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Is Mitt Romney up to the challenge?
Is current Republican front-runner Mitt Romney up to the coming challenge? These videos are taken out from the recent Republican candidates debate at Dartmouth College.
-on another potential financial meltdown:
-on China:
India got an inflation problem
The persistent high inflation reminds me of China in mid 1990s. The problem is India’s central bank is not fully committed – if you want the growth/inflation trade-off, then you often end up with high inflation and low growth; but if you are committed in fighting inflation, you will tend to have stable growth and low inflation.
Europe’s Lehman moment slowly arriving…
17 sovereign countries deeply divided, without unified fiscal authority, its banks with the world's highest leverage ratios – this is Europe. You are probably wondering why Europe's "Lehman moment" still hasn't arrived. Or it may have taken another form. Instead, we have seen a slow-motion leak of confidence and a steady drain on credibility that has extracted a large and growing toll on stock and bond prices and on the livelihoods of its citizens.
Michael Lewis: the moral breakdown
WSJ Interview of Michael Lewis. He shared his optimistic vs. pessimistic predictions about the world economy.
Can a temporary inflation hike help debt deleveraging?
Ken Rogoff at Harvard says it's a must:
In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.
The aftermath of a typical deep financial crisis is something completely different. …it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic…in a “Great Contraction,” problem number one is too much debt.
Is there any alternative to years of political gyrations and indecision?
In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.
The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.
Rajan at U. of Chicago says it will do more harm than good in the long run, especially it will damage the Fed's hard-won reputation in fighting inflation:
Over-levered households cannot spend, over-levered banks cannot lend, and over-levered governments cannot stimulate. So, the prescription goes, why not generate higher inflation for a while? This will surprise fixed-income investors who agreed in the past to lend long term at low rates, bring down the real value of debt, and eliminate debt “overhang,” thereby re-starting growth.
It is an attractive solution at first glance, but a closer look suggests cause for serious concern. Start with the question of whether central banks that have spent decades establishing and maintaining anti-inflation credibility can generate faster price growth in an environment of low interest rates. Japan tried – and failed: banks were too willing to hold the reserves that the central bank released as it bought back bonds.
Perhaps if a central bank announced a higher inflation target, and implemented a financial-asset purchase program (financed with unremunerated reserves) until the target were achieved, it could have some effect. But it is more likely that the concept of a target would lose credibility once it became changeable. Market participants might conjecture that the program would be abandoned once it reached an alarming size – and well before the target was achieved.
Moreover, the central bank needs rapid, sizeable inflation to bring down real debt values quickly – a slow increase in inflation (especially if well signaled by the central bank) would have limited effect, because maturing debt would demand not only higher nominal rates, but also an inflation-risk premium to roll over claims. Significant inflation might be hard to contain, however, especially if the central bank loses credibility: Would the public really believe that the central bank is willing to push interest rates sky high and kill growth in order to contain inflation, after it abandoned its earlier inflation target in order to foster growth?
Consider, next, whether the inflationary cure would work as advertised. Inflation would do little for entities with floating-rate liabilities (including the many households that borrowed towards the peak of the boom and are most underwater) or relatively short-term liabilities (banks). Even the US government, with debt duration of about four years, would be unlikely to benefit much from an inflation surprise, unless it were huge. Meanwhile, the bulk of its obligations are social security and health care, which cannot be inflated away.
Even for distressed households that have borrowed long term, the effects of higher inflation are uncertain. What would help is if their nominal disposable income rose relative to their (fixed) debt service. Yet, with high levels of unemployment likely to keep nominal wage growth relatively subdued, typical troubled households could be worse off – with higher food and fuel prices cutting into disposable income.
Of course, any windfall to borrowers has to come from someone else’s wealth. Inflation would clearly make creditors worse off. Who are they? Some are rich people, but they also include pensioners who moved into bonds as the stock market scared them away; banks that would have to be recapitalized; state pension funds that are already in the red; and insurance companies that would have to default on their claims.
In the best of all worlds, it would be foreigners with ample reserves who suffer the losses, but those investors might be needed to finance future deficits. So central banks would have to regain anti-inflation credibility very soon after subjecting investors to a punishing inflation. In such a world, investors would have to be far more trusting than they are in this one.
Dollar shortage drives down offshore Yuan
WSJ reports:
Until this week, the Hong Kong-traded Chinese Yuan (offshore market) had remained broadly in line with the official yuan (onshore) trading range. But market turmoil last Thursday and Friday prompted the Hong Kong price to slump at one point to a discount of as much as 2.5% to the mainland yuan, the biggest gap since China began relaxing its currency restrictions about a year ago.
![[YUAN]](https://si.wsj.net/public/resources/images/AI-BN614_YUAN_NS_20110925221202.jpg)
The drop took place mostly in Hong Kong, a Chinese city that operates under its own set of laws and the only place where the yuan can be traded outside the Chinese mainland. Chinese officials over the past year have transformed the city into a laboratory for yuan liberalization, allowing everything from the issuance of yuan-denominated bonds to yuan-trade settlement to yuan accounts for individual investors.
The moves fly in the face of currency-market conventional wisdom, which holds that the yuan is set to rise against the U.S. dollar as China soaks up capital and trade flows. The surprising turn of events may evoke long-held fears in Beijing of financial turmoil among those wary of opening up the country's capital account. An entrenched fear in Beijing is that the international capital flows that built up Asian economies before laying them low in 1997, could do the same to China. That lies behind the complicated web of controls Beijing has built to control capital flowing in and out of the country.
China learned another lesson during the more recent global financial crisis. It found that a shortage of U.S. dollar credit globally affected its own export sector's ability to sell goods. Partly to fix that it decided the yuan need to be accepted internationally, and to make that happen it would need to open up its financial markets.