New global currency wars warning!

The recent money-pumping measure by the United States has been criticised by Brazil as a protectionist move which will adversely affect developing countries.

THE recent announcement by US Federal Reserve chief Ben Bernanke that the United States would be renewing its pumping of money into the banking system has been acclaimed by some parties as a move to revive its faltering economy.

But the Fed’s measure to revive “quantitative easing” is not being welcomed by all. It has instead caused anxiety in some developing countries.

Their fear is that a large part of the massive amounts of money being unleashed into the financial markets may fail to boost the US economy but will find its way as unwanted capital flows into some developing countries.

Bernanke announced that the Fed would purchase US$40bil (RM124bil) per month of mortgage-linked assets from the market, and do so continuously until the jobs situation improves.

The hope is that cheap and abundant money will encourage entrepreneurs and consumers to spend more and spark a recovery.

However, previous rounds of such quantitative easing did not do much for the US economy.

A large part of the extra funds were placed by investors not in new US production but as speculative funds in emerging markets or in the commodity markets, in search of higher returns.

In developing countries that received the funds, adverse effects included an inflation of prices of property and other assets, as well as appreciation of their currencies which made their exports less competitive.

On the other hand, the US dollar depreciated because of the increased supply of US dollars and the reduced interest rates, making US exports more competitive.

Brazil has been in the forefront of developing countries that are critical of the US money pumping. Last week, the Brazilian finance minister Guido Mantega called the US Fed measure a “protectionist” move that would re-ignite global currency wars.

Mantega told the Financial Times that the third round of quantitative easing would only have a marginal benefit in the United States as the already high liquidity in the United States is not going into production.

Instead, it is really aimed at depressing the dollar and boosting US exports.

Japan has also decided to expand its own quantitative easing programme in response to the US move, and this is evidence of tensions and a currency war, said Mantega.

In previous rounds of liquidity expansion in recent years, Brazil has been one of the developing countries adversely affected by sharp currency appreciation, which reduced its export competitiveness and facilitated import increases.

Recently, Brazil’s currency, the real, has weakened from the high of 1.52 real to the dollar to the present two real, which has improved its competitiveness.

But the new liquidity expansion in the United States may again cause a flood of funds to enter Brazil and reverse the currency trend.

In such a situation, Brazil may be forced to take measures to stop the real from appreciating, said the minister.

Previously, the country had taken capital controls to discourage inflows of foreign funds.

What has irritated Brazil even more is an accusation by the US Trade Representative Ron Kirk that Brazil has become protectionist in raising some tariffs, even though the Brazilian measures were within its rights in the WTO framework.

Brazil’s Foreign Minister Antonio Patriota last week wrote to Kirk pointing out the unfairness of a protectionist US accusing Brazil of protectionism.

“The world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries,” said Patriota.

“As a result, Brazil has had to cope with an artificial appreciation of its currency and with a flood of imported goods at artificially low prices.”

He pointed out that the United States was a major beneficiary, as it almost doubled its exports to Brazil from US$18.7bil (RM58bil) to US$34bil (RM105bil) from 2007 to 2011.

“While you refer to WTO-consistent measures adopted by Brazil, we, on our side, worry about the prospect of continued illegal subsidisation of farm products by the United States, which impact Brazil and other developing countries, including some of the poorest countries in Africa.

“The US has managed in a short period to remarkably increase its exports to Brazil and continues to reap the benefits of our expanding market. But it would be fairer if those increases took place in an environment not distorted by exchange rate misalignments and blatant Government support”.

As the quantitative easing from the United States and Japan is only going to take effect in future, it remains to be seen whether history will repeat itself – it will have minimal effect on the United States and Japanese economic recovery but will cause problems for developing countries – or whether it will be different this time.

GLOBAL TRENDS By MARTIN KHOR

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Obama and Bernanke: Cooking Up Another Market Bubble?

BY James Marshall Crotty, Forbes Contributor

 

"Ben, look. You have to keep interest rates low or I am toast, dude."

The two most important leaders on planet earth each delivered major public speeches in the last 24 hours. Last night U.S. President Barack Obama, in what might be the last State of the Union address of his political career, suggested that the economy is improving, unemployment is heading down, the world is safer, and America’s standing in the world vastly improved all because of his administration’s policies. In a press conference this afternoon, Federal Reserve Chairman Ben Bernanke (by far, the most powerful non-elected person on the planet) delivered a more cautious assessment, suggesting that improved economic conditions, including decreased unemployment and steadily low inflation, will be affected by what happens in Europe and in the broader non-U.S. global economy (hint: China). Today’s upward rise in the U.S. stock market suggests that investors believe both men might be right. That is, there will be economic headwinds, but the U.S. will manage those headwinds well.



Just to make sure, Bernanke signaled that the Fed would keep interest rates low at least through 2014. This is unhappy news to America’s savers and the rabidly anti-Fed Ron Paul (who believes Fed money printing is the root cause of our economic malaise), but music to the ears of investors, new homebuyers, and for what Obama terms those “responsible homeowers” seeking home refinancing (who will now pay a 30-year mortgage rate of just 3.88%). Who knows, maybe housing principal forgiveness is on the way too (ah, heck, throw in a toaster while’s you’re at it).

But, with such initiatives, are Obama and Bernanke just cooking up another housing and market bubble to go along with the current student loan bubble?

What are your thoughts on Obama’s State of the Union and the Fed Chairman’s news conference today? Are things slowly getting better? Will we be able to manage the turmoil in Europe and a slower growth China? Will their remedies make the U.S. economy stronger long-term?

Or are these two men missing some elephant in the living room?

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US growth anemic, debt row poses recession risk

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By Lucia Mutikani WASHINGTON 

(Reuters) - The economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising the risk of a recession if a standoff over the nation's debt does not end quickly.

Output increased at a 1.3 percent annual pace in the second quarter as consumer spending barely rose, the Commerce Department said on Friday. In the first three months of the year, the economy advanced just 0.4 percent, a sharp downward revision from the previously reported 1.9 percent gain.

"The economy essentially came to a grinding halt in the first half of this year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "We did get side-swiped by some temporary factors which are fading, but it raises some concerns about the sustainability the recovery."

The weaker-than-expected second-quarter reading and downward revisions extending into last year underscored the frail state of the recovery, which economists said could fall off the rails if lawmakers do not raise the nation's $14.3 trillion borrowing limit and avoid a government default.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply in the second quarter, advancing at only a 0.1 percent rate -- the weakest since the recession ended two years ago.

Stocks on Wall Street fell on the data and the debt impasse on Friday, to record their worst week in a year. Prices for government debt rallied, while the dollar fell broadly.



FUNDAMENTAL SLOWDOWN?

The Obama administration has said it will run out of borrowing authority on Tuesday and could soon run out of cash, but talks aimed at raising the debt ceiling remain deadlocked.

"This should wake up those in Washington who still have their thinking caps on," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. "There is no margin for error and a default that lasted any length of time could push us back into recession."

But any debt agreement would include budget cuts that could also weigh on growth. High Frequency Economics said in a note on Thursday that a deal to trim the U.S. deficit would likely shave government spending by about $70 billion, or one-half of a percentage point of GDP, in its first year.

Growth in the first half of 2011 was held back by a combination of bad weather, expensive gasoline and supply chain disruptions after the earthquake disaster in Japan.

With economic activity yet to show signs of perking up, even with gasoline prices off their highs and the Japan supply constraints easing, there is concern that some of the weakness might be fundamental and linger for a while.

While economists still expect growth to accelerate to about a 3 percent pace for the remainder of this year and next year, the risks are stacked to the downside.

Annual revisions to GDP data that take into account newly available source material, including tax returns, showed the economy lost steam in late 2010, before it ran into the temporary headwinds. Fourth-quarter growth was revised to a 2.3 percent rate from 3.1 percent.

The revisions also showed the 2007-2009 recession was much more severe than prior measures had found.
The downgrades help to explain why the economy has only regained a fraction of the more than 8 million jobs lost during the downturn.

Economists said the current bout of weakness reinforced views that the Federal Reserve will maintain its accommodative monetary policy stance for a while, but few think the central bank will spring to the economy's rescue if it can avoid it.

"In the immediate environment, with so much at stake on fiscal policy, I think the Fed wants to remain quietly on the sidelines, sorting out events and how the data plays out in the second half of the year," said Robert DiClemente, chief economist at Citigroup in New York.

JOLT FROM JAPAN

The U.S. central bank has held interest rates close to zero since December 2008, and it has bought $2.3 trillion in bonds in an effort to further spur the economy. Fed Chairman Ben Bernanke has opened the door to a further easing of monetary policy, but officials have said they are hesitant to act.

"It's a very high bar," Atlanta Federal Reserve Bank President Dennis Lockhart told CNBC on Friday.

The March earthquake in Japan severely disrupted U.S. auto output, which subtracted 0.12 percentage point from GDP growth in the second quarter.

The decline combined with high gasoline prices to weigh on retail sales as consumers were unable to find the vehicle models they wanted.

Future spending strength will depend on employment and confidence. So far, the immediate outlook is not promising.

The Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.7 in July from 71.5 in June, a separate report showed.

But economists are cautiously optimistic the jobs market will have started to improve somewhat in July after faltering badly in the last two months, although U.S. companies are still trying to hold the line on hiring to save costs.

Merck & Co said on Friday that it plans to slash thousands of jobs by late 2015 to wring out savings of up to $1.5 billion a year.

Nonfarm jobs likely rose 90,000 in July, according to a Reuters survey, after June's paltry 18,000 gain.
Growth in the second quarter was supported by a smaller trade deficit, a pick-up in home building and a healthy rise in business spending. Most encouraging was a lack of a big build-up in business inventories, which rose only modestly.

"Inventory building does not seem to be overdone, which sets us up for a good boost from manufacturing in the second half," said Moody's Analytics' Sweet.

Government spending was another drag on growth in the second quarter. Overall inflation slowed during the quarter, but underlying price pressures continued to build.

(Editing by Leslie Adler)

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U.S. GDP

Don’t Get Caught Holding Dollars When The U.S. Default Arrives!

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Addison Wiggin

Image by Getty Images via @daylife Greece can’t solve a problem of too much debt by taking on even more. We will note, however, that by some measures, the United States is even more deeply in hock than Greece.

Greece’s debt-to-GDP ratio is 143%. America’s is officially 97%. But the $14.3 trillion national debt, stacked up against a $14.7 trillion economy, doesn’t tell the whole story. Look at these numbers:

• $14.3 trillion: “official” national debt
• $5 trillion: Amount Uncle Sam is on the hook for Fannie Mae and Freddie Mac
• $62 trillion: Total liabilities and unfunded obligations for Social Security and Medicare

That doesn’t count the black box of bailouts.

We know how much the Federal Reserve doled out in emergency loans: $16.1 trillion between Dec. 1, 2007, and July 21, 2010. We know that because yesterday the Government Accountability Office completed its first-ever audit of the Fed, made possible largely through the persistence of Rep. Ron Paul (R.-Tex.) making that audit, however incomplete, the law.

What we don’t know is how much of that has been paid back.  “We have literally injected about $5.3 trillion,” said Dr. Paul earlier this month during his questioning of Fed chief Ben Bernanke, “and I don’t think we got very much for it. The national debt went up $5.1 trillion.”

Bernanke did not challenge those figures.

“To get our overall fiscal gap under control,” writes Boston University professor Laurence Kotlikoff in Bloomberg, “the U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.”



Yep: The latest number we see bruited in Washington is $3 trillion. Whatever the final number — and there will be a last-minute deal; there always is — it will be substantially less than $20 trillion over 10 years. The can will be kicked as it keeps getting kicked in Greece.

We note here that the total of outstanding credit default swaps on U.S. Treasuries crested $4.8 billion this week. Uncle Sam has now surpassed Greece in this category.

Measured in year-over-year change, America is number one: Net notional CDS outstanding grew 109%. That means there’s double the bets out there on a U.S. default compared with a year ago.

“You may not know this, but the U.S. has actually defaulted a number of times already,” writes Chris Mayer this morning. He cites five instances:

• 1779: The government was unable to redeem the continental currency issued during the Revolutionary War
• 1782: The colonies defaulted on the debt they took out to pay for the war
• 1862: During the Civil War, the Union failed to redeem dollars for gold at terms stated by the debt contracts
• 1934: FDR defaults on the debt issued to finance World War I, refusing to redeem it in gold. The dollar is devalued 40% against gold
• 1979: A bureaucratic snafu results in interest going unpaid on some small bills.

“With the exception of 1979,” Chris says, “which was mostly due to administrative confusion — the U.S. simply ran out of money each time. The end result was the dollar had to be devalued. Meaning it lost significant purchasing power.

“My guess is that the U.S. will default again. It may not technically be called that, but the only way for the U.S. to meet its financial obligations is to print a lot of money.”

What does that mean in practical terms?  In Greece, professor Savas Robolis at Panteion University in Athens reckons that by 2015, the average Greek employee and pensioner’s standard of living will have fallen 40% compared with 2008.

Even now, Americans are turning to their credit cards to pay for groceries and gas. According to First Data Corp., the volume of gasoline purchases put on credit cards jumped 39% over the last 12 months.
You don’t want to be the average American in a default scenario, whenever it arrives. Ray Dalio, the head of Bridgewater Associates, the world’s biggest hedge fund, puts that day in “late 2012 or early 2013.”

The Path to Debt in America by Addison Wiggin originally appeared in the Daily Reckoning.

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US QE3 sparks concerns !

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Possible US QE3 sparks concerns

By Hu Yuanyuan and Chen Ji 

BEIJING - The Federal Reserve said on Wednesday it could ease monetary policy further if the United States failed to see solid growth, which analysts said may add to China's inflation and endanger its $3.2 trillion foreign exchange reserves.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Ben Bernanke, Fed chairman, told the House of Representatives Financial Services Committee. His remarks were generally interpreted as a signal of a possible QE3 (quantitative easing).

In late 2009, the Fed launched an unprecedented bond-buying drive to boost the economy and make credit more available, spending some $1.7 trillion on mortgage-backed securities and Treasuries before it ended in March 2010. It then initiated a second round of easing, that wrapped up in June, in which $600 billion of bonds were bought.

But the US economy remains weak, prompting the possible launch of a QE3. A Reuters/Ipsos poll released on Wednesday showed that the number of Americans who believe the country is on the wrong economic track rose to 63 percent this month, up from 60 percent in June. The country's jobless rate rose to 9.2 percent in June from 9.1 percent in May.



"If the Fed continues to print more money (as Bernanke hinted), it will drag China into a protracted war to limit liquidity and tame inflation," Lu Zhengwei, chief economist with Industrial Bank Co Ltd, said.

China's consumer inflation already surged to a three-year high of 6.4 percent in June, according to the National Bureau of Statistics. This was partly attributable to quantitative easing measures by the US, which drove global capital into the more lucrative developing markets, including China, analysts agreed.

Moreover, the potential injection of money in the US is likely to raise global commodity prices. Crude-oil futures finished higher on Wednesday boosted by Bernanke's comments. The rising prices may force emerging economies, such as China, Brazil and India, to pay more for imported commodities, further exacerbating their inflationary problems.

"It will be a very bad news for emerging countries," Lu said.

Those countries may have to continually tighten their monetary stance, such as by raising interest rates, further incurring capital inflows, Lu said.

Cao Fengqi, director of the Research Center for Finance and Securities at Peking University, told China Daily that a QE3 would lead to faster appreciation of the yuan against the dollar.

According to Cao, if the easing policy became a reality, the resulting flood of US dollars means a faster depreciation of the greenback, which threatens the security of China's foreign exchange stockpile as it will reduce the real value of the dollar-denominated reserves.

"The primary task for China is to control consumer prices and maintain steady and fast economic growth (to counter any external shocks)," Cao said.

The Foreign Ministry said on Thursday that it hoped the US government would take a responsible attitude to protect investor interests.

Bernanke's hint of a QE3 could also be a strategy to pressure lawmakers to agree on raising the US debt ceiling, analysts said.

US President Barack Obama and the Republicans are bogged down in negotiations to raise the borrowing limit before the Aug 2 deadline.

Bernanke may be "talking up the market" and goading Congress to reach a consensus on the ceiling, Chen Xingdong, chief economist with BNP Paribas Asia Ltd, said.

Moody's Investors Service on Wednesday put its AAA rating on US government bonds on watch for a possible downgrade, citing the "rising possibility that the statutory debt limit will not be raised on a timely basis", which would lead to a default on US Treasury debt obligations.

Meanwhile, Chinese rating agency Dagong Global Ratings Co Ltd on Thursday put US ratings on domestic and foreign currencies on a negative watch list because of the country's rising debt.

Dagong said the current political and economic situation had squeezed out room for tax increases, while it is difficult to curtail military and welfare spending.

In the worst-case scenario, the US public debt will continue to grow to 124 percent of the country's GDP in 2015, and the federal government will have to raise the debt limit by $5.5 trillion, Dagong said.

Dagong downgraded US ratings from AA to A+ on Nov 9, 2010 after the US government announced the second round of quantitative easing.

Wei Tian contributed to this story.

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