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Iceland and China Sign Trade Agreement

April 15, 2013 by Leave a Comment

PARIS — In its first such agreement with a European country, China signed a free-trade deal with Iceland on Monday as Beijing reached out for allies at a time when many of its trading partners were wary of its increasing economic might.

The accord, meant to eliminate most tariffs over the next few years, was signed by trade officials in Beijing during a state visit by Prime Minister Johanna Siguroardottir of Iceland. When completed, it will unite two hugely mismatched economies: Iceland’s 2011 gross domestic product of $14 billion was little more than a rounding error in China’s G.D.P. that year of $7.3 trillion.

Trade between the two countries is small by global standards. Iceland’s exports to China last year, mainly fish, totaled $61 million, while it imported Chinese goods and services valued at $341 million.

But while Iceland cannot offer much in the way of major new market growth, it could help China in its quest for more influence in the Arctic, as global warming and polar ice retreat make that area increasingly accessible. China is seeking to join the Arctic Council, an intergovernmental body that promotes international cooperation in the region, as a permanent observer.

Iceland, though not a member of the European Union, enjoys access to the E.U. single market through its membership in the European Free Trade Association and the European Economic Area. But China would not gain backdoor access to the E.U. market through the trade deal. Iceland had been negotiating membership in the Union but suspended talks in January amid widespread domestic opposition. John Clancy, a spokesman in Brussels for the European trade commissioner, Karel de Gucht, said Iceland would have to terminate all of its bilateral trade deals were it eventually to join the bloc.

The two governments also issued a joint statement Wednesday calling for new bilateral cooperation on “human rights, gender equality, labor issues, Arctic affairs, as well as cooperation on geothermal development, culture, education and tourism.”

With the Doha Round of trade talks under the World Trade Organization largely moribund, some nations have been seeking partnerships below the global level. At present, there are two giant trade deals under discussion, both pivoting on the United States: the Trans-Pacific Partnership being negotiated between Washington and a host of Asia-Pacific nations, and a comprehensive trade and investment agreement with the European Union.

China is party to neither the Trans-Pacific Partnership nor the E.U.-U.S. negotiations, leading some officials and trade analysts to see the proposals as being meant to “contain” China’s increasing power in global commerce.

The accord Wednesday also comes at a time when China’s designs on its North Atlantic ally have been put under a microscope, following the construction of an outsize Chinese Embassy in Reykjavik, and the puzzling effort of a Chinese billionaire to build a luxury hotel and golf course in a vast Icelandic wilderness area.

Article source: http://www.nytimes.com/2013/04/16/business/global/16iht-iceland16.html?partner=rss&emc=rss

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In Surprise, Recovery in China Loses Steam

April 15, 2013 by Leave a Comment

HONG KONG — The Chinese economic recovery lost some of its momentum during the first quarter of this year, official data released on Monday showed, surprising analysts who had expected growth to accelerate on the back of ample credit, strong infrastructure spending and firm exports.

The economy expanded by just 7.7 percent during the first three months of the year, compared with a year earlier, short of the 8 percent that economists polled by Reuters had projected, and slower than during the previous three months, when gross domestic product rose 7.9 percent year-on-year.

Disappointing industrial output data for March also underlined the fading momentum. Year-on-year growth dropped to 8.9 percent, the lowest pace of expansion since August 2012, when fears of a “hard landing” in China were widespread.

The surprisingly poor data raised concerns among some analysts that the slowdown could intensify later in the year, due the effects of recent government measures aimed at curbing property price rises and tempering risks from the growth of lending outside of the banking system.

“While August 2012 proved the bottom for last year’s downturn, we doubt March will be the turning point for 2013, given macro policy has shifted to a tighter stance with renewed controls on the housing market, local government financing vehicles and wealth management products,” Xianfang Ren and Alistair Thornton, analysts at IHS Global Insight in Beijing, wrote Monday in a research note.

Fears over the outbreak of avian flu and new signs of slowing investment momentum could also sidetrack growth in the second quarter of this year, Li-Gang Liu, a China economist at the bank ANZ in Hong Kong, wrote in a research note.

Chinese authorities on Monday played down the slowing growth.

“Our overall judgment is that, although there was a slight dip in growth in the first quarter, it was generally speaking a steady start with stable progress,” Sheng Laiyun, a spokesman for the Chinese statistics bureau, told a televised news conference in Beijing. “China’s basic circumstances have not undergone any fundamental shift, and it still has the conditions for maintaining sustained and healthy economic development over the long term.”

The country’s industrialization and urbanization would remain powerful engines for relatively rapid growth, Mr. Sheng said, while the data also contained signs that domestic consumption was making a growing contribution to that growth, displacing China’s traditional reliance on industrial and infrastructure investment.

Still, the disappointing headline growth figures helped send stock markets across most of Asia lower on Monday.

In mainland China the Shanghai composite index dropped 0.9 percent by early afternoon. The Hang Seng in Hong Kong and the Nikkei 225 in Japan both fell about 1.5 percent, and in Australia, the S.P./ASX 200 fell 1.3 percent.

Analysts had widely expected China’s economy, the world’s second biggest after the United States, to have picked up more steam during the first months of the year, as a tide of credit flowed into the economy, and government-mandated investment in infrastructure projects picked up.

In fact, the growing scale of credit has begun to worry an increasing number of analysts, who warn that the resulting buildup of debt bears substantial risks, including asset price bubbles and potentially destabilizing defaults.

Fitch Ratings last week expressed concerns about the long-term consequences for China’s financial stability over the country’s huge buildup in debt, particularly borrowing by local governments.

The ratings agency reduced its default rating on China’s long-term local currency debt to A+, from AA–.

Data released last week showed that total social financing, the central bank’s broad measure of liquidity, surged in March to 2.4 trillion renminbi, or about $390 billion — more than double the February number.

On Friday, the recently appointed Chinese Prime Minister Li Keqiang said the newly installed leadership in Beijing faced the twin tasks of maintaining growth while overhauling the economy.

“To come to grips with economic policy, we must both keep a steady footing and focus on upgrading,” Mr. Li told a group of economists and business executives in Beijing, in comments reported by the official Xinhua news agency on Sunday.

“Since the start of the year, China’s economic performance has overall made a steady start, and this will help to stabilize everyone’s expectations,” he said. “But at the same time, we must see that there are still quite a few unstable and uncertain factors in the domestic and international environment, and deep-seated problems are constantly arising.”

Article source: http://www.nytimes.com/2013/04/16/business/global/in-surprise-recovery-in-china-loses-steam.html?partner=rss&emc=rss

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O.E.C.D. Warns Slovenia on Banking Crisis

April 9, 2013 by Leave a Comment

LJUBLJANA, Slovenia — Slovenia, trying to avoid becoming the euro zone’s next bailout victim, may have ‘’significantly’’ misread the cost of fixing its troubled banks, the Organization for Economic Cooperation and Development said Tuesday.

Following the messy rescue of Cyprus last month, Slovenia, a country of 2 million perched on Italy’s northeast border, is facing intensifying market pressure while seeking funds to heal its state-owned financial sector.

The O.E.C.D., which includes 34 developed countries, said in a report that Slovenia should save state-owned banks that are viable and sell them into private hands, and allow those that are not viable to fail.

According to an assessment made last year, the local banks, mostly state-owned, are burdened with 7 billion euros, or about $9 billion, in bad loans — a fifth of Slovenia’s gross domestic product.

The country risks falling behind in its race to catch up with Western living standards, the Paris-based organization said.

The report predicted a second straight year of economic contraction, by 2.1 percent. It also said that Slovenia’s public debt had more than doubled since 2008 to 47 percent of gross domestic product and that it could rise to 100 percent by 2025 if no changes are made.

Facing uncertain costs to bail out its lenders, continued pressure on its exports from the euro zone crisis, and a rise in lending costs after Cyprus’s bailout, Slovenia has one of the worst economic outlooks in the O.E.C.D., the organization’s report said.

‘’Against this difficult background and with a possible further deterioration in the international environment, Slovenia faces risks of a prolonged downturn and constrained access to financial markets,’’ the report said.

It recommended that the government increase the powers of the competition office, gradually raise the retirement age, wean wealthier citizens off family benefits, cut unemployment and other benefits, and improve efficiency in education and health care.

Slovenia is the only former communist European Union state that declined to sell most of its banking sector into private hands, a strategy that led to political influence, mismanagement and disastrous lending that has now put the lenders at risk.

‘’Slovenia is facing a severe banking crisis, driven by excessive risk-taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools,’’ according to the report.

Last year’s estimate of the level of bad loans in the banking system is outdated and was created by methodology that was weak and nontransparent, so the real damage could be worse, the organization said.

‘’Capital needs are uncertain and could in fact be significantly higher,’’ it said.

The O.E.C.D. said it welcomed a plan by the Slovenian government to create a so-called bad bank to take nonperforming loans away from state banks, but it said that ‘’lack of transparency and potential political interference pose risks.’’

It added that weak corporate governance and credit misallocation could potentially be attributed to corrupt behavior.

The organization also urged the government to start new stress tests of the banking sector based on a more robust methodology, and to publish the results before recapitalizing distressed but viable banks, preferably through share issues.

But it said market valuation showed that equity in state banks had been ‘’virtually wiped out,’’ and that Slovenian banks that were nonviable should be wound down, with holders of subordinated debt and lower-ranked capital instruments absorbing losses.

Slovenia should then privatize the banks, the Organization for Economic Cooperation and Development said. It criticized a plan being discussed by the current left-of-center government for the state to retain a blocking minority, saying such a move could lead to political interference and new problems.

It said failure to pursue the changes pledged when the government in Ljubljana tapped the dollar debt market last year could ‘’significantly raise borrowing costs,’’ as could a higher-than-expected bill for recapitalizing banks. All of this has put pressure on growth, the report said.

‘’Potential growth has fallen significantly since the outset of the crisis,’’ it said. ‘’As a result, Slovenia is unlikely to resume the catching up toward more developed O.E.C.D. countries soon.’’

Article source: http://www.nytimes.com/2013/04/10/business/global/oecd-warns-slovenia-on-banking-crisis.html?partner=rss&emc=rss

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High & Low Finance: Cyprus Capital Controls Come Years After They Were Needed

March 28, 2013 by Leave a Comment

The new controls are aimed at stopping that hot money from fleeing Cyprus too rapidly. They limit how much cash anyone can take out of the country. Electronic transfers are banned. So is check-cashing. The controls are supposed to be temporary. But they sure don’t look like one-week wonders. There are limits on how much cash can be sent abroad each quarter for a student’s overseas education. There are monthly limits on how much any Cypriot can run up in credit card charges abroad.

That something like this was necessary seems clear. That it will work is not.

During 2008 and 2009, as it became obvious that the Irish banking system was imploding, Cyprus became the new euro zone locale for hot money. Cypriot banks paid higher interest rates on euros and — by some accounts — were not too picky about the provenance of the money coming in.

In 2008, according to a study by the McKinsey Global Institute, $40.7 billion was funneled into Cyprus through loans and bank deposits. In the context of world capital flows, that was a blip. But it amounted to 161 percent of Cypriot gross domestic product that year.

During the Asian currency crisis of the late 1990s, the world learned just how vulnerable a country can be to hot money. If it seems nice on the way in, it can be very nasty on the way out. It is one thing for international capital flows to take the form of direct investment, in factories and companies, or even portfolio investment, through the purchase of corporate stocks and bonds. The nature of that investment does not involve a promise to repay it on demand. But loans and deposits can be demanded just when a country and its banking system can least afford to repay them.

During that crisis, Malaysia broke from the consensus that capital controls were always bad, that the free market knew best. It proved to be a wise decision, although it was endorsed at the time by few economists.

What is happening in Cyprus now bears more than a little similarity to what happened in Ireland earlier. The Irish also enjoyed capital inflows that were a multiple of G.D.P., and the country’s oversize banking system eventually collapsed. There the largest part of the problem was a housing bubble, brought on by lenient lending. When that bubble burst, foreigners wanted their money immediately, and Ireland decided to stand behind its banks, virtually bankrupting the country’s government.

Most of the capital that flowed into Ireland during the good times was not bank deposits. And Ireland had enough of a real economy — absent banking and real estate — that it has continued to attract some foreign direct investment every year since the collapse.

But it used to be said of Cyprus that it had only banks and beaches. It got little in the way of foreign direct investment during the good times. When money flowed in, it took the form of demand deposits that were supposed to be available at any minute.

Luckily for those who had put money into Irish banks, or bought senior bonds from those banks, the Irish banks failed early, before governments realized they could not afford to do bailouts. In Cyprus’s case, the European institutions that were making the decisions first came up with the idea of “taxing” all bank deposits, whether they were insured or not. Fortunately, the Cypriot Parliament balked at that, and the eventual plan makes more sense.

Shareholders and bondholders at the worst bank are wiped out. Deposits up to the 100,000-euro limit for insured deposits are protected, although the capital controls may mean it will be a while before depositors can get their hands on the money. Deposits over that limit in the most troubled bank could be wiped out. At best, those depositors are likely to wait years before they get back a small fraction of their money. The central bank estimates large depositors in the largest bank will do a little better, perhaps getting most of their money back. But such estimates could prove wildly optimistic if banks lose most of their deposits when, or if, capital controls come off.

Article source: http://www.nytimes.com/2013/03/29/business/cyprus-capital-controls-come-years-after-they-were-needed.html?partner=rss&emc=rss

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Orders for Durable Goods Jump

March 26, 2013 by Leave a Comment

WASHINGTON — Demand for long-lasting manufactured goods surged 5.7 percent in February as orders for transportation equipment rebounded strongly, the Commerce Department said Tuesday.

The rise in durable goods orders, which range from toasters to aircraft, reversed January’s 3.8 percent plunge and suggested factory activity continued to expand at a moderate pace. Economists polled by Reuters had expected orders to rise 3.8 percent after a previously reported 4.9 percent fall in January.

Excluding transportation, orders slipped 0.5 percent after increasing 2.9 percent in January.

But the government also said nondefense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 2.7 percent, the largest decline since July; economists had expected a 1.2 percent drop. Orders for the so-called core capital goods had jumped 6.7 percent in January.

However, core capital goods shipments, used to calculate equipment and software spending in the gross domestic product report, increased 1.9 percent. That followed a 0.7 percent fall in January and suggested that business spending would again contribute to growth this quarter.

Though the report was mixed, it was in line with other data, including industrial production and the Institute for Supply Management’s survey of national factory activity, that have shown a steady growth pace in manufacturing.

Overall orders for durable goods were buoyed by a 21.7 percent jump transportation equipment as demand for civilian aircraft surged 95.3 percent. Motor vehicle orders increased 3.8 percent. Defense aircraft orders rose 7.6 percent.

In a separate report, a closely watched survey showed that single-family home prices rose slightly in January.

The Standard Poor’s Case Shiller composite index of 20 metropolitan areas gained 0.1 percent from December. On a seasonally adjusted basis, the rise was 1 percent, topping expectations for 0.9 percent. Prices have been gaining since February 2012.

Prices in the 20 cities climbed 8.1 percent from January 2012, unadjusted. It was the biggest yearly increase since June 2006.

Another report said consumer confidence tumbled in March as Americans turned more pessimistic about economic prospects in the short term.

The Conference Board, an industry group, said its index of consumer attitudes fell to 59.7 from a downwardly revised 68 in February. The figure fell short of economists’ expectations of 68. February was originally reported as 69.6.

Those expecting business conditions to get better over the next six months decreased to 14.4 percent from 18 percent, and those expecting conditions to get worse rose to 18.3 percent from 16.6 percent.

“The recent sequester has created uncertainty regarding the economic outlook and, as a result, consumers are less confident,” Lynn Franco, director of economic indicators at The Conference Board, said in a statement.

The $85 billion in automatic government spending cuts known as the sequester was triggered at the beginning of the month when politicians failed to come to an agreement on a new deal.

Article source: http://www.nytimes.com/2013/03/27/business/economy/orders-for-durable-goods-jump.html?partner=rss&emc=rss

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Today’s Economist: Laura D’Andrea Tyson: The Sequester and Fiscal Policy

March 8, 2013 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

The sequester – the large, across-the-board cuts in federal government spending that began to take effect on March 1 and are scheduled to persist through the next decade – is a product of political stalemate and ideology cloaked in the language of fiscal responsibility. Despite what some of its champions proclaim, there is no economic justification for the sequester. It is the wrong medicine for what ails the economy now and the wrong cure for its future budgetary challenges.

Today’s Economist

Perspectives from expert contributors.

As a result of a deep and lingering deficiency in aggregate demand, the United States economy is operating far below its potential. Real gross domestic product fell by 8 percent relative to its non-inflationary potential level in 2008 and has remained about 8 percent below the level consistent with its pre-recession growth rate ever since.

The gap between the actual and potential level of output means about $900 billion of forgone goods and services this year alone. This tremendous waste of productive potential is reflected in an unemployment rate of 7.9 percent, a higher rate than at any point in the 24 years before the depths of the 2008 recession, and a poverty rate of 15 percent, significantly above the average of the last 30 years.

High levels of unemployment impose substantial costs not only in terms of human suffering and forgone output now but also in terms of the economy’s productive potential in the future. The longer the economy operates below its current capacity, the slower the growth of its future capacity as a result of diminished risk-taking, forgone investment and the erosion of skills.

Besides its sheer size, what’s remarkable about the gap between actual and potential output is its persistence, despite a sustained and unprecedented effort by the Federal Reserve to boost demand and hasten the recovery. For more than five years, the Fed has held the nominal short-term interest rate near zero – its effective lower bound — with a promise to keep it there at least until the unemployment rate falls to 6.5 percent. The Fed has also been purchasing about $1 trillion of long-term government bonds annually. As a result of these actions, the nominal yield on the 10-year Treasury bond, a measure of the borrowing costs of the federal government, hovers around 2 percent, less than a third of its 40-year average, and both short-term and long-term interest rates are less than the rate of inflation.

In a speech earlier this week to the National Association of Business Economists, the Fed’s vice chairwoman, Janet Yellen, reaffirmed the Fed’s commitment to its bold accommodative policies until there is a “substantial improvement in the outlook for the labor market.”

Under current economic conditions, with significant unutilized resources, low inflation and highly accommodative monetary policy, contractionary fiscal policy has contractionary effects: spending cuts and tax increases reduce aggregate demand, choke job creation and dampen growth. In these circumstances, more deficit reduction is neither necessary nor wise; it is counterproductive. A more anemic recovery means less deficit reduction for any given set of fiscal policies.

Spending cuts at the local, state and federal levels have been powerful headwinds constraining growth during the last three years. And the headwinds are intensifying this year.

Taken together, the caps on discretionary spending imposed in 2011, the tax increases in the 2013 tax deal – especially the increase in payroll taxes that will trim household incomes by about $125 billion – and the sequester will cut about 1.5 percentage points from 2013 growth, consigning the economy to yet another year of tepid recovery and elevated unemployment. The sequester cuts alone will result in a loss of at least 700,000 jobs. And these arbitrary across-the-board cuts will inflict more damage on the economy than sensibly targeted cuts of the same magnitude.

Mr. Bernanke admonished Congress in his recent statement that monetary policy “cannot carry the entire burden of ensuring a speedier return to economic health.” Discretionary fiscal policy in the form of more debt-financed government spending is warranted and would be effective. Recent research finds that the multiplier for discretionary fiscal policy – the change in output caused by a change in discretionary government spending – is larger when interest rates are low and underutilized resources are available.

Indeed, under these conditions it is possible that increases in government spending will end up paying for themselves in the long run by speeding the recovery and stemming unnecessary losses in the economy’s future capacity. This possibility is the greatest for government spending in investment areas like research, education and infrastructure that generate sizable returns over time.
 
Mr. Bernanke also advised Congress that “not all tax and spending programs are created equal with respect to their effects on the economy,” and emphasized the importance of investments in work-force skills, research and development and infrastructure. Unfortunately, as a result of the caps on discretionary spending and the sequester, these areas will fall victim to significant cuts over the next decade.

If these policies are enforced, the Congressional Budget Office projects that discretionary spending will fall to 5.5 percent of G.D.P. by 2023, more than three percentage points below its 1973-2012 average, with nonmilitary outlays falling to 2.7 percent of G.D.P. compared with a 40-year average of 4 percent.

The economy needs less rather than more deficit reduction in the near term. But less deficit reduction also means more debt accumulation over time. Even with the sequester and the discretionary caps, federal debt held by the public is projected to recent Congressional testimony remain around 75 percent of G.D.P. during the next decade, compared with an average of about 40 percent between 1960 and the 2008 recession.

A large and growing government debt relative to the size of the economy has several negative potential consequences. Most important, when the economy is operating at capacity, it crowds out private saving and investment, reducing the capital stock, productivity and wage growth. It puts upward pressure on long-term interest rates and increases the cost of servicing the debt. It weakens investor confidence in the debt, heightens the risk of a financial crisis and reduces the government’s budgetary flexibility to address future, unexpected shocks.

The economy needs a long-run plan of revenue increases and spending cuts to put the federal budget on a sustainable path that will stabilize and reduce gradually the debt- to-G.D.P. ratio. Congress should jettison the sharp, front-loaded and arbitrary sequester cuts that will harm the recovery and work on such a plan.

Unfortunately, the political stalemate and ideology that produced the sequester appear to rule out this approach at least for now. Perhaps when the sequester’s costs become apparent, Congress will be forced back to the negotiating table.

Article source: http://economix.blogs.nytimes.com/2013/03/08/the-sequester-and-fiscal-policy/?partner=rss&emc=rss

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Dow Nears Record as Investors Find Reasons to Buy

February 28, 2013 by Leave a Comment

Resisting expectations of a correction, Wall Street stocks traded higher for most of Thursday, with the Dow Jones industrial average within striking distance of a record high, but at the end of the session the major indexes retreated into slightly negative territory.

Investors found reasons to keep pushing markets higher following a sharp two-day rally, despite a read on economic growth that was weaker than expected.

But at the close, the Dow Jones industrial average was down 0.2 percent, the Standard Poor’s 500-stock index fell 0.1 percent and the Nasdaq composite index lost 0.1 percent.

Earlier, the Dow had risen 0.5 percent, taking it about 16 points shy of its October 2007 closing high.

The Commerce Department said Thursday that the economy grew 0.1 percent in the fourth quarter, a weaker pace than expected, although a slightly better performance in trade led the government to scratch an earlier estimate of a contraction in gross domestic product.

Separately, the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting the labor market recovery was gaining some traction.

“The G.D.P. revision is positive but nothing to write home about, especially since it missed estimates,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

While markets suffered steep losses earlier in the week on concerns over European debt, they have since recovered, with the gains fueled by strong data and comments from Federal Reserve chairman, Ben S. Bernanke, that showed continued support for the Fed’s economic stimulus policy.

“Bulls are still leading the market with the pullback bought up quickly, but we’re in a wait-and-see period after the big move we’ve had,” Mr. Sarhan said.

So far in February, the S.P. 500 has gained 1.2 percent, the Dow is up 1.6 percent and the Nasdaq has added 0.6 percent.

Investors will also be keeping an eye on the debate in Washington over government budget cuts that will take effect starting Friday if lawmakers fail to reach an agreement on spending and taxes. President Obama and Republican Congressional leaders arranged to hold last-ditch talks to prevent the cuts, but expectations were low that any deal would be produced.

“Investors have come to the realization that sequestration isn’t the end of the world and that it will eventually be fixed,” said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, N.Y. “But going into March, the risk is that the economy slows down and disappoints investors.”

J.C. Penney shares slumped 20.9 percent after the department store reported a steep drop in sales on Wednesday. Groupon also slumped on weak revenue, with the stock off 24 percent.

Sears Holdings started the day higher, after its earnings and sales beat expectations, but then fell 3 percent.

European shares ended modestly higher, while Asian markets closed sharply ahead.

Article source: http://www.nytimes.com/2013/03/01/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Economix Blog: Predicting a U.S. Debt Crisis, Repeatedly

February 22, 2013 by Leave a Comment

Economists are not very good at predicting crises, but the problem is generally an absence of warnings. It’s not easy to anticipate which low-probability catastrophe will end up happening.

That clearly won’t be the problem if the United States has a debt crisis. Here we have the opposite phenomenon: a possible crisis that economists love to predict.

The chart below, from a paper presented Friday morning at the U.S. Monetary Policy Forum in New York, shows one such warning. The green line, labeled CBO Projections, shows the relatively sanguine expectation of the Congressional Budget Office about the average interest rate that investors will demand on federal debt as the debt rises in coming decades.

The purple, upwardly mobile line shows the average interest rate that the authors project that investors will demand. Suffice it to say that such an outcome is unsustainable.

Actual and projected 10-year bond yields under Congressional Budget Office assumptions and baseline simulations of the authors. From Sources: Haver Analytics, Congressional Budget Office and authors’ calculations Actual and projected 10-year bond yields under Congressional Budget Office assumptions and baseline simulations of the authors. From “Crunch Time: Fiscal Crises and the Role of Monetary Policy,” by David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin.

The authors, two professors and two market economists, compared interest rates on the sovereign debt of 20 developed nations with the size of those debts in comparison to their gross domestic product, and with each nation’s current-account surpluses or deficits.

The headline conclusion: A one-percentage-point increase in debt as a share of gross domestic product increases 10-year borrowing costs by 4.5 basis points. That means an additional $450,000 in annual interest payments on every $1 billion in debt.

Secondly, a one-percentage-point increase in the current-account deficit raises borrowing costs by 18 basis points, or $1.8 million in interest on every $1 billion in debt.

Third, the penalties increase at higher debt levels, and the increases are not linear. In other words, debt levels can cross thresholds that lead investors to demand significantly higher interest rates, and once that kind of cycle begins, it can be very hard to escape.

Where is the line? “Countries with debt above 80 percent of G.D.P. and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics,” write David Greenlaw, an economist at Morgan Stanley; James D. Hamilton, a professor at the University of California, San Diego; Peter Hooper, an economist at Deutsche Bank Securities; and Frederic S. Mishkin, a professor at Columbia University. The paper was presented at a conference convened by the University of Chicago Booth School of Business.

This is bad news for the United States because, as it happens, the national debt is 80 percent of annual economic output, the nation has a persistent current-account deficit, and it is planning to significantly increase the scale of borrowing, relative to output, in coming decades.

A host of other studies have reached similar conclusions. The estimated thresholds range from about 60 percent to 120 percent, but the bottom line is always the same: the federal debt cannot continue to grow relative to the size of the economy, or else investors will start demanding much higher interest rates and the United States will fall into crisis.

“We should be scared,” said Professor Mishkin, a former Federal Reserve governor. “Something needs to be done,” he added, although he acknowledged there was no sign of crisis just yet.

This is undoubtedly true in an absolute sense. But there are reasons to doubt the basic premise that the history of other nations can tell us how close we are to the cliff.

The problem with every attempt to look for debt limit thresholds has a name, and that name is Japan, a country that is able to borrow at one of the lowest average interest rates of any developed country despite a debt burden that is the largest, relative to its economic output, of any developed country. Nor is this an ephemeral anomaly. It has been true for years.

Japan’s debts total about 230 percent of its annual output, and so far, investors don’t mind.

In part, the authors address this in the traditional manner, by lopping off 5 percent of their 20-nation sample and simply declaring, “There is something very special about Japan.”

This is quite possibly true. But because there are not very many developed countries — in this study Japan is just one of 20 — it also might cause a reader to wonder about the universality of any rules derived from the remaining 19 cases, particularly since half of the remaining sample share a currency and an economic union. They are not exactly independent variables.

Furthermore, it’s quite possible that the United States also is something of a special case.

Which brings us to the more important acknowledgment, buried deep in the paper: 80 percent is not a magic number. It’s not even a particularly good summary of past experience. Rather, it’s an average of widely divergent experiences. And it doesn’t necessarily tell us much more than common sense: countries with more debt run greater risks of losing the confidence of investors, and have less flexibility to deal with new economic problems.

“We don’t know where the tipping point is,” Jerome H. Powell, a Federal Reserve governor, said in a response to the paper. But, he continued, “Wherever it is, we’re getting closer to it.”

Article source: http://economix.blogs.nytimes.com/2013/02/22/predicting-a-crisis-repeatedly/?partner=rss&emc=rss

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Stocks Spurred on by Job Growth

February 1, 2013 by Leave a Comment

Stocks ended higher Friday, with the Dow Jones industrial average closing over 14,000 points for the first time since 2007, propelled by a strong upward revision of job growth in the United States for the fourth quarter.

The Standard Poor’s 500-stock index added 1 percent by the end of trading, and the Nasdaq composite index was up 1.2 percent. The Dow, adding 149 points, or 1.1 percent, ended at 14,009.79.

Employment grew modestly in January, with 157,000 new jobs, slightly below expectations for 160,000. Still, the December report was revised upward to 196,000 from 155,000, supporting views that the American economic recovery remained on track despite a surprise contraction in fourth-quarter gross domestic product.

“Nice revision upward, and this month came in right at the sweet spot where job growth is picking up,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

“The market may be at something of a top here, but we are rising on improved economic fundamentals so the rally has been rational,” said Mr. Luschini, who helps oversee $55 billion in assets.

Corporate earnings were also a focus for investors, with some Dow components reporting profits that beat expectations.

Exxon Mobil was flat after its results, and the drug maker Merck fell 3.1 percent. While Merck’s profit was ahead of forecasts, it gave a cautious outlook on 2013.

The S.P. 500 advanced 5.1 percent in January, with gains driven by a sturdy start to the earnings season and a compromise in Washington that postponed the impact of automatic spending cuts and tax increases that were due to take effect early this year.

Wall Street stocks closed lower on Thursday amid investor caution ahead of the payroll report.

Article source: http://www.nytimes.com/2013/02/02/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

IHT Special: The Syria Report Survives as Independent Publication

December 19, 2012 by Leave a Comment

“My business thrived because there was an opening and I have to give Bashar credit,” Mr. Yazigi said during a recent conference in Istanbul, when asked to reflect upon the changes that awakened the Syrian middle class even as they enriched the elite. “The problem is he didn’t go deep or fast enough to head off the unrest. He didn’t reform the judicial system or encourage a free press, for example. These were red lines that could not be crossed.”

Mr. Yazigi, the son of an exiled Syrian dissident, publicly called for democratic reform as early as 2004, most notably in a column headlined “The D Word.”

At the same time, he applauded the government for stimulating free trade and foreign investment, liberalizing its currency, reforming its financial sector and removing subsidies on everything from cooking oil to farm equipment.

Largely as a result, the country’s gross domestic product rose steadily; between 2005 and 2010 it achieved an annualized growth rate of about 5 percent, among the highest for developing countries at the time.

Syria was not the only Arab country that aggressively deregulated its economy. Egypt, Tunisia, Jordan and Saudi Arabia all embraced similar changes which, by the end of the decade, had produced impressive growth but also high inflation, stubborn unemployment and yawning rates of income disparity.

Was it free-market reforms that triggered the convulsions that continue to destabilize the region? Or regime kleptocrats who hijacked a badly needed reform process?

“It makes it a lot more difficult for people to sacrifice for the sake of change when elites are profiting,” Mr. Yazigi said. “That said, there were more problems than just corruption.”

In promoting service sectors like hotel construction and management over labor-intensive ones like manufacturing, Mr. Yazigi added, the government neglected a fertile source of jobs. It also exposed its industries to high quality, affordable imported goods when it signed a free trade deal with Turkey.

The government withdrew price supports on farm equipment and produce too quickly, he said, sparking an exodus of laborers from an agriculture sector that once accounted for a quarter of total employment.

“Many farmers ended up moving into urban slums,” Mr. Yazigi said, “and that led to a lot of stress and resentment in the cities.”

Mr. Yazigi, a French citizen and Greek Orthodox Christian, is, like Mr. Assad, an outsider whose destiny lured him back to Syria. Both men are sons of plotters — though unlike Mr. Assad’s father, Hafez, an air force general who ruled Syria from 1970 until his death in 2000, Raja Yazigi was on the losing end of a 1961 coup he helped lead in Lebanon.

After fleeing via Jordan, he settled in Ghana, where he established a carpentry business and started a family. At the age of eight, Mr. Yazigi was sent to France for his education. Like Bashar, who studied ophthalmology in Britain before he was fated by his elder brother’s death to lead the Assad ruling dynasty, Mr. Yazigi was obliged to interrupt his studies at the American University in Paris and run the family business when his father passed away in 1995.

The building trade could never compete with Mr. Yazigi’s love of politics, and with the arrival of Bashar as president he sensed an opportunity to indulge a passion inspired by his father, who sent his children to Damascus every summer to improve their Arabic and learn the city’s political terrain.

In October 2001, from Paris, Mr. Yazigi distributed an online translation of Syria’s then-fledgling financial press. He knew he was onto something just a few weeks later when The World Bank contacted him and asked for more.

“The Internet had just started,” he said. “I felt like this was something I could do that I really loved and give something back to the country.”

The Syria Report comes out each week with data and news gathered from a variety of sources, including Mr. Yazigi’s own reporting. Among his most precious resources is a database of hundreds of Syrian companies he compiled by soliciting such details as contact coordinates, names of board directors, financial returns and shareholder information.

Article source: http://www.nytimes.com/2012/12/20/world/middleeast/the-syria-report-survives-as-independent-publication.html?partner=rss&emc=rss

Filed Under: Media Business Tagged With: , ,
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