comparison with Carter in the Economist months ago, which kinda puts in perspective the silly idea that the Economist is an apologist for the Bush administration). Now I know all this is image construction, but isn't that what politics is all about at the end of the day? I don't know whether the content of this article I am posting below is fair and balanced: I certainly hope it is. I cannot guarantee for you that Dean is the "bipartisan, Cold War, leader-of-the-free-world policy Americans know and remember", but again, I certainly hope so.

Dean and the world: the nonradical candidate


Howard Dean has won the hearts of Democratic liberals by opposing the war in Iraq and by slamming his Washington, D.C., rivals as compromisers. It is a fine strategy for the man from Montpelier, Vt., the smallest state capital in America, but it does not mean what many of his followers seem to think.

Dean is not a peace candidate in the George McGovern mold. In 1972, McGovern's stand against the Vietnam War signaled an attitude about foreign intervention generally. In Dean's case, it does not. He supported the first Gulf War and the interventions in Bosnia, Kosovo and Afghanistan.

In foreign policy, Dean compares himself to Harry Truman, the president who authorized the dropping of atomic bombs on Japan and who sent troops to South Korea without a declaration of war. Those are not the things he cites about Truman, of course, but they are part of the Truman toughness.

Consider, also, Dean's advisers. Advisers are important; in 2000, the foreign policy of George W. Bush could be discerned more from his advisers than from Bush, who (like Dean today) had no experience. Dean recently appointed a group of 14 advisers on foreign policy. One, Clyde Prestowitz, worked for Ronald Reagan, and another, Adm. Stansfield Turner, was CIA director under Jimmy Carter. Four are retired generals. Most of the rest are former civilian officials from the Clinton administration.

Dean's identity as the against-the-Iraq-war candidate energizes the Democratic base. It may even keep Ralph Nader at bay as a third-party candidate. It also pleases Bush, because against a flatly anti-war candidate, Bush wins in the latest polling.

But Dean is not Dennis Kucinich, and the Democrats, as James Traub of The New York Times writes, "are not really a peace party."

The real Dean, judging by his prepared speeches rather than his oral flubs, offers something much more like the bipartisan, Cold War, leader-of-the-free-world policy Americans know and remember.

Whether that is the best policy for the post-9-11 world is another question. But at least let us stop pretending that in foreign policy, Dean is something radical. He is not.

Update: the other economist for Dean - Lerxst - has an equally interesting piece about Dean the centrist:

One of the things that I haven't quite figured out is why many of the ex-Clintonites and DLC types are so sure that Dean will be easy to tar by Repubs as an out of the mainstream left-winger, when pretty much his whole record shows him to be more mainstream than the rest of the field. As Dean puts it in a front page Wall Street Journal article:

The Economist and Japan

You know, this has been obvious for some time now. Oh well, better late than never. One small detail, I have no accurate idea how many immigrants per year Japan would have to accept to maintain even it's current growth, the UN estimated tha scale of the problem as follows: This scenario keeps the ratio of the working-age population to the retired-age population at its 1995 level of 4.8. In order to keep this level of potential support ratio, the country would need 553 million immigrants during 1995 through 2050, or an average of 10 million immigrants per year. Under this scenario, the population of Japan is projected to be 818 million in 2050 and 87 per cent of them would be the post-1995 immigrants and their descendants. As nothing even remotely like is likely to happen, unfortunately we can only assume and imagine the worst. On increasing female participation, this is fine, and I am infavour, but do bear in mind that most assessments also assume the Japanese family model being the basis for an old age support system laking some real pillars: but that assumes that the women are staying at home. As this is definitely not a 'new economy' phenomenon, I assume here you can't have your cake and eat it.

JAPAN is entering a crucial lap in its economic race against time. The good news is that, as it makes the turn into 2004, the economy is riding the momentum it built up during a moderate expansion last year. Real GDP grew by an estimated 2.6% in 2003, according to The Economist's latest poll of forecasters, and is expected to rise by another 2% this year. The bad news, however, is that even though the economy has sped up for a bit, Japan's runaway demographic trends still threaten to leave it in the dust.

The population of 127m barely changed in 2003, rising by fewer than 100,000. The number of births continued its steady slide, with only 1.12m babies being born last year. Japan's 1.03m recorded deaths, meanwhile, were its highest number since 1947. Within only a year or two these two trends are expected to cross, and the population will begin to fall. The combination of a shrinking population and an increasingly elderly one will have a growing impact on everything from demand for goods and services, to public finances, to the structure of the workforce. Within five years, for example, Japan's universities expect to have more available university spaces than applicants.

The effects of these trends on the workforce could be especially dramatic. Although the overall population is just beginning to peak, the number of people in their working years (between 15 and 64 years old) has been falling since 1995, when it reached 87m. The National Institute of Population and Social Security Research forecasts that this age group will shrink to 70m in 2030, and to as few as 54m in 2050. Meanwhile, the number of people aged 65 and over is expected to rise from less than one-fifth to one-third of the population. If Japan cannot find some way to slow this trend, or to mitigate it through new sources of labour or faster productivity growth, it will eventually take a heavy toll on the economy.

One way to bolster the workforce would be through immigration, a prospect many Japanese find unsettling. A report published this week by Robert Feldman, Morgan Stanley's chief economist in Tokyo, does not offer them much comfort. Mr Feldman reckons that, on current trends in demography and productivity, Japan will need to import 5m foreign workers over the next decade (not counting their dependants) just to maintain the current anaemic rate of improvement in living standards. “The numbers of required immigrants are so large”, wrote Mr Feldman, “that they recast the entire debate.”

Japan could also increase its workforce in other ways, such as by making it easier for women and the elderly to take productive jobs. Progress on this front, however, seems much too slow when compared with the speed at which the labour force is shrinking.

If labour reforms and productivity do not keep pace with the demographic challenge, one way in which living standards will suffer is through a squeeze on the social-security system: a daunting prospect in the land of the rising debt ratio. The ruling coalition worked out a compromise last month to raise premiums from 13.6% to 18.4% of employees' pay, while cutting benefits from 59% to 50% of average salaries, over the next decade-and-a-half. It is expected to introduce a bill along these lines in February. Even these changes will not be enough to close the pensions gap without faster economic growth, which will become harder to achieve as tax burdens rise. Japan's reformists might want to pick up the pace.

Trichet's First Play

Again this was probably to be expected. Trichet has a reputation for being an inflation fighter, and may not have felt inclined to drop the interest rate, which would have been the only important thing he could have done. They're obviously still banking on a stronger recovery than I can see coming. OTOH, if you effectively can't do anything it may be better to cover your tracks as carefully as possible.

The euro surged more than 1 percent against the dollar and yen after European Central Bank President Jean-Claude Trichet said the euro's 22 percent gain in the past year won't prevent the region's exports from increasing. Trichet's comments led traders to erase bets he would use today's press conference to signal concern about the pace of the euro's advance. Within half an hour of the remarks, the euro had jumped almost two cents from the day's low.

"He's not looking too concerned about the euro -- the market's taking him at his word,'' said Steven Englander, chief foreign exchange strategist in New York at Barclays Capital Inc. With this kind of signal, "you sell dollars,'' he said. Against the dollar, the euro rose to $1.2766 at 1:23 p.m. in New York from $1.2631 late yesterday, according to EBS prices. It rose to a record $1.2812 Tuesday and has climbed to all-time highs on nine of the past 16 trading days. Compared with the yen, the euro had its biggest percentage since November, rising to 135.58 from 134.10.

``Although recent exchange-rate developments are likely to have some dampening effect on exports, export growth should continue to benefit from the dynamic expansion of the world economy,'' Trichet said. He spoke after the ECB's monthly meeting, at which policy makers kept their benchmark interest rate at 2 percent.
Source: Bloomberg

IMF Warns on Dollar

Nothing either especially surprising or especially new in this, except that the IMF has seen fit to say it.

Large and growing U.S. budget and current account deficits raise the risk of an abrupt drop in the value of the dollar, which could hit U.S. and global economic growth, the IMF said on Wednesday. "Although the dollar's adjustment could occur gradually over an extended period, the possible global risk of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored," the International Monetary Fund warned in a new report on Washington's fiscal stance. "An abrupt weakening of investor sentiment vis-a-vis the dollar could possibly lead to adverse consequences both domestically and abroad," particularly since U.S. debts to the rest of the world are at record highs, the fund said.
Source: Yahoo News

As you can see from the lack of posts it has been a busy day. I will try and dig out the IMF original tomorrow.

All the Way Up the Yield Curve

Actually, I just realised there is one small flaw in my Bernanke post of yesterday: the US Federal Reserve dosn't need to buy the government debt, well not yet anyway. The reason why: the foreign central banks are doing it:

Treasuries edged higher on Wednesday on news that the Treasury's five-year note auction, the first major auction of U.S. government debt this year, attracted strong demand, including from foreign central banks.

Indirect bidders, which mainly comprise foreign central banks, picked up 40 percent of the issue, beating last month's 34.6 percent. The sale of $16 billion in new five-year Treasury notes went at a yield of 3.26 percent and drew bids for a hefty 2.50 times the amount on offer, way above the 2.09 average of last year's sales.........

Dealers believe offshore central banks account for much of the indirect bidding as they spend some of the dollars they have been amassing in recent days. The Bank of Japan was thought to have bought an astonishing $28 billion in just the first two days of this week in an attempt to support the yen. Much of this money is thought to end up in Treasuries, an understandable assumption given that foreign central bank holdings of Treasury and agency debt ballooned by $224 billion last year to a record $1.07 trillion, and by $91 billion last quarter alone.

Alan Ruskin, chief economist at 4CAST, noted that is equivalent to financing 79 percent of the Treasury's entire net borrowing needs in the fourth quarter. "No wonder the Treasury market is so resilient to the influx of exceptionally strong data and the scale of supply," Ruskin said. He said central banks like the BOJ were doing the Federal Reserve (news - web sites), and the White House for that matter, a big favor by holding Treasury yields down. "Two hundred billion dollar Treasury purchases from the Fed would have been widely viewed as a massive distortion. But foreign central banks doing exactly the same thing is quietly sanctioned and encouraged by U.S. policy-makers," he added.
Source: Yahoo News

Ok, so this is a twist that really needs a bit more thought. Let's just imagine that all the central banks end up buying each others treasury debt, what is the consequence? Well clearly if they are printing money to do this - obviously if they are not then the thing probably ends up being pretty neutral until someone wants to collect on the debt from one of the indebted governments, they would in this case be only swapping bits of paper - so if they are printing money, then they are collectively undermining the unit value of each of their currencies, ie producing inflation. But then if there is a global deflationary backdraft, that inflation may simply mean that the CPI's simply register zero instead of minus 3 say. So on one front nothing changes.

But of course on another something definitely does. For what the central banks would be doing would be collectively financing each others government debts, that is the money would be channeled to the public, and not the private sector, hence there would be an effective redistribution towards public, and away from private consumption. That is one thing to think about.

Another topic might be the case of a country like China where the purchase of treasuries may only reflect an inward dollar flow, purchasing yuan to speculate on a future revaluation. Then clearly at some stage the yuan will revalue, and the Chinese central bank will simply take a loss on all the non-yuan assets it holds. The Chinese will end up being collectively richer, and everyone else poorer by the extent of the revaluation. But wait a minute, seeing the yuan rising, what if the central banks start buying Chinese government debt, as something more solid, and backed by an appreciating currency (I mean they should be neutral about location these central banks, simply following the law of best price): then clearly to attract finance the other governments will have to raise yields - here is where the problem may lie, and ultimately come. Remember Argentina had both deflation and massive risk premiums. Well, that's it. This was just thinking aloud really. Interesting set of problems though, aren't they? (In fairness I would like to point out that Lloyd was more or less covering this story on his blog about three weeks ago).

Distributed Content Analysis

Remember my endless talking about integrating the warehouses of brains, content analysis etc? No, well never mind. What matters is that I've worked out a very primitive first step, only in a very exploratory form, and I wouldn't mind some feedback on it.

First, a bit of background. According to texts like the CIA's "The Psychology of Intelligence Analysis" and stuff I've read on cognitive psychology, one of the main problems when coping with information is that we tend to haveonly a single picture or model in our heads of what's going on in a certainmoment, and we evaluate the information we receive against this main hypothesis.


The problem inherent with this is that information can be perfectly consistent with a very unlikely hypothesis. To use a somewhat whimsical example, suppose that I believe the CIA is using winning lotto numbers as a secret code totrasmit orders to agents in Amsterdam. It's clear that there will be little or nothing I could observe that would disimburse me of this notion, although all this evidence would also support [and with greater likelihood] the hypothesis that it's just a game of chance untainted by intelligence forces [this isn'ta good exaplanation, I know].

Because of this, the CIA recommends its analysts to use some form of matricial analysis: make up a table where the columns are hypothesis (as many and diverse as you can generate about a given situation) and the rows are items of evidence. In each cell of the table you mark whether the evidence is
compatible or incompatible with the hypothesis, always trying to eliminatehypothesis by identifying incompatible evidence instead of finding supportingevidence, which is always unconclusive (cf my paranoid lotto fantasy)[as good as explanation as any other of the scientific method].

My idea is to use this analytical method in a distributed, decentralized way, using the infrastructure of blogs and aggregators with the minimumof interference. I came up with this: Suppose I blog about US troop movements in Iraq's border with Iran. There are various hypothesis relevant to this: The US is going to invade Iran [suggested a week ago in post http://blogger_a/invasion], or maybe the US is threatening to invade Iran [http://blogger_b/threat predicted this a while ago] or maybe the US will never-ever put a soldier in Iran's frontier [http://blogger_c/never]. As things stand now, I would blog the news, comment it with my own hypothesis, and that would be it. Hardly synergetic.

But I could add the following line to my post:

<"wob:::"post's permalink" http://blogger_a/invasion:::+ ">
http;//blogger_b/threat:::+
http://blogger_c/never:::-! .

Most aggregators, browsers and such will ignore this, but I'm writing a little modification to an aggregator that reads this line when parsing the feed and interpretates it as:

This post says that it supports the models in
http://blogger_a/invasion
http://blogger_b/threat and, that its evidence is incompatible with the
hypothesis in http://blogger_c/never.

The aggregator would *aggregate* a lot of these annotations, and then come up with a summary like:

The following hypothesis:.... http://blogger_c/never... have been
discredited by a post [with a list of posts discrediting each hypothesis]. Post that support hypothesis http://blogger_a/invasion : ...,
,
etc.

This works both as a guide and as a summary for posts. One could gather a bunch of hypothesis about a certain topic [eg, the war in Iraq], and then check each day what news support or discredit a given hypothesis --- in short, gain a clearer and smarter picture of what can be logically inferred from the mass of posts that he/she could do even if he/she read them all. In fact, the aggreagator is putting together the smarts of all posters and synthetizing them in a summary view...

Besides the obvious advantages [possibly a quantum leap on how much insight you can gain in X hours of reading your aggregator], this particular method of doing it has the advantage of being doable with today's infrastructure [no need to modify weblogs, only adding, even by hand, the wob lines] and
distributed [it can be implemented in any number of weblogs, you can aggregate from any number of feeds, posts can have or not the annotation w/o any problem].

I'm planning to use this to annotate/organize my posts from now on [heck, even the discipline of having to explicitate hypothesis and a post's bearing on them probably does much to raise blogging quality] --- the point is, does anyone think this might be something that could interest other bloggers? Does anyone see it as potentially useful? Could it be improved? Does anyone have an idea for a better syntax for the annotation? Another way of structuring the information? Or is the 'net just not ready at the moment for distributed evidence analysis? Your thoughts please.

I Could Say I Told You So: But I Won't

Surprise, surprise: the latest Euro business confidence survey turns downwards. I could say I told you so, but I will resist the temptation, since you doubtlessly know as well as I do that one month you can go down, and the next one you can go up: the jury is still out. But I still think this is hardly surprising news:

European business confidence dropped in December for the first time in five months as a buildup of unsold goods and the appreciation of the euro led some executives to scale back production plans.

A business confidence index based on a survey of 25,000 companies in the 12 nations using the euro fell to minus 8 in December from a revised minus 6 in November, the European Commission said in Brussels. Consumer sentiment was unchanged.

An index of production expectations fell to 6 from 10, a sign that the euro's jump is denting the sales outlook for exporters such as Volkswagen AG, Europe's biggest carmaker. Exports, which account for a fifth of the economy, were behind Europe's rebound to 0.4 percent growth in the third quarter. "If the euro rises strongly from here, it will have a considerable impact on the economy,'' said Ulrich Scheinost, chief economist at the German ZVEI electrical and electronics industry association, whose 1,400 members include Siemens AG, Germany's largest engineering company.

Europe's single currency and equity prices were little changed following today's confidence report and bought $1.2673 at 12:21 p.m. today in Brussels. The euro has climbed 17 percent since September and yesterday rose as high as $1.2813. The Dow Jones Stoxx 600 Index was 0.34 point lower at 232.49 points. Today's figures chime with other reports in the past week casting doubt on the strength of the recovery in Europe. Optimism among French consumers was unchanged at a six-year low in December and an index tracking growth in Europe's services industry fell for the first month in nine. "The gloom hanging over the euro-zone's economic prospects has deepened,'' said Martin Essex, senior economist at Capital Economics in London.
Source: Bloomberg

This, however certainly is news:

The euro had its biggest decline against the dollar in three weeks in London on speculation the European Central Bank will express concern about the strength of its currency after a 21 percent surge in the past year.

Jean-Claude Trichet, who became ECB president in November, may say for the first time that the euro's advance risks hurting the region's economy after he chairs the central bank's monthly meeting tomorrow on interest rates in Frankfurt.

Investors are "now talking about the possible threats of intervention'' Kamal Sharma, a currency strategist at Dresdner Kleinwort Wasserstein in London, said in a televised interview with Bloomberg News. "Trichet may try to damp down speculation of any significant further rallies in the euro.''
Source: Bloomberg

Well he may try, but if it was that easy central banking would be a doddle. Sure the markets will pause for thought, but it seems unlikely that the downward drift of the dollar will be staunched. After all, at the end of the day how much money is the ECB prepared to print to back up its inclination? We have, when all is said and done, an anti-inflation bias here in Europe. (We could however query whether this shift is a matter of intellectual conviction, or whether it comes at the behest of the French government. The ECB was previously, you will recall, committed to passing the pain to get the structural reforms: what exactly has changed?) Meantime Bernake and Greenspan have a blank cheque book at their disposal and they are determined to avoid deflation if they can. Verdict: no contest.

Room For Improvement

I need some time to reflect, relax and work before getting back with longer posts. However, I am definitely looking forward to getting a chance to do more with charts, diagrams and tables when the new format Bonobo finally comes out (!) - Blogger doesn´t work well with them.

Meantime the curious among you you might want to read my three contributions to this thread:

(There are two longish and one short post on helicopter drops by me there). I think I will flesh out those arguments in future posts on Bonobo. BTW, the thread definitely demonstrates how people just don´t "get" it. You can expand the money supply all you want and achieve precisely nothing. There is no way macro could be made to work without looking at the real world and determining where there is "room for improvement" - in economic terms: scarcity to be
eliminated. So we have to go back to the energy issue - which has obviously come to exert a major influence on international politics by now. While the Chinese are rationing gasoline, while Saudi-Arabia´s exploding population starts to use some of the oil being pumped there domestically, the West - but most vehemently the U.S. - insists on ignoring the warning signs.

What we have to deal with is a paradigm shift. It won´t do to concentrate only on the winners - to celebrate the demise of manufacturing and the birth of the knowledge economy and leave it at that. The reason is that we know what kinds of disruption de-growth - the rapid shrinking of agriculture - caused in the past. This century will be dominated by de-growth of the fossil fuel-based economy. Since modern agriculture is essentially a way of using petroleum to convert land into food, the coming transformation concerns not the just the dominant sector of the 20th
century - manufacturing -, but also encompasses the standard bearer of deflation and increasing productivity in the 19th century - the agricultural sector -, whose continuing efficient performance is, of course, somewhat more relevant than the tradability of mp3-files (but unfortunately cannot taken for granted with the same degree of assurance.)

If Indian scientists find a way to make do without oil, your prophecies about India´s rise to power will come true. If neither Indians nor anybody else finds one, then India is the most vulnerable of the big countries. It would be one of the first casualties of a prolonged depression in the West, since that would guarantee a return to protectionism (of
course, the sequence could play out the other way around as well: Edward is pretty much at odds with himself here in neglecting the impact of Smoot-Hawley in the 1930s.)

Don't Warn Against Bush's Economic Policy: It Might Help Make Your Fear Come True

Economists for Dean has a piece on (the dangers of) using the Dollar as the World Reserve Currency.

I commented:
I searched for it but could not find anything substantial on this subject on Dean's or Clark's site.
Should econ4dean not try to get some attention from Dean (and or other dem candidates) for Paul Krugmans Rubin Gets Shrill?

The point made by Mr. Rubin now, and by Mr. Mankiw when he was a free agent, is that the traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared."

But I can see that that's dangerous. The Bushites will argue that bringing up the possibility that "investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty." is unpatriottic because it raises the chances of this scenario coming true....

What it comes down to is the problem of arguing with populists.

Very hard.

If you want to, you can make a link to a comment I wrote at the nice new blog Cabalamat who writes on the very bad idea of "yourparty": "the basic idea is that all elected representatives of Your Party will be obliged to vote on every issue the way the majority of Your Party membership tells them to - by using the Internet"

My comment there:
"A terrible idea. It's the worst kind of demagoguery: trying to make anti-politician / anti-politics / anti-governments sentiments work for YOUR political aims. The bottom line is that politics is simple but the politicians won't listen. The idea that people can manage to make a judgment on all subjects the representatives have to deal with! They simply have not the time for it.

My idea is the strict opposite: I propose more independent politicians (in both ways this can be read) combined with indirect elections. In such a system representatives at the lower level (districts, towns) do not just elect the representatives on cumulate levels but also discuss politics on the higher lever. "

Ben Bernake: Oh That Speech!

I must admit reading Ben Bernankes keynote speech to the American Economic Association, I felt one of those rare spangs that fortunately are relatively unknown to me: jealously. Maybe it's just because I went to see Master and Commander yesterday or something, but I have the distinct impression that I would have enjoyed making that speech, although my god would it have been different. I would undoubtedly have warmed up with Pericles, and finished of with my favourite 'what good are economists if we can only predict bad weather after the storm is over'........are we all dishrags or what?

Mind you I am not, and never will be, one for speeches: mine is definitely a written domain. The best you're ever gonna get from me is a webcast, maybe using instant messenger onto a big screen: lots of 'smiley faces'.

But what is the big issue here. Well........hmmm. You see maybe it is impossible to be on the inside and talk plainly. Maybe plain talking is one of the priviledges you lose: you need soft cops, and you need hard cops to interpret them. Correct me if I am wrong, but I don't think I saw the word deflation once in the speech. No wonder a highly intelligent woman like Caroline Baum has her work cut out trying to see what's going on:

Coming from someone with a less benign view of the inflation outlook, one would be tempted to infer Bernanke was trying to differentiate between actual inflation -- the old-fashioned CPI fixed basket of goods and services -- and ``measured'' inflation, with its quality adjustment and increased reliance on substitution effect (consumers buying cheaper apples instead of more expensive pears), both of which tend to depress the index.

Alas, in the case of Bernanke, who is as clear as Greenspan is dense, the parenthetical probably reflects his bias that inflation is overstated, not understated.

Bernanke outlined his argument why unusually accommodative policy remains appropriate. First, core inflation is low and falling. Second, labor productivity is soaring, raising potential output and lowering production costs. Third, the labor market remains soft, acting to restrain producers' major input cost (wages).

Bernanke downplayed the risk of rising commodity prices, including gold, and a falling dollar, saying their contribution to consumer prices is minimal. He didn't mention inflation expectations, as embedded in the steep yield curve and widening spread between nominal and inflation-indexed Treasuries -- although he devoted an entire speech Saturday to expectations and the role of the central bank in shaping them through effective communication.

While a relative newcomer to the world of policymaking, Bernanke has been at the forefront of the effort to convey to the markets that this time is different, that the Fed's reaction to stronger growth won't be the same as it was in the past. The achievement of price stability has changed the landscape. And while there's no guarantee the terrain won't shift if easy policy overstays its welcome, it's hard to envision the Fed sacrificing its hard-fought gains in the battle against inflation.

Even more impressive than the inflation performance has been the Fed's ability to counteract the normal cyclical rise in long- term rates. The yield on the 10-year note drifted between 4.2 percent and 4.4 percent during the final quarter of 2003 in the face of a barrage of statistics portraying a boom in economic activity.

Confused she may be, but to the point she is. Our Caroline is no garden variety commentator. She is sharp. My proof: the last point about controlling the long rates. I will come back to that, but it is something that only occured to me last night. She understandably continues to fear inflation, since Bernanke, unfortunately, seems to have been bereft of real arguments as to why she shouldn't be, or at least those that he may have had he couldn't put on the table: hard work sitting in the throne room with the central banker.

So now for the prince himself:

Despite all this adversity, there could never have been any doubt that the diversified and resilient U.S. economy, assisted by ample monetary and fiscal stimulus, would eventually stage a comeback.

I think here we have it. Everything, or nearly. This is a declaration of faith in the fact that economics is a game played out in abstract state space. It is curious indeed to note that many of the best known criticisms of standard neo-classical theory relate to the question as to whether market mechanisms unaided reach an optimum output solution. This is an interesting, but IMOH secondary question. There is a much more interesting one which comes from the classics but which has somehow got lost in the wash: whether economics is a game played out in historical time, with evolutionary processes entering as part of the backdrop - the meta rules.

In fact Bernake's view is not new to him. This story in fact goes back to 1993, and his review in the Journal of Monetary Economics of Eichengreen's Golden Fetters, where he argues that a decline in the money supply may cause a decline in prices, but not necessarily a drop in output: or put another way there is no problem which can resist an adequate application of monetary and fiscal policy. If that is the case it is hard to understand why the US economy may now be getting itself into difficulty.

Labor costs account for the lion's share, about two-thirds, of the cost of producing goods and services. The labor cost of producing a unit of output depends, first, on the dollar cost per hour (including wages and benefits) of employing a worker and, second, on the quantity of output that each worker produces per hour. When the cost per hour of employing a worker rises more quickly than the worker's hourly productivity--the historically normal situation--then the dollar labor cost of producing each unit of output, the so-called unit labor cost, tends to rise. Recently, however, labor productivity has grown even more quickly than the costs of employing workers, with the result that unit labor costs have declined in each of the past three years. Indeed, in the second and third quarters of 2003, unit labor costs in the nonfarm business sector are currently estimated to have declined by a remarkable 3.2 and 5.8 percent, respectively, at annual rates.

So why is productivity rising so rapidly, and labour costs falling so remarkably, you would have thought he would have had a stab at an explantation, but no: the French man o' war may be swifter and availed of greater fire power, but it is sailing blind. Everything here is craft. So let's try outsourcing and China and India: do you think they might come into the picture? And what about the ICT revolution and plummeting information costs (I don't expect him to get round to networked brains, and smiley faces, I mean central bankers can't be that modern). But if you don't know why the labour costs are falling, then you sure as hell can't talk authoritatively on how long the decline will continue. Lets just say that if you ship out the labour intensive component (not to mention globalise labour markets) then something will show up in your productivity numbers.

The third unusual factor is the persistent softness of the labor market...............Why has the labor market remained relatively weak, despite increasingly rapid growth in output? I addressed the causes of the "jobless recovery" in an earlier talk (Bernanke, 2003). Although many factors have affected the rate of job creation, I concluded in my earlier analysis that the rapid rate of productivity growth, already discussed in relation to unit labor costs, has also been an important reason for the slow pace of recovery in the labor market. All else equal, strong productivity gains allow firms to meet a given level of demand with fewer employees. Thus, for given growth in aggregate spending, a higher rate of productivity growth implies a slower rate of growth in employment

Well more of the same, but still not getting to the point. And then, and then, we get this three part summary:

the current economic situation has three unusual aspects, which together (in my view) rationalize the current stance of monetary policy. First, inflation is historically low, perhaps at the bottom of the acceptable range, and has recently continued its decline. Second, rapid productivity growth has led to actual declines in nominal production costs, which reduce current and future inflationary pressures. Finally, the labor market remains soft, reflecting the fact that growth in aggregate demand has been so far insufficient to absorb the increases in aggregate supply afforded by higher productivity. A soft labor market will keep a lid on the growth in the cost of employing workers.

Now all these three are undoubtedly inter-related, but how? That is the mystery. Now for something really to the point:

the direct effects of dollar depreciation on inflation, like those of commodity price increases, appear to be relatively small. In part, the small effect reflects the modest weight of imports in the consumer's basket of goods and services. Perhaps more importantly, however, the evidence suggests that foreign producers tend to absorb most of the effect of changes in the value of the dollar rather than "passing through" these effects to the prices they charge U.S. consumers. A reasonable estimate of the portion of changes in the value of the dollar passed through to U.S. consumers is about 30 percent. The extent of passthrough also appears to have declined over time, suggesting that foreign producers also lack "pricing power" in the current low-inflation environment in the United States. Overall, on rough estimates, a 10 percent decline in the broad value of the dollar would be expected to add between one and three tenths to the level of core consumer prices (not the inflation rate), spread out over a period of time.

So the pressure isn't on. And please note the lack of pricing power attributed to the foreign producers: could we actually be seeing a globally deflationary environment? Well you know my view. Ok, one or two last points in closing.

Firstly the thing that actually woke me up last night in a non-too-cold sweat: long-term rates and Fed policy. Do we all have such short memories? Wasn't Bernake promising not too long ago that the Fed, in the absence of visible inflation, would be prepared to intervene all the way up the yield curve. This is the novelty. With the FOMC pinned firmly on the bottom rung for as far ahead as the eye can see, real monetary policy has shifted to manipulating long rates, and keeping the curve flat. That is where we should all be looking. And what this means is that the US policy can maintain a firm rudder, constant course, and full speed ahead as far as the eye can see: or can she?

You see there is the little issue of the financial architecture, and the rising euro. This brings us back to the foolproof path and why it isn't 'foolproof' (I am still waiting to be informed who the fools are in all this!). The dollar is in freefall downwards, and as far as Bernanke is concerned this can happily continue. But from where the ECB is sitting, this ain't like this. So something is going to happen. Mind your heads!

And now for the final, final point. One think Bernanke has kindly spared us is his guesstimate for the re-entry date of the US economy into deflation mode. Now at the current rate of disinflation that should be...........anyone got an old envelope handy?

We're on the Slippery Slope

There seem to be some signs in the air that push may be about to come to shove. I think over the next couple of days I'll try and knock up a couple of major posts. The efficient cause is this bit of news from Portugal, which may seem to suggest that the supposed Harrod-Balassa-Samuelson free lunch honeymoon (which has to count as one of the worst pieces of 'justifying what there is simply because it is' pieces of quackery where there should have been solid science in recent history) may be about to come to an end. One of those darned 'catch up' economies may have just caught up so hard that's it's come to a dead halt. The Bank of Portugal has predicted growth of only 0.75% this year, and even that only if there is the anticipated growth in global demand (which I doubt extremely). Those who have been over to Fistful will have seen that I am already begining to specualte about whether we are begining to see the end of growth in the Italian economy, well just remember Portugal is lined up nicely in the queue to see where lunch is going to be served.

Portugal is set to put recession behind it this year with 0.75 percent growth, however the recovery will be less strong than previously thought, the Bank of Portugal said.

"The weak growth predicted for 2004 owes itself fundamentally to another expected moderate decline in internal demand," it said in its twice-yearly economic outlook. The bank had estimated in its last outlook issued in June that the Portuguese economy, one of the European Union's smallest, would grow 1.0 percent this year, after after a contraction of about one percent in 2003.


By comparison, the European Central Bank last month predicted the economy of the entire 12-nation eurozone would grow between 1.1 and 2.1 percent this year. The Portuguese central bank predicted domestic demand would drop between 0.5 and 1.0 percent this year as government spending cuts and low consumer confidence caused by rising unemployment continued to take their toll.


The fall in domestic demand was highlighted on Monday when Portugal's national association of auto dealers reported sales of new cars had plunged by more than 15 percent in 2003 over the previous year to the lowest level in 14 years. But the fall in domestic demand would be made offset in 2004 by a sharp rise in exports caused by an expected recovery in the global economy, the bank said.

"The upturn in the world economy, and the European economy in particular, were definately confirmed at the end of 2003 and they should go forward this year, which explains the assumptions for growth which were adopted," it said.


The bank predicted exports would grow between 4.75 and 6.75 percent this year, after rising 3.0 percent last year.


The bank predicted exports would rise further in 2005, between 6.0 and 9.0 percent, helping economic growth to pick up in 2005 to 1.75 percent. Despite the improved economic outlook, Portuguese unemployment, which stood at 6.3 percent of the workforce in the third quarter of 2003, would continue to rise this year before stabilising in 2005, the bank said.


However, inflation would become tamer easing into a range from two to three percent this year from 3.3 percent in 2003. Portugal, a nation of just over 10 million people and one of the European Union's poorest members, struggled last year through its first recession since 1992. The Paris-based Organisation for Economic Cooperation and Development estimates the Portuguese economy contracted 0.8 percent last year, giving Portugal the worst performance of the OECD's 30 members.

Rare Meat

The Cantonese are infamous for their penchant for wild and interesting animal flesh. As a dongbeiren [person from northeast China] friend once put it: "The Cantonese will eat anything that flies, except an aeroplane; anything in the water, except a boat, and; anything with legs, except a table!"

Today, in the wake of China's first confirmed SARS case in 2004, the Guangdong provincial government has begun a process of culling some 10,000 civet cats. This "radical step" — as the World Health Organisation's Dr. Jeffrey Gilbert calls it — threatens to push the trade of wild animal flesh underground.

Of course ‘underground’ in Guangzhou often means 'on the street' as I discovered in my 12 months living there.

On one of my first explorations of the city, in January 2002, I discovered Qing Ping Market — a stone's throw from Shamian Island, a former foreign concession and home to the prestigious White Swan Hotel (which was always bursting at the seams with businessmen and orphan-adopters, but that's another story). In Qing Ping's maze of fetid alleyways I came across a meat market and looked upon the strangest piece of flesh I'd ever seen. On closer inspection I realised it was a domestic cat skinned and ready for the wok. Behind the butcher, white Persian cats were crammed into filth-encrusted cages. Cat meat — according to my neighbour who was practically salivating over my own beloved Chairman Meow — goes great with snake and chicken to create 'Tiger, Dragon and Phoenix' soup.

Nearby I found the dubious pet store alley. For all intents and purposes it is a legitimate row of stores selling 'pedigree' dogs, cats, aquarium fish, iguanas, snakes, fowl and rodents galore. Only in this pet market they shove your furry purchase — in my case a cat named 'Lucky' who died three days later — into a tight string bag like it was a mess of greens.

Skinned pussycats aside, the most disturbing things you're likely to see are barrels of scorpions, turtles, mountains of insects and assorted goodies from the depths of the South China Sea. All of which I'm totally accustomed to now. (I have not returned to Guangzhou since February 2003 when, interestingly, locals were already talking about a killer flu).

As any Old China Hand will tell you Qing Ping of 2002 was nothing like the Qing Ping of 1992. Back then it was not unusual to see monkeys, bears and other wildlife reluctantly queuing for a mallet to the head. I wondered if the market's close proximity to camera-wielding American tourists had forced the wild animal traders to go underground ten years later.

I was wrong. Everything is already out there on the street to see ... and eat.

Another great Cantonese tradition that is familiar to anyone who has visited a 'Chinatown' in the West, is to display fresh produce and seafood on the front doorstep of even the most respectable restaurant.

In Guangzhou (formerly known as Canton) the passageway between road and restaurant can be more exhilarating than the meal itself. Aquariums bursting at the gills with an assortment of fish and other water life. Cages of hissing cobras writhing around each other. Terrified, fully-grown pussycats (kittens don't have enough meat). Strangely silent dogs. Once I even saw a live calf tied to the front door of a local soup den, which you can imagine looked completely out of place in China.

I remember the first time I saw a civet cat outside a fancy restaurant adjacent to the Pearl River. The strange little animal, curled up as far from the cobras as he could get, perplexed my friends and me. In fact it wasn't until last year when the poor little fellas were first blamed for the SARS outbreak that I finally knew what that animal was. (Civet cat and turtle, I'm told, make for a great soup).

But the worst was yet to come for me.

One day while making my regular walk between the Friendship Store and home I saw the remains of a tiger splayed on a dirty footpath. Most of the flesh had been sold however the unmistakable markings and shear size of the beast left me without any hesitation that this was the real thing.

Several months later while exploring Beijing Road — the city's bustling shopping precinct — I was drawn to a commotion in a nearby alleyway. Illegal vendors were proudly and openly hocking a wide variety of endangered plants and animals. First I noticed the tiger. This one was much more intact than the previous one. I was offered the paw for an astronomical sum while locals were shelling out as much as 500 yuan, or about US$60, for a few follicles of hair.

Just a few metres along that skanky alleyway, just past the bear bile, I came across a few bits and pieces of what was once a proud and beautiful elephant; my favourite animal of all. Out of respect for local customs (and a desire to stay this side of prison bars) I decided not to express what I was really feeling that day.

Whatever the origins of wildlife for dinner — opinions range from medicinal benefits to Mao-era food shortages — there clearly needs to be some changes.

First and foremost endangered animals must be saved. I asked a Shanghainese friend who seems to know everything about everything if she had ever heard of people eating pandas. "Absolutely not!" she exclaimed. China's commitment to the giant panda has resulted in "a better breeding program [that] improves the outlook for their future in China" (National Zoo). According to Save China's Tigers there are at most 30 Chinese tigers left in the wild. The World Wildlife Fund estimates there are as few as 300 wild elephants remaining in China.

Second, there needs to be stricter guidelines for the raising and selling of non-endangered and domestic species. With the exception of a few dog farms (nothing compared to Korean standards), many animals are either trapped in their natural environment or are unwanted pets. By the time the animals reach the market or restaurant many are clearly unhealthy.

* * *

In Australia you can buy kangaroo meat at your local supermarket. Kangaroos, of which my home country certainly has no shortage, are farmed, slaughtered and stored specifically for human consumption. The theory is: if the meat really tastes good then it should be delivered to the consumer while meeting (boom-boom) the same standards as beef or lamb.

This is not only a discussions about what we eat and why we eat what we eat. Food is an integral part of our culture, and if eating a non-endangered species like civet cat, kangaroo or dog rocks your boat, I am not one to impose my cultural bias. However, given the rise of mad cow disease, bird flu and now SARS, a deeper look into how animals are farmed and slaughtered here and abroad must be addressed.

Remember, you are what you eat.

Peter Drucker: Giving the Seal of Approval

You know ideas are funny things. They go round and round and round in a circulation process which is hard to understand, and then suddenly they arrive: bingo, it's true, you know so and so is saying........

Well I think we just went though one of those barriers on India. Some people have been saying kind of tirelessly and repeatedly (Stephen Roach, Brad, Me) that India is arriving: watch out. Now finally, Fortune has published an interview with Peter Drucker, which then showed up in an reduced version on Josh Marshalls Talking Points Memo (incidentally Josh seems to entirely miss the point, imagining that India is destined to enhance the US position rather than supplant the US as the global mega power) and then David goes on to post the story on Fistful. It even shows up here in India.


In general I am sympathetic to Drucker's argument. I do think India will be the new 'brainy' superpower, and that China will become the manufacturing hub, but not the global leader. Day-to-day contact with young bloggers in each of these two fascinating countries makes me even more convinced.

Druker, however, does seem to have an incredible amount of difficulty with detail.

Look at his arguments about Japan being the beneficiary of the US's discomfort, in fact they mainly stand to lose by a continuing dollar slide, as do many of the world's central banks including the ECB. Also a massive devaluation in the dollar, by making US debts worth a lot less, could be positive for the debt, although perhaps not so much so for the US standard of living.

In fact Drucker doesn't seem to understand much economics.

He is also rather weak on fact. The number of 150 million for competent English speakers is clearly ridiculous. No-one really seems to know for sure, but I deduce, somewhat haphazardly, that mother tongue English Indians may account for only between 5 and 10 millionfrom this page. (Josh Marshall again notes the discrepancy in Drucker but claims about 20 million English speakers with 150 million fluent speakers citing this page which at least has the merit of recognising that "exact figures do not exist". Not for nothing am I referring to India in my posts this week as an area of darkness!). Of course the point is that many many more understand English than those who could properly be considered mother tongue speakers, and many of those speak it well - though there are certainly not 150 million in that class - so if India moves up the value chain into things like biotech and software development, and away from all those wretched call centres - which could easily move out to Bangladesh, Pakistan etc as Indian costs rise - then speaking a clear version of the queens English may not be so important.

Drucker is also off target with his numbers for rural India, which are normally put at 700 million or around 70% of the population and possibly rising as the birth rate in the cities declines. He even gets it wrong on IITs: Bangalore is one of the places where there isn't an Indian Institute of Technology, although, there is an Indian Institute of Science there.

So when you look at it, it may be hard to find a single fact which you can corroborate here (including his information on education in China).

Having said all that, I still broadly agree with his point.

Parmalat: Just Another Scandal?

On a day which sees the Parmalat heat being turned up to full blast, with a looming 'cara a cara' between former Chief Financial Officer Fausto Tonna and Parmalat chief legal counsel Gian Paolo Zini, and while in the United States a class action law firm has named investment bank Citigroup Inc and auditing firm Deloitte & Touche Tohmatsu among defendants in a lawsuit against the food group - a lawsuit incidentally filed on behalf of a U.S. pension fund (oh when, oh when will we get class action lawsuits here in Europe) - on such a day it might well be worth asking ourselves one simple question: is this just another one-off scandal?
continue reading if you are interested

SARS: A Thorough Cleaning

Actually looking at the title I've given this piece does make me think about comparisons between the current vigour of the Chinese authorities and the European anti-cholera campaigns in the 19th century: lets try scrubbing it away.

This notwithstanding Sars 2004 is likely to be a very different animal from Sars 2003: in many senses. What follows is a slight rehash of something I have just put up on Living in China. The Mr Sars expression comes from young Chinese blogger Hailey Xie, and she coined the term in this post, which is well worth reading for anyone with an interest in how young Chinese bloggers think. (And BTW there is a world of difference between the Chinese and the Indian blogging community, a difference which I cannot help observing as the posts come in, and a difference whose importance I a sure to want to reflect on here in the coming days).


So what actually gives on the Sars front? Well for starters State media in China are saying that a campaign of culling civet cats is underway in Guandong. In fact the decision seems to have come from the Guangdong Health Bureau. Official Feng Liuxiang is quoted as saying that they "will start a patriotic health campaign to kill rats and cockroaches in order to give every place a thorough cleaning for the Lunar New Year." Meantime the WHO seems to be frantically calling for caution in the proposed slaughter. Roy Wadia, the WHO's Beijing spokesman, has been drawing attention to the fact that "the WHO hopes that the slaughter of animals and closure of wild animal markets will not be done in a way that will drive the trade underground" since "driving the trade underground could be counter-productive to containing the disease."


This point should obviously not go unheaded. Be that as it may, it is already possible to discern a number of important differences between Mr Sars 2004 style, and the 2003 version. In particular in connection with the media handling of the problem.

The Chinese authorities are certainly trying to be far more proactive. The deficiencies of the earlier secrecy approach were all too apparent, and clearly this year there is a much greater attempt to lead from the front. This is in part made possible by the first rate scientific capacity which seems to be available in China at the diagnosis end, and which can be seen in action in the reports from the Centres for Disease Control in Shenzhen and Guandong cited in my post yesterday. However some of the old weaknesses are still apparent, this time in the dangers of overreaction in the de-infestation campaign which, as some media rightly note, is somehow reminiscent of 'oldstyle' Mao Zedong's pest eradication campaigns. However, there are clear signs of a learning curve being at work.

At the other end of the spectrum is the apparent caution and timidity of the current WHO campaign. Fiercely criticised last year for over-dramatising, the WHO now seem to be adopting a much more 'low key' approach. There is still a dedicated page on the WHO site, but at the time of writing this has not been updated since the 31st December. Whilst the Chinese Ministry of Health has stated that "the only suspected SARS case in south China's Guangdong Province has been confirmed as a diagnosed case", the WHO has yet to pronounce. Xinua have also reported that "42 people with close contact with the patient have been isolated for further medical observation and 25 of them with normal physical symptoms have been freed from observation". Although it is not clear, it seems that the 42 and the 25 in question are different groups.

Another of the key features of the way the subject is presented this year is sure to be an increased emphasis on corona virus mutation. As this is a post in itself, I will not go further here. But clearly it is important to note that we are dealing with a different strain, and the consequences of this are as yet unknown. Hence, in part, the WHO's caution. Also of note is the fact that we are dealing with a more informed global public, so naturally the degree of scientific depth in the reprting will be correspondingly greater.

Finally, it should be noted that the confirmed case (plus quaranteened contacts) may not be the only one. There have been reports in the Hong Kong Standard that a waitress has become the second suspected SARS case in Guangdong but provincial officials and hospitals have denied the report. The paper claimed that the waitress, in her early 20s, developed a fever a week ago and has been kept in isolation at the Guangzhou No. 1 People's Hospital. Citing unidentified reports from Guangzhou, it said the woman had symptoms of the flu-like illness but an announcement would not be made unless test results confirmed the disease.

However Wang Ming deputy director of Guangzhou City diseases prevention and control center, subsequently told a news conference that "We do have a fever patient due to pneumonia, but this has no direct connection with any suspected SARS case," while the No. 1 People's Hospital informed Reuters: "We don't have a suspected SARS patient because we are not a first-line SARS hospital."

The reasoning behind this last quote is curious, to say the least. Meantime I would say the jury is still out here.

On another front a Filipino maid, recently returned from working in Hong Kong, and her family, are being tested as possible cases. The maid , who has a fever, is currently isolated at a hospital along with her doctor, according to health department spokesman Dennis Magat. At the same same authorities are busily trying to trace people she may have had contact with.

Are we about to see a major return of Mr Sars? It is hard to say. What we can say, is that this situation needs some extremely careful attention.

Euro: Plus Ca Change

Hi, I'm Back: on the tools as it were. 2004 Bonobo blogging begins here (although, as I'll be explaining later, it almost certainly won't be ending up here). So Happy New Year everyone, and what better way to ring out the old, and bring in the new than a timely post about the Euro.

Of course it continues to go up, and to defy what you might have thought was all economic logic. The problem is a fault, not in the Earth's crust, but in the underlying financial structure. So, at least in the short term, and come what may, the Euro is condemned to rise. What a pity Ben Bernanke isn't a European. He seems to understand what is going on, much to the surprise of the FT journalist covering the story. He is happy with the situation. Now why would this be? Because letting the dollar slide slowly down solves two problems 'a la vez': it does something to counteract the terrible trade deficit problem the US has, and it gives some extra insurance against deflation (which is after all Bernake's number one worry). Meantime what is the consequence of all this for the German economy? Methinks we are about to find out. Like I said: pity Bernanke wasn't born a European.

There was no respite for the dollar at the beginning of the new year as it registered another lifetime low against the euro in Asia as Japanese investors returned to push the greenback lower.


Comments from Ben Bernanke, US Federal Reserve governor, did little to support the struggling US currency which slid to a fresh lifetime low against the euro and the lowest levels for a month against the yen.

The dollar fell to $1.2672 in Asian trade, down from $1.2585/89 in late US trade on Friday. In early European trade the dollar was staving off fresh lows at $1.2646. The US currency has fallen close to 5 per cent against the euro in the last month as dealers worry about the size of the US current account defecit.

Against the yen the dollar fell to four-week low of Y106.76 at which point the Bank of Japan intervened to halt the dollar's decline, although the BoJ provided no official confirmation of the move. In early European trade the dollar was back above the Y107 level at Y107.02.

The euro hit a 5-month high of Y135.75 against the yen in Asian trade before falling back to Y135.24 in early European trade.

On Sunday, Ben Bernanke, governor of the Federal Reserve, seemed to indicate that policy makers were relaxed about the speed of the dollar's declines. Speaking in San Diego the governor said the risk of a dollar crisis was quite quite low and that the Federal Reserve was correct to hold interest rates in the US at their historic lows of 1 per cent.