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Big test coming for Euro

February 9, 2010 / Leave a comment

David Rosenberg warns don't take Euro's longevity for granted:

Greece today may well be the touch-off point for market instability just as Thailand was back in July 1997 — who would have thought a Baht devaluation would have touched off a major Asian financial crisis. Then again, who thought the subprime mortgage market would unleash a broad credit collapse — certainly not the folks at the Federal Reserve. And, as for the Euroland, don’t take its longevity for granted either. Go back to the history books and read about how long other currency unions lasted in that part of the world in the past (like the Latin Monetary Union circa 1867 or the Scandinavian Monetary Union circa 1873).

Maybe it's too early to be too much worried about Euro, but be reminded that the fate of Euro had always been a jousting between two of my favorite economists, Milton Friedman and Bob Mundell. 

***Read this classic historical debate*** at University of Chicago between the two great minds.

Fogel on world economy in 2040

February 9, 2010 / 3 Comments on Fogel on world economy in 2040

Robert Fogel, winner of Nobel prize in economics in 1993, predicts China will dominate the world economy by 2040 (see the table below).

 His prediction raised some heated debate in economics profession. In a recent NBER paper, he explained why he thinks:

1. China's future growth rate will be about 8% per year between 2000 and 2040;
2. EU-15 will only grow at 1.2% per year between 2000 and 2040;
3. The U.S. GDP between the same years will grow at 3.7% per year.

Betting against Euro

February 9, 2010 / Leave a comment

Traders are increasingly betting against Euro (source: FT):

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

Figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity, showed investors had increased their positions against the euro to record levels in the week to February 2.

The build-up in net short positions represents more than 40,000 contracts traded against the euro, equivalent to $7.6bn. It suggests investors are losing confidence in the single currency’s ability to withstand any contagion from Greece’s budget problems to other European countries.

Amid growing nervousness in financial markets over whether countries including Spain and Portugal can repair their public finances, Madrid on Monday launched a PR offensive to try to assuage investors’ fears.

Elena Salgado, Spanish finance minister, and José Manuel Campa, her deputy, flew to London to meet bondholders.

They sought to allay doubts about Spain’s creditworthiness by repeating promises to cut its budget deficit to 3 per cent of gross domestic product by 2013 from 11.4 per cent last year. “We’ll make the adjustment that’s necessary,” Mr Campa said. But their disclosure that the treasury planned to raise a net €76.8bn through debt issuance this year unsettled markets further. The projected sum to be raised was lower than the €116.7bn of 2009 but higher than many investors had expected.

The news sent yields on Spanish government bonds, which have an inverse relationship with prices, sharply higher. The premium demanded by investors to hold the country’s debt over German bunds rose to 1 percentage point.

The Spanish government is convinced it is being unfairly treated by foreign investors and the media. José Blanco, Spain’s public works minister, hit out at “financial speculators” for attacking the euro and criticised “apocalyptic commentaries” about Spain’s finances.

Appealing for patriotism, Mr Blanco said in a radio interview: “Nothing that is happening in the world, including the editorials of foreign newspapers, is casual or innocent.”

The single currency fell to an eight-month low of $1.3583 on Friday but recovered a little on Monday to $1.3683. Analysts said sentiment towards the euro had soured because of the increasing concern over Greece’s fiscal problems.

Thomas Stolper, economist at Goldman Sachs, said: ” Behind this intense focus on Greece obviously is the long-standing unresolved issue of how to enforce fiscal discipline in a currency union of sovereign states.”

Is China rising as a science superpower?

February 7, 2010 / 2 Comments on Is China rising as a science superpower?

Reports from Bank of Finland:

China rising as science superpower; huge growth in research activity. A Financial Times story on Monday (Jan. 25) compiled data from Thomson Reuters and Web Science database to show Chinese researchers published about 112,000 scientific articles in peer-reviewed journals in 2008. US researchers led the pack with the most published articles (333,000).

Among the BRIC countries, China has made the most impressive gains in research publications, with notable strengths in the areas of chemistry and materials science. The quality of the science in Chinese papers still is variable, but clearly the Chinese are increasingly working across borders with members of the international research community and a growing number of foreign researchers are publishing jointly with their Chinese colleagues. Generally speaking, the quality of Chinese research is improving.
Brazil has also made huge strides in increasing its out-put of scientific articles, with particular expertise shown in the areas of agriculture and bioscience. In contrast, India, and in particular Russia, failed to live up to expectations of increasing research prowess.

China’s heavy investment in education and R&D during the past decade is now coming to fruition with China joining other research leaders. The return of the Chinese re-searchers who have studied and worked in North America and Europe are playing an important role in China’s development. China has also been successful in translating basic science advances into commercial applications. This phenomenon is reflected, e.g. in the large increase in international patent applications.

Two graphs extracted from the Thomson Reuters' report on China's research output:

(click to enlarge)

China now produces the world's second most research publications, only behind the United States.

Where are China's research publications concentrated?

Eurozone’s debt contagion

February 7, 2010 / Leave a comment

Interview of Harvard professor Nail Ferguson. Will Germany-France bail out Greece, Spain and Portugal?

Remember Milton Friedman’s prediction — “Euro can’t survive a major crisis.” Let’s watch and see.

(update 1) Rolfe Winkler writes on Reuters on the same issue. He outlined three possible outcomes.

1) The PIIGS (acronym for Portugal, Ireland, Italy, Greece and Spain) cut their budgets to pay back debt. Such austerity programs are typically very difficult to get done in democracies. Deficit spending stays high long past the point that it’s possible to work off debt over any reasonable period. To successfully dig out of the hole requires cuts so deep, voters never agree to them.

2) Europe bails them out, which is the easiest solution in the short-run. Richer European countries certainly have the wherewithal to bail out a small country like Greece or Portugal. But it’s a dangerous precedent to set. What about Spain? It’s 14% of the Euro economy compared to 6% for Portugal/Ireland/Greece combined. If economies keep spending with an eye towards a bailout from the ECB, eventually you get #3.

3) The monetary union breaks apart. The customary way out of a debt crisis is to devalue one’s currency, see Argentina in 2001. It couldn’t maintain it’s dollar peg and still service its debt, so it devalued its currency and defaulted on debt. But this locked the country out of the international capital markets and drove them into a deep, though brief, Depression. For Greece to devalue, it would have to pull out of the Euro, pass a law that it’s debts are payable in new local currency and then devalue.

Beijing Consensus, no more

February 7, 2010 / Leave a comment

Yang Yao, Director of the China Center for Economic Research at Peking University, writes on Foreign Affairs that Beijing's ongoing efforts to promote growth are infringing on people's economic and political rights. In order to survive, the Chinese government will have to start allowing ordinary citizens to take part in the political process.

In my view, this so-called Beijing Consensus never existed. It's the fantasy of some academic scholars. It should not be treated as a universal development model and applied to other developing countries.

China's development model may be very efficient, but it lacks higher moral ground. It's the outcome of three decades of gradualist policy evolution during a very special transitioning period. What China needs is more individual freedom and less government intervention in both economic and political spheres.

Read Yang Yao's piece, "The End of the Beijing Consensus".

Market and the Dollar

February 6, 2010 / Leave a comment

This is a remarkable graph showing the negative correlation between the market and US dollar.

6-sense technology

February 4, 2010 / Leave a comment

The current state of six-sense technology — connecting physical world to digital world.

Amazing…

Never underestimate what human capital and knowledge can do. I am optimistic that in 50 years, human welfare will be at much higher level than what any of us can possibly imagine today.

Thanks to its immigration policy, the U.S. is still leading the pack.

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