ExRussian

Yes, the renminbi (RMB) is closer to fair value. Chinese Foreign Ministry spokesman Ma Zhaoxu states:

“Our currency, the RMB, has appreciated more than 20 percent against the U.S. dollar since July 2005, when China moved to a floating exchange rate regime,” Ma said. Before 2005, the RMB was pegged to the U.S. dollar at a fixed rate.

“The RMB exchange rate has drawn close to a reasonable and balanced level, given the international balance of payments and the market supply and demand for foreign exchange,” Ma said.

The New York Times asserts that China’s currency is undervalued by 25%-40%. The NY Times, like many politicians and media channels, is entirely too obsessed with China’s exchange rate; they fail to understand that economic fundamentals are changing.

Contrary to popular belief, the level of the renminbi has become rather inconsequential to Chinese trade flows. Why? Because despite the fact that the renminbi has been pegged against the dollar since July of 2008, imports are surging.

The chart above illustrates the 3-month annualized growth rate in exports and imports and the renminbi valued against the US dollar. I use the 3-month annualized rate, rather than the year/year rate, to remove the strong base effects from the drop-off in trade last year.

The first thing to notice is that while export growth is indeed strong, “business as usual” in China, import growth is surely breaking trend. The 3-month annualized growth rate of imports – a good proxy for domestic demand – averaged 117% annualized growth per month from April (when it turned positive) to December 2009. Compared to this period in 2006, annualized import growth is up almost 80 percentage-points, while that for exports is up just 5 percentage-points (76.2% average 3-month annualized growth in exports May-December 2009 vs. 71.7% in 2006).

It’s hard to argue that the Chinese currency is so “undervalued” if the import response is this strong.

Another myth is that China is running large current account surpluses. Given the chart above, it won’t surprise you to know that China’s current account has dropped markedly since late 2008.

The thing is: since prices in developed economies have dropped relative to those in key emerging markets (i.e., China), real exchange rates are coming back in-line with a s0-called equilibrium. Therefore, the renminbi, by definition, is closer to whatever an equilibrium would be, despite the fact that it is fixed. Thus, like Ma Zhaoxu says, it’s at a “reasonable” value.

ExRussian

Here’s one that was tucked away in the Financial Times, Japan Post Bank urged to diversify holdings. With all of the talk about China, its currency, and the question of the Chinese “financing the U.S. deficit”, the media always forgets about Japan!

From the FT:

One of the largest buyers of Japanese government bonds is under pressure to diversify its holdings in a move that will reverberate throughout the huge JGB market.

Shizuka Kamei, Japanese financial services minister, said on Monday that Japan Post Bank should diversify its investments into US Treasuries and corporate bonds in an effort to reduce the risks of over-concentration in JGBs.

and later..

A big shift by the postal bank away from JGBs could have unsettling implications for the market. Japan Post helped digest 45 per cent of the increase in outstanding JGBs between 2001 and 2007 and already holds about 24 per cent of outstanding JGBs, according to Ruixue Xu, rates strategist at Royal Bank of Scotland in Tokyo.

However, analysts do not expect Japan Post to shift away from JGBs immediately.

Although it has attempted to expand lending since it was privatised in 2007, Japan Post has largely failed to make inroads in new businesses and remains dependent on buying JGBs.

Japan Post Bank – one of four government companies that was scheduled for an IPO offer, but to my knowledge that has been stalled – holds ¥176,990.8bn in deposits, or $US1.96tn, and the equivalent of $US2.2tn in total assets. That rivals Bank of America, the US’ largest bank holding company by assets.

Who’s going to purchase Treasury bonds? That’s right, Japan (at least the very large Japan Post Bank, in this case): the largest foreign holder of US assets at 12.11% of the total (see above chart).

The disclaimer at the end of the FT article (in bold) is important – banks are sitting on quite a bit of reserves, and purchasing JGB’s creates a very safe and clean balance sheet on which to sit. However, it is very interesting that the government is pushing US bonds. Why not German?

And the chart of the day: Japan’s 5-yr CDS is 113% higher than in Q4 2009. In fact, the G3, Japan, the US, and Germany, are all seeing heightened CDS spreads.

Debt is on the mind. Rebecca Wilder

Today I wrote an article on Angry Bear, Consumers around the world are generally more upbeat, but not uniformly so, highlighting the still melancholy consumers around much of the world, especially in the U.S. Here is an excerpt from the article:

Confidence, consumer, investor, and business, is key – let’s focus on the consumer. The one that accounts for roughly 17% of global GDP – i.e., the U.S. consumer – remains afflicted by excessive debt burden and record unemployment. In contrast, consumer confidence is rebounding smartly in other parts of the world, developed and developing.

Advanced consumers showing some confidence, but the U.S. consumer confidence index remains 39% below that during the onset of the recession.

The chart illustrates various measures of consumer confidence across a selection of advanced economies (you can see the exact sources here). Consumer confidence in the U.S., U.K., Germany, and Ireland remain well short of their Jan. 2008 levels. Notably, confidence in the U.S. has moved laterally since May 2009 despite recent gains in the fourth quarter of 2009.

I wanted to add just a few comments to this post regarding the “not uniform” part of the Angry Bear title. Ostensibly (in the chart), consumers in some advanced economies – Australia, Spain, Italy, and Tokyo – are “feeling” better off than those in the U.K., U.S., and Germany…in levels, that is. But with the exception of Australia, the recent trend is admittedly less sanguine. Let’s see why.

From the Conference Board (U.S.):

“Consumer Confidence rose for the third consecutive month, primarily the result of an improvement in present-day conditions. Consumers’ short-term outlook, while moderately more positive, does not suggest any significant pickup in activity in the coming months.

From the GfK Group (Germany):

German consumers are assuming that the German economy is slowly recovering from the recession, a view that is shared by many experts. However, small set-backs cannot be ruled out, and economic expectations have consequently stagnated in January.

From Nationwide (U.K.):

Although it is still early days, these lower expectations may foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn.”

From the Westpac Group (Australia):

Four of the five components of the Index increased in January. All components are seasonally adjusted. Assessments of “Family finances compared to a year ago” increased by 5.2%; expectations about family finances “over the next 12 months” increased by 10.5%. Expectations for “Economic conditions over the next 12 months” rose by 6.8% although expectations for “economic conditions over the next 5 years” fell by 2.1%”. Opinions on whether it is a “good time to buy a major household item” rose by 7.7%.

Cheery Australia is certainly the odd-man-out. At least in the latest reports, it is the expectations index that is dragging confidence in the U.S., Germany, and the U.K. Ick, not good for spending nor growth.

Rebecca Wilder

Today Gerald F. Seib wrote an interesting article at the WSJ, Obama Invites GOP to Share Burden of Fixing U.S. In it, he says the following:

Thus, Mr. Obama, after reeling off a veritable litany of proposals focused on how to create jobs (a word that appeared 29 times in the speech), came to the heart of the political matter: Democrats’ stunning loss of a Massachusetts U.S. Senate seat means he tackles this daunting agenda one vote short of the 60 needed to stop Republicans from mounting filibusters to stop his initiatives.

Wow, “jobs” was repeated 29 times during the 70 minutes that Pres. Obama was in the spotlight. Below I illustrate trends in unemployment rates across different parts of the world; and it’s obvious that the American working population is struggling relative to many other economies.

A comparative analysis of unemployment rates in Asia (where monthly data is available),

Latin America,

Emerging Europe,

And the G7.

The charts illustrates each country’s unemployment rate relative to its 2006 average organized by region; I present the data in this manner due to the structural disparities in unemployment rates across economies. Except for Emerging Europe, the scale of the Y-axis is the same across each region for comparability of labor distress. Latvia’s off the charts; it’s unemployment rate is almost 3.5 times its 2006 average.

Across all regions, labor markets weakened dramatically in 2009. Ostensibly, the labor recovery in Asia and Latin America is fully underway. Alternatively, the U.S. labor market has stabilized, but the unemployment rate is hovering about 2.2 times over its 2006 average. And there’s no coming down from here until economic growth sticks at a 3.5% pace, or so.

ExRussian

Marshall Auerback will be featured from time to time here on News N Economics. He is a dedicated author at the New Deal 2.0 (see his biography here). Take some time to read his postings at the New Deal 2.0 – he gives interesting perspective on the European Union, Emerging Europe, Chinese and U.S. policy/politics, and more.

Marshall has some comments about my previous post, Japan rescinds war on deflation.

By Marshall Auerback (posted by Rebecca)

But Japan is also starting to be far more aggressive on the fiscal front.

The Times article on Japan from last December – ‘Debt-laden Japan shocked by £630bn spree to save lives’ reports that:

Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country’s biggest ever postwar budget: a 92.3 trillion yen (£630 billion) spending spree aimed at “saving people’s lives”.

The unprecedented budget, which supposedly shifts Japan’s fiscal spending focus “from concrete to lives”, comes amid rising concern about the solidity of sovereign debt in the world’s second-largest economy.

The new budget will require additional debt issuance of Y44.3 trillion — within the Government’s expected band, but still at a level that will raise Japan’s debt-to-GDP ratio to nearly 195 per cent.

It’s quite a significant amount of spending. The fact that new debt exceeds tax revenue is irrelevant from the solvency perspective; it’s only interesting insofar as it illustrates how depressed aggregate demand remains in Japan. As you rightly note, there is no risk of sovereign debt default in Japan because Japan can always issue as much debt as it wants in its own freely floating non-convertible currency. As Bill Mitchell has noted

“the interesting part of the story is that there is now a discrete policy shift going on as a result of the political changes in Japan that arose from the last election – that is, the ascendency of the Democratic Party of Japan (DPJ). The shift will see the government reduce its obsession with public infrastructure development as a vehicle for huge fiscal injections and instead put the spending power into poor households. ” This is very supportive of aggregate demand and income growth.

The BOJ’s actions, by contrast, are nothing more than moving numbers around on a spreadsheet. Arguably, the 0% interest rate policy in Japan has exacerbated the deflationary pressures in the economy. Virtually all of the debt held by the Japanese non-government sector is public, rather than private, so the loss of the so-called “fiscal channel” via sharply lower interest rates, has been very significant. Additionally, low rates impart a deflationary bias because they reduce the holding costs of inventory and reduce the required returns of capital. These are wonderful from a supply side perspective, but disastrous from the demand side.

The important point as Bill Mitchell, Warren Mosler, Richard Koo and I have argued previously is that it recognizes its on-going role to plug the spending gap left by non-government saving (and the export collapse) and it recognises it has the capacity as a sovereign issuer of its own currency to run large deficits. In this sense, the Japanese government is placing a premium on keeping unemployment low and is resisting pressures from the deficit hawks, the neo-liberals, and the horribly incompetent ratings agencies (all of which should be abolished).

At least that is the way I read today’s monetary policy release. According to the statement released today: “The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.” However, the statement curiously omits the following from item 6. of the previous release:

The Policy Board has concluded that it is appropriate to further disseminate the Bank’s thinking on price stability, by stating more clearly that the Policy Board does not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent and that the midpoints of most Policy Board members’ “understanding” are around 1 percent.

I don’t know why the Bank of Japan would rescind their commitment to 0 percent, when the median inflation projection is negative through 2011, although improved from its latest forecast in June 2009 (at the end of the January 2010 policy statement). That’s bad – rising real debt, further hits to consumer spending, the works. Admittedly, there’s debate over the actual benefit of quantitative easing and zero-interest rate policy (see this paper at the FRSB).

But another policy-relevant bit of news hit the wire today: S&P put Japan’s credit rating on negative watch. From the NY Times:

“The outlook change reflects our view that the Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures,” S.&P. said. “The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected.” Prime Minister Yukio Hatoyama has some lofty spending plans in its budget, funded by an expected 44.3 tn yen bond issuance.

Diminishing policy flexibility? Given the central bank’s propensity to move away from the ZIRP, and the government debt running stock at 183% of GDP (and rising), I’d say that diminishing policy flexibility is a euphemism.

Notice how Japan’s government debt rose while the nonfinancial sector’s obligations fell – that’s the deleveraging story.

Japan is not “insolvent”, at least that is what the external debt metrics say. But the only real policy flexibility is held by the central bank. And the Bank of Japan, ostensibly at least, doesn’t seem to be providing adequate liquidity.

If left unchecked, this could happen to the U.S.: policy mistakes. Raising taxes and hiking rates too early can turn into persistent economic problems.

Rebecca Wilder

Greece announced a 5-yr 8 billion euro deal today (as expected) – yesterday I called this a Hail Mary. Well, the Hail Mary worked! Books are closed, and the deal is well over subscribed (i.e., strong demand for the deal). Evidently, the talk is that there is natural demand for this product, via the rest of Europe, to shore up the value of the bonds over the near term.

But that’s it, because credit default swaps haven’t moved, remaining elevated well-above the Q4 2008 crisis point.

The credit-default swap (CDS) strips out the interest rate risk, leaving a measure of credit risk. Across the remaining PIIGS countries, CDS spreads in Ireland and Italy are relatively stable, while those of Portugal and Spain are seeing pressure in the wake of recent Greece developments.

Yesterday’s post highlighted the saving problem in parts of Europe (including the PIIGS above).We’ll see how this goes – but it appears that Greece has dodged the bullet for now.

ExRussian

Greece – it’s the Eurozone’s black sheep. If this isn’t a Hail Mary, I don’t know what is: Greece Plans Bond Issue Soon. From the Wall Street Journal:

Greece said Friday that it plans to syndicate a five-year benchmark bond next week to address renewed market jitters over its ability to finance its giant budget deficit, even as yields on Greek debt hit a new high. The bond, long awaited by market participants and seen as a key test of Greece’s ability to attract investors, will raise between€3 billion and €5 billion, the head of the country’s debt agency said.

But Greece is in good company – the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). In fact, the low saving is broad-based, with net national saving – net national saving is an aggregate measure of saving, including private and public sectors – being the lowest in Portugal, –6.9% of gross disposable income on average spanning 2007-2008, and highest in Switzerland, +13.9% over the same period.

This differential of saving patterns across Europe, i.e., Germany saves and Portugal does not, stalls any sort of bailout talk – technically, the Maastricht Treaty prohibits inter-government bailouts. However, if Greece’s Hail Mary bond issuance doesn’t work, something’s got to give. Marshall Auerback offers an interesting solution.

Greece is simply the first in a long line of European (worldwide, actually) countries that face fiscal consolidation (see two FT articles by Martin Wolf, here and here).

So we wait and see.

ExRussian

How are the data presented? At an annual, quarterly, monthly, or weekly frequency? At the onset of the New Year, you will undoubtedly see many charts illustrating records broken in 2009 using annual measures. This is always fun (from a data junkie’s point of view), but it only tells the reader where we were, on average in many cases, rather than where we are now! Quarterly data are the same story – often presented well after the culmination of the period.

Alternatively, monthly data are a little more telling but still lagged by at least one month. For example, the employment report is the first major economic release of the month, which sets the stage for many subsequent releases. However, by the release date, generally the first Friday of the month, the survey information is already one month old.

This leaves weekly, or even daily, data. High-frequency data can tell us “where we are now”, but are subject to substantial volatility. Nevertheless, high-frequency data are quite informative at economic turning points. So where are we?

Here are three high-frequency indicators that show an improving labor market, as illustrated by initial claims and daily tax receipts. However, the money multipliers remain at historically low levels, signaling that consumer spending and credit growth continues to elude monetary policymakers.

The weekly initial claimant count is dropping off quickly. So far, the 4-week moving average is 33% off its peak, a definite positive. And comparing to previous recoveries, the claimant count does suggest that this recovery will look more like a job-plus, rather than a job-less recovery.
However, don’t get too excited – an awful lot of jobs need to be created each month just to drop the unemployment rate.

The stabilization of the labor market is likewise seen in the Treasury’s daily tax receipts. Daily receipts have stabilized, and are now growing, off of their lows.

High-frequency monetary aggregate indicators show that traditional Fed policy – increasing bank reserves through open market operations – is not flowing into the economy as new money for spending on goods and services. Money multipliers of all types are half of what they were just two years ago (dropping even lower in recent months).

This is the bane of the Fed’s policy existence during and in the aftermath of the banking crisis. Inflation is not going to be a problem until this money clog frees up.

There is widespread stabilization, and even improvements, as shown by the high-frequency economic data. Perhaps I will follow up this post on the remaining weekly data, like on credit extension and housing.

Rebecca Wilder

The term of Brazil’s President, Luiz Inácio Lula da Silva, concludes this year. During President Lula’s tenure, Brazil enjoyed stable monetary policy and strong economic growth. However, President Lula is likewise known for growing the size of Brazil’s government, for example, by adding over 300k government jobs. This translates into a 4.8% increase in the government payroll when adjusted for working-age population growth.

This is a criticism of Lula’s administration – growing the size of the government (here, as measured by its payroll), and stifling some prospects for long-run economic growth.

Accordingly, let’s see how previous U.S. Presidents grew the U.S. government payroll: is there a party trend? The general idea is, that the Democratic Party seeks a larger role for government as a mechanism to increase economic welfare than does the Republican Party (generally). A priori, I expect to see more robust government payroll growth during Democratic administrations.

The chart illustrates the level change in the total government payroll by Presidency since 1953 (the data are not seasonally adjusted and reported here). There is no noticeable correlation between party and the government payroll, although LBJ and Clinton, Democrats, did grow government jobs by the widest margin, 2.6m and 2.3m, respectively.

State and local government jobs are included in the measure of “government”, while a better link to party affiliation is the federal payroll. Furthermore, the population – and thus total payroll – grew as well. So, in focusing solely on the federal payroll in percentage gains (in order to remove effects of term length), and adjusting for population growth, there appears to be a stronger correlation between the current administration’s party affiliation and government jobs growth.

The top 3 federal job-creators were LBJ, JFK, and Obama, Democrats, while 4 out of the top 5 top federal job-slashers were Nixon, Bush, Bush, and Ford, Republicans. Interestingly, Clinton ranks first in cutting the federal payroll; it fell by almost 10% when the population grew by roughly the same amount – in adjusted terms, that’s -18% fewer federal jobs.

This analysis, of course, does not account for recessions, budgets, or external factors that would differentiate payroll growth across periods. However, there is a correlation, as in Brazil, between party affiliation and the growth of the federal payroll.

Rebecca Wilder