Despite the initial shock, people have forgotten about that all together.
But the problems will only emerge on economic data after few months. Anything released now will not be particularly useful.
The nuclear crisis causes lower electricity production, which will be a big stumbling block for the resumption of industrial production. That is affecting the global supply chain, particularly in the electronics and auto sector.
The crisis will also means more borrowing from the government, and shortages of various goods and services. The earthquake should weaken yen and (finally) produce inflation for Japan.
Though it will be bad for government, which is having debt amounted to 200% of GDP.
Friday 15 April 2011
Thursday 14 April 2011
Euro And Gold Standard
Gold standard is a barbarous relic.
Gold standard has no difference from any kind of currency-peg system. The single currency is just a currency peg in another form.
Greece, Ireland, Portugal and Spain, their problem is that they are tied to the Euro, which is nothing but another gold standard.
They will have to adjust prices internally, but their debt is still in Euro. That is, wages have fallen, prices will fall, everything will fall except the debt burden.
Giving them finances in short-term will not solve the problem because they are already indebted, and these ECB IMF whatever stuff more debts to them.
How to solve this?
Either they leave the euro, or Germany and France should leave the Euro. Just like when UK leaving gold standard after great depression.
Gold standard has no difference from any kind of currency-peg system. The single currency is just a currency peg in another form.
Greece, Ireland, Portugal and Spain, their problem is that they are tied to the Euro, which is nothing but another gold standard.
They will have to adjust prices internally, but their debt is still in Euro. That is, wages have fallen, prices will fall, everything will fall except the debt burden.
Giving them finances in short-term will not solve the problem because they are already indebted, and these ECB IMF whatever stuff more debts to them.
How to solve this?
Either they leave the euro, or Germany and France should leave the Euro. Just like when UK leaving gold standard after great depression.
Wednesday 13 April 2011
China: More Indebted Than You Think
China has a terrible debt problem that no one is talking about. Its local government debts are huge, and they rely on real estate developers to finance themselves.
They sell land to developers at high prices in order to obtain revenue. As a result, it is of their interest to keep land prices high, and it is important for them to have a hot real estate market to keep the music playing.
But as China continues to tighten, it is much harder for them to do so.
They sell land to developers at high prices in order to obtain revenue. As a result, it is of their interest to keep land prices high, and it is important for them to have a hot real estate market to keep the music playing.
But as China continues to tighten, it is much harder for them to do so.
Tuesday 12 April 2011
China and US
China is keeping its currency low to help export to America.
By that, they allow the US to buy its goods by accumulating foreign exchange reserve and creating huge bubble and inflation at home.
How long can this party last? Once the Yuan is allowed to appreciation significantly, things might start falling apart.
By that, they allow the US to buy its goods by accumulating foreign exchange reserve and creating huge bubble and inflation at home.
How long can this party last? Once the Yuan is allowed to appreciation significantly, things might start falling apart.
Monday 11 April 2011
US dollar
US dollar is now regarded as potentially worthless.
Truth be told, everything can ultimately be regarded as worthless from a more philosophical perspective.
Truth be told, everything can ultimately be regarded as worthless from a more philosophical perspective.
Sunday 10 April 2011
Inflation, Hyper-inflation and Money
Hyper-inflation is a rejection of a currency.
Because prices rose so much in short period of time, currency becomes worthless, and people reject the currency. In the past, this has been associated to some sort of dollarisation, where people in highly inflationary countries would prefer holding US dollar instead of the currency of their own countries.
Now, there isn't any such things happening, yet some people are expecting that to happen, and so they reasoned that they should buy gold and silver, which, to them, are currencies, believe it or not.
Gold and silver is just like paper money except no central banks can print it. Gold and silver can be just as worthless as fiat money. People constantly saying that gold and silver are some sort of ultimate store of value apparently has no understanding of what money really is.
Because prices rose so much in short period of time, currency becomes worthless, and people reject the currency. In the past, this has been associated to some sort of dollarisation, where people in highly inflationary countries would prefer holding US dollar instead of the currency of their own countries.
Now, there isn't any such things happening, yet some people are expecting that to happen, and so they reasoned that they should buy gold and silver, which, to them, are currencies, believe it or not.
Gold and silver is just like paper money except no central banks can print it. Gold and silver can be just as worthless as fiat money. People constantly saying that gold and silver are some sort of ultimate store of value apparently has no understanding of what money really is.
Friday 8 April 2011
United States: Problems Of Fiscal Deficits
Deficit spending has traditionally been associated with inflation. The reason is obvious: if the government want to sustain the deficit spending, the obvious way is to print more money and inflate the debt again.
However, the story isn't as easy as that. Japan is a good example where huge deficit, high debt level, and continuous monetary expansion all failed to produce any inflation at all.
So which side should I bet on?
My answer: deflation for the next 5-10 years or so, and hyperinflation at the end.
Because the economy is deleveraging, that is profoundly deflationary. The government is also now threatened to cut spending, which will ultimately be deflationary as well. So demand is low, the economy slows. Businesses wouldn't want to invest and individuals now save more. That means increasing the monetary base dramatically will not be multiplied through the banking system because banks have no demand for their lending.
But inflation will eventually come back, sometimes. We just don't know when.
However, the story isn't as easy as that. Japan is a good example where huge deficit, high debt level, and continuous monetary expansion all failed to produce any inflation at all.
So which side should I bet on?
My answer: deflation for the next 5-10 years or so, and hyperinflation at the end.
Because the economy is deleveraging, that is profoundly deflationary. The government is also now threatened to cut spending, which will ultimately be deflationary as well. So demand is low, the economy slows. Businesses wouldn't want to invest and individuals now save more. That means increasing the monetary base dramatically will not be multiplied through the banking system because banks have no demand for their lending.
But inflation will eventually come back, sometimes. We just don't know when.
Thursday 7 April 2011
United States: Balance Sheet Recession
The US is in a balance sheet recession. The great moderation was possible because of loose monetary policy over the past 10 years, which helped credit growth to an unsustainable level.
As a result of that, bubble after bubble were formed, and one burst after the other. Now, after the burst of the housing bubble, finally, the private sector is in a painful process of deleveraging.
Quantitative easing will not work because monetary policy has been very loose. The problem is there is little demand for credit because of all the deleveraging, so making credit easy does not make credit growth at a faster rate.
At such time, only the government can be not deleveraging. But facing with increasing political pressure in the United States, one might expect that the government may be forced into some sort of austerity some time. If that happens, that is going to be deflationary.
The obvious precedent of such situation is Japan.
As a result of that, bubble after bubble were formed, and one burst after the other. Now, after the burst of the housing bubble, finally, the private sector is in a painful process of deleveraging.
Quantitative easing will not work because monetary policy has been very loose. The problem is there is little demand for credit because of all the deleveraging, so making credit easy does not make credit growth at a faster rate.
At such time, only the government can be not deleveraging. But facing with increasing political pressure in the United States, one might expect that the government may be forced into some sort of austerity some time. If that happens, that is going to be deflationary.
The obvious precedent of such situation is Japan.
Wednesday 6 April 2011
China: Why Investment driven?
The low currency value helped export to grow fast. Because the currency is pegged with the US dollar, the central bank has no choice but to accumulate foreign exchange reserve.
What does that mean? Because of high demand of China's goods, the demand for Chinese Yuan is high, naturally. That would put upward pressure on Yuan. In order to keep Yuan low, the central bank has to increase money supply.
That is creating liquidity at home, fueling the out-of-control money supply growth and credit growth, which went into real estate and all sorts of investments.
Increased money supply fueled over-investment, but it is also creating inflation. That's a paradox: if credit growth fueled over-investment, that means there is over-capacity in China, so how could there be inflation at the same time?
Well, over-capacity will result in deflation. That is not a question of how. Rather, it is a question of when.
What does that mean? Because of high demand of China's goods, the demand for Chinese Yuan is high, naturally. That would put upward pressure on Yuan. In order to keep Yuan low, the central bank has to increase money supply.
That is creating liquidity at home, fueling the out-of-control money supply growth and credit growth, which went into real estate and all sorts of investments.
Increased money supply fueled over-investment, but it is also creating inflation. That's a paradox: if credit growth fueled over-investment, that means there is over-capacity in China, so how could there be inflation at the same time?
Well, over-capacity will result in deflation. That is not a question of how. Rather, it is a question of when.
Tuesday 5 April 2011
China: The Flawed Investment-Led Model
Besides being an export driven model, China is probably more investment driven.
That makes sense, as saving rates are high, investment has to be so. Manufacturers, for instance, can use their big savings to build larger factories. Real estate developers invest heavily to build huge residential developments.
Government is also the cause of huge investment, particularly in the time of crisis. Breaking down the GDP growth, the biggest part that the government can really control is investment. As a result of the previous financial crisis, the government invested heavily on infrastructure, like the high speed rail. Huge corruption aside, these projects are most probably not profit-making, but because of the growth target set by the government, they have to build simply because that's the most certain way to boost GDP.
But the debt associated with investments is also high. The Ministry of Railway associated enterprises have some 1.8 trillion RMB of debt of their balance sheets. Because the high speed rail is likely to be a massive miscalculation of demand, there is almost no hope to make money with it, so it is extremely unclear how they can pay back.
That's the danger of such debt driven investment model.
That makes sense, as saving rates are high, investment has to be so. Manufacturers, for instance, can use their big savings to build larger factories. Real estate developers invest heavily to build huge residential developments.
Government is also the cause of huge investment, particularly in the time of crisis. Breaking down the GDP growth, the biggest part that the government can really control is investment. As a result of the previous financial crisis, the government invested heavily on infrastructure, like the high speed rail. Huge corruption aside, these projects are most probably not profit-making, but because of the growth target set by the government, they have to build simply because that's the most certain way to boost GDP.
But the debt associated with investments is also high. The Ministry of Railway associated enterprises have some 1.8 trillion RMB of debt of their balance sheets. Because the high speed rail is likely to be a massive miscalculation of demand, there is almost no hope to make money with it, so it is extremely unclear how they can pay back.
That's the danger of such debt driven investment model.
Monday 4 April 2011
China: More On Inequality
Inequality in China also has something to do with the political and economic system.
Corruption is common. With good connections with officials in the government, one might be able to win big by means of collusion with the government. That is not unusual: in fact it is very common.
For various reasons, these privileged group of people with access to officials would do great business because their competitors are being kept out of the market, creating ultra wealthy group of people. Exporters are also rich because of the export-led growth model. The working class, unfortunately, could not share as much as the other groups of people.
Corruption is common. With good connections with officials in the government, one might be able to win big by means of collusion with the government. That is not unusual: in fact it is very common.
For various reasons, these privileged group of people with access to officials would do great business because their competitors are being kept out of the market, creating ultra wealthy group of people. Exporters are also rich because of the export-led growth model. The working class, unfortunately, could not share as much as the other groups of people.
Sunday 3 April 2011
China: The Trouble With Export Led Model
Export-led model is flawed in many ways in China. In created economic growth, but not wealth.
China has kept its currency value really low for ages. The reason is very simple: that helps exports. The Chinese Yuan is some 30% undervalued on an absolute purchasing power parity basis, and because of the ample supply of labour for the past 30 years or so, exporters can have cheap labour to produce their goods, and sell them at a very competitive price.
Because of the low currency, China could sell a lot. Exporters gain huge profits consistently, making these people rich. However, these companies are not raising wages for their workers at the same pace because there has been no shortage of labour in the past. They are not paying out the profit as dividend either.
The myth of China's high saving rate is not well understood. The reality is that companies saved a lot, while the saving rates for individuals may not be much higher than other Asian economies. And also, naturally, the owners of these companies are rich, creating huge inequality.
China has kept its currency value really low for ages. The reason is very simple: that helps exports. The Chinese Yuan is some 30% undervalued on an absolute purchasing power parity basis, and because of the ample supply of labour for the past 30 years or so, exporters can have cheap labour to produce their goods, and sell them at a very competitive price.
Because of the low currency, China could sell a lot. Exporters gain huge profits consistently, making these people rich. However, these companies are not raising wages for their workers at the same pace because there has been no shortage of labour in the past. They are not paying out the profit as dividend either.
The myth of China's high saving rate is not well understood. The reality is that companies saved a lot, while the saving rates for individuals may not be much higher than other Asian economies. And also, naturally, the owners of these companies are rich, creating huge inequality.
Saturday 2 April 2011
China: The Beginning Of The End Of The Growth Story
The buzz word of the last decade must be BRIC. It was all about the story of the amazing growth of Brazil, Russia, India, and China.
The financial crisis of 2008 has accelerated the "shift" of global economic powerhouse. True, emerging economies have been leading the global growth for sometime, and now the destroy to the developed economies makes emerging economies like China looks much stronger than it was, economically and politically.
There was a saying that China will become the next world power after the British Empire and the United States. It was said that the 21st century belongs to China, and China will become the greatest country in the world. True, the growth was spectacular over the last 30 years also, and if that course continue, the country will overtake the United States very soon. But that doesn't mean anything.
People are still very much disillusioned about Chinese growth. Many are still expecting a high growth China to persist for another 20 years or so. Unfortunately, that is most likely not going to happen.
The population is ageing. Just like Japan and the United States, the population is ageing, and it is ageing really fast in China. Ageing will create one great problem: labour shortage. In the past, China could get goods produced at really low prices partly because it is really a labour resource rich country. Because of the one-child policy, the dependency ratio for the generation which came into the work force since 1970s was declining, and the working population as the percentage of total population increased steadily.
But soon that's going to be changed. One-child policy has lowered the birth rate, which was good for the previous generation because less people depended on them. But as these people start to retire, the work force will shrink at an astonishing rate. Wages will go up, and the export-led model will fail.
The financial crisis of 2008 has accelerated the "shift" of global economic powerhouse. True, emerging economies have been leading the global growth for sometime, and now the destroy to the developed economies makes emerging economies like China looks much stronger than it was, economically and politically.
There was a saying that China will become the next world power after the British Empire and the United States. It was said that the 21st century belongs to China, and China will become the greatest country in the world. True, the growth was spectacular over the last 30 years also, and if that course continue, the country will overtake the United States very soon. But that doesn't mean anything.
People are still very much disillusioned about Chinese growth. Many are still expecting a high growth China to persist for another 20 years or so. Unfortunately, that is most likely not going to happen.
The population is ageing. Just like Japan and the United States, the population is ageing, and it is ageing really fast in China. Ageing will create one great problem: labour shortage. In the past, China could get goods produced at really low prices partly because it is really a labour resource rich country. Because of the one-child policy, the dependency ratio for the generation which came into the work force since 1970s was declining, and the working population as the percentage of total population increased steadily.
But soon that's going to be changed. One-child policy has lowered the birth rate, which was good for the previous generation because less people depended on them. But as these people start to retire, the work force will shrink at an astonishing rate. Wages will go up, and the export-led model will fail.
Friday 1 April 2011
The perfect storm: Introduction
In 2008, Lehman Brothers went bust.
In many ways, it was a perfect storm. Many things, related and unrelated, added together, and produced a unprecedented financial storm and swept through the whole world. It was unprecedented and unexpected.
Or was it?
Yes and No.
Smart mind should have been mindful of the fragility of the system. Debt, derivatives, and the inter-connectedness made the system work like charm in good time, but they blew up at the time when we needed it to work.
Wasn't debt supposed to be a good thing in capital structure theory? Wasn't derivatives making the financial market more efficient? Wasn't globalisation making the world economy growing faster?
They were, but they all broke down in the time of crisis, and they will fool us again.
The reason to start writing here is to tell my prediction of how a perfect storm in the world economy will happen again soon.
In many ways, it was a perfect storm. Many things, related and unrelated, added together, and produced a unprecedented financial storm and swept through the whole world. It was unprecedented and unexpected.
Or was it?
Yes and No.
Smart mind should have been mindful of the fragility of the system. Debt, derivatives, and the inter-connectedness made the system work like charm in good time, but they blew up at the time when we needed it to work.
Wasn't debt supposed to be a good thing in capital structure theory? Wasn't derivatives making the financial market more efficient? Wasn't globalisation making the world economy growing faster?
They were, but they all broke down in the time of crisis, and they will fool us again.
The reason to start writing here is to tell my prediction of how a perfect storm in the world economy will happen again soon.
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