FOMC Acts As Expected

Thursday, June 30, 2005

The Federal Reserve Open Market Committee (FOMC) has acted as expected and raised the Fed Funds rate for the ninth time in a row 25 basis points to 3.25 percent. Most important: The Fed kept to its "measured" pace in the statement which indicates another raise to 3.50 percent at its next meeting on August 9.
A word-by-word comparison of the latest two statements (see below) shows that only two sentences were marginally changed.
In sentence 3 the FOMC sees the a firm expansion and a gradually improving labor market despite higher energy prices. It erased its former worries about a slowdown in spending growth.
In the next sentence the FOMC shortened its inflation outlook, saying "pressures on inflation have stayed elevated," after it had said before that "pressures on inflation have picked up..." The longer term outlook on prices was described unchanged and called again "well contained."
Altogether the FOMC has done a good job. Nothing in this statement could unsettle markets. This announcement can be seen as a calming primer for a quiet summer holiday season '05. The only thing that could keep phones ringing on the beach is another surge in energy prices that cannot be ruled out, given the fact that oil markets worry already now about the supply for the cold season.
Continue for more...
Comparison Of The Two Latest FOMC Statements
JUNE:The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/4 percent.
MAY: The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3 percent.
JUNE: The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.
MAY: The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.
JUNE: Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually.
MAY: Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually.
JUNE: Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.
MAY: Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.
JUNE: The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.
MAY: The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.
JUNE: With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.
MAY: With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.
JUNE: Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
MAY: Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
JUNE: Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
MAY: Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
JUNE: In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
MAY: In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

Fed Funds 1995-2005

GRAPH: Federal Funds and several key interest rates. Courtesy of
Who Wins, Who Loses?
Markets took the statement in an orderly fashion. Bonds were barely moved with the benchmark 10-year Treasury yielding 3.96 percent after 3.95 percent the day before. With the FOMC's move the yield curve has further flattened to 71 (94) basis points.
The 1/2 percent decline in stocks corresponds with the proven fact that rising interest rates have never helped the stock market in the long term.
The rate hike in general favors people and institutions who carry no debt. The first ones to feel the pinch will be adjustable rate mortage (ARM) holders or shoppers who will see higher rates at the next adjustment date. So will home equity line of credit holders, credit card debtors and all others who purchase on credit.
ADDENDUM: The biggest loser of the rate hike is of course the USA as it will have to offer it's creditors higher yields from this day onwards. Most of the US budget deficit is financed with short-term maturities up to six-months, so the rollover will come sooner than the government wishes for.
NOTE: The Federal Reserve Board has posted the schedule for the FOMC's meetings in 2006 here.
UPDATE: Barry Ritholtz has an interesting post that contests the good GDP growth numbers released on Wednesday. He calls the strong upward revision "fishy." Is there more optimism in the official releases than in the real economy?

China Overheating Indicator on a Gentle Downward Slope

Don't worry about an overheating of the Chinese economy. Deutsche Bank Research has published its latest reading of the so-called "China Overheating Indicator" (pdf) (COI) that remains on a gentle downward slope and below the amber threshold, indicating weaning overheating pressures.

COI June 2005

GRAPH: The COI tracks demand factors that exert upward pressure on prices and can be used as leading indicator for inflation with a lead of roughly 12 months. To gauge the extent of overheating pressures, DBR has established 2 thresholds, amber and red, which indicate increasingly high degrees of overheating risk. The amber and red thresholds represent 1.5 and 2.5 standard deviations from the historical average of the series, starting in the period after the last big overheating/high inflation episode in China in the early to mid 1990s. The 2 thresholds are intended to serve as warning: If the COI crosses the amber threshold from below, it signifies that the COI is nearly entering overheating territory. Moving above the red threshold indicates the presence of overheating. Conversely, if the COI falls below the amber threshold it would indicate that overheating pressures are subsiding.
The COI comprises merchandise exports, retail sales, industrial sales, money supply, domestic credit and per-capita income.

Chart of the Day: DJIA/OIX


CHART: Dividing the Dow Jones Industrials (DJIA) by the Oil Stocks Index (OIX) shows that the stability of the US share market is largely based on the rise in oil stocks which have been profiting from the rise of oil prices. The picture looks the same with other indices replacing the Dow.
The US current account deficit that is expected to reach 800 billion dollars by the end of 2005 equals the market capitalization of the following 15 Dow components, Peter Schiff explains: Alcoa, American Express, Boeing, Caterpillar, Coca-Cola, DuPont, General Motors, Hewlett-Packard, Home Depot, Honeywell, 3M, McDonalds, Merck, SBC Communications, and Walt Disney.

Warning #n of Unorderly Markets - This Time the IMF

The International Monetary Fund (IMF) warns of an unwinding of complex leveraged bets in a disorderly fashion and notes a shift in the long-term preferences of institutional investors toward fixed-income instruments in it's most recent Financial Markets Update (pdf), released on Wednesday. Here is the summary:
Financial markets have produced some unexpected developments so far in 2005.
First, despite a growing US current account deficit, the dollar has appreciated this year as market participants have turned their focus toward relative growth and interest rate differentials in favor of the United States.
Second, despite a yearlong tightening of short-term rates by the U.S. Federal
Reserve and an earlier round of rate tightening by the Bank of England, yields at the long end of the curve in mature markets have actually fallen in the last several months. While this reflects in part expectations of more moderate growth and contained inflation, it is also part of a shift in the long-term preferences of institutional investors toward fixed-income instruments.
These developments have been accompanied by an ongoing search for yield that has driven spreads on corporate and emerging market bonds to very low levels. These low spreads and the low and flat mature market yield curves have provided incentives to financial market participants to move out the credit spectrum toward riskier and more complex investments, involving "relative value" trades using credit derivatives.
What are the main risks ahead?
First, given the ongoing shift in institutional demand for longer duration bonds, a flat yield curve and low long-term rates may persist. This will continue to provide incentives for "relative value" trades and prove a more difficult environment for financial intermediary earnings.
Second, leveraged bets - especially in complex derivatives markets - could be unwound in a disorderly fashion. While this could conceivably lead to credit market volatility, strong balance sheets and risk management practices of banks would likely confine dislocations to individual investors, including hedge funds. In fact, occasional market "corrections," so long as they remain confined, should reduce investors' complacency and contribute to the stability of the global financial system. Improved fundamentals in many emerging market countries and continued strategic allocations by institutional investors may help to cushion these markets against the risk of mature credit market volatility. Emerging market countries therefore continue to enjoy favorable financing prospects for the time being.
Third, while the US current account deficit represents a growing long-term vulnerability, so far there have been ample capital flows to accommodate the US current account deficit.
The IMF also
sees support for the dollar from the American Jobs Creation Act.
The measure, passed in 2004 (but only fully clarified in January 2005), allows US companies to repatriate profits previously held abroad at a 5.25 percent tax rate rather than the 35 percent that would otherwise prevail. To meet the provisions of the act, companies must outline how the funds will be used in a plan that requires executive approvals. The tax advantages of repatriation may lead to substantial flows, to be reported as negative direct investment abroad, and may have become significant starting in the second quarter of 2005.
Not that I like the advice of the IMF for developing countries, but this makes sense.

Unconfirmed: EU Decides on Euro-English as Official Language

Wednesday, June 29, 2005

Enjoy your English while you can.....
The EU Commission has just announced an agreement whereby English will be the official language of the European Union rather than German, which was the other possibility.
As part of the negotiations, Her Majesty's Government conceded that English spelling had some room for improvement and has accepted a 5-year phase-in plan that would become known as "Euro-English".
In the first year, "s" will replace the soft "c". Sertainly, this will make the sivil servants jump with joy.
The hard "c" will be dropped in favour of "k". This should klear up konfusion, and keyboards kan have one letter less.
There will be growing publik enthusiasm in the sekond year when the troublesome "ph" will be replaced with "f". This will make words like fotograf 20% shorter.
In the 3rd year, publik akseptanse of the new spelling kan be expekted to reach the stage where more komplikated changes are possible.
Governments will enkourage the removal of double letters which have always ben a deterent to akurate speling.
Also, al wil agre that the horibl mes of the silent "e" in the languag is disgrasful and it should go away.
By the 4th yer peopl wil be reseptiv to steps such as replasing "th" with "z" and "w" with "v".
During ze fifz yer, ze unesesary "o" kan be dropd from vords kontaining "ou" and after ziz fifz yer, ve vil hav a reil sensibl riten styl.
Zer vil be no mor trubl or difikultis and evrivun vil find it ezi tu understand ech oza. Ze drem of a united urop vil finali kum tru.Und ve vil be von big hapy famili. Yavol?
If zis mad you smil, ples pas on to oza pepl. Und don't forget tu turn of ze spelchecker!

One Blog Post > 10,000+ Unique Visitors

Having started this blog 87 days ago, on April 3, I am happy to have recorded almost 33,000 hits (Statcounter) from 18,000 readers (Sitemeter) by today.
Don't conclude that econ blogging is a widely read affair from these figures that elevated me to rank #343 in The Truth Laid Bear ecosystem for a passing moment, overtaking such tempting blogs like the one from a cat-lover, called "Pussy Talk".
The recent spike comes solely from a non-econ story, "Zimbabwe: No Oil >> No Fight for Freedom, Democracy, Humanity..." which attracted more than 10,000 readers since last Friday, surfing here from more than 130 countries.
Most prominent among them are the US Democratic Leadership Council, the US Naval Undersea Warfare Centre (sold my sailboat long ago) along with many other military folks, the Dept. of State and several other Federal agencies as well as three dozen major MSM (Mainstream Media), the FRB and the World Bank and countless other important institutions. I am most delighted by this as it shows that stories about humanitarian tragedies are of much more interest than comments on the global economy which in my opinion is a politically correct ranking of importance.
I want to thank all my readers, whose growing number of regulars encourages me to stay along the lines of my motto described in the header.
Special thanks go to all those who linked to my blog in the early days and who are the pillarstone for my expanding readership.
I would never have thought that non-commercial writing could become such a passion for someone who got well paid for his professional writings before.
In my opinion blogs are the hottest thing in the world of reporting as they combine news with explaining commentary for a news-hungry world that suffers from information overload and misses the context between the myriad pieces of information swamping all of us every day. This is where bloggers come in as we are the only truly free reporters in a media circus entangled in the web of commercial and political interests.
The expertise and insight I find in the blogosphere on any given day easily surpasses 99 percent of what gets written in the MSM.
MSM journalists are bound to stay with the facts/lies given to them and have less and less leeway to tell their readers the story between the official quotes. (2+2=4 is not allowed in most media anymore; you need to have an established expert telling you so which can be a problem because of the trend to stay with the herd)
I guess this is the reason why blogs are becoming so popular as they can do exactly this: Connecting the dots to provide a clearer (big/macro) picture. My list of regularly read blogs - most but not all of them contained in the blogroll in the sidebar - proves this every day very successfully.
Hat tip to everybody who delivers his insights instead of hitting it with the happy hour crowd. Your work is more recognized than most of you think, I guess.

US GDP Revised Upwards - Fed Pace Will Remain Measured

The Federal Reserve will be able to stay on its path of a measured removal of policy accomodation after the upwardly revised figures for real GDP growth show that the economy is still on a firm footing, as Fed chairman Alan Greenspan had indicated recently. Real GDP was reported at an unchanged growth rate of 3.8 percent by the Bureau of Economic Analysis (pdf) (BEA). This is a tad higher than the market consensus that had estimated a revision to 3.7 percent from the preliminary number of 3.5 percent.

US GDP Q1 05

With the Q1 figure out of the way markets are most likely to focus on the future as it can be taken as given that the FOMC will raise the Fed Funds rate another 25 basis points tomorrow. The speculation on the future rate policy is wide open though.
Record oil prices will probably show up in the next inflation readings, keeping the FOMC's hawks on their toes. On the other hand recent economic data paints a mixed picture of the growth dynamic, excluding any acceleration in the Fed's rate steps.
Seeing it from a European perspective, I can only envy the prevailing strength in the US economy and don't quite understand commentators painting a picture of lacklustre growth. Hey, 3.8 percent is a growth rate Europe would take as a reason to light the fireworks!
The structure of the growth pattern does not look bad either.
Real personal consumption expenditures increased 3.6 percent in the first quarter, compared with an increase of 4.2 percent in the fourth.
The government stepped on the spending brakes as well (save for defense).
Real federal government consumption expenditures and gross investment increased 0.6 percent in the first quarter, compared with an increase of 1.2 percent in the fourth. National defense increased 0.5 percent, in contrast to a decrease of 0.6 percent. Nondefense increased 0.9 percent, compared with an increase of 5.3 percent. Real state and local government consumption expenditures and gross investment decreased 0.1 percent, in contrast to an increase of 0.6 percent.
The trade picture shows a pickup in US activity too.
Real exports of goods and services increased 8.9 percent in the first quarter, compared with an increase of 3.2 percent in the fourth. Real imports of goods and services increased 9.6 percent, compared with an increase of 11.4 percent.
The question remaining is whether the US economy can sustain such growth rates. Most recent economic indicators pointed to a slowdown in most sectors except housing which foots on the still very low longterm rates.

US Yield Curve 290605

Tomorrow's probable announcement of the ninth 25 basis point increase in a row will see the yield curve flattening dramatically. The spread from Fed Funds to 10-year Treasuries will decline to a mere 69 basis points.
SPOTTED BLOG/GLOB/ALLY: Barry Ritholtz has a piece on "Translating Greenspeak into Plain English" by the mysterious Peneboscot Princess who has managed to escape the Googlesphere so far.
Jim Picerno asks whether the dollar really has has legs. I'd say for the moment they are longer than those of the other two ugly ducklings Euro and Yen.
Mark Thoma points to the CBOT 30-day Fed Funds futures which show a 100-percent chance for a 25 basis point increase and a 4-percent chance for a 50 basis point hike.
General Glut criticizes the Fed's hesitation "to take the punch bowl away from these party-goers" in advance.
David Altig showed us already on Monday that the Fed Funds probabilities imply "a lot of volatility around expectations of where we will be come October."
Tim Iacono has a nice roundup of last week's Q&A session of Alan Greenspan at the Senate Finance Committee. Quote #1 (by the Maestro himself) : "If there's a crisis, we'll all get together and solve it - or hopefully solve it." Quote #2 (by Democrat Max Baucus): "I don't see a plan in the United States. I think frankly too much burden is on your shoulders. Too many people in this country think, "well the Fed will take care of it."
If that's not enough preparation for tomorrow, please note my earlier post "FRB's Kohn: When the Unexpected Inevitably Occurs" which is this year's sternest warning from any FOMC member.

US Net Private Assets Abroad Decline Sharply, Consumer Loans Off Their Highs

US Net Private Assets declined sharply to a net of minus 290.2 billion dollars by October 1, 2004, after a figure of minus 137.9 billion dollars three months before. The figure comes close to the record of 296.4 billion dollars set at the beginning of 2004, according to data released by the Fed St. Louis. The last time when private assets showed a small net plus of 2.3 billion dollars was mid-2002.

US Net Private Assets Abroad Decline Sharply

The shift to mortgages based on rising property values gets reflected in consumer loans which declined about one percent to 704.7 billion dollars by the end of April 2005 from their record level of 711.4 billion reached a month earlier. This trend can be expected to accelerate once banks tighten their lending practice more after there have been reports that loan criteria have been getting handled quite lax recently. Consumers are also taking advantage of still very low mortgage rates which have encouraged them to refinance their consumer loans pawning their houses to ever bigger extents, raising the possible severe consequences to their own financial stability when the red-hot housing market begins to cool.

US Individual Loans Decline

M3 Growth in Euro Area Shrinks Rate Cut Hopes

Hopes for a rate cut to spur the economy in the Euro area got shattered on Tuesday with the release of the latest money supply growth figures. M3 growth accelerated to an annual rate of 7.3 percent in May from 6.8 percent in the previous month, according to a release (pdf) from the European Central Bank (ECB). Loans to the private sector roared ahead at an annual growth rate of 7.6 (7.4) percent. The 3-month average of M3 growth lies now at 6.9 percent and exceeds the target rate of 4.5 percent significantly. M3 growth has been exceeding the target growth rate since May 2001.
ECB president Jean-Claude Trichet has repeatedly said that he considers the high growth rate of M3 as the biggest threat to price stability. The ECB's other big concern are high oil prices which have risen further since Trichet's latest statements about the difficult task of the ECB which prioritizes price stability over economic growth.

Free Markets - Yes, No...Or A Bit Pregnant?

Tuesday, June 28, 2005

The bid of the China National Offshore Oil Company (CNOOC) for the American oil company Unocal raises high waves on the political circuit. While the White House is buying time and shields itself behind some Congress members who suggested - along with CNOOC - a review of the deal by the Treasury's Committee on Foreign Investment in the US, see the WSJ, this matter raises one important question. Is the US now for a global free market economy where the highest bidder can satisfy the just demand of shareholders to yield the maximum return on their investment, or not, or will they try to be a bit pregnant?
It is most amusing to see that the nation that stands for the spread of capitalism, having preached the gospel of open markets for investment and trade for decades to everybody else, suddenly does not want to apply the same standards when the game reverses.
According to the latest available data from the BEA for the year 2003, US multinationals reduced their capital expenditure 2.1 percent to 435 billion dollars whereas that of foreign companies rose 4.8 percent to 116 billion dollars.
Remembering the recipes of the US-dominated International Monetary Fund (IMF) who monotonously told indebted nations - no one has more debts than the US - to open up their markets for foreign investment and products from abroad, the spontaneous retreat appears as a parody on these guidelines.
The parody is not limited to investments. It is played on the stage of international trade as well, the discussion about unilateral tariff sanctions shows. The applause in the latter case goes to Fed chairman Alan Greenspan and Treasury Secretary John Snow who warned correctly that such measures would likely result in a backlash on the US homeyard.
While Snow has not yet declared himself on the CNOOC bid, The Prudent Investor wants to remind readers on his stance on free investment 12 days ago.
"Business people are going to put capital where they feel they are welcome, where capital is honored and where they can get good returns," Snow said, adding, "it is not so much the language that is used, it is the policies that get embraced. And if policies get embraced that make capital feel unwelcome, capital won't come."
Snow made these comments on his recent trip to Europe where he felt anti-business sentiment after the rejection of the EU constitution. A bit of schizophrenia can also be smelled listening to the initial outcry of officials when Iran's new - democratically elected - leaders said that they might impose curbs on foreign investment in the country's oil sector. Now the US does the same.
A policy of "shut up and keep buying our IOU's" does not exactly encourage the belief in a system that otherwise propagates the free flow of capital. Warren Buffett said already some time ago that the US must be ready to see some of its assets sold, when the high-speed train that loads off Treasury debt all around the world does not stop.
PINR's "Intelligence Briefing: China"
The highly recommended Power and Interest News Report (PINR) has published the following intelligence briefing on China today.
Outlining China's geopolitical strategy - on the basis of its newly developed missiles with a range of 6,000 miles - that aims to heighten the global respect of the not-sleeping-anymore giant, the briefing's author Michael Weinstein has this theory:
Until Lenovo's acquisition of IBM, Beijing's development strategy had been based on attracting foreign investment to China on the basis of its massive pool of cheap labor and its potential market in order to build up its industries and acquire advanced technologies. Having succeeded in creating an industrial base with some powerful and cash-rich companies, the opportunity exists for China to expand its export markets and to secure supplies of the energy and mineral resources that it needs to run its burgeoning industrial machine through the purchase of foreign corporations.
The acquisition of foreign businesses has the added strategic advantage of creating interest groups in the countries in which those businesses are based that are economically dependent on China and, therefore, would tend to be favorable to its interests in political conflicts.
Unocal is especially attractive to Beijing because of the drilling rights that the company has in Thailand and Myanmar, which Beijing includes within its prospective sphere of dominant influence.
In order to achieve its goal of transforming China into a comprehensive world power, Beijing must have secure access to raw materials in markets that have become increasingly competitive and tight, due in great part to China's growth. The bid for Unocal signals that Beijing is aware that it must act quickly to guarantee its resource supplies, at the expense of competitors, especially the US. As part of Beijing's overall strategy, Chinese enterprises have recently purchased mines in Australia and Canada, and Beijing has pursued trade deals geared to natural resources in South America. Unocal is part of that larger picture.
He therefore concludes:
The Bush administration's tepid response to the Chinese bids reflects its conflicting commitments to globalized markets, national security and domestic interests that increasingly appear to be irreconcilable. Protectionist sentiment, aimed mainly at China, is rising in Congress and could ultimately threaten the globalization process. In a pattern that is becoming familiar over a broad range of international issues, the Bush administration is facing increasing difficulties in sorting out its priorities, giving the advantage to states with more coherent strategies.
China's next stage of development brings the incipient conflict between Beijing and Washington into full view. Holding back Chinese expansion - if that is even possible - carries the high probability of derailing globalization; allowing it to occur makes the realization of Beijing's geostrategic aims far more likely.
Look for Beijing to proceed confidently on its course and for Washington to be incapable of mounting effective resistance.
Apart from these concerns I also want to raise the issue of shareholder's rights. Can the government deny a shareholder a higher profit by directing Unocal's fate? If that is the case the US has arrived at an entirely new stage: Central planning.
A political decision on CNOOC's bid for Unocal will also bear the danger of slowing foreign direct investment in the US. When an investor is not guaranteed his right to sell to the highest bidder, he may turn elsewhere to put his money at work.
One thing is sure: There is no such state like being a bit pregnant.

IMF in Zimbabwe - Expect the Economy to Get Worse

Monday, June 27, 2005

With markets treading water there is time to fire off one more post on Zimbabwe. The International Monetary Fund (IMF) has just completed a mission to the country in turmoil and has concluded the worst is yet to come. The country whose economy shrank according to IMF data (pdf) about 30 percent between 1998 and 2003 in nominal local currency terms while inflation soared 12-fold from 40 to 470 percent in the same period will see another significant turn for the worse.

ZIM Inflation

GRAPH: Zimbabwe inflation rate 1998-2004. Data: Fed Cleveland
According to the IMF release,
"output is expected to decline sharply this year, in part due to the continued difficulties in agriculture-which have been exacerbated by drought-and the intensification of foreign exchange shortages.
The mission projects that, on the basis of present policies, the budget deficit will increase markedly in 2005, partly due to the cost of higher food imports, interest payments and higher pension costs. Together with the Reserve Bank of Zimbabwe's substantial producer and credit subsidies, these deficits would fuel a sharp increase in money supply, and hence inflation, by end-2005. The authorities indicated their desire to address these problems by taking measures to contain further increases in the budget deficit. The macroeconomic outlook is further clouded by the gravity of the food security situation and implementation of "Operation Restore Order," which threatens to worsen shortages, contribute to lower growth, and aggravate inflation pressures."
The inofficial economy that has provided employment for a good proportion of the population in a country where unemployment runs as high as 70 percent, has been demolished in the last two months. The remnants of it meanwhile provide goods and food that would otherwise be totally unavailable.
Gasoline for 18 USD Per Litre, 69 USD Per Gallon
This comes at a huge cost though. According to Zimbabwe's Daily Mirror a litre of fuel has soared to almost 8 US dollars at the official exchange rate. As the black market rate for US dollars is about double the official rate of 9,000 ZIM dollars, this results in a world record price of 18 dollars for fuel - or in one of the ten poorest countries on the world. The US dollar was revalued 45 percent only six weeks ago, see this post. Inflation has officially declined to 130 percent in 2005.
Dictator Robert Mugabe has announced that the razing of the shantytowns would be followed by a 300 million US dollar building programme. This is pure propaganda as the country is in payment arrears with South African electricity providers, gets fuel only on a COD basis and is in arrears with it's IMF payments to the tune of almost 300 million US dollars as well. In February the IMF has extended its deadline for a compulsory withdrawal until August 16. Compulsory withdrawal is the last step in a series of escalating measures that the IMF applies to members that fail to meet their obligations.
While the international community is ignoring the situation in Zimbabwe, China takes advantage of it. China buys into the country's infrastructure, it's precious metals mining operations and other business sector, paying with arms and fuel.

PHOTO: Is this Zimbabwe's outlook into the future? Courtesy of
The clean-up starts claiming more lives. ZWNews reports of six fatalities due to the cold temperatures the homeless have to endure. Temperatures approach the freezing point during the night. Those people who are sent back to their original homes in the countryside are facing famine as there is no food anywhere. Police confiscates food from individuals, claiming it is intended for the black market, opposition media on the internet report.

FOMC Meeting Will Overshadow All Other Events in the Week to Come

Capital markets are in for a thrilling week. The Federal Reserve Open Market Committee (FOMC) will meet on Wednesday and Thursday, publishing its statement on Thursday at 2.15 PM ET. While the consensus focuses on the ninth 25 basis point hike in a row, bringing the Fed Funds rate to 3.25 percent, the release of the final reading of GDP growth in the first quarter could add further ammo for speculation on Wednesday. Analysts are predicting that the growth figure will be revised to 3.7 percent from 3.5 percent in the first quarter. If the revision leads to a better figure for the first quarter, the policymakers at the FOMC will be able to stay on the path of "measured" rate hikes. David Altig's Fed Funds forecast on macroblog meanwhile points solidly to a 25 basis points hike.
All attention will turn towards the wording on the FOMC statement as investors will scrutinize it for hints on the future FOMC policy. Any change in the wording about inflation, which used to be seen "contained" in the last statements, could send markets into a tailspin. The Wall Street Journal had a teaser story, where an analyst said that the markets would also look if the term "accomodative" would still be included. If not it would mean that the Fed thinks inflation has been fought successfully (for the time being.)
A significantly higher GDP reading, say 3.9 percent or more, could lead to heated discussions at the FOMC. There have been enough hawkish tones from several Fed members in the last weeks, warning of inflationary pressures mostly stemming from the record levels of oil prices, now at more than 60 dollars per barrel, and prices for refined products. On the other hand the FOMC will have a hard time to justify a rate hike when the upcoming macroeconomic numbers indicate a slowing growth dynamic. The latest economic indicators have not helped in painting a brighter outlook. House sales slowed and the rise in durable goods orders hinged on aircraft orders which are likely to slow as well when airlines have to shell out ever more money for kerosene.
The fight to contain inflation also bears the risk of slowing the two last support columns of the economy: real estate and consumer spending. At some point higher mortgage rates will translate into less borrowing, a process that has already begun on the consumer credit level as the following graph shows.

Consumer Credit 2000-2005

Real estate lending has leveled off as well.

Morgage Lending 2000-2005

Fed chairman Alan Greenspan repeated to Congress that the Fed is looking forward to stay on its course of a measured removal of policy accomodation on June 9.
Other Fed members were more hawkish. Non-voting Fed Kansas City president Thomas Hoenig concluded earlier this month that the Fed still has some way to go before the "neutral zone", where inflation will be contained and growth not hampered, will be reached. Fed Atlanta president Guynn had said inflation risks all seemed to be pointing in one direction - up - and hinted that more rate increases were coming.
Fed governor Donald Kohn has signalled that he is quite pessimistic for the future and sees no harmless way out of the problems the economy is entangled in, delivering an orange to red alert speech less than two weeks ago.
Looking back to a period where oil prices caused the Fed more or less the same problems as nowadays, that is from 1979 to 1981, then Fed chairman Paul Volcker tackled the period of discomfort with a rapid rise in Fed Funds. Big difference though: He had started raising before oil took off. This time Fed Funds are trailing behind enormously although the economy is in a better shape now than it was then.
Not that Volcker made friends at the White House this way. But when the time for his renomination came, Wall Street mass-mailed Ronald Reagan to stay with the highly respected Fed chairman, keeping him on the Fed chair. This year Volcker has repeatedly asked policymakers to get their act done, as the US is operating on increasingly thin ice, reminding people of the 1970's - a time with a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.


GRAPH: Oil prices (blue), Fed Funds (red) and recessions (pink shades)
Alan Greenspan, retiring in 218 days if nothing unforeseen happens, does not have to care about his renomination. He can focus on saving the purchasing power of the dollar.
The question is though how much pressure the Bush administration will exert. As the approval ratings of the president have begun plummeting and the fragile composure of the economy with non-existent job growth in the private sector moves into the focus of voters, Bush will try to avoid higher interest rates at all cost as they will not only slow growth but increase the debt-service portion in the budget.
As there has been no period in history where rates and stocks trended in the same direction, the administration probably sees higher rates also as a kind of flak against its disputed plans for Social Security. The president is already confronted with growing criticism on that issue.
This Week's Economic Data
After last week's leading indicators showing another turn for the worse in nine of the ten subindices, this week's lagging indicators do not offer much hope for a marked upturn of economic conditions. While GDP is expected to come in a notch higher, investors will focus on the ISM Manufacturing Index on Friday which has been on a slide all year long and approaches the contraction zone. Personal incomes are expected to retain their weak growth trend and this could also get reflected in consumer confidence and consumer sentiment readings.
Consumer confidence: consensus 104, last 102.2
GDP Q1 final: consensus 3.7 %, last 3.5 %
Jobless claims: consensus 325,000; last 314,000
Personal income: consensus 0.4 %, last 0.7 %
Consumer spending: consensus 0.1 %, last 0.2 %
NAPM Index: consensus 53.0; last 54.1
Consumer sentiment: consensus 94.5; last 86.9
Construction spending: consensus 0.5 %; last 0.5 %
ISM Manufacturing Index: consensus 51.3; last 51.4
Oil and Gold Remain on the Watchlist
Besides this trickle of data market participants will closely watch the two other inflation indicators gold and oil, which I had correctly predicted to move higher last week. If oil manages to stay above 60 dollars, gold will probably continue its recent gains too after it closed at 440 dollars an ounce on Friday, having decoupled from the dollar since two weeks. As the supply fears will not fade, no matter what the oil stock report on Wednesday tells, the rally might consolidate but not lose much of its steam.
Oil prices at the current levels are designed to leave a painful dent on share markets which sold off significantly the last two trading days for this reason and will have a hard time to shake off the rising oil pressure. As this would indicate higher inflation expectations it could also help to end the conundrum on bond markets, where the 10-year yield closed at 3.91 percent on Friday. The end of the conundrum will come at a price.
Currency markets will likely see a further weakening of the Euro as Europe gets hit hard by the double whammy of higher oil to be paid in a stronger dollar. This in turn will cloud the moderate growth expectations on the old continent even more.
I close with a quote of Donald Kohn's latest speech. "Although the most likely outcome for the overall economy is good, a number of characteristics of the current situation suggest some greater-than-usual risks around that central tendency, and, in particular, raise questions about the pattern of asset price movements that might accompany even favorable overall economic performance."

Another War Map - Casualties in Iraq

Sunday, June 26, 2005

As another reminder that the war in Iraq is not a distant political event but a tragedy that is turning into a bloodbath, ending the lives of thousands violently, jump to this animated map of military casualties in Iraq done by I may also point you again to the interactive war map from the Nobel Foundation that shows all armed conflicts since 1900.

Zimbabwe: 200 NGO's Issue Appeal to the UN

Friday, June 24, 2005

As the human rights situation in Zimbabwe steadily deteriorates, a coalition of more than 200 African and international NGO's today issued an unprecedented Joint Appeal to the United Nations (UN) and African Union (AU) to help the people of Zimbabwe. Strongly condemning the mass forced evictions, the coalition of organizations urged Nigerian President Obasanjo, as Chair of the AU, to put the crisis in Zimbabwe on the agenda of the upcoming AU Assembly - scheduled to take place in Libya on July 4/5.
demolition of shantytowns in Zimbabwe

PICTURE: Zimbabwe riot police watch the ongoing destruction of the dwellings of 100,000s of poor people. Courtesy ZimObserver
The coalition also called on relevant bodies at the UN, including the Secretary-General, to publicly condemn the ongoing mass violations and take effective action to stop them. "The appointment of a UN Special Envoy to investigate the mass violations taking place in Zimbabwe is welcome," said a representative of the coalition. "But effective action must also be taken immediately to help those already sleeping on the streets, beside the rubble of their homes - and to ensure that the evictions and demolitions stop immediately. The AU and UN simply cannot ignore such an unprecedented, wide-ranging appeal on behalf of the people of Zimbabwe, particularly from African civil society," said a coalition representative. "African solidarity should be with the people of Africa - not their repressive leaders." Amongst the human rights and civic groups signing the Joint Appeal are Zimbabwean Lawyers for Human Rights, the Inter Africa Network for Human Rights (AFRONET), Amnesty International, the Centre on Housing Rights and Evictions (COHRE), the International Bar Association's Human Rights Institute, and the International Crisis Group.
It does not stop here
Zimbabwe demolition

PICTURE: A small boy looks at what was his former shelter. Courtesy AP
Civil society structures in Zimbabwe have accused President Robert Mugabe of demolishing shacks and market stalls under the pretext of restoring order in the cities to reduce the dominant position of the Movement for Democratic Change (MDC) in urban areas.
Crisis in Zimbabwe Coalition spokeswoman Bella Matambanadzo said the group believed Mugabe had absorbed the militia youth he previously trained and used to terrorise the countryside during elections into the Zimbabwean police.
These youths were now being used in the campaign in which people's houses and informal trading stores had been razed.
Addressing a conference arranged by the Centre for the Study of Violence and Reconciliation in Johannesburg to discuss the crisis, Matambanadzo said a lack of fuel in Zimbabwe meant that destitute people were forced to carry furniture on their backs as they moved from one town to another searching for shelter, as they could not afford transport costs.
She said more than a million Zimbabweans had been left homeless since the government launched its three operations targeting informal settlement areas.
Themba Nyathi said that the demolitions were designed to hide the Zimbabwean economy's backward slide.
"They are trying to hide the poverty of the people to display false claims that the country's economic reforms are improving the lives of ordinary Zimbabweans."
MDC spokesman Paul Themba Nyathi said the campaign was an attempt to punish and intimidate the party's supporters ahead of local government elections, expected to take place within the next two years.
Yesterday police said they were taking the campaign to prosperous suburbs of the capital, where they will target illegal property developments and houses that have been turned into offices.
A further story from Zimdaily:
The ruling Zanu-PF supreme decision making body, the Politburo, met in Harare yesterday to deliberate several issues, mainly the "clean-up" ahead of the United Nations visit which Mugabe is afraid the world would be informed that he violates human rights.
Sources said Mugabe who does not approve of the UN visit ordered the politburo to come up with a plan that would create an impression that Zanu PF is building houses for the people they made homeless.

After the meeting, Mashonal Central governor Mr Ephraim Masawi said the meeting had discussed the setting up of provincial committees that would spearhead construction of houses and factory shells for people affected by Zanu PF's inhuman exercise.
"The demolition is no longer news to us, we are now embarking on the restructuring that is expected to start soon," he said.
He said the party had instructed several ministries to start looking at providing shelter for the people affected by the demolitions.
The Minister of Local Government, Public Works and Urban Development, he said would coordinate the projects at national level while the Minister of Defence would coordinate the activities of all provincial committees with the support of nine other ministries.
Analysts are of the opinion that judging from Zanu PF's history, nothing would be done regarding building houses for the homeless. They just want to appear as if they are doing something to the UN and the out side world.
Meanwhile to confirm Zanu PF's confusion the government yesterday reversed its decision on urban farming saying urban agriculture was not banned but what had been outlawed was stream bank cultivation and farming on undesignated places.
Police and council officials had on Tuesday announced that urban farming had been banned.
"Urban agriculture has not been banned. Government respects its contribution to the national food basket. The ban is not global. It only affects stream bank cultivation and the cultivation on undesignated areas," Zanu PF said.
Many urban dwellers practice subsistence farming with most of their produce for home consumption.

"Zimbabwe: No Oil >> No Fight for Freedom, Democracy, Humanity..."
"Zimbabwe: 200 NGO's Issue Appeal to the UN"

IMF Sees Subdued Growth in Russia

Thursday, June 23, 2005

The International Monetary Fund (IMF) sees subdued growth in Russia. The mission estimates that real GDP will grow by about 5.5 percent in 2005, close to the government's revised estimate of 5.8 percent, and well below the 7.1 percent recorded in 2004. The main reason for this is the assumption that growth in oil extraction will not regain the fast pace of recent years, but also that investment growth will fail to recover fully as well.
As oil has pushed through the 60-dollar mark today this concluding statement from June 6, published today at the IMF website may not be 100 percent accurate anymore.
I have omitted the advisory part as I am critical of the IMF recipes. Bolivia has come close to civil strife recently after they had implemented the IMF's advice of more privatization that ultimately led to the installation of coin operated water meters amongst other measures by the new owners of vital resources of the country. Bolivia has since reversed most of the policies the IMF had requested in return for international loans.
Concluding statement of the IMF mission to Russia 2005
Russia has had several years of high GDP growth, partly due to high oil prices, but also good macroeconomic policies, notably that of taxing and saving oil revenues. This policy is now being relaxed, however, as a much larger share of oil revenues is being spent by the government, despite continued buoyancy in other demand and a slowdown in potential growth. This risks exacerbating the slowdown by increasing the already high inflationary pressures and causing the real ruble appreciation to overshoot its long-term path. Moreover, while there is scope for relaxing fiscal policy once inflationary pressures ease, the fact that the increased spending is used overwhelmingly for public sector wages and pensions suggest that the oil wealth is not being harnessed in support of reforms that could raise potential GDP growth. At best, Russia risks missing an opportunity to accelerate growth over the long run; at worst, it may have to undertake a painful and prolonged fiscal tightening if oil prices drop substantially. If it is becoming politically impossible to continue to resist pressures to spend the oil wealth on wages and transfers, it becomes a matter of urgency to raise potential growth by reinvigorating structural reforms, which have lost the momentum that they had a few years back
GDP growth has slowed. While growth in all the main components of demand accelerated notably in 2004, GDP growth decelerated and the higher demand spilled over entirely into higher imports and increased inflationary pressures. This points to emerging supply constraints in some sectors and in local labor markets, after 6-7 years of robust GDP growth but relatively low levels of investments. The deceleration in GDP growth was pronounced since mid-2004, when oil production weakened notably, due to disruptions associated with the break-up of Yukos and capacity constraints in both extraction and transportation. The Yukos affair appears also to have taken a toll on the investment climate as investment growth began to decelerate from mid-year as well, suggesting that the slowing of GDP growth has reflected an interplay of demand and supply factors. Recent data confirm that GDP has continued to grow more slowly in 2005 and that inflationary pressures have remained high.
GDP growth is likely to remain subdued. The mission estimates that real GDP will grow by about 5.5 percent in 2005, close to the government's revised estimate of 5.8 percent, and well below the 7.1 percent recorded in 2004. The main reason for this is the assumption that growth in oil extraction will not regain the fast pace of recent years, but also that investment growth will fail to recover fully as well. Consumption growth, on the other hand, is expected to remain buoyant, and could possibly even accelerate compared to 2004, due to the continued strong growth in real wages, record high oil prices, and a much more expansionary fiscal policy stance. As in 2004, it is expected that a further boost to consumption will elicit only a limited domestic supply response, causing mainly a further sharp rise in imports. Achieving even a modest decline in inflation under these conditions will require a change in monetary and exchange rate policies, as discussed below. The projections are admittedly subject to much uncertainty, especially with regard to the investment climate and the extent of supply constraints in the economy, not least in the energy sector.
Oil Price Should Not Be the Problem for Russian Budget
As to 2006, plans discussed with the mission entail a further relaxation on a constant oil price basis by, at least, 1.3 percent of GDP. This assumes that the government will be able to maintain expenditure constant as a share of GDP, despite allocations for a new investment fund, additional transfers to the regions, and the need to make a down payment on the President's promise to raise pensions and public wages by 50 percent in real terms over the next three years. The mission estimates that the oil price required to balance the budget at the federal level is set to increase from $23 per barrel in 2004 to $28 per barrel in 2005 and to $31 per barrel in 2006

Greenspan and Snow Warn Against Unilateral Sanctions on China

Imposing unilateral trade sanctions on China could have grave consequences to the financial system, Federal Reserve chairman Alan Greenspan warned the US Senate today. "A tariff of 27.5 percent ... if that ever gets implemented the consequences will be extraordinary ... You are getting a former communistic system to recognize that capitalism is where they want to be," Greenspan said in the Q&A session of the Senate's finance committe hearing on trade with China. He went on to say that a unilateral implementation of tariffs could result in great danger to the international financial system. The Chinese as biggest buyers of US debt paper could easily retaliate by simply reducing their bids, Greenspan did not say. Greenspan found an ally in US Treasury Secretary John Snow who also warned against unilateral sanctions in his prepared remarks.
Greenspan said in his remarks that
"any significant elevation of tariffs that substantially reduces our overall imports, by keeping out competitively priced goods, would materially lower our standard of living. A return to protectionism would threaten the continuation of much of the extraordinary growth in living standards worldwide, but especially in the United States, that is due importantly to the post-World War II opening of global markets. Such an initiative would send the adverse message to our trading partners that the United States, while accepting the benefits of broadened world trade, is not willing to absorb the structural adjustments that are often necessary."
In the Q&A session Greenspan pointed out that there was no analytical support that sanctions would be of help in balancing the US trade deficit. "If you go back we have had periods of trade deficits and surpluses intermixing with growing and declining changes the structure of jobs," Greenspan said, adding that structural changes have to come, "...the basic problem we have is a very severe bifurctaion of our labor markets."
The Fed chairman stressed again the point that the US need to improve their educational system as there were too few highly skilled people and too many with low or no skills. The first group would enjoy the benefits of steadily rising wages while the latter one would be at the mercy of the general employment situation, he implied.
Revaluation Would Not Protect Any Jobs
In his introductory remarks he dampened hopes that a revaluation of the Yuan would help creating jobs and reduce the trade deficit. "Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi (RMB) relative to the US dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion," was his first statement to the Senate.
Following are the key statements to the Senate.
An increase in the exchange rate of the RMB, relative to the dollar, would likely redirect trade within Asia, reversing to some extent the patterns that have emerged during the past half decade. However, a revaluation of the RMB would have limited consequences for overall U.S. imports as well as for U.S. exports that compete with Chinese products in third markets. Such a revaluation would affect Chinese value added but not the dollar cost of intermediate goods imported into China from the rest of Asia, which represents a significant share of the gross value of Chinese exports to the United States and elsewhere.
The broad tariff on Chinese goods that has recently been proposed, should it be implemented, would significantly lower U.S. imports from China but would comparably raise U.S. imports from other low-cost sources of supply. At only slightly higher prices than prevail at present, U.S. imports of textiles, light manufactures, assembled computers, toys, and similar products would in part shift from China as the final assembler to other emerging-market economies in Asia and, perhaps, in Latin America as well. Few, if any, American jobs would be protected.
Don't Trade, Produce
A policy to dismantle the global trading system in a misguided effort to protect jobs from competition would redound to the eventual detriment of all US job seekers, as well as of millions of American consumers. Policy should aim to bolster the well-being of job losers through retraining and unemployment insurance, not to stave off job loss through counterproductive efforts to impede the process of income-enhancing international trade and globalization.
Greenspan explained to the Senate committee that China has to work towards a more flexible exchange regime anyway as they have to sterilize the massive inflow of capital or they would otherwise risk creating an inflationary environment with all the problems that follow inflation.
The chairman does not get tired to warn about the devastating effects the close to zero savings rate of the US could have in the long run,
"policies that would enhance national savings are generally good."
An improvement in the current account deficit would come by reducing the budget deficit first, Greenspan said. "We do find evidence that if the federal deficit is brought down 20 cents on the dollar, the current account deficit...follows." But there was no evidence that sanctions would help in balancing the current account deficit.
The Treasury secretary had the following key remarks to the Senate committee.
I cannot overstate my firm belief that resorting to isolationist trade policies would be ineffective, disruptive to markets and damaging to America's special role as the world's leading advocate for open markets and fair trade.
Acting on any of the punitive legislative proposals before Congress now would be counterproductive to our efforts at this time. The unintended consequence would be to delay the concrete steps on currency reform that China should take for its own sake and for the sake of the global economy.
Sanctions Would Provoke Retaliation
In addition, implementation of trade sanctions would lead to retaliatory policies against our exports, damaging the US and the global economy. Walls will not protect America's workers and industry. We succeed not with barriers, but with the openness and dynamism which has always characterized our nation.
Snow made them aware that policymakers will have to act soon in their home-turf if they don't want to be confronted with a financial crisis.
Addressing imbalances in the global economy is a shared responsibility among the major economic regions of the world. While imbalances occur as the patterns of trade and investment flows shift between economic regions, uneven rates of growth in the major economies and inefficient or distortionary policies restrict adjustments and put stress on the global financial systems. Economic policymakers must address these imbalances now; delay increases the risk that adjustments will occur abruptly.
He sees the US on a good path to reduce its budget deficit.
Because of strong growth and appropriate fiscal policy, the U.S. budget deficit in 2004 was well below projections, and with recent data, I expect further improvement in our fiscal deficit position this year. Some private forecasters predict that our fiscal deficit will be below 3 percent of GDP this year if we continue to hold the line on spending.
And he took the steam off the Chinese, pointing out that they have already employed a string of measures towards a more flexible exchange rate system. US politicians seem to put too much of their economic hopes on a revaluation as cure for all domestic problems.
Since 2003, China has taken critical steps to establish the necessary financial environment and infrastructure to support exchange rate flexibility, Snow remarked.
  • It has introduced a foreign currency trading system permitting onshore spot trades in eight foreign currency pairs and allowing banks to act as market makers.
  • It has adopted measures to increase the volume of foreign exchange trading, for example: eliminating the foreign exchange surrender requirement for many commercial firms; allowing domestic Chinese insurance firms and the national social security fund to invest in overseas capital markets; and increasing the amount of foreign currency business travelers can take out of the country.
  • It has taken steps to develop foreign exchange market instruments and increase financial institutions' experience in dealing with fluctuating currencies. Foreign exchange forward contracts can now be offered in China; foreign exchange futures are being developed; and domestic Chinese banks can now trade dollars against other foreign currencies, not just remnimbi.
  • It has also acted to strengthen its financial sector and regulation, so that this sector is more resilient to any fluctuations in exchange rates.
He urged China to proceed with intermediate steps toward a full free-float of the Yuan which would be in the interest of itself. The Yuan/renminbi has been pegged to the dollar at a rate of 8,28 since 10 years.
Altogether Snow has drastically reduced his previously quite aggressive stance towards China's exchange rate policy.
For some background and the recent past of the China issues, jump to these earlier posts.

Zimbabwe: No Oil >> No Fight for Freedom, Democracy, Humanity...

Before I start my post on Alan Greenspan's testimonial about China and all that first a very emotional comment on the escalating situation in Zimbabwe. There is a dictator who rigged the elections and who has now made some 2 million people homeless by razing their makeshift shelters with bulldozers in a campaign that started about a month ago.

Harare shantytown

PICTURE: Left shows a shantytown in Mbare south of Harare that is missing on the right picture. 2 million people are homeless in the middle of the African winter. And it gets cold there in the night. Check out a weather service for temperatures in Harare. Scroll down to see the dictator's "dwelling"!!Courtesy: Kurier
And where is the outcry of the international community, let alone intervention??
There are reports the bulldozers don't even hesitate to maim children. And now Robert Mugabe, the "statesman" has prohibited the growing of food in backyards in a country that encounters severe famine for years already. For more information visit websites like,, and especially The Zimbabwe Situation, which compiles all other media reports on the deterioration of the former food-box of Southern Africa. Nobody can say he does not know. The internet provides us with free realtime information about even the most distant corners of the globe.

Demolition in Zimbabwe

PICTURE: Click this image for a better version of the above one. Hat tip to Mandebvhu, who has even higher resolution pics here. Courtesy of Digital Globe.
So far there are only a few calming words from UK politicians, but no action whatsoever.
Mugabe enters the early stages of a holocaust that can be compared with the terror regime of Saddam Hussein against the Kurds.
I decline the right of every politician in the world to call himself civilized when she/he shuts the eyes in front of this ongoing humanitarian catastrophe.
I feel ashamed of a world that manages to set up an "international coalition" for the official reason to depose an inhuman dictator who coincidentally happened to control the world's third biggest oil reserves. A coalition that applies the same regime of inhumanity as did the dictator they chased away, with torture, killings and a puppet government that has "invited" them, that is the phrase White House spokesperson Scott McClellan used at a press conference.
Well, I am sure the people of Zimbabwe would be happy if the "international coalition" would follow their invitation to Zimbabwe. Sorry if it's not a formal invitation; people there have no money for a post stamp and all the internet cafes are closed.
Where is this "international coalition" in the case of a country that has no black gold?
No special UN sessions get devoted to this issue, no talk about intervention in the name of freedom, democracy, humanity. Poor Zimbabweans, destined to starve or get maimed just because they are not in the position to be able to show the "international community" some oil fields that would be worth a war in the name of humanity.

mugabe mansion

PICTURE: Dictator Robert Mugabe meanwhile builds himself a 15-million dollar mansion.
UPDATE I: Please see this post "Zimbabwe: 200 NGO's Issue Appeal to the UN" (with more pictures of the destruction) and maybe mail this and the other one to your political representatives. The world must not remain quiet in the face of an unprecedented act of barbarism from an aging despot who builds himself a 110-room mansion for 15 millions US dollars at the same time this is happening. Half of the starving population of Zimbabwe depends on foreign aid.
UPDATE II: Jump to posts "IMF in Zimbabwe - Expect the Economy to Get Worse" and "Dollar rises 45 % - in Zimbabwe"

China's BIG Problem Goes by the Name of Energy

China faces the same problem like all other industrialized nations. It is highly dependent on oil imports and has to meet daunting environmental challenges stemming from the intensive use of coal. Philip Andrews-Speed, director of the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP) at the Scottish university of Dundee sums up the huge tasks for China's energy policy in a contribution to the Far Eastern Economic Review. Read on for a compact version.
China faces two pressing sets of energy policy challenges. The first relates to the immediate need to improve management and coordination of the nation's energy supply. For the last two years economic growth has been running at about 9% per annum. Meanwhile energy demand was up 15% annually while oil imports grew at 30% per year. Electrical power shortages are widespread, and transport bottlenecks constrain the ability of the industry to move both coal and oil to where they are needed.
The second set of challenges is longer-term in nature and concerns the continuing inability of China's government to formulate a coherent energy policy which could provide the basis for the effective management of the energy sector and its environmental consequences.
China's energy sector has a number of intrinsic weaknesses. These include a shortage of domestic oil and gas reserves relative to current and future demand, and a geographic mismatch between the location of primary energy resources and the main centers of demand. These deficiencies are being addressed by increasing the level of energy imports and by building long-distance energy transmission infrastructure.
Yet two more profound weaknesses have to be tackled in a systematic manner, beginning with the issue of overall efficiency of production and use of energy. During the 1980s and 1990s the energy intensity in China declined, reflecting a sustained enhancement of the efficiency with which the country used energy. Over this period, economic growth was running at 5% to 10% per year, and the annual rise in energy consumption lay in the range 5% to 8%. Energy intensity, that is the amount of energy used for each unit of GDP, declined at an average rate of 5% to 6% per year. Today, given the double-digit increase in energy demand over the last two years, it is clear that 20 years of improvements in energy efficiency have been reversed.
Unsustainable Growth in Energy Consumption
Current rates of growth in energy consumption are not sustainable, not least because of the very high rate of investment required to produce, transform and deliver such quantities of energy. China is now the world’s second largest consumer of energy, accounting for some 12% of global energy demand, but its rate of increase of demand is some four to five times that for the rest of the world. So what happens in China’s energy sector affects us all.
The second aspect of China’s energy sector which must be addressed by any new energy policy is its continuing dependence on coal. China is the world's largest consumer of coal, accounting for more than 30% of global coal consumption. Further, coal continues to provide some 65% of China's primary energy demand. While such dependence on coal is not necessarily a curse, it has two mutually reinforcing drawbacks: low energy efficiency and pollution.
Coal Fills 65 % of Energy Demand
The heat value of a unit weight of coal is intrinsically less than that for oil and gas, and the recovery rates for many of China's coal mines are low, meaning that much of the country's coal resource is left in the ground, never to be recovered. Furthermore, the efficiency of appliances which use coal in China continues to be substantially lower than the average in OECD countries. Progress has been slow in enhancing the efficiency of consumer electrical appliances and implementing building codes which reduce heat losses. Finally, the continuing low level of end-user prices has failed to provide consumers with incentives to save energy.
As a consequence of all these deficiencies, China is mining, transporting and burning substantially more coal than is strictly necessary. This in turn exacerbates environmental damage, which can be felt locally, regionally and globally.
The government must either find a way to dramatically reduce the country's dependence on coal, or it must adopt the best available technologies and practices to enhance the efficiency and cleanliness with which coal is mined and transformed into energy. Both options necessarily involve huge costs. Given the large size of China's coal resources, it is most likely that the government will prefer the second option. The risk remains that policy paralysis or a failure to effectively implement new policy will result in the continuation of the current trend to use ever increasing amounts of coal, with little improvement in either efficiency or cleanliness.
In 2003, the newly installed government realized that the country was facing an energy crisis and that the main threat to security of energy supply was domestic rather than international. A year later Beijing announced a new draft energy strategy which emphasized the overriding importance of energy efficiency and energy conservation and which set specific targets for energy savings. However the announcements lacked details on how such targets were to be met, and to date there is little sign of a truly new approach to energy policy.
China Needs an Energy Ministry
These weaknesses in China's current energy policy can be traced primarily to the absence of an Energy Ministry or equivalent strong and well-staffed agency responsible for energy policy. The fragmented institutional structure of the energy industry has led to a fragmented energy policy, aggregated from specific industry objectives driven more by the leaders of these industries than by the formulation of sector-wide initiatives.
Last year's announcements on energy strategy and the recent formation of a leading group to oversee the energy sector clearly reflect a realization on the part of the most senior government officers that a new approach and a new institutional structure are required to address the short- and long-term challenges faced by China's energy sector. However, the creation of a leading group is an interim measure which should be followed by the establishment of a permanent agency at ministerial level, or above, with overall responsibility for energy. Such an agency will require a much higher level of staffing and of political authority than any of its predecessors, for radical measures will need to be taken along the entire energy supply chain. Of these measures, the most politically contentious will be the need for energy users to pay the full cost of their energy supply.
Three Potential Opportunities
Assuming such a new energy agency is established, the future direction and nature of China's energy sector will depend on three further potential opportunities for change. The first will be a substantial improvement in the coherence of energy policy and in its linkage with environmental policy. Such a policy should not only state the objectives, but also the means through which these objectives will be achieved.
The second opportunity is for the government to undertake a radical change in their approach to the production, transformation and consumption of energy by bringing in measures and technologies to substantially enhance the efficiency and the cleanliness of the sector. The question is whether the future direction of energy strategy will be "business-as-usual" with incremental improvements at the margin, or a truly new approach.
Finally, and most importantly, Beijing needs to keep energy policy at or near the top of its agenda, and not allow it to be replaced by other pressing priorities once the crisis has passed. The energy sector in any country is highly politicized. If China's leaders really wish to change the way their energy is produced and used, then sustained political commitment will be required for many years.
While China is in discreet negotiations with Venezuela about oil imports, see this post, its third largest oil company CNOOC has started a takeover battle for US oil giant Unocal, the Wall Street Journal reports today. CNOOC offers 67 dollars a share. Nearly half of Unocal's reserves, the oil and natural gas equivalent of 1.75 billion barrels, consists of natural gas in Asia - which China wants to keep its plants running. Overall, a combined entity would have 85% of its reserves in Asia, according to Cnooc's bid proposal.
Unocal has gas or oil fields in Thailand, Indonesia and Myanmar, complementing the offshore Chinese, Indonesian and Australian holdings of Cnooc. Unocal also owns a 10% stake in a big Azerbaijan field and pipeline operated by BP PLC, which is to move oil to the Mediterranean.
The need for oil has also revived old plans that China could diversify its huge forex stash into the build-up of a strategic petroleum reserve. See "China may use FX reserves to build SPR".

Euro Area CB's Sold about 180 Tons of Gold in 2005

Wednesday, June 22, 2005

The 12 central banks (CB's) of the Eurozone have sold roughly 180 tons of gold since January 1 with a value of 2.104 billion Euros. Only in the last 3 weeks reported, gold with a Euro-value of 432 million Euros has been sold. This despite a contradicting statement discussed in the post "ECB sold gold despite saying otherwise earlier." Altogether the net value position of "gold and gold receivables" (see note at the end) has seen a decline of 3.52 billion Euros since January 2 which is the result of the gold sales and a revaluation of the gold assets on the back of dollar that rose more than 12 percent since the beginning of the year. Is gold that bad in the eyes of the Eurozone CB's that they chose to avoid a paper-profit of some 15 billion Euros which would have come by simply doing nothing?
As the ECB reports only the number, but not the location of central banks who sold gold in their weekly financial statements, I tried to dig out this information from the statements of the national central banks themselves.
Adhering to the old rule "follow the money" I went to the Banca d'Italia's website as I thought a country with huge imbalances might be tempted to take advantage of a gold price close to its 2005-high of 443 dollars an ounce. My research into the transactions of a unified Europe stops here: The statistical part is in Italian only. A link promising useful information yields the same result: Italian only.
In Portugal, where the budget deficit is approaching 7 percent of GDP, there is a working English version of the website of the Banco do Portugal, alas they only provide you with quarterly net changes of the BdP's reserve positions - latest data from March. Gold is not given an extra line in the table. But they tell you the number of consumed bednights in Portugal's hotels. Yes, I know I'm being cynic. I just can't help it.
So much about transparency in a united Europe where every law regarding roadsigns, the labeling of Parma ham or whatever else has to be translated into every member language at an annual cost of 1 billion Euros.
Central banks are a very special elite, The Prudent Investors growls. For a confirmation of this I browsed Hungary's central bank website. Don't inflict that pain on yourself when trying to find current useful information in a broadly understood language.
A further note on gold: Those central banks who are so nice to report on their gold holdings will only give a combined position of gold and gold receivables. The first item is the real stuff while the second is gold they have a claim on. How was that stuff about counter-party risk?
UPDATE: The Russian news agency Interfax reported today the following:
A total of 37 commercial banks had ordered 150 tonnes of gold from Russian producers by the middle of June, a source at the Gokhran or precious metals and gemstones repository told Interfax.
Last year, 51 banks ordered 194.5 tonnes of gold.
Banks do not always buy as much gold as they order, though. Russia only produced 180.5 tonnes of gold last year. Production grew 3.7% year- on-year to 41.2 tonnes in January-May this year and could total 183 tonnes in 2005 as a whole, the Russian Gold Producers' Union has said.

US Debt: 136,347 Dollars per Head

Michael W. Hodges, author of the Grandfather Economic Report (link in the sidebar) has a nice piece on US debts at Financial Sense Online. According to his calculations every American, from babies to those in the final stage of their lives, carries an average debt of 136,347 US dollars. The total US debt stands now at 40.1 trillion dollars, of which 7.6 trillion is Federal debt, states and communities owe 1.7 trillion and the private sector - including businesses - owe altogether 30.8 trillion. From this sum households owe roughly a third or 10.3 trillion dollars.
Add in unfunded contingent liabilities like Medicare and Social Security and this sum raises to a mind-boggling 84.1 trillion or 286,258 dollars per head, old and young.
Want a still higher number? No problem, do additional research and try to find out about the pension liabilities approaching the aging nation.
Even when one remains with the first number of 40.1 trillion dollars, at a conservatively estimated interest rate of 4.5 percent this means the load of debt costs 1.804 trillion dollars in interest only.
US GDP increased 6.2 percent to 12.192 trillion current dollars in the first quarter of 2005, according to the Bureau of Economic Analysis.
A linear extrapolation would see the total GDP for 2005 come in at 48.767 trillion dollars. Staying with the conservative estimate of 4.5 percent interest this means 3.7 percent of GDP or every 27th dollar have to be used for interest payments.
If interest would rise to 7 percent, and that is not something unimaginable, interest payments would surge to 2.8 trillion which is 5.7 percent of GDP or every 17th dollar made.
What's even more worrying is that every debtor sector has elevated itself to a record debt status. And Hodges thinks the true debt is even higher because of off balance-sheet debt (Enron and Worldcom were very creative at that) and private debts between households.

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