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Friday, August 22, 2003

US Economy: 'Condemned to Grow'

It would happen, wouldn't it. One day after I stick my neck out far enough to say I think the equity markets are looking overpriced, and ready to take a knock, we get a string of very positive looking data, and off we go again. Well that's good, it's chastening to get humbled from time to time, but then, the game isn't over yet, not by a long stretch.

First it was the turn of the Conference Board to come in with an increase in its Index of Leading Economic Indicators, then the Department of Labour followed suit with a drop in new signings to below the dreaded 400,000 mark (386,000 provisional). Then the Philadelphia Fed waded in with its monthly industrial guage of manufacturing in the U.S. Mid-Atlantic region which leapt to 22.1 August from 8.3 in July (don't however miss the detail that the continuing higher productivity has allowed firms to do more with fewer workers, and thus delay new starts. The Philly Fed's employment index slipped sharply, to -8.7 from 0.8. ). At the same time various voices at the Fed are busy trying to reassure everyone that interest rates are set to stay low as far as the eye can see.

So where's the problem. Everything looks set to run, doesn't it. Well before we start why not look at a couple of charts. Firstly try this looks good, doesn't it? Now try this . A bit different, huh. Both the charts are of the NASDAQ composite, the first is over three months, and the second over five years. The perspective is different don't you think? What looks in the first to be a nice solid upward trend has another feel to it in the longer perspective. Sure we may be on the way up, but equally we could be about to run out of steam just one more time. Who knows? (BTW just glancing at the chart, the rebounds in the spring and autumn of 2002 seem to have had a lot more force to them than this recent one, but it's only a thought). So let's apply the same principal to industrial production. Maybe output has come back to life in the last three months, but that doesn't stop capacity utilization being still at 20 year lows. Then, and as everyone by now must surely know, there's the little problem of employment. Given the strong productivity performance and the increasing working age population the US economy may need to grow at around 4% to start generating net new employment. So where are we really? Paul Krugman puts his finger on something important in a recent NYT piece (Twilight Zone Economics):

Since November 2001 — which the National Bureau of Economic Research, in a controversial decision, has declared the end of the recession — the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, but when it comes to jobs there has been no recovery at all. Nonfarm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001. Meanwhile, employment is chasing a moving target because the working-age population continues to grow. Just to keep up with population growth, the U.S. needs to add about 110,000 jobs per month. When it falls short of that, jobs become steadily harder to find. At this point conditions in the labor market are probably the worst they have been for almost 20 years. (The measured unemployment rate isn't all that high, but that's largely because many people have given up looking for work.) ............

Is relief in sight? Over the last few weeks two numbers have led to a spate of optimistic pronouncements. One is the preliminary estimate of second-quarter growth, which came in at a 2.4 percent annual rate — about one point higher than expected. The other is the rate of new applications for unemployment insurance, which has fallen slightly below 400,000 per week................. Just to stabilize the labor market in its present dismal state would probably take growth of at least 3.5 percent; it would take much more than that to return the economy to anything resembling full employment. Meanwhile, about those unemployment claims: somehow that 400,000-per-week benchmark has acquired a lot more significance in people's minds than it deserves. For example, claims came in at 398,000 yesterday — and this was treated as good news because it was (barely) below the magic number. Well, here's some perspective: since November 2001 new claims have averaged 414,000 per week. A number a bit lower than that might mean stable or slightly rising payroll employment — but as we've just seen, that's not nearly good enough. For comparison, in 2000 — a year of good but not great employment growth — weekly claims averaged 305,000. ............The best guess is that growth in the second half of the year will be faster than in the first half, possibly high enough to create some jobs, but not high enough to make jobs easier to find. In other words, in terms of what matters most, the economy will continue to deteriorate.
Source: New York Times

Now this argument is interesting, since, among other things, it highlights the important difference in demographics between the US and most of the rest of the OECD. Due to record immigration across the 90's the US working age population continues to increase at a significant pace. So in fact the US has precisely the opposite problem to the other 'industrialised' economies, finding jobs for all those extra young people hitting the labour market. (Digressing a moment, I think it's time to get away from the 'many people have given up looking for work' cliche - in Japan, in the US, in Europe - I'm sure it's true, but the more I think about it, the more I think we need some better metrics. The 'official' unemployment rates are just about meaningless in terms of understanding anything - of course they're wonderful for political debate. What we need to follow is the working age population, participation rates - across cohorts - dependency ratios etc. What would be nice to know would be how the active labour force was changing as a proportion of the working age population, although even this is not too helpful until we get a better purchase on what this expression means these days, what with young people studying longer and the retirement ages about to go up. It would also be interesting to know each month how the relative participation rates across cohorts were changing, and within the 'dependent' population to have a breakdown between young and old on an ongoing basis. Bottom line: we need something like a new 'Boskin' to work out some metrics for labour market analysis, with something like a composite index as the end product, but as someone likes to say, 'oh well, never mind', at least the absence of such a thing gives us economists plenty of margin for guesswork and speculation).

All this is then compounded by the fact that the economy, when it is working is highly productive (parodying the late Rudi Dornbusch: the US manufacturing sector isn't working too regularly, but when it is, boy is it productive). So really, more than any other OECD economy the US is 'condemned to grow', and this is where we hit the snags. As I have been flagging, all that outsourcing is fine, but you need value generating activities to pay for it, you need to be able to export, and to export (as the Japanese have been finding out) you need growth somewhere else. You also need a currency which is competitively valued, but it is here that we discover just how finely balanced the whole thing is. The dollar drops, US manufacturing begins to see export opportunities, the economy starts to rev up, people see growth on the horizon, and back comes the money looking for action with the undesireable consequence that the dollar starts to climb, and the export opportunities start to disappear, and............

Not only this, the dollar rise is deflationary in its impact, so the fed starts to get nervous, so...........

Just how highly stung everything is can be seen from the treasury and mortgage interconnect. The fed genuflects one way, and down comes the treasury market sending up long rates and choking the recovery, the fed genuflects the other, and everyone gets busy buying treasuries waiting for the unconventional tools. Well you wanted to know why I think the game isn't over: now you have it.

Mobile News From China

As Hutchinson struggles to meet its 3G targets in the UK, the mobile business seems to continue to advance by leaps and bounds in China. Keep your eyes on the various 'proto 3G' versions of CDMA in the third world, this could be important, we could even see some 3W countries leapfrogging Europe here:

Chinese are expected to send up to 200 billion text messages this year. China could wind up accounting for roughly half all short message services (SMS) globally. Last year, mobile phone users worldwide sent off a total of 360 billion messages. The increased SMS traffic would be good news for mobile operators, who could expect revenues of 15 billion yuan (US$1.8 billion) even if the total number of Chinese messages this year was limited to 150 billion. Apart from allowing for instantaneous exchanging of messages, SMS can also be used to deliver information on demand, such as news, sports results, and weather information.

China Mobile announced its first quarterly decline in net profit, warning of limited growth and intensifying competition in the mainland mobile phone sector. Second-quarter net profit fell 5.4 per cent to 8.5 billion yuan (US$1.0 billion). Revenue was up just 3.6 per cent quarter on quarter to 39 billion yuan (US$4.7 billion). Half-year earnings increased 13.1 per cent year on year to 17.5 billion yuan (US$2.1 billion). Although in line with analyst expectations, earnings were boosted by the acquisition of eight provincial networks in July last year. On a pro-forma basis, the world's largest mobile-phone operator recorded profit growth of just 3.5 per cent.

Siemens Mobile has completed the first trial of China's own version of third-generation (3G) technology - TD-SCDMA - with network operators China Mobile and China Railcom. Siemens tested the technology in May with good results. Deployment is expected as early as next year. To speed up the development process, Siemens hoped to soon unveil another TD-SCDMA partnership in the mainland. The company is also co-operating with Datang Telecom Technology.
Source: Finance Asia

Pity About His Sentence Construction

In the mailbox today: "I can say quite readily that I do like his hat..................I had to go check and make sure mine was still on the rack.... those sly Spanish based economists....He writes very well (though he needs for his wife to edit his sentence construction, I think.)" The remarks come from a fellow hat-wearer in Austin Texas, forwarded to me by the wise and wonderful Ed Buffaloe. BTW, if you're the curious kind, you can check out Ed's hat here . We could run a competition to see which of them Wim Duisenberg should be constrained to eat! Meanwhile in self-defence of my sentences, part of the problem I'm sure is being in the habit of thinking in too many languages at the same time (the other part being the disorderly way I think - or my 'unruly' mind) . This is not some sophistocated form of one-upmanship, its a real problem. In any given moment I can have any one of the three languages in regular use in this household (English, Spanish, Catalan) circulating through my cerebral pipework. This means that even though the end product is in English (or at least what I claim to be English) the intermediaries may not have been. Result : something feels not quite right. The worst thing of all is that I can no longer spot when things are going wrong. Incidentally my brother has exactly the same problem with German. He 'dropped out' of a magnificent banking career some 15 years ago to dedicate his life to art. Initially he went to live in Leipzig, just before the wall came down, not I may add to familiarise himself with the more intimate details of authoritarian regimes, but because Leipzig was the home of JS Bach, and the whole area is a repository of some extremely fine examples of German Baroque - not to mention the nearby Weimar, home at one time or another to Goethe, Liszt and Schiller. They also had a very acceptable and very cheap opera house in Leipzig at the time. Anyway, since those early days he has had a certain success, in particular with poetry, in German. But English publishers just don't seem interested in his prose: one of the reasons (and now we finally get to the point), they keep asking him whether he is a native English speaker! So it seems it is true: you can get too much of a good thing. In fact something similar seems to have happened to my accent. Brits I meet have no problem accepting that I am speaking in English, but they still find something preoccupying about the way I speak. 'Have you ever lived in South Africa' I was recently asked.

Well the answer is no, and finally let's get back to Ed Buffaloe who has a marvellous site full of photography, poetry and travel stories. Among the many little gems, a link to this one from Freeman Dyson:

In this world of digital wonders, why are we so fascinated with things analog? Mechanical watches and fountain pens have become status symbols, but what is the attraction? It involves the appreciation of well-made artifacts, and a certain nostalgia. Expensive fountain pens were status symbols in the 1920’s just as they are today. Fine watches have always been cherished for beauty as well as mechanical precision. But it seems the advent of digital technology has given many things analog an air of antiquity.

The fact is, many of our mechanical wunderkinds will long outlast the cheap digital junk that is being made today. My Casio calculator watch has lasted nearly ten years on one battery (pretty remarkable, really), but when it finally dies I will be more likely to buy another than to attempt to replace the battery. So much of what we make today is made to be thrown away when it breaks..............

“The next question that arises is, are we humans analog or digital? We don't yet know the answer to this question. The information in a human is mostly to be found in two places, in our genes and in our brains. The information in our genes is certainly digital, coded in the four-level alphabet of DNA. The information in our brains is still a great mystery. Nobody yet knows how the human memory works. It seems likely that memories are recorded in variations of the strengths of synapses connecting the billions of neurons in the brain with one another, but we do not know how the strengths of synapses are varied. It could well turn out that the processing of information in our brains is partly digital and partly analog. If we are partly analog, the down-loading of a human consciousness into a digital computer may involve a certain loss of our finer feelings and qualities. That would not be surprising. I certainly have no desire to try the experiment myself............

Another possible form of life is the Black Cloud described by Fred Hoyle in his famous science fiction novel. The Black Cloud lives in the vacuum of space and is composed of dust-grains instead of cells. It derives its energy from gravitation or starlight, and acquires chemical nutrients from the naturally occurring interstellar dust. It is held together by electric and magnetic interactions between neighboring grains. Instead of having a nervous system or a wiring system, it has a network of long-range electromagnetic signals that transmit information and coordinate its activities............

I started thinking about the abstract definition of life twenty years ago, when I published a paper in Reviews of Modern Physics about the possibility that life could survive for ever in a cold expanding universe. I proved to my own satisfaction that survival is possible for a community of living creatures using only a finite store of matter and energy. Then, two years ago, Lawrence Krauss and Glenn Starkman, friends of mine at Case Western Reserve University in Cleveland, sent me a paper with the title "Life, the Universe, and Nothing". They say flatly that survival of life for ever is impossible. They say that everything I claimed to prove in my Reviews of Modern Physics paper is wrong. I was happy when I read the Krauss-Starkman paper. It is much more fun to be contradicted than to be ignored.

In the two years since I read their paper, Krauss and Starkman and I have been engaged in vigorous arguments, writing back and forth by E-mail, trying to pokes holes in each others' calculations. The battle is not over, but we have stayed friends. We have not found any holes that cannot be repaired. It begins to look as if their arguments are right, and my arguments are right too. We can both be right because we are making different assumptions about the nature of life. It turns out that they are right, and life cannot survive for ever, if life is digital, but I am right, and life may survive for ever, if life is analog. This conclusion was unexpected. In the development of our human technology during the last fifty years, analog devices such as LP records and slide-rules appear to be primitive and feeble, while digital devices are overwhelmingly more convenient and powerful. In the modern information-based economy, digital wins every time. So it was unexpected to find that under very general conditions, analog life has a better chance of surviving than digital life. Perhaps this implies that when the time comes for us to adapt ourselves to a cold universe and abandon our extravagant flesh-and-blood habits, we should upload ourselves to black clouds in space rather than download ourselves to silicon chips in a computer center. If I had to choose, I would go for the black cloud every time.

What Do You Think of The US?

Big Picture has an interesting link today, of course GWB would say 'the point is to make them respect me, not to make them like me':

The BBC hosted a unique global television debate about America's place in the world with 10 other national broadcasters. As part of the What The World Thinks of America programme, 11,000 people in the UK, France, Russia, Indonesia, South Korea, Jordan, Australia, Canada, Israel, Brazil and the US responded to a poll asking their views and opinions on America. The respondents were asked about their general attitudes towards America and US President George Bush. The poll also posed a range of other questions on America's foreign policy, military power, cultural influences and economic might.

Slanted and Sensationalist I

Here's the first in a new series of 'slanted and sensationalist posts from Edward Hugh, the blogger you can't rely on'. I just gave a post which veered mildy (sorry, I mean extremely) towards a defence of the IMF so now - in the interests of prejudice - let's have an extremist (sorry again, I mean moderate) criticism of the thing.

When Michel Camdessus, head of the International Monetary Fund, went to Moscow in 1993, Viktor Chernomyrdin, the Russian prime minister, took him on a wild bear hunting trip to the Zavidovo region. That set the tone for what many see as a personalised and politicised approach to economic policymaking that helped create the conditions for the country's August 1998 financial crisis. Five years after the simultaneous collapse of the rouble and debt default, IMF officials argue that an over-valued, fixed exchange rate at a time of irresponsible fiscal policy was at least partly to blame. But debate is still raging about their own role in triggering the collapse.

While a rise in oil prices also played a large role, few question that devaluation substantially aided Russia's fast economic recovery after the crisis. It boosted domestic producers and suggested the previous exchange rate had been too high. To its critics, the IMF was obsessed with a fixed exchange rate without considering the realities of the Russian economy - notably large budget deficits, as spending was not matched by tax collection, and a high volume of barter trade. "I visited the IMF in Washington and it reminded me of the central committee of the Communist party, with the same subsidised canteen and isolation," recalls one Russian economist. "They were very smart in finance but naive in other ways."

John Odling-Smee, the senior IMF executive responsible for Russia who recalls a frenetic period of travel to and from Moscow during 1998, says: "It's true that following the Asian crises there was a general shift in opinion away from the consensus among economists for fixed exchange rates and we had been part of that [view]." Another factor was the lack of reliable information. One IMF official says the data available in the period leading up to the crisis suggested the financial system was solid and the rouble competitive, with productivity by local industries that competed with imports appearing to improve, alongwith import penetration. "We didn't put our foot down enough, but we were flying blind," he says. "We did not really know the foreign exposure of the Russian banks . . . because the central bank itself did not have a systematic view."

But a third issue was the political reality and the IMF's own ability or willingness to implement the policies it was advocating in theory. The official says it was the Russian government that insisted on a fixed rate, while the IMF was by late 1997 starting to advocate a gradual shift towards a floating rouble. Then the government announced a three-year stable currency policy designed to offer certainty to investors until after the 2000 presidential elections. "Rouble stability was seen by Russians as one of the main accomplishments of the Yeltsin era," he says. "If we had opposed it, there would have been a run on the rouble. In retrospect, we should have insisted on a more flexible approach."

Mr Odling-Smee agrees. "What I regret is that we didn't find a way of persuading them to be tough on the fiscal side. But there was not any more leverage we could have brought to bear." However, Augusto Lopez-Claros, former IMF resident representative in Moscow, argues that the fund had enormous influence and could have stopped disbursing loans. Instead, it continued to give support, ignoring Russia's failure to raise more revenues and reduce controversial tax breaks. It also ignored abuses, including controversial loans-for-shares schemes in 1995-97 by which state assets were sold to insiders in cut- price deals. For many critics, that reflected pressures for continued lending including direct lobbying by Mr Chernomyrdin to Mr Camdessus, against a backdrop of the "Bill and Boris show" of support by then President Bill Clinton for his counterpart Boris Yeltsin.

"The IMF was always hoping that fiscal adjustment was just around the corner," says Mr Lopez-Claros. "But this strategy did not work, and over time the government accumulated $22bn of debts to the fund, which would be a heavy burden on the Russian population and impose constraints on other, sometimes vital, areas of spending." If the IMF's focus on exchange rate policy has since diminished and its experience broadened, its recent loan to Turkey with heavy US endorsement suggests the political context in which it operates has not. The August 1998 crisis was a lesson for Russia's political class which has since implemented on paper the fiscal responsibility demanded by the IMF. But President Vladimir Putin's insistence on rapidly paying down Russia's foreign debts also means IMF leverage in steering future economic policy in the country has diminished still further.
Source: Financial Times

Of course Russia is rather a special case, the 'transition countries' need to be treated in a category of their own. But the muddle about whether to support or not support fixed rates rings true, as does the poor information quality and the lack of political resolve to tackle a government head on. The most serious of the problems has to be real information quality. Most of the societies with which the IMF gets involved are not especially 'information friendly', normally the corruption is enormous, and maybe the IMF execs and resident representatives just don't have the worldy wisdom and 'street knowledge' to see through the spin.

Interest Rates and Demography

Well, as usual, I no sooner open my mouth than I get sidetracked. As Big Arny said, never say never. In Brazil the interest rates are coming down:

Brazil's central bank yesterday cut its prime lending rate by 2.5 percentage points to 22 per cent, the largest cut in more than four years. The cut exceeded market expectations of a 150 basis point reduction and is likely to assuage critics who argued the central bank had been too conservative in easing monetary policy. It was the third consecutive monthly interest rate cut. Economists say the cut was possible because of successful inflation control in recent weeks. Consumer prices fell by 0.15 per cent in June and grew by only 0.2 per cent in July.
Source: Financial Times

Taking another, similar example, Turkey also cut rates in early August.

Turkey’s Central Bank has announced a three point reduction in short term interest rates. The reduction, announced on Wednesday, covered rates for the Interbanks Monetary Market, the Istanbul Stock Exchange (IMKB) and Repo-Reverse Repo Market according to the Central Bank statement. With the reduction, the borrowing interest rate was decreased from 35 percent to 32 percent and overnight lending interest rate was reduced from 41 percent to 38 percent. The rates for one week borrowing was reduced from 35 percent to 32 percent. The Central Bank cited continuing positive trends in rate of inflation and the ongoing success of the government’s economic restructuring program as being the major factors in the decision to cut interest rates.
Source: MSNBC

Now what's the point here? Well look at the rates: Brazil goes from 24.5 to 22, while Turkey goes from 35 to 32. Meanwhile Japan is at zero and the US at 1%, why the enormous difference? Well hyperinflationary tendencies for one thing. Rates in Brazil and Turkey (and I pick these two countries for their rough equivalence in the 'demographic transition') are where they are in order to put a firebreak on the inflationary tendencies of the two economies. When I came to Spain 15 tears ago mortgage rates were in the high teens, now you can find a mortgage here for !% over MIBOR, or roughly 3- 3.5%. Why the big difference? Well clearly rates in Spain are artificially low due to the common currency (and this, of course, has produced a spectacular housing and construction boom: one curious detail, house prices don't figure in the EU HICP, if they did Spain would have a rather higher rate of inflation, but construction activity does figure in GDP calculations, so it may be this fairly undesireable inflation-provoking excess - and not that marvellous sounding Harrod-Samuelson-Balassa effect - which accounts for Spain's 'mini-boom' growth differential. Watch this space for more news). But even if mortgage rates were at a more appropriate level, they would only be a few percentage points higher. So Spain has been able to make a remarkable reduction in interest rates over the last twenty years, and one of the big, big questions is why? How do you get those rates down?

The IMF approach has been to try and impose a fiscal and currency straightjacket. For this it has received a lot of criticism, but not all of this is justified, (and here ). My own feeling is that this needs to be a lot more flexible than it has been. If Malmberg is right, and countries like Turkey and Brazil are making the transition from child dominated to young adult societies (Spain in contrast has made the transition from young adult to middle age in the last twenty years), then this needs to be understood, and more imaginative measures need to be found to help them ease the pain. Remember the characteristics of this transition are a still large dependent population, low saving and large cohorts entering the labour force (it is this which creates the fiscal deficit pressures and the inflation-push). At the same time 10, 15 years from now these societies could be extremely credit-worthy, the problem is to find a mechanism to bridge this gap. Mind you, the IMF has learnt something: both the Turkish lira and the Brazilian real are floating.

Global Divergence

Well it certainly looks like the topic of the day should be the growing divergence between the different components of the global economy. (Incidentally, it's clear that the greatest divergence is still between Africa and Latin America and the rest, but this is fairly obvious, and non-controversial. Still, it is an unfortunate habit we get into of talking about the global economy, and then speaking OECD with India and China as 'add-ons'. This leaves out the majority of humanity, and this shouldn't be like this. My own personal 'get out' is that I'm trying to understand something, and this means focusing. I don't know enough about Africa and Latin America, and since I don't think it need be a defining characteristic of an economist that you have to have an opinion on absolutely everything (save this for the politicians), I think it is not only necessary, it is even healthy to say 'don't know'. But one day, one day).

Returning then to the OECD, the different short term perspectives between Euope and the US couldn't have been made clearer yesterday - and, of course, the changing fortune of the euro-dollar valuation reflects this perfectly. The reasons that this is happening in Europe have, I feel, been pushed fairly forcefully by me over recent months. Yesterday I commented long on Japan. I am not convinced that we are about to see the end of a ten year problem, if this were to be the case I would surely have to think again, and hard. What we might see, and this depends on the US outlook, is more export driven growth, but internally, aggregate demand in terms either of personal consumption or government spending, I doubt it. And without an increase in internal demand it's hard to see how the capex spurt can be sustained. But before looking a bit more closely at the US situation, a bit of news from S Korea, where last year's growth seems to be turning all to rapidly into this years recession. What happens to a tiger when it grows old?

Growth in South Korea's economy contracted 0.7 per cent in the second quarter, as a decline in domestic consumption and waves of labour unrest continued to exacerbate the country's slowest period of economic expansion since the 1997-98 Asian financial crisis. Gross domestic product fell a seasonally adjusted 0.7 per cent in the second quarter compared with previous quarter, according to the Bank of Korea, the country's central bank. The contraction followed a 0.4 per cent decline in the first quarter. On a year-on-year basis, South Korea's GDP expanded 1.9 per cent. Such a modest figure is a painful contraction for an economy that saw on average 8 per cent annual growth during its rapid economic development of the past 40 years. Strikes by militant workers, a corporate accounting fraud, North Korea's nuclear weapons programme and the impact of the Sars virus have all contributed to a slowdown from last year's 6.3 per cent growth rate. But the main factor has been the collapse in domestic consumption after a four-year spending spree came to an end beneath a mountain of credit card debt.
Source: Financial Times

Thursday, August 21, 2003

Blogland in China

T-Salon is back from her Rocky Mountains holiday and she has forwarded me links to two new China BusinessBlogs. Firstly Fons Tuinstra is a Shanghai based journalist working for Chinabiz. Last Friday he reflected on the state of business journalism in China:

In one of the standard phrases I use to introduce Chinese media to newcomers in this city, I tell them that reporting on economy and finance has gone up, both in volume and in quality, over the past few years but that none of the Chinese media would have an authoritative position as a leading paper at this stage ¨C making it very hard to follow all the information available.

Mostly my visitors take my input for granted and move on to the next subject, but last week one of those smartarses started to ask me questions. ¡°Who do you think is the leading English-language information source on China,¡± she asked after my introduction. I was lost for a moment. Since Chinabiz is running an English language headline service, I do see the most important news about China in foreign media and I could not come up with an answer. Up to five years ago, I would have probably mentioned the South China Morning Post, but I stopped reading that paper when it started charging for their online access and I have not felt I have missed a lot since then. This month I cancelled my subscription for the Far Eastern Economic Review, the last subscription I actually paid for. I can read their articles at the site of the Wall Street Journal for free so why should I pay?

Chinese English-language media might be offering more and more reliable information than in the past but at times when you really need it ¨C take SARS ¨C they would rather toe the official line than tell the truth. I can deal with that, since I have learned to read between the lines, but it will stop them from becoming really mainstream or even leading media. In Amsterdam and New York they can read the People¡¯s Daily online nowadays, but that does not mean they can make sense out of it.

Then there is Walter Hutchens a US academic who specialises in law and Chinese financial institutions. His material is technical (often linking to direct sources in Chinese) but he does promise to give an informed (and 'fair and balanced') view of what is happening as it happens:

PRC leaders constantly "zhi chu." The lead stories on nightly CCTV broadcasts routinely feature a top leader "pointing out" (Ö¸³ö, zhi chu) this and that. Stories in the print media also regularly have some official pointing out, emphasizing or "revealing" a litany of platitudes. In fact, the sarcastic piece that got the Beijing Xin Bao newspaper permanently shut down listed just this as one of the "7 disgusting things" about the PRC. It lamented the way top leaders "zhi chu" obvious things such as, "when you are hungry, you should eat," or "when it is cold you ought to dress warmly."

Lately Shang Fulin, the head of the CSRC, has been busy "zhi chu-ing." Often he points out that reform (gai ge) and cleaning up (gui fan) of the PRC securities markets must be kept in pace with development (fa zhan). I think these comments, though vapid on one level, do have some hermeneutic purpose. They are readable tea leaves. I take them to express that a different political or policy "line" exists under Shang than under Zhou Xiaochuan, the former CSRC chairman. Zhou sometimes expressed the idea that it is not the job of regulators to assure that investors profit. Rather regulators are simply to enforce the laws. Shang, I think, is saying that law enforcement has to be moderated so as not to disrupt the development of the markets or unduly affect existing share prices.

Obviously these blogs are only of interest to the dedicated China watchers among us, but I am posting in the hope that I may not be the only one around with sufficient curiousity. BTW, on the 'Fair and Balanced' front I am greatful to Dave for letting me in on the joke, which has lead me to pull some fairly silly comments I made in an earlier post, my only excuse for missing out on the action is that I must have been asleep on holiday. Only one quibble, wouldn't it have been better for everyone to put something like 'slanted and sensationalist' on their blogs. The 1930's surrealists had in this sense a much more effective idea of protest, and I have always been most impressed with their idea of using the vous form for their closest friends and children, while relegating the rest of the world to being the mere tu (the French for this being vousvoyer and tutoyer) so you put the 'other' in the ridiculous position of asking whether they can 'vousvoyer': lovely. By the same token if you call your blog superficial, ill-informed and inaccurate, then you sure as hell take a lot of ammo away from your critics in advance. Bottom line: I don't see any point at all in attacking directly certain kinds of extremely stupid media, I think it's better just to ignore them completely.

German Recession Now Official

Now the Federal Statistics Office has made it official: Germany is in recession. Not a good day for Europe this.

The dollar hit a four-month high against the euro on Thursday after Germany, the eurozone's largest economy, went into technical recession as its exports dropped sharply and domestic demand remained weak. As expected, the Federal Statistics Office confirmed gross domestic product fell 0.1 per cent quarter-on-quarter, adding to a 0.2 per cent drop in the first three months.

Exports, which have supported Germany's economy during the downturn of the last two years, were hit in the second quarter by the single currency's steep climb to over $1.19 against the dollar in May. However, revisions to first-quarter data showed that exports fell in the first three months also, after a previously reported rise. "We have emphasized for months now that the rapid increase in the euro would add another unneeded drag on the eurozone economy, said Steven Saywell at Citigroup. "We take these data as confirmation of our view that the eurozone economy cannot sustain euro-dollar at current levels." The euro has sustained a sharp sell off in recent sessions as upbeat US data compared with bleak European numbers have led investors to sell the single currency and buy dollars on expectations the US economy will recover fastest from the global slowdown.
Source: Financial Times

The Dollar Revisited

Ok, I think it's time for a quick reality check on the dollar, since it's clear that for some time now the wind direction has changed and what went down is now coming up. Now what better way of doing this than by dropping-over to take a look at the Big Picture. ( Of course economics news isn't all you will find, admirers of Big Arny may well also want to check out this link ). Now according to our man Barry:

A sustained dollar rise certainly raises questions about the health of the rest of the World's economy; When the buck was weak, the industrial sector had a nice currency based rise in Q2 earnings; Now we are looking at the potential flipside of the issue. The WSJ quoted Derek Halpenny, a currency economist at Bank of Tokyo-Mitsubishi in London: "A significantly stronger dollar would raise concerns over the incipient recovery in the U.S. manufacturing sector." About a third of the net gains in S&P 500 companies was due to currency factors, with revenues up 7.4% versus estimates of 5.5%, according to First Call’s Chuck Hill. While I agree with that assessment, its worth noting that a stronger U.S. currency means that foreign investors are placing their bets in U.S. dollar assets – and that helps to keep the markets rising. When the dollar was weakening prior to the war, we saw a lot of repatriation of overseas assets.

Barry goes on to quote Forbes' Gary Shilling who was sayin back in June thet the "Odds are, though, that the dollar's weakness is only temporary. The U.S. is too strong economically for the dollar to stay down much longer. Besides, whatever problems we face will not be cured by foreign exchange rates . . . ". He might well have also cited another commentator who was saying back in May that:

I think the important thing here is to distinguish between the short and the medium term. Short-term people are buying euros, and European bonds, not principally for the interest rate differential, but because of the US policy of lowering the dollar in relation to the euro, and because this policy convinces them that the dollar will have to fall, and this adds to the momentum. At the same time the absence of any evident willingness to resist from Frankfurt and Brussels only encourages this process. But once we look out to the medium term (say 18 months to two years) process can only unwind. It can only unwind since the relative economic strengths of the two regions can only change in the direction of US positive.

The only real problem here is that I thought the euro strength would hold longer than it has. Mind you, we still don't know, the dollar decline may not be done yet, although one day it will be. There is too much 'noise to signal ratio' at the moment. Part of the problem is reading Greenspan's Fed language (Problem for market participants I mean. I think I understand only too clearly the problems they must be having down at the Fed, the only way is 'duckin and weavin' zigga-zagga style, since there is no easy and obvious solution to this. The problem for the market participants is that they assume there is, and Greenspan can't tell them they're wrong). One minute they're with the unconventional tools, then the deflation threat is receding, then rates are going to stay low for some time, then........... Another serious deflation warning from the Fed and the dollar drift up could be stopped dead in it's tracks, and looking at the output gap just such a warning must be on the cards in the not too distant future.

Before leaving our erstwhile film fan, I simply must comment on his very interesting VIX chart. Now VIX stands for market volatility index and, as Barry explains, low volatility can be associated with market complacency, which itself may often be thought to indicate the calm before the storm of a market reversal. I'm no markets specialist, but sometimes I can't help taking the risk of sticking my neck out: looking at this chart, and thinking about everything we already know (both economically and geopolitically) I can't help feeling that an imminent reversal is just what we may be looking at.

Iraq: Japanese Government Having Second Thoughts

Just a short follow-up to my sideswipe comment yesterday about Japanese troops in Iraq. It seems they may be the first knock-on casualty of the bombing of the UN in Baghdad:

The U.N. bombing frightens an already jittery government. The terrorist bomb that exploded in Baghdad on Tuesday not only destroyed the local U.N. facility, but dealt a blow to Japan's plans to dispatch Self-Defense Forces to Iraq. Government sources said Wednesday that if SDF troops are sent at all it will be next year at the earliest.

The bloodshed in the months after U.S. President George W. Bush declared major combat operations over May 1 has scared Japanese officials so badly that even a fact-finding mission set for this month has been postponed indefinitely. While criticizing the deadly attack on the U.N. office, Prime Minister Junichiro Koizumi was circumspect when discussing any dispatch of SDF troops. "The Japanese government will carefully observe conditions in Iraq and provide help, if possible, for logistical support,'' Koizumi told reporters in Warsaw, the second stop in a three-nation visit. He returns to Japan on Saturday.

A high-ranking Defense Agency official said Wednesday, "Since the minimum prerequisites (a relatively safe operating area) for dispatching the SDF are not present, we cannot send the fact-finding mission at this time.'' The government had considered sending the mission right after passage early this month of the special measures law on Iraq. Deployment of the SDF under this scenario would have followed in October. However, continuing attacks on U.S. troops by remnants of the Baath party and terror bombings have torpedoed these plans. Yukio Okamoto, special assistant to Koizumi, was to go to Iraq on Aug. 16 to see what help nongovernmental organizations could offer. However, this fell by the wayside at the last moment, also a casualty of the abysmal security situation.

Political calculations are also in play, with government officials loath to pull the trigger on an Iraq deployment, fearing they could get hurt at the polls if the Lower House is dissolved and a snap election is called this fall.In any event, the earliest the SDF could disembark in Iraq would be mid-November. Earlier, officials said the SDF's mission profile had changed from supporting U.S. and British troops struggling to keep the peace to assisting U.N. reconstruction efforts. However, now that terrorists have blown up the U.N.'s Iraq headquarters, there are no guarantees that any conceivable activity could provide the margin of safety required for the SDF. A government official said the recent escalation of violence in Iraq indicates growing dissatisfaction among the Iraqi people. "Even if the SDF were only providing assistance for reconstruction, they could become targets of violence,'' said one official
Source: Asahi.com

BTW the death of one Spanish citizen in the bombing is also causing something of a political scandal here in Spain. Certainly the issue is highly sensitive, it is probable that the majority of Spanish voters only want to see any troop deployment taking place within a genuinely multilateral force and that Aznar's position on this is becoming increasingly untenable. As I feel is the US Pentagon one. People like meme's apparently, so try this one: the WMD argument to justify 'go-it-aloneism' could turn out to be its own undoing. In terms of WMD Saddam is now disarmed (we hope), so where's the rush, that threat is over, what's the problem with changing the terms of reference? It is impossible - however hard you might try - to blame the UN for getting itself bombed. There's a simple rule, if you're there to do a job (in this case guarantee security) then do it, and if you can't then get round a table and talk to try and find a formula which might be able to. Clearly the argument that Iraqui involvement is needed is sound, my point would be that to get genuine street level Iraqui commitment you need multilateralism. Meanwhile Kaushik Banerjee has reached broadly the same conclusions as I have. Here's another definition of blogging: 'you blog to know that you are not alone'.

It is beginning to dawn on me that politics as it is practiced in the Western world is not very different from the way politics is practiced back home in India. The sleaze touches almost everyone. The politicos in US run a way more sophisticated operation, though if you dig deep as you make your way down south, you are bound to feel queasy. I was not especially bothered about the disintegrating case for war on this side of the Atlantic. I don’t think truthfulness is this US government’s strong point. I also felt (and still feel) that the overthrow of Saddam was a good thing anyway. But what followed seems to be worse. I also had a soft corner for Blair. I believed that his support for war was based on his conviction and that the sleaze did not reach 10, Downing Street. It was of course my political naiveté...........But if the case for WMD was completely manufactured and the relationship between iraq and Al Quaida never existed, we are bound to wonder why did the US and British governments decide to invade Iraq...........I now fear that in order to show a rosy picture back home and extricate itself before the 2004 election the US is going to continue to penny-pinch in Iraq and hand over the running of reconstruction and war to the private contractors of the kind that used run wars in West Africa. However, if the western world now washes its hands off Iraq, it would lead to its Beirutization, an exponential increase in religious fundamentalism, and a disaster that the future generations will pay for.

Good, or Bad, News From Japan?

A couple of interesting heterodox pieces on Japan. Michael Hann in the Guardian casts an extremely skeptical eye on what seems to be generalised 'spin' on the 'new tipping point'. Lehman Brothers is "encouraged by the fact that the main contribution to Japan's growth is coming from improved private-sector demand.........This is not simply an export-led recovery." However most of this increased private sector demand seems to have come from Japan's electronics makers producing high-tech toys such as digital cameras and camera-equipped mobile phones. Sharp for eg has said it will raise its capital spending by 20 percent this year, mostly for liquid crystal displays. Sony, meanwhile, raised its capital spending estimates late last month for the current business year by more than 10 percent to 350 billion yen ($2.93 billion), mainly to replace equipment and boost manufacturing capacity for semiconductors: all of which raises the question as to whether this capital spending is economically justified and will lead to real growth or is a 'risk' decision taken in anticipation of a global market which may not deliver. This latter scenario would not, of course, be a 'historic first' for Japan where project evaluation decisions seem to be made using rather different criteria to those commonly applied in, say, the US. (Of course, no sooner do I open my mouth than I want to correct myself. This distinction may well have been a lot more applicable in the past than today, since the tech sector both in the US and Europe is also now swimming in overcapacity. But the substantive point remains: in technology investment the argument risks becoming circular, enterprises invest in anticipation of demand growth, fine, but we can't then read this data off as evidence of coming growth. The expectation/decision may be a bad one, may be disappointed. In which case the outcome will be more deflation not more growth. This is why we still need to be talking about a New Economy dynamic characterised by increased risk, limited visibility, fundamental undertainty, compressed depreciation timescales (the creative destruction hurricane) and, of course, increasing returns. To the victor the spoils, but 'many are called and few are chosen'.)

Analysts at BCA Research in Montreal put out the word last week. Last Wednesday Canada's National Post reported that the firm had just released a report, The Japanese Bull is Set to Run, "advising clients that the Nikkei may be in the early stages of another monster rally, even if the country's economic fundamentals leave much to be desired". On Monday the 225-issue Nikkei Stock Average duly closed above 10,000 for the first time since August last year, 20% up on the index's spring low point.

"While hitting 10,032.97 may seem a feeble victory when compared with the assaults of yore on 40,000, it represents a remarkable turnaround for an index which in March fell near 7,500 as the threat of Iraq war quelled hopes of Japanese economic recovery after a decade of stagnation," said Sally Patten in the Times. "For 14 years after the bursting of the late-80s asset price bubble, the Japanese market has slid inexorably downwards," said Ruth Sunderland in the Daily Mail. "But a growing camp of foreign investors believes the tide has turned." The Wall Street Journal Europe noted the reasons for the change of heart: "Restructuring by corporate Japan is paying off. Companies have cut labour costs, and total corporate debt fell to ¥185 trillion (£980bn) last year from ¥354 trillion during 1994."

At Forbes.com, the website of the financial magazine, Lisa Hess was bullish. "Japan's long-awaited revival is getting under way. This is not another false start. Bad deflation is ebbing, business is reviving and the stocks are very cheap." For evidence, Hess pointed to the "Bank of Japan's recently released Tankan survey of business prospects, which covers 10,000 Japanese companies, large and small, [and] shows a meaningful increase in capital spending plans by large corporations. Businesses are not going to spend if executives think they can't turn a decent profit". However, as Sunderland pointed out in the Mail, "Japanese punters have ... largely steered clear of the [share] buying frenzy - perhaps for good reason." The good reason in question is the fact that deflation in Japan is running at 2%.

As the Lex column of the Financial Times pondered: "Should foreigners rush in where locals fear to tread? ... Recent real GDP data have been flattered by deflation - meaning that, in nominal terms, the economy remains flat. Moreover, a key reason for the Japanese investors' caution is that they have been burnt before. On several occasions in the 90s, the Nikkei surged amid a cyclical recovery and reform hopes. But these rallies subsequently faltered because the government backed away from implementing painful policy change, as a sense of crisis ebbed." No wonder the Japanese daily Yomiuri Shimbun - the world's bestselling daily paper - refused to get too excited by the Nikkei's revival. "One of the effects of looking at the world from the bottom of an economic ravine is that we tend to delude ourselves into thinking we have scaled the heights when we get such news, when in reality we have but inched a little higher." The paper criticised ministers for excessive jubilation over the Nikkei's rise and suggested, "the government should not take the rebound of stocks to the 10,000 level as an excuse to rest on its laurels. Rather, it should initiate bold measures to buoy the economy." The Yomiuri reckoned the current rebound was largely down to US economic measures having an impact overseas.
Source: The Guardian

Which brings us to the real point, is the Japanes economy, as some would have it 'flat', or is it growing, as others don't hesitate to point out, at a reasonably attractive 2.2%. The answer, as always, is it depends (this habit I have of hedging is one of the reasons I try not to mix economics and politics, and try to avoid pronouncing too much on the latter. Big Arny is receiving a lot of stick at the moment for the emminetly reasonable 'never say never' - although of course I'm not saying that Big Arny is emminently reasonable. A politician, maybe, is someone who finds it easy to be sure about something, I only have doubts - even on the euro, honest, I think I'm right, but as they should say: once you stop doubting you're dead.

Anyway to get back on subject, is Japan growing? Answering this takes us back to an earlier debate I had with Dave (and here ) about the uses and abuses of data at current dollar prices. We live in a world awash with numbers, the real problem is what to make of them all. Churchill had it that there were 'lies, damn lies and statistics'. I think this is unduly cynical, but we do need to ask ourselves some important questions in each and every case when we use economic numbers. In particular we should ask why the data has been assembled the way it has. The issue in the present case revolves around the distinction between real and nominal values. Real values are the numbers economists use to compare time series data in terms of a common reference point: constant prices. They is important for constructing such things as consumer price indices and for making comparisons of economic performance between periods. But despite their name they are constructs, the real numbers are the 'nominal' ones. If we go back to my vision of the economic system as the man in the Chinese room interpreting the ticker tape signals fed to him, the data to interpret are the nominal prices, the economy as such doesn't operate through the mediation of a GDP price deflator any more than it matters whether the products exchanged are melons, mobile phones or phone numbers of potential clients (except wait a minute, wait a minute, we have this unfortunate problem of dualism, we have (let's stay Cartesian to keep it simple) brain and mind, so the economy is not a simple machine, we form part of the picture with our tastes and our expectations, and all this enters, economics is a social science. But, again, the main point holds: the real numbers are the 'nominal' ones). Think of the classic businessman's problem in times of deflation: falling stock values. Now is it of any consolation to tell the person who has just lost money that their stock in hand has actually risen in value 'in real terms'. They will just laugh at you, if they don't cry that is.

So getting back to Japan, this is the problem. Prices are dropping at 2%, the nominal value of GDP is roughly constant, so we can derive the idea that there is 'real' growth of 2%. This is true, and it is important, since if nominal GDP was falling the problem would be far worse, but it of little compensation to the Japanese businessman who wants to invest. This is why cracking deflation has to be Japan's number one priority, and the fact that it has not made any progress on this front has to be the most significant piece of information about Japan we have on the table right now.

One last point on the above mentioned Dave. There could be a ripost that with the rise in the value of the yen the whole Japanese economy is now worth more. No, no, no, wait a minute. This is a very complex question (Krugman did his doctoral thesis on just this problem if my memory serves me well), but this is an illegitimate comparison for all sorts of reasons. It is important to distinguish between the traded and the non traded sector. Now comparing the current dollar values of Japanese exports with US exports, Chinese exports, world trade or whatever is, it seems to me, a competely legitimate exercise since these are the numbers which move the economy in real time, viz these are the numbers that matter, and in this sense I feel that the kinds of comparison that Roach makes about world trade shares and growth in current dollars are interesting and legitimate, but maybe the whole idea of changing relative shares of Global GDP would be better left in the wardrobe, since we are never sure what we are comparing with what. Now for Susumu Saito to put some flesh on all this abstract argument:

Chairman Alan Greenspan of the U.S. Federal Reserve Board recently acknowledged the U.S. economy was at risk of suffering Japanese-type deflation and that Washington needs to learn important lessons from the Japanese experience. Japanese prices as measured by the implicit deflator of gross domestic product (GDP) have fallen almost 10 percent since 1994, and GDP at current prices, or nominal GDP, has been on a downward trend since 1997. Greenspan's concern is quite understandable as his ammunition of conventional monetary policy has been nearly exhausted, with the federal funds rate already at 1 percent. The response of the U.S. economy to the Fed's monetary easing has been much weaker than expected by most American economists, probably including Greenspan himself. After the Fed's unprecedented aggressive monetary easing in 2001, nominal GDP rebounded only at a 6-percent annual rate in early 2002 and quickly petered out thereafter. Past upturns showed rates of 8 percent or so. The Fed was obliged to ease monetary policy further last November, and in June of this year. For the past three quarters, however, the growth of nominal GDP has fallen to 3 percent levels.

So what have been the Japanese lessons in deflation?

Japanese government statisticians have been doing a fairly good job tracking the long-term trend in Japan's economic activity as measured in GDP. As many users of GDP statistics know very well, the ``estimates'' of GDP and its components usually have a margin of error of 1 to 2 percent or even larger. So it is not very meaningful for economists to read too much into the minor quarterly changes in GDP. GDP statistics, however, are a fairly useful tool to track economic activity in the long term, simply because it is very difficult for any group of statisticians to continue producing larger and larger margins of error over many years.

Recently, the Japanese government announced the economy had grown for the past six consecutive quarters. Indeed, real GDP (GDP at 1995 constant prices) is ``estimated'' to have increased by 3.4 percent from the first quarter of 2002 to the second quarter of 2003. In a long-term retrospect, however, the ``level'' of real GDP has been hovering marginally around 540 trillion yen for the past six and a half years since the first quarter of 1997. More important for businesses than real GDP is nominal GDP, or GDP at current prices, because businesses keep their books at current prices.

Especially when prices are falling, real GDP and the rate of economic growth derived from it sound like imaginary numbers. They appear far from the sentiments of business managers who have been hard pressed to maintain sales. Indeed, nominal GDP has remained almost flat for the past six quarters. Under more rigorous terms, the size of GDP minus ``imputed'' rent corresponds more closely to businesses' books and business managers' sentiments on sales and so forth. As a practice in estimating GDP, each homeowner is ``regarded'' to have paid rent at a market price. And such imputed rent is counted as personal consumption, or the largest category of GDP, even though ``transactions'' do not involve any cash or credit.

Misleading and false impression

This statistical practice is a good measure of ``housing services'' for homeowners. Personal consumption and GDP including imputed rent, however, give laymen a misleading and false impression on the level of business activity measured in money terms in two ways. First, imputed rent is very large and accounts for more than 10 percent of nominal GDP: 52.6 trillion yen from nominal GDP of 498.0 trillion yen at an annual rate in the second quarter of 2003. Secondly, imputed rent keeps rising because housing investment does not entirely stop even during a recession, and the resulting rise in housing stock is translated into an ever-rising imputed rent: from 41.5 trillion yen in the first quarter of 1994 to 52.6 trillion yen in the second quarter of 2003 at an annual rate.

After all, GDP minus imputed rent at current prices has been on a downward trend, except for a temporary pickup in the period of the IT bubble around 2000, shrinking by a staggering 6.9 percent to 445.4 trillion yen in the second quarter of 2003 from 478.3 trillion yen in the final quarter of 1997 when financial panic erupted in Japan. The latest figure of GDP minus imputed rent is actually lower than the corresponding figure in the first quarter of 1994. It is no wonder most Japanese businesses are still bothered by an ever-sinking feeling. Through 1997, however, both nominal and real GDP kept growing in Japan despite the crash in asset prices early in the 1990s.

Two factors in particular distinguish the pre-1997 period from the 1997-2003 period. The first is fiscal policy. Fairly expansionary fiscal policy, though insufficient in retrospect, supported the growth of GDP, nominal and real, in the pre-1997 period. Thereafter, public demand was frozen at around 120 trillion yen per year on a GDP account basis, and has been cut further in the latest three quarters. The switch in fiscal policy, of course, has worked as a powerful brake on nominal GDP. The second is the current financial restructuring plan that has forced Japanese financial institutions to sharply-and quickly-cut back their outstanding loans. The resulting credit squeeze quite naturally has shrunken aggregate demand, and hence, nominal GDP. Actually, the current financial restructuring plan is a major culprit in the acceleration of Japan's deflation. The greatest irony is that the switch in policies in 1997-2003 has not achieved its objectives. It has rather aggravated the problems it purported to alleviate. Fiscal austerity was intended to restore the balanced budget. But the shrinkage in nominal GDP has sharply reduced tax revenue, resulting in a much sharper deterioration in the budget balance. The shrinkage in aggregate demand due to the financial restructuring plan has actually made it harder for more Japanese companies to service their debt from banks. The resulting increase in bad loans has cornered more banks, and the vicious cycle goes on. It is no wonder that financial restructuring under the current plan does not appear to be drawing to an end.
Source: Asahi.com

French Economy in Recession

So let's start the day with the good news shall we. I am of course being ironic. The latest info on second quarter GDP growth in the French economy (released yesterday by Insee) shows a 0.3% contraction. The equity markets seem way out of line with a very flat looking economic horizon here in Europe, and we shouldn't be surprised to see a 'correction' at some stage.

The French economy suffered a sharper-than-expected fall in growth during the second quarter, casting a shadow over hopes of a recovery in the eurozone. French GDP fell 0.3 per cent in the period, according to figures released on Wednesday by Insee, the official statistics institute, which lowered its previous figure for first quarter growth from 0.3 per cent to 0.2 per cent. Equity markets have risen strongly in recent weeks on hopes that an accelerating US pick-up will drag the 12-eurozone nations out of the mire. "It shows we should not get carried away by market optimism," said Ken Wattret of BNP Paribas. "At the moment it is expectations that are leading the charge . . . there's not much improvement in hard data." Forward-looking surveys, such as Germany's ZEW index, which rose strongly this week, have pointed to a rebound in optimism and a gradual upturn by the year-end. But the weak data from France - Europe's second largest economy - highlight the lack of drive in the region's economy. They are likely to lead to a downward revision of preliminary GDP data which showed the eurozone stagnated in the second quarter as recession gripped Germany, Italy and the Netherlands. "Last week's snap estimate of flat eurozone growth is already looking optimistic," said Mark Cliffe of ING. Eurostat - the EU statistics agency - is now likely to cut its estimate of eurozone economic growth in the second quarter from zero to minus 0.1 per cent, according to Reuters.
Source: Financial Times

Wednesday, August 20, 2003

Indian GDP Looks Set to Grow Over 6% This Year

Just to reinforce the last post, Indian GDP growth seems to be holding up remarkably well.

Confederation of Indian Industry has pegged the economic growth at 6.5-6.8 per cent this fiscal backed by a rebound in agriculture and continuance of a robust growth in industry and services sector." In view of our revised agriculture growth estimate for 2003-04, we are revising up our GDP growth forecast to a range of 6.5-6.8 per cent," CII said in its report 'State of the Economy' released today. This is based on the projection that agriculture will grow by 4-5.5 per cent, industry by 6.5 per cent and services by 7.5 per cent in this fiscal.
Source: Economic Times India

Now It's Nortel on the India-China Trail

Nortel just joined the growing list of companies seeing expansion in China and India as the solution to the growth slowdown in the OECD world.

Nortel Networks Corp, one of the world's largest telecoms gear makers, expects rapid growth from the booming Indian and Chinese mobile phone markets to partly offset tepid global demand, top officials said."The telecom equipment markets globally are still quiet, but good growth is coming out of the Asia region: especially India, China," said Vivian Hudson, president for GSM sales and wireless Internet solutions at Nortel, late on Tuesday.............. Hudson, a 15-year Nortel veteran on her first visit to India, said telecom gear makers are bullish on India, if only because just five out of 100 people have phones.

"India has probably one of the highest capacity requirements in the world just by sheer size of the population, Paris-based Hudson told Reuters in an interview. "There is no question that you will be right up there with the Chinese and other major Western markets." India has more than 16.3 million mobile phone users, and analysts expect the number to surge to at least 100 million by 2008, or about 10 percent of its current population. China is already a much more developed market: It has some 240 million mobile phone users, or about a fifth of its population. One reason for the heady growth projections: India's hotly competitive cellular sector has the world's lowest tariffs at about 1 rupee (2 U.S. cents) a minute.

"The rate structure for wireless in India is very attractive. If its more affordable, more people will get in," Hudson said. The nine-year-old sector will need more than $60 billion this decade to push phone penetration to 15, the current global average, analysts say. Nortel doesn't break down its India business but it reported Asia Pacific wireless revenues jumped 49 percent in the second quarter, the highest gain of any region. Total Asia-Pacific, Latin America and Caribbean sales rose four percent to $467 million, or one fifth of the total -- the only geographical segment to post growth. Limited mobility services that work on CDMA (Code Division Multiple Access) technology and have 3.5 million users are expected to experience even faster growth. The number is rising rapidly as firms now tap smaller cities and rural areas.
"Without a doubt India is the largest unserved market for telecom services in the world," said Ashoka Valia, managing director for Nortel's Indian operations. "India is a clear strategic market for us because of the potential and the opportunity here." India's demand for wireless telecoms gear peaked in 2002 as private firms such as Bharti Tele-Ventures Ltd (BRTI.BO), 16 percent owned by Singapore Telecommunications, state-run Bharat Sanchar Nigam Ltd and the powerful Reliance (RELI.BO) group set up nation-wide telecoms backbones for their services. "Last year was a record year in terms of growth and sales," Valia said. "A key opportunity for Nortel is in the wireless equipment business. We expect it will be one of our growth drivers in India."
Source: Yahoo News

The Precarious State of China's Financial System

Just in case any of you were under the illusion that I thought everything in China was going to be just plain sailing, this article from finance Asia on a conference in Beijing last week about the problems with China's Securities Regulatry Commission should set things straight. The Chinese economy will never be able to enjoy stable sustained growth until it sorts this mess out. Of course the other side of the problem is: if and when it does how the hell will the US be able to continue to find the purchasers of dollar denominated assets which fund the deficit?

An extraordinary sense of gloom surrounding the securities market has emerged from a top level finance conference held last week in Beijing. The gathering of leading financial executives was notable also for being the venue for CSRC chairman Shang Fulin's first big speech. But other than promising that China's 130 securities companies were on track to be given permission to issue bonds publicly and by private placement, Shang didn't announce any new market boosting measures. That promise, long in the works, failed to spark the markets which saw thin trading of RMB4-5 billion in volume on both the two exchanges on the days of the summit, while the Shanghai Composite index dropped below the psychologically important 1500 mark. Despite economic growth averaging 8% over the last two years, the market's last high was 2200 in June 2001. In fact, the markets are in a very serious condition, say observers, who point out that they are not fulfilling any of their three functions of raising capital, pricing capital and acting as a barometer of the general state of the economy.

Figures show that China's stock market could, rather alarmingly, be slowly dwindling away. For example, the ratio of the funds directly raised in the capital markets to all funds raised has actually fallen to 5% compared to 8% in 2001, according to figures from the central bank. And last year, according to figures from the CSRC, 122 companies raised RMB78.8 billion ($9.39 billion), only 67% of what was raised in the previous year. In the first half of this year, only 58 companies have issued shares, raising just RMB32 billion, or around 80% of the amount raised last year for the same period.

The decline in direct financing is not of course, just a problem for the CSRC, it's also a problem for the whole economy since so much of the systemic risks fall on the banks - rather frail vessels, as has been widely reported, for such trust. The main victims of this situation are the securities companies, and sector reports estimate that the whole sector in the first half of this year saw a reduction of 5% on its stock trading, 44% and 47% respectively on fund and bond trading and that underwriting revenue was only 40% of the same time last year. In 2002, the sector made a loss as a whole of RMB 2.6 billion from 51 companies in the red. Of course, the CSRC is in an impossible position. On the one hand, its young technocrats want to introduce a first class capital markets system. But to do that it has to rout out many of the existing ills - potentially crippling market confidence in the process. Indeed, corporate governance was one of the focuses of the summit, with an emphasis on finding ways of preventing the brokerage houses misappropriating customer funds.
Source: Finance Asia

No Historical Parrallels

"There’s no doubt that we are caught in a economic riddle; There are no historical parallels with which to compare this period to". This is the opinion of Barry " Big Picture " Ritholtz, and it's an opinion with which I entirely concur. There are no road maps here. It's a truism to say that every business cycle is different, but this one really is. My guess is that's because there is some long term historical structural change taking place under the ice-cap, but that's all it is, a guess. Barry also has some very clear graphics courtesy of the Cleveland Fed to back him up. This idea is further re-inforced by John from Colorado in a mail he sent me about my post earlier today where he says things may well be bottoming out, but with 'a new concept of what bottom means':

By the way the July numbers came out and they are trending the same direction as June. Interestingly, the numbers are up for INCOME tax, but way down for SALES tax. Overall things are going better, but not uniformly. Don't know if that is a general trend and something seen in other recessions, but it's very true for Colorado. That means the bottom for us in State government (we live on income tax), but the start of hard times for County and City government (who are largely funded through consumption taxes).

In Colorado, most services are actually delivered by local government. We in the state run labs for the local governement departments like health andlaw enforcement, act as a collection point and forwarding agent for sales taxes, but don't have much (on a relative basis) contact with the average citizen. If you kept your job, this last recession here in Colorado was relatively transparent, and consumption kept up. If you kept your job. With the inevitable cut-backs coming now in local government I think that transparency will stop. What the cycle will be for all of this, I can't say. But I think we may end up inventing new concepts for what 'bottom' means, and I see signs we
could be there for a long while.

The New Saudi Connection

At the risk of pushing the topic a bit too much, I can't resist this piece from Monday's Financial Times about the growing international dimension of Islamic terrorism in Iraq and in particular the Saudi connection. This is exactly what we should be worried about. The thought of Islamic militants fleeing Saudi Arabia for the 'relative security' of Iraq is indeed preoccupying. Ironically the relative success in mopping up the higher echelons of the old Baath establishment may only make things worse in the short term by creating a vacuum in the sunni community, a vacuum which may only too eagerly be filled by Islamic radicalism. In fairness, this was the danger some people were flagging before the war started.

Increasing numbers of Saudi Arabian Islamists are crossing the border into Iraq in preparation for a jihad, or holy war, against US and UK forces, security and Islamist sources have warned. A senior western counter-terrorism official on Monday said the presence of foreign fighters in Iraq was "extremely worrying".

A statement purportedly from al-Qaeda was broadcast on Monday by the Arab satellite television channel al-Arabiya. It claimed the al-Qaeda leader Osama bin Laden and the leader of the Afghanistan's ousted Taliban regime Mullah Mohammed Omar were still alive. But it also asserted that recent attacks on US forces in Iraq were the work of jihadis. The focus of concern for US counter-terrorist officials was at first on a reconstituted Ansar al-Islam, the al-Qaeda-linked terrorist group based in northern Iraq before the war. But US officials have recently acknowledged the presence of other foreign fighters in Iraq. Paul Bremer, the US administrator in Iraq, said recent raids, including one near al-Qaim last month, uncovered fighters "carrying travel documents from a variety of countries".

According to Saad al-Faguih, a UK-based Saudi dissident, the Saudi authorities are concerned that up to 3,000 Saudi men have gone "missing" in the kingdom in two months, although it is not clear how many have crossed into Iraq. Saudis who have gone to Iraq have established links with sympathetic Iraqis in the northern area between Baghdad, Mosul and Tikrit, where they have hidden in safe-houses, a Saudi Islamist source said on Monday. Pressure on Islamists in Saudi Arabia has grown since the bombing of an expatriate residential compound in May killed 35 people. The subsequent arrest of many Islamists has forced some underground while others are trying to flee to Iraq.

"Part of this movement of people has been individual, but it is getting more organised now," Saad al-Faguih said, adding that the loose organisation of Saudi Islamists did not have a clear link to al-Qaeda. "Al-Qaeda is there and not there. But its umbrella is huge, which is what has given it its ability to survive," he said. A senior UK official said there was evidence of extremists from several countries focusing on Iraq, though it was unclear what role al-Qaeda played. "I don't know whether you can talk about an al-Qaeda strategy in Iraq, though there is great evidence of al-Qaeda involvement in the jihadi cause inside Iraq. But there's as much talk about other people doing things inside Iraq," the official said.

Weblogging China with Google

Checking things out over with John Pasden at Sinosplice there are a number of interesting snippets. Firstly, Google has more uses than meet the eye at first glance. Among these is the Google dictionary. Many of you will have noted my horrendous spelling problem by now, but believe me, if it weren't for Google, matters would be a lot worse. When I realise I can't remember how to spell something I simply run the word through Google (the big problem is the growing number of cases were I don't even realise). John too has discovered this, only it seems the problem in Chinese is more interesting:

What I find Google especially useful for is checking up on Chinese words [sorry, you'll need Chinese input capability for this]. There are a lot of Chinese words that are in common practice but have not made it into dictionaries. Proper nouns are not usually in dictionaries anyway. So what do you do in a case like that? Google them. Take a guess at the characters. If you're wrong, you'll know by the search results.

I'll give an example. You want to search for information on Jay Chou in Chinese. You know his Chinese name is Zhou Jielun, but you're not sure which "lun" the last character is. Google all your guesses. Chances are, the one which turns up the greatest number of results is the right one. In the case of Zhou Jielun, it clearly is.

I'll give away another little bloggers secret while I'm at it: Google can make you look more erudite than you really are. I mean if there is some name or some phrase that you remember is vaguely connected with something, you just run it through Google and voila. now talking about bloggers secrets, there are a bunch of people over at Berkley who are crazy enough to think you can teach all this:

Creating the Berkeley China Internet Weblog

CCN# 48162, Journalism 298, section 13
10-11:30 WF, 209 Greenhouse
3 units
Instructors: Xiao Qiang, Paul Grabowicz, John Battelle

China is currently undergoing a digital revolution. In this class, students will create a collaborative news Weblog, the Berkeley China Internet Weblog, which will cover the development of the media and technology in this complex, rapidly changing society. Students will also develop an understanding of Weblogs, a new form of online publishing that has quickly become a popular way to get news and information on particular topics. In the United States, Europe and around the world, Weblogs are redefining the boundaries and practice of journalism, and transforming the landscape of both traditional and new media. The Berkeley China Internet Weblog aims to act as a comprehensive resource center and a forum for public discussion on the social, political, economic and cultural impact of China's Internet development.

Mein Gott, this means that some bright young things over in California are going to be studying..........China Economy Watch. I'd better get to work now.

Mind you, the whole idea seems crackpot to me. "develop an understanding of Weblogs" What the hell does this mean? I thought courses on using an internet browser were pretty weird, but going to class to learn to blog, that just about beats everything. Don't they understand, everything that is happening right now - music, photos, video clips, writing, blogging - is about the de-professionalisation of things. It could even be that blogging as a research strategy will one day - god forbid - lead to the de-professionalisation of science.

Finally John has an interesting post on a topic which has often puzzled me. Google search terms leading to your site. I simply don't understand how certain kinds of terms arrive. I mean, looking through todays batch I have Japans Geographical Landmarks (which I can half understand, although at No2?), but 'diswashing machine air gap problems' (No 81) now where the hell did that come from? John has been asking the same question, and has had at least one rather extraordinary hit. This may not ne too surprising since John, through Sinosplice provides a wonderful service hosting blogs into China, so they can sneak in under the radar as it were. Thanks John.

Looking for what?

I think it's high time I did the "weird search terms people entered to stumble upon my site." I've never done it before. Now that I'm hosting a bunch of other blogs as well, it's hard to say who exactly is responsible for these. What's more, putting these terms in Google frequently does not get a Sinosplice result, so I'm not sure what search engines these weirdos are using. Without further ado, some of the results:

bleached hair pics (26)
With is one that I actually understand. I do have a pic of this. What's surprising is that it got me 26 hits!

shu qi nude (12)
Ah yes, that was a good post. Adolescent boys everywhere (well, maybe 12 of them, anyway) are thanking me for that link, I bet.

?‚?l entrance exam (10)
This is because of Prince Roy. I think it's kind of odd, though, that so many people seem to be looking for information in English but can nevertheless enter gao kao (the name of the Chinese college entrance exam) in Chinese.

dalian girls (10)
Undoubtedly Derrick's doing. That guy wouldn't shut up about the dazzling beauty of Dalian girls the whole month he was here. It was jealousy of Hangzhou and Shanghai's abundance, no doubt.

depressing monologues (3)
Hehe... ssshhhh! Don't tell Hank!

how can i improve my students spoken english (2)
Well, that one was because of me. I don't think many people are reading it, but if you're a brand new teacher in China (or anywhere in Asia, really), you might find my guide useful.

underaged girl gets covered in cum (2), older men with big dicks (1)
OK, these I really cannot explain. I thought maybe someone in the network was writing about something I didn't know about, but I did a search in Google, and Sinosplice was not among the pages and pages of other wholesome family entertainment that turned up. Weird. You can't find mention of this stuff on Sinosplice! Well, er... until now, that is....

New Productivity Paradox?

Barry Ritholtz doesn't just have opinions about Iraq, he's also an economist and markets analyst. He too is interested in the US GDP Jobs Disconnect and has even coined the expression New Productivity Paradox to describe the shortfall between productivity and GDP growth. His blog The Big Picture is one of the few economics blogs I've come across which is actually really engaged with the nitty gritty of the 'dismal science' and the 'ever so vulgar' custom of making calls. Good luck to him, he's going on the blogroll. Incidentally in the piece below - just in case it isn't clear - the second extract (August 7th) is from our very own blogger Barry. He is in fact asking the same question Frans was asking yesterday, how can a good geek spot a winning meme. You should be so lucky. I like his confidence though, Blogs will soon be surpassing mainstream media. I am inclined to agree though I still have to write up why.

I love catching a meme before the Major Media does. Sometimes I'll read an interesting analysis on someone else's blog (or even write one myself), and almost forget about it. Until a week or a month later, when it shows up as a front page story in a major publication.

I've been seeing that happening a lot lately. Blogs have been supplementing, and will soon be surpassing, the mainstream media.

Here's an example:

"The Fed has in very short order lost pretty much all credibility with bond-market participants," said Stephen Stanley, economist at bond dealer RBS Greenwich Capital. As a result, "Whether it's right or wrong that the market feels that way, the Fed will be unable to jawbone long-term rates lower." Indeed, yields have headed higher since the Fed on Tuesday indicated an unusually explicit willingness to keep rates low for a "considerable period." -Fed Missed Mark on Impact Of Cut on Bond Market, by Greg Ip, WSJ, Friday, August 15, 2003

versus this

"The new Fed fear is deflation. For a while, they seemed to have successfully jawboned the bond market into believing that rates would stay low for a long, long time. The Fed Chief even suggested that they stood ready to make open market purchases to ensure rates stay low. As Bond buyers have discovered to their chagrin, this statement has turned out to be false (at least so far). The fixed income crowd has become Wile E. Coyote to Greenspan’s Roadrunner. The Fed Chief painted a tunnel entrance on a wall, and they ran face first into it. Forgive the equity crowd their snickering, as they had already paid their tuition to learn that costly lesson." -The ACME Federal Reserve, August 07, 2003

If some geek can figure out how to scan, digest and analyze blogs for early meme detection (i.e., pre-WSJ), perhaps the next gold rush will be Investment Blogging. Could "blog millionaires" ever replace dot com millionaires? I doubt it. But there is so much good stuff in the blogosphere, I'm looking forward to seeing how people figure out how to sift through it all in real time.

And just to show Barry isn't the only one in the blogsphere who can do the business, try looking at this. Back in April when everyone plus my aunty was busying writing down their China cards in the wake of the Sars crisis, yours truly was saying what?

The Not-So-Hidden Agenda in Iraq

Following Brad's 'promo' of my recent Iraq piece Barry Ritholtz of Big Picture has mailed me about a background report entitled titled "Not-So-Hidden Agenda: Strategic and Economic Assessments of U.S. led Invasion in the Middle East, a Pre War Analysis," he published three hours before the war commenced. In harmony with my recent strictures about being right both before and after the event I am posting this to give credit where it seems credit may well be due. Clearly Barry is not the only person who suggested that the WMD argument was not an adequate account of US strategic thinking at the time, but he does present and clear and reasoned discussion of what the thinking actually might have been. He does also anticipate that the subsequent war would be both protracted and costly, a judgement which seems to be only too painfully borne out by current experience.

Where I do have my reservations about the report though is in connection with its assumption about the viability of any long term US military presence in Iraq, at least in it's present form. Amidst all the 'noise' of the pre-war debate, one key argument seems to have been neglected in the Bush-Blair camp: the need for any new regime to be seen to have international legitimacy. Iraq was always going to be different from Kosovo or Afghanistan, since the objective in Iraq was not to dissuade and dismantle but actually to change something. Max Weber's idea of legitimacy seems to have some paramount importance here: it is essential that any post-war regime be transparent and legitimate internationally. Many opponents of the war here in Barcelona were not opposed to intervention in principle, but to intervention on a unilateral basis. If in the best case of having this multilateral component the post war future of Iraq would be be difficult, without it it could easily become a nightmare for the US soldiers on the ground and a bed of thorns for US foreign policy. Even while I write events in Baghdad and Israel show that others too are aware of this vulnerability and are determined to exploit it. Derailing the Israel-Palestine peace process and making life hell for the UN in Iraq seems to be a high priority somewhere.

The 'coalition of principle' (Spain, Bulgaria, Japan, Turkey) which is assembling itself behind the 'go it alone' strategy surely will only make matters worse. I fully endorse Barry's point that the war both was and was not about oil. It was not about oil in the most primitive conspiracy theory version. But this doesn't mean that inside Iraq it won't be seen as being about oil in the most simple (robber barron) version of the story. Looking at how ready some people here in Spain are to imagine that Aznar is going to be paid in oil I have no difficulty in imagining that on the streets in Iraq demogogic politicians will have little difficulty getting a sympathetic ear. Put another way: the current US obsessions with deregulation (which, of course, I'm not against) and privatisation which are the product of a unique history will hardly be seen in the same like in a society which is just emerging from an entirely different mind and problem set, if the crucial role of Haliburton is not well understood even in Princeton , the situation is unlikely to be better in Basora.

I have already made reference to the tragi-comic dimensions of this story. Another example of this was to be found in the scenes of fighting in the Japanese parliament when the change in Japanese law necessary to permit the participation of Japanese troops came to be signed. And the thought went through my head, just why are the Japanese so eager to send troops (and just how will they be seen by the Iraquis)? My cynical response was that this might be an attempt at winning a more sympathetic ear for the Japanese preoccupations about the value of the yen. And so on, and so on, and so on..........But now, enough of me and over to Barry:

We have undertaken a strategic assessment of the War and its economic impact, using “open source” materials. Based upon that, we have reached several unexpected conclusions: First, the explanations proferred by the nation’s leadership for military action is inadequate to explain the US commitment to any invasion. Second, by “reverse engineering” the strategic and military decision making process, we discover there are, indeed, several compelling reasons for invading and occupying Iraq. We surmise these rationales are what persuaded President Bush to approve the military conflict.

These same surprising findings lead to the conclusion that we are at the beginning of a large scale, continuing US military operation. We expect the subsequent occupation of Iraq to last several years, and may continue for as long as a decade. The cost for this effort starts at ~$200 billion dollars, and may scale up to one trillion dollars by 2011..........

This analysis starts with a simple premise: The U.S. has offered numerous explanations as to why a military incursion into Iraq is a necessity. These reasons have morphed over time: initially, the goal was destroying weapons of mass destruction (WMD); Subsequently, that shifted towards ending Saddam's support of terrorism. Protecting neighboring countries and oil supplies has also been used as a pretext. The laudable goal of freeing the Iraqi people from their oppression was also mentioned. Finally, there have been general calls for a regime change in Iraq................

The reasons given to the public for an invasion fail to withstand close scrutiny; We do not, however, believe the President of the United States (POTUS) would put half a million American troops in harm’s way on mere whim; We therefore made two key assumptions: first, that the President and his advisors are rational, and second, that there are significantly more compelling explanations for military conflict than has been publicly discussed. The logician in us acknowledges that rejecting the “Dr. Strangelove” scenario is an assumption, and as such, a vulnerable point of this thesis.

Moving beyond the abstract, we make the intermediate conclusion that other more compelling reasons must exist for this military action. The next step in the analytical progression is to “reverse engineer” the military and strategic decision making process. To determine what these reasons may be, we reviewed the issues strategic planners may have presented to the President and his advisors. What threat scenarios might they have considered that compelled the invasion of Iraq as a matter of necessity?