By Ambrose Evans-Pritchard, Telegraph, UK | 1 December 2008
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Whether it is the Indian rupee, the Shanghai bourse, or Kremlin debt, the stars of the credit boom have fallen to earth. Investors are retreating into 3-month US Treasury bills— the ultimate safe-haven. The yield has fallen to 0.02%, less than zero after costs. You pay Washington to guard your money.
The working assumption of the "Great Boom" is— or was— that we live in a benign era where most societies are converging towards some form of market liberalism; where trade and capital flows are unrestricted; where governments have enough legitimacy to keep order by light touch; where a major war is unthinkable. This illusion is now being tested. We should not read too much into the Bombay carnage. It may or may not be significant that the Deccan Mujahideen— whoever they are— picked India's financial hub to launch their spectacular.
Even so, the love affair with Bombay's bourse was cooling anyway. The Sensex index is down almost 60% from its peak. The exodus of foreign capital may now quicken, laying bare the horrors of Indian public finance. The combined federal and state deficit is 8% of GDP. Plainly, spending will have to be slashed.
If the atrocity now propels the Hindu nationalist leader Narendra Modi into office at the head of a revived Bharatiya Janata Party (BJP), south Asia will once again face a nuclear showdown between India and Pakistan. Events are moving briskly in China too. Wudu was torched by rioters this month in a pitched battle with police. Violence has spread to the export hub of Guangdong as workers protest at the mass closure of toy, textile, and furniture factories.
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We are about to find out whether China has made the wrong bet with a development strategy of vast investment in manufacturing plant for mass export at thin margins to the US and Europe. The shocking detail in the World Bank's latest report on China is that wages have fallen from 52% to 40% of GDP since 1999. This is evidence of an economic model that is disastrously out of kilter, and unlikely to retain popular support.
The Communist Party lost its ideological mission long ago. The regime depends on perpetual boom to stay in power. As the economy sours, there must be a high risk that it will resort to the nationalist card instead. Tokyo certainly thinks so. When I visited Japan's Defence Ministry last year, the deputy minister showed me charts detailing the intrusion of China's fast-growing fleet of attack submarines into Japanese waters. "We see its warships in the Sea of Japan all the time," he said.
Shoichi Nakagawa, the head of the ruling LDP party, was even more explicit. "What happens when China attacks Japan? Will the US retaliate on our behalf?" he said. As for Europe, it is already fragile: Iceland, Hungary, Ukraine, Belarus, Latvia, and Serbia have turned to the IMF. Russia is a hostage to oil prices. If Urals oil stays below $50 a barrel for long, we are going to see an earthquake of one kind or another.
It is too early in this crisis to conclude whether Europe's monetary union is a source of stability, or is itself a doomsday machine. The rift between North and South is growing. The spreads on Greek, Irish, Italian, Austrian, and Belgian debt remain stubbornly high. The lack of a unified EU treasury has become glaringly clear. Germany has refused to underpin the system with a fiscal blitz.
In the 1930s, it was not obvious to people living through debt deflation that their world was coming apart. The crisis came in pulses, each followed by months of apparent normality— like today. The global system did not snap until September 1931. The trigger was a mutiny by Royal Navy ratings at Invergordon over pay cuts. Sailors on four battleships refused to put out to sea. They sang the Red Flag.
News that the British Empire could not uphold military discipline set off capital flight. Britain was forced off the gold standard within five days. A chunk of the world followed suit. Nor was it obvious that Germany would go mad. Bruning persisted with deflation, blind to the danger. The result was the election of July 1932 when two parties committed to the destruction of Weimar— the KPD Communists and the Nazis— won over half of the seats in Reichstag. [[And, foolishly, the government supposed that Hitler was the lesser of the two evils.: normxxx]]
We can hope that governments have acted fast enough this time— with rate cuts and a fiscal firewall— to head off such disasters. But then again, the debt excesses are far greater today. If in doubt, cleave to those countries with a deeply-rooted democracy, a strong sense of national solidarity, a tested rule of law— and [[nuclear weapons and: normxxx]] aircraft carriers. The US and Britain do not look so bad after all.
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1930s Beggar-Thy-Neighbour Fears As China Devalues
By Ambrose Evans-Pritchard, International Business Editor | 3 December 2008
China has begun to devalue the yuan for the first time in over a decade, raising fears that it will set off a 1930s-style race to the bottom and tip the global economy into an even deeper slump. The central bank has shifted the central peg of its dollar band twice this week in a calculated move that suggests Beijing aims to offset the precipitous slide in Chinese manufacturing by trying to gain further export share abroad.
The futures markets are pricing in a 6% devaluation over the next year. "This is clearly a big shift in policy and we are now on alert," said Simon Derrick, currency chief at the Bank of New York Mellon. The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market". China has allowed a crawling 20% revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington.
Mr Obama has called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law. Outgoing US Treasury Secretary Hank Paulson is viewed as a "friend of China". He called for a stronger yuan this week before embarking on a visit to Beijing, but the plea was couched in friendly terms. This soft-peddling may soon change.
Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events. "If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said. It makes sense for countries with current account deficits such as the UK, US or Turkey to let their currencies fall, but China has the world's biggest trade surplus.Michael Pettis, a professor at Beijing University, said it was "very worrying" that a pro-devalulation bloc seemed to be gaining the upper hand in the Communist Party. "I really do believe that we are on the brink of a very ugly period for trade relations," he said. China has relied on exports to North America and Europe as its growth engine, making it acutely vulnerable to the contraction in global demand.
Mr Pettis said this recalls the role played by the US in the 1920s, a parallel fraught with danger. "In the 1930s the US foolishly tried to dump capacity abroad, but the furious reaction of trading partners caused the strategy to misfire. China already seems to be in the process of engineering its own Smoot-Hawley," he said, referring to the infamous US Tariff Act of 1930.
China showed restraint during the Asian crisis in 1998, holding the line against domino devaluations across the region. It may yet hold the line this time. However, this crisis is more serious. The manufacturing sector has seen the steepest decline since records began, with devastation sweeping the textile, furniture and toy sectors. Civil unrest has begun to rock the Guangdong and Longnan regions.
Beijing has slashed rates and unveiled a fiscal stimulus of 14% of GDP, but most of the spending comes in the form of instructions to local governments to spend more— but without giving them the money. Does China really intend to step in to prop up global demand? The jury is out.
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Is Britain Going Bankrupt?
By Ambrose Evans-Pritchard | 24 November 2008
The bond vigilantes are restive. We are not yet facing a replay of the 1970s 'Gilts Strike', but we are not that far off either. There is now a palpable fear that global investors may start to shun British debt as the budget deficit rockets to £118bn— 8 per cent of GDP— or charge a much higher price to cover default risk.
The cost of insuring against the bankruptcy of the British state has broken out— upwards— over the last month. Yes, credit default swaps (CDS) are dodgy instruments, but they are the best stress barometer that we have. Today they reached 86 basis points, near Portuguese debt in the league table. For good reason.
Alistair Darling has had to admit that the British economy faces the most sudden economic collapse since World War Two, and the worst budget deficit of any major country in the world. Ok, this is a lot lower than Iceland, Ukraine, Hungary, and other clients of the IMF, but is significantly higher than Germany (35 bpts), USA (43 bpts), and France (49 bpts). After trading at similar levels to our AAA-rated peers for years, we started to decouple in August and then began to soar in October.
We reached a fresh record the moment the Chancellor told the House of Commons that the budget would not return to its already awful condition until 2016. Should we be worried? Yes. Marc Ostwald from Insinger de Beaufort said Gilt issuance would reach £146bn in fiscal 2008/2009. Britain will have to borrow £450bn over the next five years.
This is an utter fiasco. With deep embarrasment, I plead guilty to supporting the Brown-Darling fiscal give-away— though with a clothes peg clamped on my nose. As the Confederation of British Industry and many others have warned, we face an epidemic of bankruptcies unless we tear up the rule book and take immediate counter-action.
The Bank of England's drastic rate cuts are a necessary but not sufficient stimulus. Monetary policy is failing to get traction because the credit system has broken down. We face the risk of a rapid downward spiral if we misjudge the threat at this dangerous moment, as we sit poised on the tipping point.
Besides, the whole world is now resorting to fiscal stimulus in unison under IMF prodding. Sticking together is imperative. If countries reflate in isolation, they can and will be singled out and punished. That is the lesson of 1931.
But this is not to excuse the Brown Government for the total hash it has made of the British economy. It presided over a rise in household debt to 165% of personal income. How could the regulators possibly think this was in the interests of British society? What economic doctrine justifies such stupidity? Why were 120% mortgages ever allowed? Indeed, why were 100% mortgages ever allowed? Debt is as dangerous as heroin.
Labour ran a budget deficit of 3% of GDP at the top of cycle. (We had a 2% surplus at the end of the Lawson bubble, so we go into this slump 5% of GDP worse off). The size of the state has ballooned from 37% to 46% of GDP in a decade, and will inevitably now rise further.
It is because Gordon Brown exhausted the national credit limit to pay for his silly boom that today's fiscal stimulus— just 1% of GDP (China is doing 14%)— is enough to rattle the bond markets. Our national debt will jump in what is more or less the bat of an eyelid from under 40% of GDP to nearer 60%— according to Fitch Ratings. It is enough to make you weep. But is this bankruptcy territory? Not yet. Britain will remain at the mid to lower end of the AAA club.
A Fitch study today estimates the "fiscal cost" of the bank bail-outs (which is not the same as just adding guarantees to the national debt) is 6.9% of GDP for Britain— compared to Belgium (5.7%), Germany (5.8%), Netherlands (6.3%), and Switzerand (12.9%). We are not alone in this debacle.
If and when the storm blows over, Britain should still have a lower national debt than Germany, France, or Italy. It will certainly have a better demographic structure that most of Europe (except France and Scandinavia), and less catastrophic pension liabilities than most. The situation is desperate, but not serious— as the Habsburgs used to say. Fingers crossed.
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Germany Facing Worst Slump Since 1949
By Ambrose Evans-Pritchard | 24 November 2008
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French president Nicolas Sarkozy met Germany's Chancellor Angela Merkel in Paris yesterday to plead for stronger German support for an EU-wide rescue package. The talks come as the European Commission adds the final touches to a €130bn (£110bn) fiscal stimulus plan. Germany has clung steadfastly to budget orthodoxy but the downturn has now begun to engulf Europe's biggest economy with shocking speed. The Bundesbank is now expecting the worst recession since the terrible year of 1949, according to Deutsche Press Agentur.
Howard Archer, Europe economist at Global Insight, said the blizzard of dire data from the eurozone now points to a severe manufacturing slump. "Output, total orders, exports orders all contracted at record rates in November, which was alarming," he said. The broad IFO index of German confidence fell to the lowest since 1993 in November, but it was the unprecedented slide in the expectations index that most worried economists.
"This is extremely bad, it's even worse than the dog days of early 1970s," said Julian Callow, Europe economist at Barclays Capital. "German exports to the US, UK, Spain, and Italy have all collapsed, and the next shoe yet to drop is Eastern Europe," he said. Latvia has joined the queue waiting for an IMF bail-out, while Russia devalued the rouble again yesterday.
"The European Central Bank needs to cut rates very aggressively. They're trying to take this steady line, but this is a not the time for that. We think rates will be cut to 1.5% by February," he said. The ECB, which raised rates in a widely-criticized move in July, has since cut by just 100 basis points to 3.25%, largely staying aloof as the Anglo-Saxon central banks take drastic action to stop the downward spiral.
Adding to eurozone woes, the bloc's current account deficit doubled in September to €10.6bn despite the drop in the cost of imported oil. It is further evidence that the euro's surge to extreme levels of over-valuation in recent years has 'hollowed out' Europe's industrial base and inflicted damage that may take a long time to unfold.
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Normxxx
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