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Wednesday, December 28, 2005

Too Much Of A Good Thing?

The IMF is in danger of becoming a 'deficit institution'. With large debtors like Argentina and Brazil steadliy paying off their outstanding loans, and few new clients knocking on their doors, they are having difficulty earning the one billion dollar cost outlay they run-up every year. Of course, as Ken Rogoff says, "The fund has the reserves to pay for its operations for the next several years", the problem really only becomes important if "It is only if the good times go on for another five to seven years and there are no major financial crises, then it is going to become a significant issue." Well, if I have to chose, maybe I prefer that the good times go on and that there are no financial crises.

A decision by Brazil and Argentina to repay their loans to the International Monetary Fund ahead of schedule raises the question of whether the institution needs a new business model.

Brazilian and Argentine repayments of about $15.5bn and $10bn respectively will wipe out another big chunk. Those repayments mean that Uruguay’s much smaller loan will be the fund’s largest exposure in Latin America. In Asia, following the financial crises of the late 1990s, governments built up huge financial reserves, in part to ensure that they never again had to go cap in hand to the IMF...

Low demand for IMF credit is mainly the result of emerging market countries’ good economic performance, and very favourable conditions in international financial markets.

But lower lending raises the questions of how the fund is going to pay its annual expenses of close to $1bn in the most recent financial year.

Tuesday, December 27, 2005

Happy Birthday Japan

Happy birthday Japan, welcome to year one of your new era. December 31st will mark the first anniversary of when your population actually started to fall, and from now on each year will see less and less Japanese citizens in the land of the setting sun. Another way of putting this would be that the proportion of robots to people is definitely set to rise there.

This turning point in human history is not necessarily a bad thing, it is, after all, partly a product of the fact that we get to live longer. The worrying thing is the blasé fashion in which we seem to be treating it. Typical of this are the statements by the Japanese Health, Labour and Welfare minister:

"Our country is now standing at a major turning point in terms of population," Health, Labor and Welfare Minister Jiro Kawasaki told a news conference. "We must take countermeasures against the falling birthrate along with measures to support and foster our future generations,"

This might have been a credible response a decade or so ago, but today it is almost laughable.

Meantime "hope eternal" struggles-on. Japan is still the best story in town we are cheerfully informed by Buttonwood in an article entitled Sweet Spot. Well if this is the best show, I'd certainly hate to see the worst one :).

Now, there are more conflicting signals in the press today:

Japan’s core consumer prices rose in November for the first time in two years, the FT tells us "sending the strongest signal yet that the world’s second-biggest economy has emerged from seven years of deflation and reinforcing expectations of a change in monetary policy".

That certainly sounds like good news, but hang on a minute:

The yen fell the most against the euro in more than two months and dropped versus the dollar after reports showed a surprise drop in Japan's household spending and an increase in the jobless rate.

Japan's currency is down 12 percent against the dollar this year as the Bank of Japan held interest rates near zero to combat falling consumer prices. Finance Minister Sadakazu Tanigaki said today deflation ``still persists'' even after prices rose last month for the first time in two years.

``The weaker data confirms it's going to take quite a while for the BOJ to be able to act, even if consumer prices rise,'' said Niels From, a currency strategist at WestLB AG in Dusseldorf, Germany. ``The yen will continue to weaken for now.''

So we aren't out of the deflation woods yet, and consumer spending - whilst being markedly better than at some moments in the past - still isn't as solid as it might be. Hmmmm. Isn't it better to hedge our bets a bit more here. Especially when there are sound theoretical reasons for doubting internal consumption sustainability.

Tuesday, December 20, 2005

This Seems To Be Important

The Japanese finance ministry seems set to unveil plans to cut new government bond issuance by more than 10 per cent - to below Y30,000bn ($258bn) - in the year to April 2007. The Financial Times has the story. They had better hope they are reading the situation aright, since if they aren't they are heading straight back into recession. This is what all the battle with the BOJ is about. 2007 is rapidly getting pencilled into my diary as an economic annus horribilis.

Mr Koizumi considers that the economic recovery, about to enter its fifth year, is robust enough to withstand a mild fiscal contraction, although he on Monday came out against a consumption tax increase for at least two years.

Sadakazu Tanigaki, the finance minister, said: “I think we can break down the barrier of Y30,000bn.”

Japan has been running a budget deficit of about 6 per cent of gross domestic product, including interest payments on public debt of about 150 per cent of GDP. Mr Tanigaki is keen to accelerate the process of regaining primary fiscal balance, before interest payments, by the first years of the next decade.

The finance ministry will make cuts by, among other things, trimming payments made to doctors and further bearing down on public works spending, which has fallen by a quarter since Mr Koizumi took office in 2001.

Monday, December 19, 2005

Ben Bernanke, The Speculation Starts

How quickly the world moves on these days. This is more than yet another trite observation, I am sure there is an underlying logic to all this. This time it's the issue of by-by Alan, hello Ben. Only last week I was bemoaning the fact that the Fed FOMC seemed to have forgotten about the transition in taking the rate rise decision, and now, this morning the FT is here to remind us just how complicated last weeks decision now makes the immediate future.

Bernanke's first year at the Fed could prove his toughest

When Ben Bernanke takes over from Alan Greenspan as chairman of the US Federal Reserve in just over a month he will barely have got his feet under the desk before he faces the central banker's most difficult decision: when to call the end of an interest rate cycle. The timing of the changeover could not be worse, say Fed-watchers......

Friday, December 16, 2005

Wolfgang Lutz and the Fertility Trap

Just to point out I have an extensive post on the fertility trap topic (with some good dicussion) over at A Fistful of Euros.

Also to put up a link to an intersting paper I just found by Ronald Lee: Rethinking the evolutionary theory of aging: Transfers, not births, shape senescence in social species. Here's the abstract:

"The classic evolutionary theory of aging explains why mortality rises with age: as individuals grow older, less lifetime fertility remains, so continued survival contributes less to reproductive fitness. However, successful reproduction often involves intergenerational transfers as well as fertility. In the formal theory offered here, age-specific selective pressure on mortality depends on a weighted average of remaining fertility (the classic effect) and remaining intergenerational transfers to be made to others. For species at the optimal quantity–investment tradeoff for offspring, only the transfer effect shapes mortality, explaining postreproductive survival and why juvenile mortality declines with age. It also explains the evolution of lower fertility, longer life, and increased investments in offspring."

Thursday, December 15, 2005

Right Royal Row Over the BOJ

Things down at the Bank of Japan are hardly calm these days. On one version of events (see yesterdays Tankan) Japan is about - finally - to emerge from deflation, and the BoJ naturally enough wants to 'normalise' monetary policy. The politicians however are non-too clear about this:

"Japan’s ruling Liberal Democratic party will on Thursday urge the Bank of Japan to tie its monetary policy to nominal gross domestic product in an effort to lock in the central bank’s ultra-loose monetary stance for as long as possible."

"The proposal, which marks an escalation in tension between Japan’s politicians and the independent central bank, aims to stimulate above-trend economic growth for up to five years."

"Some senior members of prime minister Junichiro Koizumi’s administration argue that a period of strong nominal growth is needed to repair Japan’s tattered finances."

This balance sheet repair objective wouldn't include monetising Japan's huge government debt, now would it? It is important here to distinguish two issues, escaping from inflation and monetising the debt. I am still skeptical that Japan is actually escaping from deflation, global inflation, among other things, is now turning down, so caution is called for, and I would be opposed to any precipitate raising of rates in Japan. This mistake has been made before. Monetising the debt through inflation is another question. Since Japan's ageing population stand to be the big losers from any sustained bout of inflation, this needs to be avoided. Getting the balance right here won't be easy.

Meantime the IMF has waded in:

The International Monetary Fund on Thursday added its voice to the tense debate over Japanese monetary policy, saying it was too early for the Bank of Japan to consider abandoning its ultra-loose monetary policy.

On Thursday, the IMF’s director Rodrigo de Rato appeared to endorse the politicians’ view that the risks of moving too early were higher than those of moving too late. “We see a need for monetary policy to continue until deflation is completely rooted out,” he said.

“We are not there yet,” he added, referring to the fact that the rate of change in the core consumer prices index, stripped of fresh food, stabilised at zero per cent in October. Some economists say the CPI overestimates inflation, particularly now because of the effects of rising energy prices, which are included in the index.

Don't Kill-off The Beast Just Yet

Well, while Alan plays his last shot, and Ben Bernanke waits quietly in the wings, the Economist has dedicated a global agenda article to the state of the US economy. A number of things occur to me to say.

Firstly, I got it wrong.

I thought the Fed might have paused this month for a numbers of reasons, the most important of which being the need to give some support to Bernanke during the transition. I don't think it is going to be easy for anyone to follow Greenspan's act, and if the only thing which Bernanke is left with is the possibility of keeping things on hold, then he could well get off to a rather unfortunate start. I would have left 'our Ben' with a couple of blank rounds to fire-off while he settles in.

I say this becuase of this kind of article, which I think could go the rounds:

In 1983, Mark Gertler asked his friend and fellow economist Ben Bernanke why he was starting his career by studying the Great Depression. "If you want to understand geology, study earthquakes," Bernanke replied, according to Gertler. "If you want to understand economics, study the biggest calamity to hit the U.S. and world economies."

Bernanke's fascination with the economic earthquake never abated. "I am a Great Depression buff, the way some people are Civil War buffs," he wrote in 2000. "The issues raised by the Depression, and its lessons, are still relevant today."

Bernanke's interest in the Depression, which dates back to his childhood, is a guide to the evolution of his thinking. In particular, his groundbreaking research on how mistakes by the Federal Reserve compounded the catastrophe is likely to influence how he steers the economy once he succeeds Alan Greenspan as its chairman early next year.

So here is the issue, the DeutschBank is seen as an inflation fighter becuase of the hyperinflation of 1923, and Bernanke is seen as a defaltion fighter, because of, well...

The point is, these reputations once they are acquired are hard to shake off.

On the Economist:

FOR several years now, economists have been watching American consumers with the same mixture of astonishment and anticipation that wide-eyed fans bring to endurance sports: amazing that they’ve made it so far, but how much longer can they go on like this? Strong consumer spending has underpinned America’s robust economic expansion, even as most other industrialised countries have struggled to get their economies back on track.

But consumers have been running down savings to sustain this level of spending; the personal savings rate has actually been negative since June....

Yet the consumers soldier on......It seems unlikely that consumers will have the stamina to keep this up much longer......Economists have long been warning of these risks.

Well, this is one narrative version, and a lot of people buy it. I don't.

In the longer run the US economy may well run into problems with the rise of China and India, but for now it is certainly the strongest economy in the developed world (most of the rest are dependednt upon it one way or another), and this beast has life in it yet awhile.

Turning Iraq Into A Normal Country?

The Economist today has this:

"Iraqis vote this week for their first full-term government since the fall of Saddam Hussein. Even if the election is peaceful, it will be hard to construct a government that Shias, Sunnis and Kurds can all accept, and harder still to defeat the insurgency and turn Iraq into something approaching a normal country"

It all depends what you mean by 'a normal country' I suppose. If you look at Iraq, with a total fertility rate of 5.1, a median age of 19.43 it would be hard to call Iraq a demographically 'normalised' country. Nor is it a country where the underlying demography suggests you could see a stable democracy arising anytime in the near furture. If only the people who dreamed up the democratise Iraq by invasion plan had read Bo Malmberg's Four Phases of the Demograohic Transition!

As the song says: it's a long winding road.

Friday, December 09, 2005

Japanese Third Quarter Growth

Well here it is, all coming home to daddy. The Japanese data I mean. Third quarter annual growth in Japan has just been revised down from 1.7 to 1%. This is coming home to daddy, since I continue to believe that - for demographic reasons - we will not see a self-sustaining Japanese recovery. Japan will continue to be dependent for growth on China, the US and Europe. Hence weaker than expected data should hardly be surprising.

Gross domestic product was up only 0.2 per cent on the quarter in real terms, with an annualised rate of 1 per cent. The new figures show that growth has been slower than expected, and significantly lags behind the pace in the first half of the year. The government had previously estimated quarterly growth of 0.4 per cent in the three months to September and 1.7 per cent growth on an annualised basis.

Many economists have already been disappointed by recent data on Japanese household spending growth which, at 0.4 per cent, was considerably lower than the April-to-June figure.

Wednesday, December 07, 2005

US Productivity and Earnings Data

The US labour productivity grew by a robust 4.7% annualised in the third quarter, which seems to suggest that the US economy can continue to grow at a rapid pace without sparking inflation. This seems to have impications for decisionas at the Federal reserve.

"The minutes of the Fed’s last meeting in November suggested that the central bank believes that interest rates are approaching a neutral stance – a level at which they neither encourage nor restrict growth. Once this point is reached, further interest rates will be necessary only if inflationary pressures intensify, economists believe.

The Fed is widely expected to raise rates from 4 to 4.5 per cent before considering a pause. But there is less certainty about whether rates will need to rise in March, when the first meeting of the Fed’s Open Market Committee chaired by Ben Bernanke will be held.

Quite why US productivity is so good - in particular in comparison with its eurozone rivals, still remains something of a mystery. If it was simply ICT, then the eurozone countries who are introducing ICT components just like everyone else should have been showing signs of 'catching up'.

Productivity growth in the US has eclipsed the performance of other leading economies over the past six years, allowing the Fed to permit levels of economic growth that would previously have forced it to apply the brakes through higher interest rates. Economists have been expecting growth in productivity to slow from its peak at the end of 2003. But the slowdown has been much less abrupt than forecast.

Monday, December 05, 2005

Cohort Analysis, Morbidity and th Barker Hypothesis

Actually I am posting these links so I can find them again easily, but if anyone lese finds them useful, then good luck to you:

Airborne infectious diseases during infancy and mortality in later life in southern Sweden, 1766–1894 by Tommy Bengtsson and Martin Lindström.

Fetal origins of coronary heart disease by David Barker.

Inflammatory Exposure and Historical Changes in Human Life-Spans by Caleb E. Finch and Eileen M. Crimmins.

Comment on "Inflammatory Exposure and Historical Changes in Human Life-Spans" Elisabetta Barbi and James W. Vaupel

Response to Comment on "Inflammatory Exposure and Historical Changes in Human Life-Spans" by Caleb E. Finch and Eileen M. Crimmins

Inflammation and Life-Span by Calogero Caruso, Giuseppina Candore, Giuseppina Colonna-Romano, Domenico Lio, Claudio Franceschi;, Anthony G. Payne;, Caleb E. Finch, and Eileen M. Crimmins

E-Letter responses to: Caleb E. Finch and Eileen M. Crimmins "Inflammatory Exposure and Historical Changes in Human Life-Spans"

Broken Limits to Life Expectancy by Jim Oeppen and James W. Vaupel.

Increase of Maximum Life-Span in Sweden, 1861-1999
by J. R. Wilmoth, L. J. Deegan, H. Lundström, S. Horiuchi

Lifespan depends on month of birth by Gabriele Doblhammer and James W. Vaupel.

How Much and How Quickly We Forget

I am doing some work today on the ideas of Nobel prizewinner Robert Fogel (more on this later). Taking a look at his Nobel page I have just realised that he got the prize jointly with Douglas North, someone about whose work I am woefully ignorant. In Fogel's Nobel biography I found this:

"I began my graduate training with the naive belief that by combining the study of history and economics I would quickly discover the fundamental forces that had determined technological and institutional changes over the ages and that such knowledge would point to solutions to the current problems of economic instability and inequity. As I became aware of how little was actually known about these large processes and their interconnections, I began to focus on more discrete issues:"

Well I have to say that I share his initial belief, and I don't regard it as especially naive. Also I personally am still amazed by how little we really do seem to actually known about the large processes and their interconnections he mentions, but maybe that's just me :)

Further down the speech I also find:

"Simon Kuznets, who supervised my doctoral dissertation, was by far the most influential figure in my graduate training. Soft spoken and of moderate stature, one did not have to be in his class very long to discover that he was a towering intellect, erudite not only in economics, but also in history, demography, statistics, and the natural sciences. His course in economic growth covered the history of technological change during the modern era, demography and population theory, and the use of national income aggregates for the comparative study of economic growth and of the size distribution of income".

It's funny, Simon Kuznets also gave his name to an important sub-cycle of the US business cycle - the Kuznets cycle - yet no-one seems to have heard of it these days. Which is funny, since the Kuznets cycle idea could go a long way to help understand why current US growth is so resilient.


Pension Demand Inverts The UK Yield Curve

The U.K. government may well find itself paying less to borrow over 50 years than it does to borrow over six months when it sells 2.25 billion pounds ($3.9 billion) of bonds in an auction this week: The main culprit: demand from the pension funds. The yield on the UK government's 4.25 percent bond due in December 2055 was at 4.06 percent in London this morning. This compares with 4.48 percent available on six-month bills. Actually 4.06% fifty years out from now looks a little expensive to me, but then, I guess - or at least I hope for the pensioners-to-be - that these guys are hedged. Anyway, rather than talking about impending recessions, shouldn't we be getting back to all that talk about a global savings glut?

Longer-term bonds have yielded less than shorter term securities for most of the past two years. The yield on Britain's 2055 bond is less than the 4.16 percent on 30-year gilts which are below the ten-year's 4.26 percent. Bonds maturing in 50 years have yielded less than six-month Treasury bills since they were first sold on May 26.

Investors often interpret this so-called inverted yield curve as a sign of an impending recession. In the U.S., the past four recessions came after 10-year notes yielded less than two- year Treasuries.

The situation is different in the U.K. because of demand from pension funds.

``Bonds between 30 and 50 years are in a sweet spot,'' Robert Stheeman, chief executive of the agency that manages the U.K.'s debt sales, said in a Dec. 1 interview. ``Our core investor base is the U.K. pension industry.''

Japan and the US Yield Curve

Understand why the US yield curve may be about to invert and you've understood a lot IMHO.

Brad Setser picks up on the FTs Steve Johnson, and earlier here.

Johnson makes one extremely revealing point:

"The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities - negating the value of these latter flows in currency terms."

Obviously what we have is asymmetric hedging. This begins to solve what had long been a mystery for me: who was really buying into the sustained Japanese recovery argument. Obviously many of the Japanese themselves aren't (sensible them). But OPEC members are. Really they should sack all their financial consultants :). The big issue, of course, is the US yield curve. The chain normally cracks at its weakest point, so this is a must to watch. Also, I wonder how much asymmetric hedging is taking place in Germany?

Basically the growth imbalance between the US, Germany and Japan, and the inability of these latter two economies to 'normalise' interest rates is producing a significant distortion in the global financial system. The US can have interest rates in the 4 to 5% range and still grow faster than either of the other two.

Co-indidentally cross this with a petro-dollar surplus arising from the changing terms of trade, and you have all the ingredients for some kind of problem. Now let's wait and see what happens next. I'm fascinated.

Friday, December 02, 2005

Gunnar Myrdal and the 'Population Problem'

I discovered the work on demography and economics of Swedish Nobel Prizewinner Gunnar Myrdal when I read this paper by Bo Malmberg,Thomas Lindh and Joakim Palme. In that paper they draw attention to the way in which Myrdal was an early pioneer stressing the importance of demographic influences for economic theory, and in particular of how declining population might exert a negative influence on economic performance.

In this sense he was truly a visionary, exploring more than 60 years ago many of the ideas of which I and others have only recently begun to think about (in fact reading Myrdal's lectures I am amazed at how he seems to have gotten through to thinking about just the same issues - like ageing and productivity - which are worrying me right now).

In fact Myrdal seems to have:

1/ Had a major role role in the history of the debate about race relations in the US
2/ With his wife Alva (the mother of modern feminism?) pushed for a series of gender and child friendly policies in Sweden which seem to have given a lot of impetus to the so called 'Swedish model'.
3/ Been the first modern economist to raise the issue that the neo-Malthusians had it wrong about population (in this case the neo-Malthusian Knut Wicksell) and that number wasn't the important issue, but that structure and momentum were.

Myrdal made his population 'discoveries'in the 1930s for the purely conjunctural reason that Sweden was then already suffering from low fertility. As he points out, this was partly a 'structural shock' produced by economic recession and out-migration. But Sweden did have a very early move to the second phase of the demographic transition (the one were birth rates fall below replacement). Sweden's population dynamic has in fact held up fairly well over the last 60 odd years, partly due to inward migration and partly due to child friendly policies. But the long run tendency is making itself felt even in Sweden now.

I have posted the economically relevant Godkin lecture on my website. As a taster, here is a short extract:

Curiously enough, in this neoclassical speculation on population the factor of age distribution was for a long time not studied, and it was never studied intensively as to its economic implications. It is remarkable, because this factor could to a large extent be taken care of in a stationary model of theory. When a certain trend of the population development is maintained for such a long period that a stable age distribution has been reached, the difference between a progressive, a stationary, and a regressive population -- apart from a different development of population numbers -- is that in the first more than in the second, and in the second more than in the third, the number of children is relatively large and the number of old people relatively small. A corresponding difference rules even within each major age group taken by itself. If we thus compare a regressive population with a stationary one, we find that in the first young children are relatively fewer than older ones and that the center of gravity is also higher in middle age as well as in old age.

Now people in different ages are productive in different degrees, and -- within a given standard of living -- their consumptive demands, their cost of living, also differ. Here intensive empirical studies ought to set in, and they are now being made in Sweden, to ascertain the average productivity and the cost of living in different age groups. These calculations give somewhat different results in different social classes. The occupational and cultural changes also alter the quantities from time to time very considerably.

I cannot in this short synopsis enter upon the details of how such realistic studies of agedifferential productivity and cost of living are to be planned and carried out. One very broad generalization must suffice. If, by combining productivity and cost of living into a net productivity, we try to get a general index for the contribution or noncontribution of various age groups, we get, of course, the general picture that normally a person during two periods of his life, the beginning and the end, consumes without producing, while during a period between he produces more than he actually consumes. The influence of its age structure on the average level of living of a nation will then be determined by the relation between the "overproducing" and the "overconsuming" age groups.

continue reading #

The ECB, The Yield Curve and Central Bank Independence

I have just posted on all these topics:

The Most Bizarre Monetary Policy DecisionOf Recent Times?

Central bank independence seems to be once more ’a l’ordre du jour’, and the ECB may well live to find to its cost that there is one thing worse than actually playing the game, it’s playing the game and losing. Now why? Continue reading #

More Pressure on the Yield Curve

One of the things about targeting expectations, and factoring-in changes, is that the world moves on at a very rapid clip these days. So the ECB rate rise in now, really, yesterday's news. The big issue today is the fact that the easing cycle in the eurozone may already be over (we need to see the data going forward before we can be sure about anything here). Continue reading #

Locking Swords

I'd simply love to be a fly on the wall in London this weekend. The G7 finance ministers are about to meet the central bankers, and as in by now well known, these two groups haven't exactly been hitting it off too well lately, at least, and better said, in Germany and Japan they haven't. Continue reading #

Wednesday, November 30, 2005

Postponement of Childbearing in Europe

The Vienna Institute of Demography are organising a Conference - Postponement of Childbearing in Europe - between December 1 and December 3 2005. Most of the people with interesting things to say on this topic seem to be attending. I'll get back with more comments on relevant papers as and when they appear online.

Bo Malmberg and The Four Phases of the Demographic Transition

The Swedish demographer Bo Malmberg has offered us a four-phase typology of the demographic transition which is not without interest.

Clearly the impact of the demographic transition on population size and growth rates has been considerable over the last couple of centuries, and it is probably this aspect more than any other that has attracted all the popular attention. Less well appreciated and less well publicised, however, has been the fact that the impact of the transition on the age structure of populations has been an equally strong and significant one.

Further, impacts on age structure tend to be more extended in time. Indeed as I am arguing here, the demographic transition may in fact best be thought of as an extended and continuous process of age-transition. Now, according to Malmberg this age transition consists of four distinct phases, each of them marked by the strong specific weight of one age group. The onset of the transition (which is characterised by a sharp decline in mortality) creates a child phase, then, as fertility begins its decline comes a young-adult one, acceleration of the fertility decline towards replacement fertility produces a phase of population maturity, or adult stage, and finally sustained below-replacement fertility produces in its wake an elderly society.

The first phase of the age transition, the child phase, occurs when falling death rates produce an increase in the number of children. The reason for this increase is fairly self explanatory in that in earlier high-mortality populations, most of those who die are infants and children. Added to this, the process of cohort maturation means that the increasing numbers surviving into adulthood produce yet more children and so on, since the available fertile population grows continuosly, and, with unchanged fertility behaviour, this will inevitably further increase the number of children born.

Continue reading

Tuesday, November 29, 2005

Now It's Official

China did not manipulate its currency. Who says? The US Treasury, and they can't be wrong, can they?

"The Treasury, in a semi-annual report required by Congress, said that while China’s rigid exchange rate continued to create distortions and risks in the global economy, Beijing had taken important steps towards introducing flexibility."

“The initial steps by China to increase exchange rate flexibility played an important part in this decision,” said John Snow, Treasury secretary, noting in particular China’s formal abandonment on July 21 of its peg to the US dollar. But he added: “It is imperative that China move towards greater flexibility as quickly as possible.

Monday, November 28, 2005

Slowing US Housing Market

Is the boom in the US housing market finally slowing? With the measured pace from the Fed going on and on it is logical that it will bite at some stage:

Sales of existing U.S. homes slowed in October and the inventory of unsold houses rose to the highest level in nearly 20 years, a trade group said on Monday in a report confirming the end of the nation's housing boom. Sales of previously owned homes fell 2.7 percent from September's upwardly revised 7.29 million unit annual pace, and the drop would have been even larger if not for a surge in home-buying linked to Hurricane Katrina, the National Association of Realtors said. "The housing sector has likely passed its peak ... and the boom is winding down to an expansion," NAR chief economist David Lereah said. "Many of our hot housing markets are transitioning from a sellers' market to a buyers' market."

My gues is that the chief economist with the National Association of Realtors would know something about that of which he speaks, which only makes even more fascinating this, already in its own right fascinating debate among Morgan Stanley economists on the meaning of the looming inversion of the interest rate yield curve. Either a recession is coming in 2007, or the Bernanke lead fed is going to start easing again in mid 2006, or both, or something like that.

Foreign Investors Buy Into the Japanese Recovery....

Foreign investors buy into the Japanese recovery, but the Japanese themselves apparently don't, or at least if they do its's on nothing like the same scale. More to add to the puzzle I was getting at in my last post about how people seem to find all this so hard to understand or accept. Denial, what denial!

Foreign buying of Japanese stocks has reached a record level as global investors buy into the country’s economic recovery. Overseas investors bought Y9,441bn ($78.9bn) more in Japanese shares than they sold in the year to November 18, according to the Tokyo Stock Exchange. The figure includes trading on the Osaka and Nagoya exchanges and beats the previous record of Y9,127bn in 1999.

Feverish overseas interest has been the biggest reason behind Japanese stocks’ sharp rise. The Tokyo Stock Price index climbed 33 per cent to 1,529.67 by last Friday – though the rise is still dwarfed by the near 60 per cent increase in 1999.....

But the strong interest shown by foreigners contrasts with the scepticism of Japanese institutional investors, who are still net sellers. For this reason, Japan bears regard this year’s share price rally as very fragile.

Here We Go Again!

Well yet another consumption driven recovery seems to be grinding to a halt in Japan. The only thing which puzzles me is why people continue to be surprised, and why people fail to see the similarieties between Japan and Germany in this regard. It's an up-hill (rather than a flat) world obviously:

Japan’s “Warm Biz” campaign, which should have boosted the sale of warm winter clothes, has failed to catch the imagination of consumers. Retail sales in October were down 0.3 per cent on the year – the first annual fall in eight months. The news prompted the Ministry of Economy, Trade and Industry, which published the figures on Monday, to downgrade its view on retail spending. An official was quoted by Reuters as saying on Monday that retail sales were flattening, toning down the Ministry’s view in the second quarter that sales were recovering moderately.

There is some discussion of the German comparison in this post and comments.

Meantime, with the fiscal deficit issues looming in both countries, central bank independence (or reducing it I should say)is one more creeping onto the agenda. I noted this last week vis-a-vis Japan:

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.

Meantime, vis-a-vis Germany, Wolfgang Munchau reminds us that:

"It is still not too late to propose ECB reform as part of the next treaty revision. For as long as EU leaders maintain the status quo, they have the central bank they deserve."

"The pre-announced interest rate rise that the European Central Bank is due to agree this Thursday must rank as one of the most bizarre monetary policy decisions of recent times. The economic recovery in the eurozone remains fragile, as last week’s German confidence indicators have shown. Even the ECB’s own forecast for headline inflation is relatively optimistic, while core inflation remained unchanged at 1.5 per cent in October."

I couldn't agree more with Munchau about one thing though: the recent decision announced by Trichet to raise eurozone rates "must rank as one of the most bizarre monetary policy decisions of recent times"!

Saturday, November 26, 2005

Xavier Sala i Martin and 15 Years of New Growth Research

I've been reading this paper, and its definitely a good review of recent growth research. He concludes by saying that:

(i) There is no simple determinant of growth.
(ii) The initial level of income is the most important and robust variable (so conditional convergence is the most robust empirical fact in the data).
(iii) The size of the government does not appear to matter much. What is important is the 'quality of government'.
(iv) The relation between most measures of human capital and growth is weak. Some
measures of health, however, (such as life expectancy) are robustly correlated with growth.
(v) Institutions (such as free markets, property rights and the rule of law) are important for growth.
(vi) More open economies tend to grow faster.

He repeats the idea that "life expectancy is one of the variables most robustly correlated with growth". Since I am now reasonably convinced that the increase in life expectancy is somehow connected with the decline in fertility, this is quite an interesting result.

On another front, I have just come across this paper:

The Impact of Poor Health on Total Factor Productivity
, by Matthew Cole and Eric Neumayer.

Here's the abstract:

"A number of recent studies have illustrated the link between health and economic growth. This paper argues that a key mechanism through which health affects growth is via total factor productivity (TFP). We first estimate TFP based on a production function and then estimate the determinants of TFP, paying particular attention to three indicators of health that are particularly problematic in developing regions: malnutrition, malaria and waterborne diseases. We find the impact of poor health on TFP to be negative, significant, and robust across a wide variety of specifications."

Friday, November 25, 2005

German Consumer Prices Drop

While Japan celebrates the minor victory of stopping the fall in consumer prices, Germany has just registered a month on month drop of 0.5 percent from October to November according to figures just out from the Federal statistical office. Of course most of the drop was brought about by a fall in the 'volatile elements', but still, hardly justification from a rate tightening exercise at the ECB, as the ever perspicatious Paul de Grauwe was arguing in the FT yesterday:

So it was quite surprising that several ECB policymakers came out arguing that the interest rate would have to increase in December. Sensing trouble, Jean-Claude Trichet, ECB president, announced unexpectedly that a rate rise in December was all but inevitable.

It is difficult to understand such a turnaround. One can only guess what underlies this “volte face” that put the financial markets on the wrong foot. Here is my explanation, which I cannot prove but which seems to make sense. There is a hard core of “hawks” in the governing council who cherish a monetarist agenda. This agenda has two items. One is to bring the rate of inflation back below 2 per cent, the only target the ECB has declared to be salutary and consistent with price stability. The second is to curtail the “excessive” growth of the money stock, M3, which has now reached an annual rate of 8 per cent (but this was also the case two weeks ago when the ECB declared that this was not sufficient to raise the interest rate). The hawks somehow managed to have the upper hand in the governing council and to make the president their spokesman when he came out declaring that a rate increase now had become necessary. This statement also makes a rate increase almost inevitable next month.

Good News, Now Let Battle Commence!

Most commentators are getting excited about the recent reading on the Japanese core consumer prices index which stopped falling in October. There is just one small snag, the core CPI in Japan - until next August - still includes oil and energy costs. Stripped of these it is estimated that the underlying CPI was still down by about 0.3 per cent. The reading does however mark the first 'near miss' of the Japanese index with positive prices in some years, so it is hardly a 'non-event'. Meantime, as the FT notes:

Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.

The government of Junichiro Koizumi, prime minister, is worried that the BoJ could choke off the lengthy, but fragile, recovery by exiting too early from the ultra-loose quantitative easing monetary policy adopted in 2001.

Curiously enough all of this has a striking parrallel with what is happening in Germany right now, where politicians, who want to address the fiscal deficit by raising taxes are worried that the ECB could choke off the fragile German recovery by exiting too early from the ultra-loose monetary policy operating for some months now in the eurozone.

Monday, November 21, 2005

The FT on the Dollar and the US Deficit

Brad Setser points us to a lead article in the FT argues dollar strength (v. Europe and Japan) can be sustained for several more years. Brad, of course, is rather critical of the piece, while I think it argues exactly the view I have been putting forward for some time now.(Incidentally I don't think it is quite right to say that "the FT is no longer worried", better put, the FT is facing up to reality, a reality that Brad doesn't like, and that worries both me and the FT in the long term).

For a currency that most experts predicted would fall this year, the dollar is in remarkably good shape. This week the US currency hit two-year highs against both the euro and sterling....

Until March this year, the focus was on the current account deficit, and the dollar steadily declined against those of its trading partners with floating exchange rates, notably the euro and sterling. But since spring the focus has shifted to the interest rate story, with the dollar rising against these two currencies and the Japanese yen....

Movements in short-term interest rates alone cannot explain large shifts in currencies. However, since the start of the year, the long-term interest rate differential has also moved in the US's favour, across the entire yield curve and against all its peers. This largely reflects better news on economic growth in the US than elsewhere......

None of this means that the dollar can forever escape the consequences of the current account deficit. The deficit is not sustainable in the long run, it will eventually narrow and this will require further overall depreciation of the dollar.

But a long-term requirement does not make a certain short-term bet. The current account dynamic may not bite for several years yet. In the meanwhile, there is nothing to prevent the dollar enjoying lengthy periods of strength.

I couldn't have put it better myself :).

Saturday, November 19, 2005

Sunnyside Up On Europe?

The Economist has an article this week which essentially pushes the theme that "the euro area's economies are in better shape than they look". This may well be true, especially if you think they are in very, very bad shape: everything is relative to the expectations of the beholder.

I find the article a frustrating one, since some of the points it makes are extremely valid, and yet overall it still fails to grasp the underlying 'big picture'.

Things they get right:

1/. Eurozone economies are picking up speed. (Although not all of them, Italy isn't, and picking up speed for how long?).

2/. By American standards eurozone growth looks sluggish.

3/. The main reason - for the extra US growth - is that America's population is increasing much faster than the eurozone's.

4/. Spain has enjoyed the fastest expansion in jobs, 4% a year since 2000. (And Spain has the fastest growing eurozone population, thanks to a 1.5% increase per annum from immigration).

5/. Employment has not grown particularly slowly in the eurozone: "employment has grown a tad faster in the euro area than in America whether one looks at the past five years or the past ten - a striking improvement over the decade to the mid-1990s".

6/. Europe has to learn to live with a shrinking workforce and an ageing population.

Things that it gets not quite right:

1/. The article doesn't look at comparative numbers for changes in productivity. This - eg - is obviously in favour of the US (although this is one of the things which may change).

2/. The Economist claims that "even in Germany there are now signs that domestic demand is stirring". This, I think, is hope against hope. As the article itself notes, "economists at HVB, a big German bank, reckon that private consumption probably shrank for the third quarter running, for the first time on record". I see no reason why this situation is going to change dramatically.

3/ Really they fail to distinguish between France and Spain on the one hand, and Germany and Italy on the other ( See my posts on AFOE here, and on Afem here).

Basically I think their conclusion - "given that Europe's unhappy economies have not been doing so badly compared with America's jollier one, the rewards from further reform might be all the greater" - is a mistaken one.

It is mistaken since in the first place it is not a valid procedure - IMHO - to put all Europe's economies in the same basket in this context, and in the second place, because the whole argument depends on a kind of steady-state prejudice. Simply put, the only reason to assume that the Eurozone economies having grown slower than the US one for sometime may now grow more quickly, is the idea that they all share one common 'steady state' balanced growth path. This I think is a theoretical prejudice and a mistake, and if this assumption falls, then so does the argument. None of which should be taken as implying, of course, that most of the reforms the Economist is advocating aren't badly - and in most cases very badly - needed.

Friday, November 18, 2005

Contradictory Surveys?

The FT reports this morning on the latest survey from the Pew Research Centre to the effect that:

"Some 42 per cent of Americans say the country should 'mind its own business internationally and let other countries get along the best they can on their own'"

"As the Iraq war has shaken the global outlook of American influentials, it has led to a revival of isolationist sentiment among the general public"

On the other hand Brad Setser points us to an Economist article which highlights the fact that:

"In America, China looms enormous in the public's fear of globalisation. According to a recent Harris Poll, four in ten Americans believe that China will be stronger than America within a decade, and most reckon the Asian giant will have a negative effect on the future of America's economy."

Perhaps I am alowing myself to be influenced by the fact that Brad's prime target in his post was how the 'China menace' perception might fuel an Asian interventionist policy from the Pentagon (itself financed by dollars lent by the Chinese themselves), but it does seem to me that the Harris poll would lead you to expect more not less intervention in the future.

Perhaps the way to square the apparent anomaly would be to imagine that it is perceptions of globalisation, and its advantages and disadvantages, which may be changing inside the US.

Thursday, November 17, 2005

India Picks Up The Reform Baton

Well, its not the last word in "open-ness", but it certainly is a step in the right direction. According to the FT, India’s government is about to move forward on package containing sweeping liberalisation of foreign direct investment rules in order to kick start a long-stalled programme of economic reforms.

Kamal Nath, India’s minister for commerce and industry, has proposed allowing 100 per cent foreign direct investment in a range of sectors, including airport construction, oil & gas infrastructure and cash & carry wholesale trading.The cabinet will also debate whether to allow FDI in the exploration and mining of coal, lignite and diamonds, and in the cultivation of important plantation crops such as coffee, tea and rubber....

The measures will disappoint the US and UK government, however, who have been lobbying aggressively for foreign direct investment thresholds to be allowed in the Indian retail sector and for the ownership ceiling to be raised in insurance. Mr Nath, in an interview on Tuesday, said he would be in a position to put a proposal to the cabinet permitting FDI in retail, allowing companies such as Wal-Mart and Tesco to enter into the $205bn Indian retail market, within three months.

Paul Colinvaux and Rivers That Flow Uphill

Here's a new take on the 'living in interesting times' theme: the curse is really that with so many interesting things going-off its hard to concentrate sufficiently on any one of them. The latest case in point is Robert, who wrote me about the size of an acre, and indirectly pointed me towards the work of Paul Colinvaux. As can be seen from the photo, he must undoubtedly be a man after my own heart.

Colinvaux's work is ecological, and he is, of course, interested in population dynamics. Equally interesting, he seems to have attracted the attention of fellow Bonobo enthusiast William H Calvin. Calvin discusses Colinvaux's work in The River That Flows Uphill, which is his river diary of a two-week whitewater trip through the bottom of the Grand Canyon. Again, well worth the read.

Wednesday, November 16, 2005

Fertility Among Foragers and Agriculturalists

Now here's an interesting paper from karen kramer and james boone: Why Intensive Agriculturalists Have Higher Fertility: A Household Energy Budget Approach.

Basically Kramer and Boone look at comparative fertility rates in foraging and agricultural societies:

"It is widely held that human population growth rates began to increase markedly after the Pleistocene/Holocene transition largely as a consequence of the adoption of agriculture and sedentism. A common explanation for this increase in growth rates has been that circumstances associated with food production and/or the accompanying decrease in mobility allowed for higher fertility rates, but over the past decade a number of empirical studies and simulation analyses have revealed that the relationship between mode of subsistence and fertility is more complex than had previously been realized."

"In 1988, Campbell andWood published a cross-cultural compilation of total fertility rates (TFR) of 70 forager, horticultural, and intensive agricultural societies from the contemporary ethnographic record that showed no significant differences in TFRs across subsistence regimes. Hewlett (1991) published a similar analysis of 40 mobile and sedentary foragers and pastoralists that indicated slightly higher fertility rates among pastoralists, although the difference was not significant. In 1993, Bentley et al. published an extensive critique and reanalysis of the Campbell and Wood study, presenting a new cross-cultural comparison of 57 forager, horticultural, and intensive agricultural groups (Bentley, Jasien-ska, and Goldberg 1993, Bentley, Goldberg, and Jasienska 1993). Using a subset of the Campbell andWood sample, excluding nonindependent cases (ethnic groups that were closely related) and populations with high levels of sterility, they found that intensive agriculturalists had significantly higher fertility rates. Interestingly, however, horticulturalists showed slightly lower fertility than foragers in the sample, although the difference was not significant. Using a similar kind of data base, Sellen and Mace (1997) have shown that for every 10%increase in dependence on agriculture there is a 0.4 increase in TFR."

Now a number of points seem to clearly stand out here. Firstly, fertility generally in foraging (hunter/gatherer) societies is not especially high: Hewlett finds a mean TFR of 5.6 with a range of 3.5 - 7.9, while Bentley, Goldberg, and Jasienska find a mean for agriculturalists of 6.6 with a range of 3.5 to 9.9. So fertility in agricultural societies is somewhat higher, now why the difference? Now as Kramer and Boone state circumstances associated with food production and/or the accompanying decrease in mobility might have been thought to account for the difference, but apparently not. So what was it?

"This paper explores the idea that children’s contribution to underwriting the cost of large families may be an important factor conditioning variation in family size and the higher fertility attained by at least some intensive agriculturalists."

In other words it was the role of children as a source of cheap labour which drove the additional fertility. Well, what'd'yu know. Definitely worth a read.

The Full Cantillon Post is Worth Reading

As I suspected, Cantillon didn't write exactly what many have subsequently attributed to him:

In the lower classes of the state also there are men who from pride and from reasons similar to those of the nobility, prefer to live in celibacy and to spend on themselves the little that they have rather than settle down in family life. But most of them would gladly set up a family if they could count upon keeping it up as they would wish: they would consider themselves to do an injustice to their children if they brought them up to fall into a lower class than themselves. Only a few men in a state avoid marriage from sheer flightiness. All the lower orders wish to live and bring up children who can live like themselves. When labourers and mechanics do not marry it is because they wait till they save something to enable them to set up a household or to find some young woman who brings a little capital for that purpose, since they see every day others like them who for lack of such precaution start housekeeping and fall into the most frightful poverty, being obliged to deprive themselves of their own food to nourish their children.

From the observations of Mr Halley, at Breslaw in Silesia, it is found that of all the females capable of child bearing, from 16 to 45 years of age, not one in six actually bears a child every year, while, says Mr Halley, there ought to be at least 4 or 6 who should have children every year, without including those who are barren or have still births. The reason why four women out of six do not bear children every year is that they cannot marry because of the discouragements and difficulties in their way. A young woman takes care not to become a mother if she is not married; she cannot marry unless she finds a man who is ready to run the risk of it. Most of the people in a state are hired or are undertakers; most are dependent and live in uncertainty whether they will find by their labour or their undertakings the means of supporting their household on the footing they have in view. Therefore they do not all marry, or marry so late that of six women, or at least four, who should produce a child every year there is actually only one in six who becomes a mother.

The increase of population can be carried furthest in the countries where the people are content to live the most poorly and to consume the least produce of the soil. In countries where all the peasants and labourers are accustomed to eat meat and drink wine, beer, etc. so many inhabitants cannot be supported.

Men multiply like mice in a barn if they have unlimited means of subsistence; and the English in the colonies will become more numerous in proportion in three generations than they would be in thirty in England, because in the colonies they find for cultivation new tracts of land from which they drive the savages.

A state which has conquered several provinces may, by tribute imposed on the vanquished, acquire an increase of subsistence for its own people. The Romans drew a great part of their subsistence from Egypt, Sicily and Africa and that is why Italy then contained so many inhabitants.

A state where mines are found, having manufactures which do not require much of the produce of the land to send them into foreign countries, and drawing from them in exchange plentiful merchandise and produce of the land, acquires an increased fund for the subsistence of its subjects.

The Dutch exchange their labour in navigation, fishing or manufactures principally with foreigners, for the products of their land. Otherwise Holland could not support of itself its population. England buys from abroad considerable amounts of timber, hemp and other materials or products of the soil and consumes much wine for which she pays in minerals, manufactures, etc. That saves the English a great quantity of the products of their soil. Without these advantages the people of England, on the footing of the expense of living there, could not be so numerous as they are. The coal mines save them several millions of acres of land which would otherwise be needed to grow timber.

It is also a question outside of my subject whether it is better to have a great multitude of inhabitants, poor and badly provided, than a smaller number, much more at their ease: a million who consume the produce of 6 acres per head or 4 million who live on the product of an acre and a half.

Essai sur la nature du commerce en general
Part One: Chapter Fourteen The Fancies, the Fashions, and the Modes of Living of the Prince, and especially of the Landowners, determine the use to which Land is put in a State and cause the variations in the Market price of all things

Cantillon, Mice and China

I am rumaging around trying to find the source of the Cantillon quote:

"Men multiply like mice in a barn if they have unlimited means of subsistence"

I have found it, and the idea behind the quote is, of course, interestingly wrong. It is wrong for self-evident reasons, and it is interesting for the lasting impact it has had on the way some economists see demography and fertility. (More on all this soon, but meantime you can find Cantillon's Essai Sur La Nature Du Commerce En General here).

However, I couldn't help noticing the similarity between what Richard Cantillon argued 250 years ago, and the latest OECD report on Chinese agriculture (see previous post and - plus ça change!).

There is no country where population is carried to a greater height than in China. The common people are supported by rice and rice water; they work almost naked and in the southern provinces they have three plentiful harvests of rice yearly, thanks to their great attention to agriculture. The land is never fallow and yields a hundredfold every year. Those who are clothed have generally clothing of cotton, which needs so little land for its production that an acre of land, it seems, is capable of producing a quantity full sufficient for the clothing of five hundred grown up persons. The Chinese by the principles of their religion are obliged to marry, and bring up as many children as their means of subsistence will afford. They look upon it as a crime to lay land out in pleasure gardens or parks, defrauding the public of maintenance. They carry travellers in sedan chairs, and save the work of horses upon all tasks which can be performed by men. Their number is incredible if the relation of voyages is to be depended upon, yet they are forced to destroy many of their children in the cradle when they apprehend themselves not to be able to bring them up, keeping only the number they are able to support. By hard and indefatigable labour they draw from the rivers an extraordinary quantity of fish and from the land all that is possible.

Nevertheless when bad years come they starve in thousands in spite of the care of the emperor who stores rice for such contingencies. Numerous then as the people of China are, they are necessarily proportioned to their means of living and do not exceed the number the country can support according to their standard of life; and on this footing a single acre of land will support many of them.

Guessing that 0.65 hectares is around an acre, this seems to be the case: "Fully 200m of China’s 248m rural households farm on plots of land of around 0.65ha".
OECD 2005

Update: Robert "the rattlesnake" has just mailed me pointing out the following:

0.65 hectare is 1.6 acres

One hectare is 2.5 acres (actually close to 1% less)
and 1 acre is 0.4 ha (actually a little over 1% more)

In passing I would add two unrelated comments. Firstly I have comments switched off since Blogger has been attracting one hell of a lot of spam, and since posts which may be more likely to attract comments and discussion go on A Fistful of Euros (or Afem) anyway. Secondly, can I recommend Robert's interesting looking tour de force: Choice and Constraint.

OECD on Chinese Agriculture

The OECD has a new report on Chinese agriculture (you can download a free read-only browse copy here).

According to the report agriculture accounts for 40 per cent of China’s workers, but produces only 15 per cent of economic output. This gap that can only be narrowed if farmers are re-deployed to other, more productive sectors sectors.

"The transfer of huge numbers of workers from low productivity agriculture to higher productivity manufacturing is one of the basic ingredients of China’s economic growth"

Fully 200m of China’s 248m rural households farm on plots of land of around 0.65ha. While output is high per unit of land, it is low relative to the number of workers employed. The result of this is that China tends to have a comparative advantage in the production of labour intensive crops, such as fruits and vegetables, and a disadvantage in the production of land intensive crops, such as grains and oilseeds.

The report also suggests that anywhere between 70m and 100m more rural workers will leave agriculture between 2000 and 2010 on current trends. The capacity of businesses in smaller towns to absorb them seems doubtful, so pressure on China’s larger cities is only likely to grow.

Much of the evaluation of progress in Chinese agriculture is positive:

Over the last twenty five years, China has made huge progress in meeting its agricultural policy objectives: agricultural production has risen sharply, rural industries have absorbed a large part of farm labour, poverty has fallen dramatically, and the level and quality of food consumption has improved significantly. In line with the improving economic situation, government priorities have shifted from increasing production, especially of food grains, to rural income support and, most recently, to environmental concerns.

Bernanke To Introduce Inflation Targeting

I suppose this is hardly 'beaking news', but Ben Bernanke made it abundantly clear in his appearance yesterday before the US Senate banking committee that he is an inflation targeting enthusiast. His actual words:

"Providing quantitative guidance about the meaning of ‘long-term price stability’ could have several advantages, including further reducing public uncertainty about monetary policy and anchoring long-term inflation expectations even more effectively....This step would in no way reduce the importance of maximum employment as a policy goal. Indeed, a key justification for this action is its potential to contribute to stronger and more stable employment growth by further stabilising inflation and inflation expectations".

Since he is also a realist and a pragmatist, Bernake also stressed that changes would be gradual and consensual. OK, I tend to be more with Greenspan on this, but now lets see how it works out in practice.

Monday, November 14, 2005

An Orderly Withdrawal?

On one version of events the Bank of Japan is simply dotting the 'i's and crossing the 't's on it road map to exit the massive monetary easing process sometime during the next six months. On another the road itself is fraught with difficulty, and an overly 'inflation wary' central bank might risk upsetting the whole apple cart if it proceeds to rapidly. It is this tension which seems to be reflected in today's FT article from David Pilling about a shouting match which seems to have broken out between the Ministry of Finance and the BoJ. According to Pilling:

Japan’s government on Monday tried to calm a potentially explosive row with the central bank over the timing of monetary tightening, saying there was no “wavering of trust” in its relationship with the Bank of Japan.

The MoF is concerned that any premature monetary tightening could threaten fragile economic growth and limit its ability to conduct what it considers essential fiscal tightening.

MoF officials are also concerned that the central bank may cut its purchases of government bonds, currently at Y1,200bn a month, as part of monetary tightening, a move that could push up long-term rates and damage efforts to roll over huge quantities of public debt.

Hidenao Nakagawa, policy chief of the ruling Liberal Democratic party, is quoted as saying:

The BoJ has no independence when it comes to policy targets.If it does not understand this, we need to consider amending the BoJ Law

Former BoJ board member Nobuyuki Nakahara is also cited as saying that the central bank was “crazy” if it thought the government would let it reduce JGB purchases, since it was a move which “would immediately invite long-term rates to rise.”

Coincidentally or otherwise the FT also has a story today about how Sadakazu Tanigaki, Japan's finance minister, said on television on Sunday that spending cuts and a reduction in debt issuance were not sufficient to restore government finances to sound health, and that an increase in consumption tax was required to tackle the country’s heavy debt burden.

And if anyone is really interested in following where the coincidences end here and the patterns begin, the FT has another piece, about Germany this time, where it notes that the new coalition partners "are poised to preside over one of the most fiscally conservative governments in nearly two decades". Value-added tax is about to rise by three percentage points from 2007, with two-thirds of the proceeds going towards plugging the budget hole. The top tax rate for high earners will rise by three percentage points, and many tax incentives that had allowed Germans to minimise their tax bills will be scrapped. A corporate tax reform intended for 2007 will also be postponed by one year.

Of course both Japan and Germany are countries with export driven economies, running balance of payments surpluses, and where domestic consumption has been running notoriously weakly, so the ecopnomic rational here is peculiar, except for the fact that both have the fical holes due to the presence of rapidly ageing popultaions.

Still, if you want to follow the coincidence through to the end, what's the betting that government representatives in Germany (but this time perhaps diplomatically), are making it known over at the ECB that moving later rather than sooner with any rate rises would be greatly appreciated.

Friday, November 11, 2005

Japan Continues To Grow

I think there is a pretty fair and balanced assessment of the current Japan situation by David Turner in today's FT. He makes the following points:

1/. Japan’s economy continued to grow slowly but surely in the third quarter, supported by heavy investment by companies and moderate growth in consumer spending.

2/. The world’s second largest economy was expanding despite a negative contribution from trade. The country’s trade surplus in the period had narrowed on high crude oil prices, reducing overall GDP by 0.1 per cent.

3/. Corporate investment remained one of the high points of the economy, as companies took advantage of continuing high profits. Capital spending rose 0.7 per cent.

4/. The real-term rise in third-quarter GDP was also the slowest this year, compared with the 0.8 per cent growth in the June quarter. Recent data on household spending, such as retail sales, have disappointed economists. Although Japanese consumers are spending more, the country is still far from a consumption boom.

5/. There have been encouraging signs which point to the end of deflation. Property prices are at last rising in Tokyo....At the same time, residential property prices continue to fall throughout most of Japan. Moreover, the Cabinet Office said on Friday that the GDP deflator – which some economists favour as a broad measure of inflation – was 1.1 per cent down on the year.

Migrant Workers in the US

The Congressional Budget Office in the US yesterday released a report on the role of immigrant workers in the US. The thrust of the report is perhaps clearly captured in this statement:

"The United States is known as a nation of immigrants— a characterization that is more appropriate today than at any time since the 1930s. Census Bureau data for 2004 indicate that 34 million of the nation’s 288 million people — 12 percent of the U.S. population—were foreign born. That was the highest percentage of foreign-born people the Census Bureau had recorded in 70 years."

and this:

In 2004, among workers age 25 and older who lacked a diploma, nearly half were foreign born, and most were from Mexico and Central America. At the same time, many other immigrant groups were highly educated. The educational attainment of foreign-born workers from other regions was slightly higher than that of natives; in particular, a higher percentage of those immigrants had taken graduate

"A flexible labor market will adjust over time to the presence of more foreign-born workers. The U.S. economy should attract more capital as investors see opportunities to increase their returns. Increased investment, in turn, will tend to raise workers’ productivity and earnings. Ultimately, lower production costs should increase employers’ profits and lower prices for consumers. Even after such adjustments occur, however, the earnings of native workers whose education and skills are most like those of immigrants could be adversely affected by the increased competition. Over even longer time periods, some of those workers may be motivated to obtain additional education to receive the increased labor market payoffs associated with greater education."

The Ft has an article summarising the report, which draws attention to this point:

"Commonly cited statistics on earnings growth can be misleading if used as indicators of progress during a period in which an increasing share of the workforce is foreign born," the CBO said in a study of immigration and the US labour market commissioned by the Senate finance committee.

Thursday, November 10, 2005

Inflation Targeting 'Wholly Inadequate"?

This is the view of Morgan Stanley's Joaquim Fels who argues - in a very interesting piece on Mortgan Stanley - that it is excess liquidity, not excess savings, that is driving the low interest environment. The whole article is worth a read, but here is a taster:

"While there are good fundamental reasons to be bearish on bonds (higher inflation) and risky assets (slower economic growth), excess liquidity is likely to remain plentiful, which should cushion any sell-off in some asset classes and could even pump up new bubbles in others (equities?). And, turning to monetary policy, central banks need to find new approaches to deal with the liquidity monster. An old-fashioned concept like inflation targeting is certainly not the answer, in my view — in fact, it may be part of the problem."

"According to our calculations, global excess liquidity has been on a steep upward trend since about 1995. Between 1995 and 2005, the credit-to-GDP ratio has risen by 25%, broad money-to-GDP by 32%, and narrow money to GDP by no less than 55%. The steep rise especially in narrow money reflects the fact that this aggregate is particularly sensitive to short-term interest rates, which were reduced sharply following the bursting of the equity bubble in 2000. Thus, monetary easing has produced an unprecedented amount of liquidity not needed to finance transactions in the real economy and available to chase bond, equity and other asset prices higher."

"Against this backdrop, it strikes me that the concept of ‘inflation-targeting’, as it is commonly understood, is wholly inadequate to deal with the excess liquidity issue. Many central banks who have applied the concept directly or indirectly in the past are becoming increasingly aware of the limits of this approach. It is a great concept if you want to acquire credibility and want to bring about disinflation. But, once inflation is low and stable, credibility may become a curse as it encourages excessively low interest rates and excessively high risk-taking."

"There are two possible ways out. The first is to stick to inflation targeting in principle but extend the time horizon for the inflation forecast exercise to 3 to 5 years out, and to explicitly incorporate risks to longer-term price stability emanating from asset price developments into the forecast exercise and into the monetary policy stance derived from the process. This could imply tolerating, say, an undershoot of consumer price inflation below target for some time and pursue a less expansionary policy so as to prevent a build-up of financial sector imbalances that could give rise either to higher inflation or, if bubbles burst, to deflation over the medium to longer term."

Chinese Producer Price Inflation Eases

As oil prices fall back, making a case that global (and even local) inflation is a big issue is getting to be uphillwork. The latest example comes from China, where producer price inflation has now fallen back to a straight rate of 4% this month, down from an annualised 4.5% last month, thus registering the lowest reading since March 2004. And don't miss the fact that:

Manufacturers of producer goods priced up their products by only 1% over last year (+1.5% in Sept). Consumer goods manufacturers suffered the seventh successive month of deflation, worsening to 0.5% YoY in Oct. (-0.4% in Sep.). Mild inflation in food (+0.3%), clothing (+1.2%) and daily use articles (+1.5%) was more than offset by the continued deflation in durable goods (-3.2%).

In fact the y-o-y CPI was 1.2% in October, up just a touch on the September reading. The big-push factor was fresh vegetables which rose at an annualised rate of 17.5%.

Information from Denise Yam at Morgan Stanley

Wednesday, November 09, 2005

Don't Speak To Soon

I have been arguing continuously for some months now that Japan might not escape the deflation trap so easily as some seem to imagine. Today there are two pieces of news which should at least give the 'optimists' some pause for thought.

Firstly the news that Japan's economy most likely slowed in the third quarter, with one of the principal explanations being the lack of dynamism in the consumer sector.

Secondly Morgan Stanley's Takehiro Sato suggests that negative influences on prices may mean that y-o-y positive prices may still be quite a time away.

Based on the above, it is clear that the scenario calling for the BoJ to eliminate quantitative easing owing to a slight recovery in the core CPI inflation rate is now on unexpectedly shaky ground. Even if the BoJ is compelled to keep its commitment and eliminate quantitative easing, the factors affecting whether it will be able to follow that move fairly soon with rate hikes as currently planned are becoming even less certain over the near term.

Wednesday, October 19, 2005

Adult Longevity and Saving

Here's another part of the life cycle mystery getting solved. Do oldest old societies save or dis-save. Many think that the life cycle modle predicts dis-saving. Tomoko Kinugasa and Andrew Mason say it shouldn't, it depends on how rapidly life expectancy is rising. Rising life-expectancy produces a behavioural change which (ceteris paribus of course) leads to more saving, people need to support themselves for longer. The paper is based on Kinugasa's PhD research. I need time to think more about this, but my initial impression is that this is definitely a step in the right direction, and helps us understand China a little bit more, since in China, of course, life expectancy is currently rising very rapidly. (Incidentally, this may also have something to offer on the old East Germany, since life expectancy rates jumped dramatically in very few years to a level very close to their counterparts in the west.

Previous research has emphasized two channels through which the demographic transition may influence the accumulation of wealth. First, the transition produces changes in age structure that will have compositional effects if saving rates vary by age.Second, changes in demographic variables may influence behavior.... Empirical research has supports the hypothesis that a decline in the share of the dependent population, the child dependent population in particular, leads to higher saving rates. The magnitude of compositional effects, however, is a controversial and important empirical issue. The controversy is particularly salient in light of East Asia’s successful development experience. Large increases in aggregate saving rates, leading to rapid capital accumulation, is widely recognized as one the key ingredients to the region’s success. Several recent empirical studies, based on the analysis of aggregate cross-national panel data, have identified changes in age structure as the most important or perhaps even the exclusive reason why aggregate saving rates increased (Higgins 1994; Kelley and Schmidt 1996; Higgins and Williamson 1997; Williamson and Higgins 2001).

An alternative approach, employed by Deaton and Paxson (2000), reaches very different conclusions. They use a series of consumer expenditure surveys from Taiwan to estimate individual age profiles of consumption and earning. They combine these estimated profiles with observed and projected changes in age structure to simulate aggregate saving rates over Taiwan’s demographic transition. They conclude that changes in age structure had modest effects on saving rates and can not explain the dramatic increase in aggregate saving rates in Taiwan. One possible resolution of this empirical controversy is that the changes in fertility and mortality have behavioral, as well as, compositional effects.

Labor force behavior varies with fertility. Expectations about old-age support – either from public or familial systems – may shift in anticipation of changes in age structure. The decline in adult mortality may influence saving by affecting the expected duration of retirement. It is the last possibility that is explored in this paper.

The effect of mortality on saving has been explored in a number of previous studies (Yaari 1965; Davies 1981; Zilcha and Friedman 1985; Cutler, Poterba et al. 1990; Kuehlwein 1993; Leung 1994; Borsch-Supan 1996; Schieber and Shoven 1996; Bloom, Canning et al. 2003; Kageyama 2003). Our interest was stimulated in particular by recent simulation results that show that increases in life expectancy can have large effects on aggregate saving if household saving is governed by the lifecycle model (Lee, Mason et al. 2000; 2001a; 2001b).

Changes in adult survival influence aggregate saving in two ways. First, as the survival rate increases the expected duration of retirement rises. Thus, individuals will consume less and save more during their working years in order to support more expected years of consumption during retirement. Second, increases in the adult survival rate lead to an increase in the share of retirees in the adult population. Given that retirees are saving at a lower rate than workers, the compositional effect of an increase in adult survival is to reduce aggregate saving. What is the net effect on improvements in adult survival on aggregate saving?

Providing a clear answer to this question requires a careful examination of the dynamics in addition to the comparison of steady states......

The second important feature of the results is the implication for population aging and aggregate saving. There is widespread concern, though limited empirical support, that population aging will lead to a decline in aggregate saving rates. The empirical results presented do not support that conclusion. If old-age survival rates continue to increase, as is widely expected, our empirical results imply that saving rates will continue to rise.

Demographic Dividends in developing and Developed Countries

Andrew Mason had another paper at the UN experts meeting on ageing: DEMOGRAPHIC TRANSITION AND DEMOGRAPHIC DIVIDENDSIN DEVELOPED AND DEVELOPING COUNTRIES. Well worth a read. Mason is very aware of the issues.

This paper has several objectives. The first is to explain the demographic dividends in a conceptual and formal way. This draws on earlier work that identifies two demographic dividends (Mason and others, forthcoming). The first dividend arises because changes in age structure influence the share of the population concentrated in the working ages. The second dividend arises to the extent that anticipated changes in the share of the population concentrated in the retirement ages induce individuals, firms, and/or governments to accumulate capital.

The first dividend is inherently transitory. Demographic transition around the world has led to an increase in the share of the working age population that has lasted for many decades. But when large cohorts of prime age adults pass into their retirement years, the first dividend ends. The share of the population in the working ages begins to decline and the first dividend turns negative. The first dividend can have a lasting effect on economic growth if the gains in per capita income are used to create human capital by investing in health and education, to accumulate physical capital, to support technological innovation, to create growth-inducing institutions, etc.

The second dividend is permanent in nature because it is driven by the rising share of the elderly in our populations. It is not self-evident that lifecycle wealth would necessarily continue to rise as the share of the retired population increases. The estimates presented here do not extend beyond the year 2000, but detailed simulations to 2150 show that for the US and Taiwan life cycle wealth stabilizes at a high plateau or continues to increase depending on the mortality assumptions employed (Lee and others, 2003). Thus, the second dividend does not turn negative as the demographic transition proceeds.

China's Demographic Dividends

I am hard at work trying to write something, so I don't have much time or energy to blog, but two pieces on China that cannot go unremarked. Firstly And Xie again: this time he has picked up on the demographic issues related to China's high savings rate. Also the UN held an experts meeting on ageing in August, and one of the papers was on China: DEMOGRAPHIC DIVIDEND AND PROSPECTS FOR ECONOMIC DEVELOPMENT IN CHINA by Wang Feng, of the University of California Irvine and Andrew Mason, of the University of Hawaii and the East West Center. Just a short couple of extracts to give a taste:

During the last two and half decades, China has undergone demographic as well as economic changes of historic proportions. Demographically, China has transformed itself from a "demographic transitional" society, where reductions in mortality led to rapid population growth and subsequent reductions in fertility led to a slower population growth, to a "post-transitional" society, where life expectancy has reached new heights, fertility has declined to below-replacement level, and rapid population aging is on the horizon. In the not-too-distant future -- in a matter of a few decades -- China’s population will start to shrink, an unprecedented demographic turn in Chinese history in the absence of wars, epidemics, and famines of massive scales. In this process, China will also lose its position as the most populous country in the world.

The rationale for China’s one-child policy was a neo-Malthusian perspective on the relationship between population and development – a view largely dismissed by mainstream economists. The architects of China’s population policy can point, however, to the post-reform economic record as evidence of the success of the policy. This assertion can be questioned on two grounds. The first is the extent to which the transition to low fertility was accelerated by the one-child policy (Wang, 2005). The second, considered in this paper, is the extent to which fertility decline, the slow-down in population growth, and changes in age structure contributed to China’s economic success. In light of the recent and future changes in China's age structure, we also examine and speculate in this paper the role of population age structure changes in affecting China's prospect for economic development in the coming decades of the twenty-first century.

Monday, October 17, 2005

The BoJ is Convinced

The entire nine-member board of the Bank of Japan is convinced that deflation in Japan will be over by the end of this year: I only wish I was.

Minutes of the bank's board meeting earlier this month show board members expect year-on-year changes in consumer prices to be zero or to rise slightly at the end of the year.

In recent weeks, senior members of the BoJ, including governor Toshihiko Fukui, have been making statements saying the time is approaching when the bank can consider abandoning quantitative easing and considering raising interest rates.

Inflationary Pressure From China?

Andy Xie had an interesting and important article in the MS GEF last Friday. He asks whether the epoch of China as a deflationary force on global prices may not be coming to an end. This is an interesting change of tack for Andy, since to date he has been on of the principal exponents of the Chinese 'reserve army of labour' argument wherby internal labour migration (estimated variously to have been of a magnitude of over 150 million people) drives down unit labour costs globally.

Andy is now speculating that this 'broad river' may now be reaching its limits. In particular difficulty in finding new migrants may be having an upwards impact on the 'cheapest cheap' wages. This has to happen at some stage, it is hard to tell whether we are there yet.

Xie speculates that this will impact on prices of products at 'big box retailers'. It will also influence the extent to which the cost push element of rising oil can be adsorbed. Otoh, Xie speculates that, as China moves up the value chain, the deflationary impact may still be felt in a broader range of end products.

China is not deflationary for the global economy at present, I believe. It could be an inflationary factor for one or two years due to cyclical and political reasons. Over time, China may become deflationary again when it moves up the value chain to re-price higher value-added products with Chinese costs. What matters to the market now is that China’s impact on global economy is becoming inflationary

The deflation winners, mainly big-box retailers, could see their gains reversed in the next year or two. Also, the major central banks may have to tighten into a slowing global economy, as the China factor no longer holds inflation back.