Bargaining power in Germany

Germany’s reemerging economy is giving labour unions bargaining power and some are looking for annual wage increases up to 6%. If successful, Germany and the euro zone could see inflation rates move higher and eventually above the European Central Bank’s 2% target, economists warn, presenting a dilemma for ECB policy makers who must balance a strict anti-inflation mandate with a still-fragile recovery in Europe’s periphery. To give you an idea of the robustness of the German economy unemployment has fallen for 14 consecutive months, bringing the unemployment rate back to its prerecession level of 7.6%, the lowest since 1992. Unemployment in other big economies, particularly the U.S., is still stubbornly high, keeping a lid on wage growth. ECB President Jean-Claude Trichet wants others in the region to take note of Germany’s success at restraining labour costs – see graph below. Since 2000, German labour costs have increased just 19%, significantly below the average for Europe. In Spain they rose nearly three times as fast. Click here to view article from the Wall Street Journal.

Return of the Gold Standard?

Ever wondered why money isn’t worth the paper it is printed on? Why currencies float and occasionally sink? What ever happened to gold as the cornerstone of the currency market? There are some who believe that the world should return to aligning currency to a gold standard – in other words being able to redeem paper money for fixed weights of gold. For much of the 19th century and part of the present century, the exchange rates of the world’s most important trading countries were fixed in terms of gold. The system was known as the gold standard system of fixed exchange rates.

Why return?
Some economists are very optimistic with regard to gold prices for a variety of reasons:
• The US dollar is trending downward against other major currencies, which increases the US dollar price of gold.
• The quantitative easing by central banks around the world will most likely lead to inflationary pressures which ultimately will increase the price of gold

As a result of this bullish behaviour gold is initially recovering some of its lost standing as the world’s reserve currency. What is more, with many countries now holding significant amounts of US dollars as reserves there is the probability that preference will be given to hold something else that maintains its value – gold is likely to be part of the mix. As a result many countries would favour the inclusion of gold in a currency basket that would make up of a new world currency based on Special Drawing Rights issued by the IMF. Although from 2009 The Daily Telegraph (UK) has an interesting article entitled Russia backs return to Gold Standard to solve financial crisis. It also has a video interview with Arkady Dvorkevich, the Kremlin’s chief economic adviser.

Brazil – the global farm

This grapic from The Economist shows how Brazil has transformed itself from an importer of food to one of the world’s biggest exporters. It is the largest exporter of five internationally traded crops, and number two in soybeans and maize. Furthermore, quite a diverse range of crops considering the climate.

The modern economy – what students should be learning.

Here is an interesting article from the New York Times. Gregory Mankiw – Harvard Economics Professor – outlines what is required to understand and be prepared for the modern economy. He comes up with 4 main areas of learning:

Learn some economics – As the economist Joan Robinson once noted, one purpose of studying economics is to avoid being fooled by economists.
Learn some statistics – One thing the modern computer age has given everyone is data
Learn some finance – Americans are increasingly in charge of their own financial future
Learn some psychology – A bit of psychology is a useful antidote to an excess of classical economics. It reveals flaws in human rationality, including your own.
Ignore advice as you see fit – The one certain thing about the future is that it is far from certain. I don’t know what emerging industries will be attracting college graduates four years from now, and neither does anyone else.

Maybe all of this can explain the graph on the left. Click here for the full article from The New York Times.

Ambrosetti Forum – bleak prospects for world economy

The annual Ambrosetti Forum is an economic conference that takes place each year in the Italian town of Cernobbio. It is attended by heads of state, ministers, economists and discusses pressing issues in the world economy. New York University economist Nouriel Roubini is still very much concerned with a double-dip recession. Most seem to agree on some basic problems.

  • The stimulus to create demand in stagnant economies creates deficits and further debt.
  • China is the engine of world growth and is dependent on exports to now struggling economies.
  • The € continues to strengthen against the US$ therefore euro countries lose competitiveness.
  • The US housing market – the catalyst for the the global downturn – has not recovered.
  • Unemployment rates worldwide are a major concern – US 9.6%, France 10%, UK 7.8% Spain 20%, EU 9.7%

Niall Ferguson – author of The Ascent of Money – noted that since 2001 the United States has seen its debt-to-GDP ratio double to 66 per cent and that it may well be headed towards the danger zone of 100 per cent.“This is a completely unsustainable fiscal policy,” said Ferguson. “Pretty soon the US will be spending more on debt service than national security … That’s a tipping point for any global power.”

When asked to predict, several hundred business leaders came up with the following by the end of the year (approximate figures):
* 70% – predicted an increase in turnover
* 50% – predicetd an increase in investment
* 27% – predicted an increase in employing more staff
* 50% – predicted no change in staff numbers
* 23% – predicted cuts in staff numbers

For more information on this conference click here.

Earthquake will boost GDP

If you read Brian Fallow in the Hearld this morning you will have come across some opinions of leading economists with regard to the economic impact of the earthquake. Canterbury contributes 15% of the New Zealand’s GDP but according to Nick Tuffley (ASB Chief Economist) every week of Canterbury operating at half capacity would shave 0.14% off GDP – approx 0.6%/month . It is generally regarded that in the longer-term the earthquake will boost GDP in the district. Fortunately the building sector has spare capacity unlike a few years ago and this should mean lower prices charged by suppliers. Some talk of the effects on tourism as well as the loss of business by supply disruptions to customers. Click here for the full article.

Anyone for cricket? Yes please – Alan Bollard

You might have seen Alan Bollard on TV ONE Q+A programme yesterday morning. As well as talking about his new book “Crisis” he was questioned about the Job Summit in which he stated that it was to a certain extent “feel good” exercise and wondered its worth. Furthermore, he wasn’t impressed with some of the business leaders naivety with regard to economic policy.

Anyway he left the conference early to watch the 20/20 match in Wellington against India – he had taken part in the groups that were related to him. Click here if you are interested in the interview.

His book backgrounds the financial crisis and takes readers from the sub-prime catastrophe of 2007, through to the collapse of Lehman Brothers and onto the eventual recovery (???). He relays his experience in terms of the human behaviour under immense pressure in trying to deal with the worst downturn since the Great Depression of 1929. The book can be acquired through Amazon.

Wheat Prices – what’s driving them up?

Once again there is concern about wheat prices being overstated, even with the Russians fires and the extended export ban, so what has been causing prices to rise? Like when oil prices hit US$147/barrel on 18th July 2008 (today US$73) analysts are suggesting that investors are to blame. They are buying wheat on world commodity markets in the anticipation that prices will rise further and are thus overriding the fundamentals of supply and demand. The fact is, the world market remains very well supplied with wheat.

However if this price rise in wheat is due to the Russian fires and its exports ban, one should be aware of the long-term picture for prices – overall global food prices have risen by an average 83% in the past 10 years, according to the Food & Agriculture Organisation of the United Nations. The United Nations’ food agency has called a special meeting of policy makers to discuss the recent rise in global food prices – click here for further information from the BBC. The photo shows traders in the wheat pit at the Chicago Board of Trade Exchange.

The Battle of the Metaphors

You may remember the posting I did on the Volcker Rule (28th July – “82 year old holds key to banking regulation in the US”) which talked about the role of former Fed Chairman Paul Volcker in the Dodd–Frank Wall Street Reform and Consumer Protection Act – 2010. The implementation of the Act is currently being discussed by members of the Financial Crisis Inquiry Commission. Vice Chairman Bill Thomas suggested that the regulatory architecture being created might stifle financial innovation and used the metaphor of a child playing in the snow. He said:

I often think, you know, you’ve got the cartoon of the child who’s going to go out in the snow so the mother puts on one layer, two layers, three layers, and it finally then is allowed to go outside and play and it can barely move getting outside. You can set up a structure to make sure that it doesn’t happen, but how do you keep the flexibility to allow the system to function? Where are we in terms of your concerns — Dodd-Frank legislation, providing some additional tools, comfort level, and now understanding better and more importantly, if we are now not going to have these crisis interventions when we do fail, unwinding structures in a reasonable way?

Ben Bernanke later in the hearing had a metaphor of his own. He likened the subprime crisis to the dangerous bacterium E. coli, suggesting that the housing crisis was simply the catalyst that exposed deep-seated susceptibillity in the financial markets.

If we had a healthy, strong, stable, financial system, it could’ve accepted this problem without creating such a major crisis, so I believe very strongly that it wasn’t subprime lending per se, although obviously that was a bad thing and caused significant problems, but rather it was the fact that the system as a whole had structural weaknesses. And so if you like, the E. coli got into the food supply and that created a much bigger problem.

The report is due to be completed on 15th December. Click here for the New York Times article.

NZ debt – the good news and the bad news

Despite a glowing report from the IMF which stated that New Zealand has the second smallest government debt among 23 developed countries, credit rating agency Standard and Poor’s (S&P) has indicated that the overall level of debt has the country vulnerable. Treasury estimate govenment debt to be 27% of GDP by 2015 but this compares to total net debt at 90% of GDP with much of this in the private sector.
Their concern is that if there is a major budget crisis in other countries this could make markets nervous about investing in high debt economies – both government and private debt. New Zealand is borrowing up to $240 millilon dollars a week and if the former were to happen interest charges on that borowing would go up (maybe a downgrade by credit rating agencies) which ultimately would effect growth in the economy and the NZ$. S&P suggest that there is a need to rely less on foreign funds and generate more export revenue especially from the Asian markets. The balancing act is making sure that debt as a % of GDP doesn’t get too high but at the same time generating growth in the economy. Click here for Brian Fallow’s column in the NZ Hearld.

US Economy – where to from here?

They cut interest rates, printed money and gave massive fiscal stimulus packages but still the outlook for the US economy is poor. With 9.5% unemployment – this figure is likely to be higher when the number of part-time workers are added – the economy is slowing considerably. Furthermore, as the unemployment benefit in the US is lower than European countries, this acts as a constraint on demand and in difficult times people tend to save rather than spend. From the meeting of the world’s central bankers in Jackson Hole (see posting on 29th Spetember) there are clear indications that another major shot of quantitative easing is just around the corner. However, there are those who see the problems of the US economy as too entrenched and argue that it is in serious trouble. Larry Elliott from the Gaurdian Newspaper wrote a book review of The Long Twentieth Century by Giovanni Arrighi in which he talks about ceratin prevalent issues including:
– the dominance of Wall Street
– the structural trade deficit
– the military’s overestimate of its abilty
– the switch from being the world’s biggest creditor to biggest debtor

All of which, Arrighi suggests, will lead to the demise of the American economy. Albert Edwards, an analyst at French bank Societe Generale who correctly predicted the Asian financial crisis, sees global equity markets at a new low and chances of another global recession in 2010. He refers to the current situation as unprecedentedly strong monetary and fiscal stimulus has led to unprecedentedly weak recovery. Ben Beranake will be aware of this and Japan’s lost decade and will do everything to keep the economy moving. Remember he did his PhD on the Great Depression but will need all his expertise to get the US economy back on track.

Happy Planet Index

Got this link from Geoff Riley who runs the excellent Tutor2u Blog. Statistician Nic Marks asks why we measure a nation’s success by its productivity – instead of by the happiness and well-being of its people. He introduces the Happy Planet Index, which tracks national well-being against resource use (because a happy life doesn’t have to cost the earth). Which countries rank highest in the HPI? You might be surprised.

Freakanomics: bad economy = deadlier terrorists & more crime?

Steven Levitt and Stephen Dubner (authors of Freakonomics and SuperFreakonomics) have been looking at research into the correlation between economic conditions and the quality of suicide terrorism. They suggest that poor economic conditions lead to more able, better-educated individuals to participate in terror attacks, allowing terror organizations to send better-qualified terrorists to more complex, higher-impact, terror missions. The research was carried using data from the Israeli-Palestinian conflict. Furthermore the New York Times has looked at crime rates and the level of unemployment in New York City- see graph. The main findings were:

1970’s – stagflation and abandonment of neighbourhoods and rising crime rates
1981 – recession – 107,495 robberies reported compare that with 21,787 reported in 2008
1987 – the stock market crash and NYC had historically high murders

Every recession since the late ’50s has been associated with an increase in crime and, in particular, property crime and robbery, which would be most responsive to changes in economic conditions. There is a year lag between the economic change and crime rates.

Between 1993 and 2008 NYC had seen a drastic drop in crime, economists and sociologists have debated how much of the success was attributable to new trends in policing and how much to other factors, including a growing economy. To the contrary some have argued that it is in boom periods that crime has the potential to be at high levels as there are more people walking the street or using ATM machines. Click here to see Freakanomics blog posting.

New Zealand exporting water to China?

In the New Zealand Herald last Saturday (28th August) Mark Lister of Craigs Investment Partners wrote a very thought-provoking piece about the potential of the Chinese market to our agricultural sector. China is expected to become a major importer of food and as incomes rise so does their demand for more dairy products and meat. He states that the main indicator to look out for is the growing Chinese middle class. GDP/Capita is approximately US$4,000 but there are 120 million who have income greater than US$70,000. This trend should increase the demand for higher-value food products such as dairy and meat. One of the reasons that China has had to start importing food is the fact that they only have one-third of the freshwater per capita of the global average and with a higher proportion of China’s water being required for residential consumption there will less available for agricultural purposes.

New Zealand water
Mark Lister says that Our rainfall averages 2m a year, more than double the world average of 0.8m. What is sometimes overlooked is that food production is water intensive. One litre of water is required to produce a calorie of food, and 2000 litres to 3000 litres is required to satisfy one person’s daily dietary needs.

You could argue that when New Zealand exports food, we are essentially exporting water.

As well as being relatively close to China, New Zealand has become a world leader in agricultural productivity and produces safe food in a stable and regulatory environment. Click here to view the full article from the Craig Investment Partners website.