Too hard to break China’s savings habit
Why do Chinese save so much?
BBC reports
Becker: How much should we care about budget deficit
Insights from Nobel winning Gary Becker, professor of economics at University of Chicago:
To the extent that the source of the rise in a deficit is increased government spending, then whether that rise is justified depends on how socially valuable are these government expenditures. By that I mean the social rates of return on these expenditures, such as longer lives for the elderly, relative to the interest cost of raising the required funds, and relative to the returns on other investments in the economy. Much of the increased government spending in different countries during this recession went to help out banks that were in danger of going under. While numerous mistakes were made that will be argued about for a long time, such spending on the whole was necessary in order to limit the financial crisis that had developed.
Other parts of the increase in spending in most countries are far more dubious and may even have harmed their economies. I include in that most of the $800 billion Obama stimulus package, much of which is still not spent even though the brunt of the recession is over This package was promoted as a way to fight the recession, but mainly it is an attempt to re-engineer the economy in the directions of larger government favored by many liberal Democrats. I believe much of this reengineering will hurt the functioning of the economy, and of course at the same time will add to the debt burden.
A very small example was the cash for clunkers program in the US that ended a short time ago. The 19th century French essayist Frederic Bastiat discussed facetiously the gain to an economy when a boy breaks the windows of a shopkeeper since that creates work for the glazier to repair them, and the glazier then spends his additional income on food and other consumer goods. The moral of that story is to hire boys to go around breaking windows! The clunkers program was hardly any better than that (see our discussion of the clunkers program on August 24th).
Deficits also arise automatically during recessions because tax revenues fall as the growth in aggregate incomes slows down, and even becomes negative, as it did during this recession. This automatic effect on deficits during recessions from falling tax revenues is supposed to be balanced by automatic surpluses during prosperity times as tax revenues grow because income are expanding faster. Unfortunately, the period prior to the recession also had budget deficits, even though incomes grew quite fast, because Congress and President Bush pushed for greatly expanded spending.
To turn to the second question, will financing the debt become a serious obstacle to rapid US growth as the current and projected sizable US deficits increase the ratio of government debt to American GDP? That depends on four critical variables: the size of the debt/GDP ratio, the level of interest rates, tax rates, and the rate of productivity growth in the American economy. Suppose the debt held by the public-which excludes government debt held by other government agencies- reaches 100% of present or near term GDP, which is not unlikely.
The burden on the government budget that this imposes depends on the interest rates on the debt. At an average interest rate of 5%, that means 5% of GDP would go to servicing the debt, which is a little less than 20% of total federal government spending. This might be manageable but it is not trivial. On the other hand, if average interest rates were only 3%, servicing costs would be far more tolerable. In fact, the US has been paying about 3% on its debt, so even a considerable increase of the debt to 100% of GDP would still be manageable. But if the Fed starts raising real interest rates to head off the inflation potential in the $800 billion of excess reserves, the debt burden could become a major problem. Another factor is the savings rates coming from the Asian countries, like China. If their savings decline sharply, that too would raise world interest rates and increase the debt burden for all countries.
Rapid productivity growth and an improved tax structure could save the situation because the expansion of GDP caused by such growth and better taxes lower the ratio of the debt to GDP, and makes financing the debt easier. To maintain rapid productivity growth requires that an economy provide powerful incentives to invest in physical and human capital and R&D. It also requires that Congress and other legislatures do not start growing government spending as GDP grows rapidly. But members of Congress and other legislatures are tempted to use much of the growing tax revenue on their pet projects.
One important determinant of the incentives to invest is the tax rates on the rewards of investments in new knowledge and capital. Rich people should pay a larger share of the tax burden, and they do. However, if the emphasis changes from encouraging investments to redistribution, the poor as well as the rich will suffer. Probably the poor will suffer more since the rich can more their capital and themselves to the many low tax jurisdictions in the world.
The Dollar is breaking…(at this moment)
Dollar is breaking to new lows…if we don’t repeat another Lehman this fall, I don’t see how it can go up.
Gold price jumped above $1000, and stayed there quite nicely.
Bernanke: Recession is likely over
Ben declares so, although what lies ahead is anemic recovery:
From a technical perspective, the "recession is very likely over at this point," Mr. Bernanke said in a question-and-answer session at the Brookings Institution.
But he added that even if recovery is under way, the economy will still seem weak because credit conditions remain tight and any decline in the unemployment rate will probably happen gradually. He noted that one risk is that the economy will grow in the second half of 2009, but not enough to trigger a rapid recovery in employment.
If there is only moderate economic growth, unemployment "will be slow to come down," he said. "It will come down, but it will take some time."
China’s GEM
China's Nasdaq market is ready to launch (source: wsj):
The countdown has begun for the launch of China's Nasdaq-style stock market, with the country's securities regulator poised to announce the first batch of companies approved for listings on the Growth Enterprise Market as soon as Thursday.
If everything goes according to plan, the GEM, which will be on the Shenzhen Stock Exchange and is aimed at funding technology- and innovation-driven start-ups, would open for business as early as mid-October, analysts said.
Hopes are that the GEM, which authorities have considered for nine years, will open up a fund-raising channel for cash-hungry start-ups that are deemed critical for Beijing's effort to restructure its export- and manufacturing-dependent economy in the long run. Such smaller firms have had little access to an avalanche of new lending in China this year.
Down the line, supporters say the GEM could prove a rival to the likes of New York's Nasdaq Stock Market and London's Alternative Investment Market as a place for small Chinese companies to find backing, though precedents for such markets in Asia aren't too encouraging.
Although the GEM has been positioned as a high-risk, high-growth marketplace, a look at the seven companies whose initial public offerings are being reviewed suggests Beijing is seeking to ensure a stable start for the exchange by selecting more mature firms, including a state-owned enterprise.
The China Securities Regulatory Commission said Sunday that it will start reviewing GEM-related IPO applications from Thursday, with seven firms chosen for the first round, including Beijing Lanxum Technology Co., Beijing Ultrapower Software Co. and Lepu Medical Technology (Beijing) Co.
The companies could raise a combined 2.27 billion yuan ($332.4 million) from their IPOs, according to a calculation based on information in their prospectuses.
"Most of the seven companies look very similar to those previously seeking a listing on the Small and Medium Enterprise Board in terms of size and industry," said Li Bin, an analyst at Guolian Securities, who said it is likely the companies were originally SME Board applicants, which generally are relatively well established and not in the high-risk category that the GEM is supposed to target.
The average scale of the seven IPOs falls into the range of 200 million yuan to 500 million yuan considered typical for a new listing on the SME Board, which is also on the Shenzhen exchange.
So far, 149 companies have applied for GEM listings, and analysts said those with sounder financial health and more stable earnings are expected to go through first.
Indeed, Mr. Li said most of the seven companies being reviewed this week don't qualify as innovation-driven start-ups, neither in terms of the nature of their businesses nor their shareholding structure.
In a market meant as a playground for mostly private enterprises, one hardly expects to see a state-owned company, but 53.9% of Lepu Medical Technology, a medical appliances maker, is indirectly held by China Shipbuilding Industry Corp. through two of its units.
The CSRC has said the GEM would mainly serve companies in businesses such as renewable energy, biomedicine, electronic information and environmental protection.
Hatzius on the state of the economy
Jan Hatzius, Chief US economist at Goldman Sachs talks about his view on the state of the US economy
link to the video (source: FT)