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Yearly Archives: 2010
China lens on America
It’s been a while to have Tom Ashbrook’ On Point on this blog.
This Hour, On Point: how the U.S. looks from rising China.
Tom Ashbrook with guests:
Peter Hessler, staff writer for The New Yorker. His latest book is “Country Driving: A Journey Through China from Farm to Factory.” Listen back to the On Point show about it. His new article for The New Yorker, about returning to the U.S. after years of living in China, is called “Go West: Scenes from An American Homecoming.”
Jia Cheng, a 28-year-old graduate student at Harvard Business School. She has moved back and forth between the two cultures as a businesswoman working for both McKinsey & Co. and Goldman Sachs. She grew up in Shanghai and graduated from Fudan University.
Europe Needs a Plan B for Greece
Greece has gotten out of trouble, temporarily, for a few times this year now. But the solution did not solve the fundamental problem. You can't just solve debt and credit problem by throwing more money at it. WSJ reports tough roads ahead for Europe in 2011-2 and beyond.
Third time lucky? Two mostly political agreements in recent months failed to ease market fears about Greece. The euro-zone's latest promise—to provide up to €30 billion ($40.49 billion) in loans, with the International Monetary Fund expected to offer another €10 billion to €15 billion—should finally remove any short-term liquidity risk. But in the longer term, the deal does little to address fundamental questions about the euro zone. Sunday's agreement still contains seeds of doubt.
Even the clearest, most credible part of the deal, the interest-rate mechanism, raises questions. On one level, charging 5% for a three-year fixed-rate loan represents a concession when compared with last week's market levels. But this is still 3.7 percentage points over German Bunds—a long way north of where Greeks would like to be able to borrow.
![[Greeceherd]](https://sg.wsj.net/public/resources/images/EM-AI216_Greece_NS_20100412182205.gif)
Indeed, if Greece were to take a 10-year loan under the package, it would be at a rate of well over 7%, the rate the market would have charged last week. The package as it stands could mean an increasing reliance on short-term funding for Greece, boosting rollover risk and creating a refinancing hump in exactly the same way as the provision of government guarantees did for banks. And in a curious way, the euro-zone rate may actually act as a floor for private market rates. Why should a bond investor lend money to Greece more cheaply than other euro-zone governments are willing to?
Any actual disbursement will also raise further political questions, with the euro-zone effectively taking a step toward greater fiscal transfers. Spain, Portugal and Ireland will be expected to help Greece even as they battle with their own budget deficits and economic rebalancing. The amounts are relatively small—Ireland, for instance, says it might have to contribute €450 million—but they may still stick in the craw and act as a disincentive to carry through the harsh measures necessary at home. Short-term bond yields edged lower for these countries, too, on Monday, but investors could yet test Europe's willingness to offer similar deals to other weak countries.
The euro zone should be working on a Plan B, if it wishes to retain credibility. The real challenge in Greek fiscal consolidation may come in 2011 or 2012. The need may yet arise for a mechanism that allows an orderly restructuring of sovereign debt within the euro zone, just as policy makers are seeking a solution to unwind systemically important banks that get into trouble.
Such a mechanism, if credible, could even strengthen the euro as an institution. Sunday's deal perhaps buys policy makers time. They need to be prepared for the eventuality that Greece does end up following in the footsteps of Argentina, which defaulted after a decade of IMF bailouts.
China’s bubble pricking experiment
The latest news came in from China:
In my view, China stands at the forefront of the policy experiment of pricking asset-bubbles. Many economists and central bankers hold the view that bubble is impossible to detect; instead, policy makers should focus on minimizing the damage in the aftermath of bubble bursting. Former Fed Chairman, Alan Greenspan, is one of them.
The recent financial crisis taught us an important lesson, i.e., central bankers should take a pro-active role in containing the bubble – the damage left by bubble bursting is just too great to ignore, especially to the employment.
China’s case is especially interesting – unlike Western central bankers, so far Chinese policy makers have largely relied on administrative measures, instead of the traditional policy instruments, like interest rates.
I would think the new regulation on down-payment would be quite effective. However, it’s an open question how strictly Chinese policy makers would want to implement such policy; and how long and how far the policy makers would allow the price to fall, without worrying about the stability of the system – yes, I am talking about the stability of political system.
If speculators know the government isn’t going to allow the price to fall (or fall too much), then this will eventually create a Moral Hazard problem – Next round, when new policy measures come about, real estate developers and speculators just hold up, accumulating housing inventories, anticipating the policy will soon reverse. This will essentially render polices ineffective.
So all in all, we may never really get rid of bubble – as long as there is human greed and fear, and no matter which system you are living in – unregulated or heavily regulated.
Expectation of currency appreciation drives up China’s Hot Money
China’s foreign exchange reserves rose substantially despite its trade deficits. Imagine how many people or investors are moving their money into China to bet on an incoming (and continuous) Yuan appreciation.
This is part of reason that caused Japan’s real estate bubble.
Jim Grant critiques Greenspan
Jim Grant has some tough words on Alan Greenspan, and central bankers in general.
Rates will only go up
How the coming rising of interest rates will affect American consumers:
That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.
The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.
Youth Unemployment
Daniel Henninger wrote on WSJ editorial page that the youth unemployment in the US is rising, now at 20%. He is worried about the US becoming another Europe, where welfare state creates a shortage of private-sector jobs.
Unemployment today doesn’t look like any unemployment in the recent American experience. We have the astonishing and dispiriting new reality that the “long-term jobless”—people out of work more than six months (27 weeks)—was about 44% of all people unemployed in February. A year ago that number was 24.6%.
This is not normal joblessness. As The Wall Street Journal reported in January, even when the recovery comes, some jobs will never return.
But the aspect of this mess I find more disturbing is the numbers around what economists call “youth unemployment.” The U.S. unemployment rate for workers under 25 years old is about 20%.
“Youth unemployment” isn’t just a descriptor used by the Bureau of Labor Statistics. It’s virtually an entire field of study in the economics profession. That’s because in Europe, “youth unemployment” has become part of
Now comes currency diplomacy
Tim Geithner postponed labelling China as currency manipulator, and he goes to China for back-door negotiations. It’s likely the appreciation will come not long after the visit.