By TOM RAUM, Associated Press Writer Tom Raum, Associated Press Writer
–
35 mins ago
WASHINGTON – Labeled antibusiness by Republicans and some corporate chiefs, President Barack Obama mounted a campaign to show he wasn't. But his charm offensive has hit a rocky patch.
Business leaders gripe about burdensome new financial
and health care regulations, what they see as unfriendly tax policies
and vast government spending. They were put off by Obama's harsh
depiction of "fat cat bankers" and "reckless practices," a label he
applied both to Wall Street and to oil-spill giant BP.
Among the Obama policy detractors: JPMorgan Chase CEO
Jamie Dimon, who supported Obama's presidential bid but actively
opposed his financial regulation overhaul. Not surprisingly, Dimon was
not on the 400-strong guest list for the bill-signing.
White House aides
dispute an antibusiness bias, noting that corporate profits are up 65
percent from two years ago. "The stakes are too high for us to be
working against each other," top presidential advisers Rahm Emanuel and Valerie Jarrett wrote to the U.S. Chamber of Commerce.
Reaching out to big business, Obama named more than a
dozen top CEOs to a presidential Export Council, revived a Bush
administration free-trade pact with South Korea and stumped aggressively
for cutting taxes and increasing loans for small businesses. But it is
noticeable that not a single former corporate executive is in his
Cabinet or among his top economic advisers.
Friday's dismal jobs report, showing unemployment
stuck at 9.5 percent, further underscored the need for government and
private sector cooperation to produce jobs.
Still, Obama has nurtured "an increasingly hostile
environment for investment and job creation," says Verizon CEO Ivan
Seidenberg, chairman of the Business Roundtable. Thomas Donohue, who heads the U.S. Chamber of Commerce, sees a "cumulative job-killing impact of over-regulation" under Obama.
"The truth is that not even the Franklin Roosevelt
administration was as hostile to and ignorant about free enterprise as
this administration is," declared magazine publisher and one-time GOP
presidential contender Steve Forbes.
So far, Senate Republicans — echoing some of the same
antibusiness complaints — have been able to block Obama's
small-business jobs bill, even though small business is a traditional
core GOP constituency. Republicans claim the bill is misguided.
"This should be as American as apple pie," Obama told
a Democratic fundraiser in Austin, Texas, on Monday. "And yet we can't
get it moving through the Senate." He speculated that Republicans were
blocking the bill because they didn't want to do anything to help him
and were "thinking about the next election instead of the next
generation."
But Senate Republican leader Mitch McConnell of
Kentucky shot back in a statement, "For more than a year and a half, the
president and his Democrat allies on Capitol Hill have pushed an
antibusiness, anti-jobs agenda on the American people in the form of one
massive government intrusion after another."
The current adversarial climate is being aggravated
by November's midterm elections. Both parties recognize that job
creation has not been strong enough to push down an unemployment rate
long hovering near 10 percent. And both recognize the vital role to be
played by small businesses, which account for two out of every three
jobs.
The new financial overhaul law — while not going as
far as some Democrats wanted — and other new regulations along with the
prospect of higher taxes irritated many financial and corporate leaders
"and they've moved away from Obama," said James Thurber, a political
scientist at American University.
"Certainly, the campaign money has migrated away from
the Democrats. And Wall Street will go with whomever helps them out the
most," Thurber said.
Obama must weigh whether he wants to anger bankers
anew when filling the top job at the new Bureau of Consumer Financial
Protection, created in the financial overhaul.
Consumer advocates and labor groups want him to pick
Harvard law professor Elizabeth Warren, who now chairs the congressional
oversight panel scrutinizing bank bailouts. But she has little support
within the financial community and nominating her would risk a big
Senate confirmation fight.
Of course, not all business leaders are negative and many have offered words of support.
UPS chief executive Scott Davis said Obama's goal of
doubled exports in five years would help "foster engagement in the
global economy for small and large businesses." And Ford CEO Alan
Mulally said Obama recognizes that "for exports to grow we must ensure
that market access for manufactured goods remains at the center of U.S.
trade policy."
Both Davis and Mulally are members of Obama's new export panel.
Other CEOs have expressed frustration, not just with Obama but with stalemate in Washington.
Jeff Immelt, CEO of General Electric, complained that "government and
entrepreneurs are not in sync." He also decried lack of progress in
formulating energy policy. "Our policy is uncertainty ... I'd say status
quo for this country is a losing hand."
Obama brought former President Bill Clinton — generally seen as
business-friendly — and Berkshire Hathaway CEO Warren Buffett to the White House
to discuss job creation. The billionaire investor from Omaha supported
Obama in the 2008 election but has since been sometimes critical of
Obama's handling of both the financial crisis and the Gulf oil spill.
While Obama says small businesses will "lead this recovery," the
National Small Business Association recently issued a report saying that
more small businesses are unable to get financing than at any time over
the past 17 years. Unless they can get the loans they need "we will
continue to see high unemployment," said NSBA President Todd McCracken.
Douglas Holtz-Eakin, a former Congressional Budget Office director who
was 2008 GOP presidential candidate John McCain's top economic adviser,
said some of Obama's economic overtures have merit, such as his push for
doubling U.S. exports and vow to move ahead on the South Korea trade
agreement.
But, he said, "I think Republicans are going to be skeptical until they
see real action." Holtz-Eakin said "the business community's dismay"
with Obama is driven by a sense that "he's saying one thing and dead set
on doing another."
As spending by wealthy weakens, so does economy
AP – FILE - In this June 1, 2010 file photo, a woman hangs onto her shopping bags while exiting the Neiman …
By JEANNINE AVERSA, AP Economics Writer Jeannine Aversa, Ap Economics Writer
–
Sun Aug 1, 2:09 pm ET
WASHINGTON – Wealthy Americans aren't spending so freely anymore. And the rest of us are feeling the squeeze.
The question is whether the rich will cut back so
much as to tip the economy back into recession — or if they will spend
at least enough to sustain the recovery.
The answer may not be clear for months. But their
cutbacks help explain why the rebound could be stalling. The economy
grew at just a 2.4 percent rate in the April-June quarter, the
government said Friday, much slower than the 3.7 percent rate for the
first quarter.
Economists say overall consumer spending has slowed
mainly because the richest 5 percent of Americans — those earning at
least $207,000 — are buying less. They account for about 14 percent of
total spending. These shoppers have retrenched as their investment
values have sunk and home values have languished.
In addition, the most sweeping tax cuts in a
generation are due to expire in January, and lawmakers are divided over
whether the government can afford to make any of them permanent as the
federal budget deficit continues to balloon. President Barack Obama
wants to allow the top rates to increase next year for individuals
making more than $200,000 and couples making more than $250,000. The
wealthy may be keeping some money on the sidelines due to uncertainty
over whether or not they will soon face higher taxes.
The Standard & Poor's 500 stock index has tumbled
9.5 percent since its high-water mark in late April. Home values fell
3.2 percent in the first quarter, according to the Standard &
Poor's/Case-Shiller 20-city home price index.
Think of the wealthy as the main engine of the
economy: When they buy more, the economy hums. When they cut back, it
sputters. The rest of us mainly go along for the ride.
Earlier this year, gains in stock portfolios had
boosted household wealth. And the rich responded by spending freely.
That raised hopes the recovery would strengthen.
No longer. The dizzying plunge on Wall Street in May
and June and lingering stock market turbulence have shrunk Americans'
wealth. The Dow fell 10 percent for the April-June quarter. The broader
Standard & Poor's 500 index dropped 11.9 percent. And the rich are
once again more cautious about spending, economists say.
The affluent went back to tightening their belts in
June after months of vigorous showing. Data from MasterCard Advisors'
SpendingPulse showed luxury spending fell in June for the first time
since November. The decline followed a solid rise in sales revenue
earlier in the spring.
"It isn't a good omen for the consumer recovery,
which cannot exist without the luxury spender," said Mike Niemira, chief
economist at the International Council of Shopping Centers.
At the same time, government reports show shoppers as a whole cut back on their spending in both May and June.
Companies have responded by refusing to step up
hiring. The housing market is stalling. And Americans are seeing little
or no pay raises. It adds up to a recipe for a grinding recovery to slow
further.
And it helps explain why economists expect the
rebound to lose momentum in the second half of the year. Especially if
the rich don't resume bigger spending.
"They are the bellwether for the economy," says Mark
Zandi, chief economist at Moody's Analytics. "The fact that they turned
more cautious is why the recovery is losing momentum. If they panic
again, that would be the fodder for a double-dip recession."
That's because whether they're saving or spending,
the wealthy deliver an outsize impact on the economy. What's not clear
is whether they will remain too nervous to spend freely again for many
months. That's what happened when the recession hit in December 2007 and
then when the financial crisis ignited in September 2008.
As their stock holdings and home values sank, the
affluent lost wealth. Their jobs weren't safe, either. Bankers, lawyers,
accountants and mortgage brokers were among those getting pink-slipped.
Those who did have jobs feared losing them. Neither group spent much.
Instead, Americans' savings rate spiked. And most of
the increase came from the richest 5 percent, according to research by
Moody's Analytics.
In the first quarter of this year, stocks rebounded, layoffs slowed and the rich were spending again.
But now the rich are building up their savings and splurging less on
discretionary items. That's starting to show up in softer sales at
upscale retailers, such as Neiman Marcus and Saks Inc. It's because
people like Angeli Gianchandani, 40, have cut back.
She used to hit the mall every two weeks — flicking through the racks at
Saks or Bloomingdale's and returning home with a new frock. Not
anymore. She's limiting her splurges now. The downturn in the stock
market has played a role.
"Rather than spending more money, I'm keeping more," says Gianchandani, who lives in New Jersey.
Even with recent losses, household net worth has risen 13 percent from
its bottom during the recession. Net worth — the value of assets like
homes, checking accounts and investments minus debts like mortgages and
credit cards — grew 2.1 percent in the first quarter.
However, net worth would have to grow 21 percent more to regain its
pre-recession peak. In the meantime, don't expect the wealthy to
suddenly start spending lavishly.
"The affluent — as their wealth goes down — they'll become more and more
conservative," predicts David Levy, chairman of the Jerome Levy
Forecasting Center.
China economic growth points to possible rise in yuan
China is set to overtake Japan as the world's
second biggest economy
China's economy grew at an annual rate
of 11.9% in the first quarter of the year, which experts say could lead
to a revaluation of the yuan.
The growth figure was slightly
higher than expected, while consumer price inflation was surprisingly
low at 2.2%.
"We have got off to a good start this year," a
Chinese spokesman said.
The figures have helped to fuel debate
among experts about whether the recent fiscal stimulus package could be
stoking up problems for the economy.
"There is a lot
of talk about overheating," Glenn Maguire, chief economist for Asia
Pacific at Societe Generale, told the BBC. "But the classic symptom is
inflation."
March's consumer price inflation was 2.4% versus
expectations of 2.7%, and producer price inflation was 5.9% versus the
expected 6.4%.
KEY DATA RELEASED
Q1 growth: +11.9%
(year-on-year)
Q1 industrial production: +19.6%
Q1 fixed asset investment: +25.6%
Q1 retail sales: +17.9%
Q1 CPI: +2.4%
March CPI: +2.4%
March PPI: +5.9%
"There had been speculation on the back of strong construction data
[of] an imminent rate hike," added Mr Maguire. But given the low
inflation, he now thinks the next step will be a revaluation of the
yuan.
Either policy - a rise in interest rates or an increase in
the value of the yuan - could be used to help slow the Chinese economy.
However,
China has been under pressure from President Obama to address the yuan,
which many commentators say is undervalued and gives the Chinese an
unfair advantage in export markets.
But the Chinese refuse to be
rushed. "I think, on the exchange rate problem, the biggest headache we
face isn't the economic problem, rather it is that this problem is being
highly politicised," Chinese commerce minister Yi Xiao Zhun told the
BBC.
"China should still maintain stability in the trade policy
and exchange rate policy," he added.
Wasted investment?
However,
other economists fear that the rush by the Chinese authorities to boost
investment spending during the global recession may have been too
hasty.
Property prices surged in March, heightening fears
of a bubble.
"In the short term you can get as much growth as you are willing to
pay for", Michael Pettis, professor at Peking University's Guanghua
School of Management, told the BBC.
"[But] it has turned out to
be very hard for Beijng to rein in investment spending, especially at
the local [government] level," he added.
"The worry is that these
seemingly-strong growth numbers may reflect a surge in investing that
turns out to be very wasteful in the longer run."
Bubble
Data
showed that urban property prices in March grew at their fastest rate
in over four years.
Cheap and plentiful loans are helping to push
up housing prices and raising fears of a bubble, BBC business reporter
Linda Duffin says.
That is why mortgage rates have been raised
and a new sales tax on homes has been introduced, she adds.
But
the low inflation rate in the first quarter eases pressure on Beijing's
policymakers to raise interest rates and cool the boom.
And if
the government is successful at keeping growth at a manageable rate,
China is likely to overtake Japan as the world's second biggest economy
this year, our reporter says.
Li Xiaochao, spokesman for China's
National Bureau of Statistics, told reporters in Beijing that the
"momentum of national economic recovery" had further expanded and there
was "a good foundation for reaching the targets set for the whole year".
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SHANGHAI (AP) - Workers at a second auto parts factory affiliated with Honda Motor Co. walked off the job Wednesday as a strike dragged on at the other facility, forcing the company to halt production at two of its Chinese car assembly plants.
The latest labor dispute was at Honda Lock (Guangdong) Co., in Zhongshan, a city near Honda's production base in the southern city of Guangzhou and began Wednesday morning, said Yoshiyuki Kuroda, a Honda spokesman in Tokyo. He said the reason for the strike was unclear.
Separately, Honda said in a statement that production at its two car plants would remain suspended Thursday due to "labor negotiations" at parts maker Foshan Fengfu.
Production at Honda's other two China car assembly plants was not affected because they had a sufficient supply of parts on hand, the company said.
Workers at Foshan Fengfu Autoparts Co. walked off the job earlier this week, seeking pay raises, just days after Honda settled a two-week strike at a wholly owned parts supplier that had forced the Japanese automaker to freeze production at all four of its car assembly factories in China due to a lack of parts.
The conflicts reflect rising tensions between workers and foreign companies that rely on China as a source of cheap labor and a fast-growing market. Companies in China are finding it harder to attract and keep workers, who are demanding better pay and working conditions.
But Honda's own situation is unique in that apart from its car assembly joint ventures with local partners Guangzhou Auto Group and Dongfeng Motor Group, it tends to run its car parts businesses without teaming up with local partners.
The lack of a local partner - Foshan Fengfu is owned by Honda subsidiary Yutaka Giken Co. and a Taiwanese partner, Moonstone Holding Co. - can mean a lack of support in persuading or forcing workers to return to their jobs.
"The first strike was in a parts factory wholly owned by Honda, which makes a lot of difference in terms of how the company is run, its corporate culture and how it treats workers," said Zhang Xin, an auto analyst at Guotai Jun'an Securities in Beijing.
"Most foreign companies still cooperate with local companies even if joint ventures are not required for parts plants, unlike car assembly plants. Honda is a rare exception," he said.
The strikes have hobbled Honda just as it was gearing up to expand production to meet strong demand. Foshan Fengfu makes exhaust pipes and other parts for Honda's Odyssey, Accord and Fit models. Honda Lock's website says it makes ignitions, handles, mirrors, wheel sensors and key sets, among other parts.
Wage disputes and strikes are common in China, but rarely attract as much attention as the Honda strikes and other disputes that surfaced following 11 suicides and three suicide attempts - mostly by jumping off tall buildings - at Taiwan's Foxconn Technology Group, a contract manufacturer in China of iPhones and other name-brand electronics.
Labor activists accuse Foxconn of having a rigid management style, an excessively fast assembly line and forced overwork. The company denies the allegations, but has announced two raises for its Chinese workers. It also is installing safety nets around buildings and hiring more counselors.
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One sign of better economic times is when more people start finding jobs. Another is when they feel confident enough to quit them.
More people quit their jobs in the past three months than were laid off - a sharp reversal after 15 straight months in which layoffs exceeded voluntary departures. The trend suggests the job market is finally thawing.
Some of the quitters are leaving for new jobs. Others have no firm offers. But their newfound confidence about landing work is itself evidence of more hiring and a strengthening economy.
"There is a century's worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves," said Steven Davis, an economist at the University of Chicago.
Still, the number of people quitting their jobs is nowhere near what it was before the recession. Economists expect the improvement in the job market to be fitful, rather than consistent. In May, for example, private employers added only 41,000 net jobs after adding 218,000 in April.
Yet the long-term trend points to an improving job market. The economy has created a net 982,000 jobs this year after a recession that wiped out more than 8 million of them.
The government said Tuesday that the number of people quitting rose in April to nearly 2 million. That was the most in more than a year and an increase of nearly 12 percent since January. That compares with 1.75 million people who were laid off in April, the fewest since January 2007, before the recession began.
During the depths of the recession, workers were hesitant to quit - and not only because jobs were scarce. Even if they found a new job, some feared that accepting it would leave them vulnerable to a layoff. At many companies, layoffs follow a simple formula: Last hired, first fired.
Many clung to their jobs out of fear, said David Adams, vice president of training at Adecco, a national staffing agency. When Adecco tried to recruit workers to fill open positions, it frequently ran into the same obstacle: Few workers felt like betting on a new job that might soon disappear.
Not so much any more. Adecco is seeing more employed workers seeking interviews, rather than laid off workers searching for a lifeline.
"The hangover is kind of over," Adams said. "It's really starting to move toward a market where the employee can have a lot more confidence making a move."
That's why Katie Charland just quit her job at a parenting magazine in Phoenix to take a position with a nonprofit that supplies children's educational programs.
Charland, 27, says the position is a dream job. Still, it carries a cost: She's abandoning seniority at her old job. But she thinks the economy is expanding enough that her company will be able to attract state and corporate funding.
"I don't see leaving my current job to pursue this as a risk," Charland says. "I do feel like the economy is getting better, and there's more opportunity out there."
Such optimism was rare in 2008 and 2009, when employers cut more than 8 million jobs, sending the unemployment rate to a 26-year high of 10.1 percent. The number of people who quit fell 40 percent to 1.72 million in September 2009. That was the fewest since the government began tracking the data in 2000. It was down from nearly 2.9 million in December 2007, when the recession began.
Studies have shown that worker morale fell during the recession. Productivity rose as companies squeezed more work out of their employees. That points to a reason quits may keep rising: Overworked employees could jump at the chance to switch jobs as new opportunities arise.
"There is going to be a mass exodus of the top performers as the economy starts to turn around," predicts Razor Suleman, a consultant who helps companies retain their best workers.
About 25 percent of companies' top performers said they plan to leave their current job within a year, according to a survey published in the May edition of the Harvard Business Review. By contrast, in 2006, just 10 percent planned to leave their jobs within a year. The survey questioned 20,000 workers who were identified by their employers as "high potential."
Companies retained those workers during the recession but heaped more work on them, said Jean Martin, the study's co-author and executive director of the Corporate Executive Board's Corporate Leadership Council in Washington. At the same time, employers cut back on awards and bonuses, she said.
Now, top performers at some companies are heading for the exits as hiring picks up. It means companies will feel more pressure to retain them.
"These rising stars know what they're worth," Martin said. "They feel somewhat neglected."
Phil Edelstein can attest to that. He spent two years on his first job at an advertising agency gaining more responsibility but no pay raises.
Edelstein, 25, worked for an agency in Philadelphia that was stretching its budget as clients cut back their spending. After researching clients' brand names and marketing strategies, he moved on to directing study projects.
Bosses kept promising a pay raise commensurate with his workload. It never came.
"There's this intense frustration that comes with that, because you basically feel like you have no control over how much money you're making and how much work you do," he said.
Edelstein hung tight through 2009 as the economy shed jobs. But this year he began sending out resumes to other ad agencies. Then a prospective client called. The CEO of a Colorado-based tea maker needed a marketing director. Edelstein didn't need long to say yes.
"It felt good, because I was initiating the change," he said.
More people are now taking a leap that few dared just a few months ago: Quitting without a new job waiting. The improving economy has given them confidence.
Robert Dixon is among them. He was consulting with companies doing business in China, helping them establish supply chains with factories there. But he tired of spending weeks at a time away from his wife in Massachusetts. So in May he quit - without a backup plan.
"Somebody the other day said to me I was the first person they'd met who quit a good-paying job without another one to go to," Dixon said. "I know there are other companies out there. I just need to find them."
Volcker warns against controversial derivatives
provision in Wall St. reform
By Silla Brush
-
05/07/10 01:30 PM ET
Paul Volcker, adviser to President Barack Obama and former
Federal
Reserve chairman, is warning against a controversial provision in the
Wall Street overhaul that would limit commercial banks' use of
derivatives.
"The provision of derivatives by commercial banks to
their customers in the usual course of a banking relationship should not
be prohibited," Volcker wrote to senators in a letter obtained by The
Hill. The letter was sent on Thursday.
Senate Agriculture
Committee Chairwoman Blanche Lincoln (D-Ark.) has backed controversial
legislation aimed at limiting banks from having derivatives operations
in house. The "spin off" provision has quickly become one of the most
controversial aspects of the Wall Street bill.
Volcker said
he is, "aware of, and share, the concerns about the extensive reach of
Senator Lincoln's proposed amendment."
Federal Deposit
Insurance Corporation (FDIC) head Sheila Bair warned against the
provision last weekend.
Lincoln said in a statement Friday she
would continue to support her legislation.
"I have great respect
for Chairman Volcker and agree with his proposal to require banks to
push out certain trading operations," Lincoln said. "Like him, I believe
that banks need to get back in the business of banking and my provision
gets us closer to this goal by separating swap dealing operations from
banking operations. I also agree that we can, and should, encourage
banks to manage their considerable risk. My provision would preserve a
bank's ability to use swaps to hedge their risks - not doing so would be
foolish. Absent my provision, however, we have not done enough to
address the massive size of entities that became so large that taxpayers
were left with no option but to bail them out. My provision begins to
cut down the size of these institutions by moving this risky activity
into fully regulated entities, protecting American taxpayers."
Some
Democratic and Republican senators have expressed concern with the
provision, including Sens. Judd Gregg (R-N.H.), Mark Warner (D-Va.) and
Kirsten Gillibrand (D-N.Y.).
White House's Orszag warns of dangers of huge deficits
Tue Apr 27, 2010 10:51am EDT
WASHINGTON, April 27 (Reuters) - President Barack Obama's top budget adviser, Peter Orszag, said on Tuesday that the U.S. The government must significantly alter its policies in order to tackle a growing mountain of debt.
Orszag warned that huge deficits could cause the market to lose confidence in a government's creditworthiness.
Out-of-control deficits could also "require increased borrowing abroad which will mortgage our future income to foreign creditors," Orszag told the first meeting of the 18-member National Commission on Fiscal Responsibility and Reform.
Reining in the deficit, which was $1.4 trillion in 2009, would "require significant changes in policy that build on what we have done," Orszag said. (Reporting by Kim Dixon and Ross Colvin, editing by Jackie Frank
Risk of Japan going bankrupt is real, say analysts
Greece's debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation.
Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population.
Based on fiscal 2010's nominal GDP of 475 trillion yen, Japan's debt is estimated to reach around 950 trillion yen -- or roughly 7.5 million yen per person.
Japan "can't finance" its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"Japan's revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010, " he said. "Its debt to budget ratio is more than 50 percent."
Without issuing more government bonds, Japan "would go bankrupt by 2011", he added.
Despite crawling out of a severe year-long recession in 2009, Japan's recovery remains fragile with deflation, high public debt and weak domestic demand all concerns for policymakers.
Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops.
Its huge public debt is a legacy of massive stimulus spending during the economic "lost decade" of the 1990s, as well as a series of pump-priming packages to tackle the recession which began in 2008.
Standard & Poor's in January warned that it might cut its rating on Japanese government bonds, which could raise Japan's borrowing costs amid the faltering efforts of Prime Minister Yukio Hatoyama's government to curb debt.
The system of Japanese government bonds being bought by institutions such as the huge Japan Post Bank has been key in enabling Japan to remain buoyant since its stock market crash of 1990.
"Japan's risk of default is low because it has a huge current account surplus, with the backing of private sector savings," to continue purchasing bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities.
But while Japan's risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt.
"There is no problem as long as there are flows of money in the bond market," said Kumano.
"It's hard to predict when the bond market might collapse, but it would happen when the market judges that Japan's ability to finance its debt is not sustainable anymore."
"And when that happens, the yen will plummet and a capital flight from Japan's government bonds to foreign bonds will occur," he said.
Yet others argue that there is no precedent for the ratio of debt to GDP nearing 200 percent being dangerous.
Nomura Securities economist Takehide Kiuchi cited Britain's government debt in the post-war period "which reached 260 percent but (the government) didn't face a debt crisis.
"There is no answer to the question of what the critical level of debt is for a government to go bust."
The likes of single-currency Greece and non-eurozone countries are also different in that the latter group have flexible currency exchange rates which are more closely calibrated to their fiscal conditions, he said.
Instead, the most realistic hazard brought by huge Japanese debt is prolonged deflation under a shrinking economy, say analysts.
"Regaining fiscal health needs fiscal austerity, which could weigh on economic growth," said Kiuchi.
"And when the economy is bad, people don't spend money as they are worried about their future, which in turn intensifies the deflational trend," he said.
Continued deflation could further worsen Japan's fiscal health because of less tax revenue and more stimulus spending, stirring fears over big tax hikes, which in turn weigh on demand and again reinforce deflation, analysts said.
The key to breaking the vicious cycle is drafting a feasible economic growth strategy for Japan, they said.
"If the economy grows, tax revenue increases," Kumano of Dai-ichi Life said.
Since 2001 Japan's annual growth rate has peaked at 2.7 percent in 2004.
The economy shrank 1.2 percent in 2008 and 5.2 percent last year.
Prime Minister Yukio Hatoyama's centre-left government has pledged to announce details of its new strategy in June, which aims to lift annual growth to two percent by focusing on the environment, health, tourism and improved ties with the rest of Asia.
Setbacks lead China to tone down anti-US rhetoric
Apr 11 06:24 AM US/Eastern By CHARLES HUTZLER Associated Press Writer
BOAO, China (AP) - China is softening its recent muscular global posture, muting criticisms of the U.S. at a time of delicate negotiations with Washington and simmering economic troubles at home.
The rhetorical time-out comes as President Hu Jintao heads to Washington this week, after months of friction with the U.S., and was in full evidence this weekend at an international meeting designed to showcase China's growing reach as an economic and diplomatic powerhouse.
Senior Chinese officials repeatedly sidestepped major issues roiling the global economy. Asked about the Chinese currency—which Washington wants to see rise in value to right trade imbalances—the central bank governor said now was not the time to discuss it. When it comes to regulating the risky Wall Street practices that contributed to the global economic meltdown, China's chief banking regulator sheathed his former critiques and instead called for teamwork and more financial prudence.
"I don't want to poke my nose into other people's courtyards," banking regulator Liu Mingkang said Sunday at the Boao Forum for Asia, a government-sponsored annual gathering for the political and economic elite on tropical Hainan island.
The meeting featured the now usual Chinese calls against trade protectionism in the West, including one from China's vice president and presumptive next leader, Xi Jinping.
But the tenor was a far cry from last year's Boao meeting, held at the depths of the economic crisis. Then, Liu and others directed barbs at the U.S., calling for a new financial world order and indirectly threatening that China might stop buying U.S. Treasury notes that help finance Washington's growing deficit. The elbowing continued for much of the year as Beijing resisted U.S. and European calls to halt North Korea's and Iran's nuclear programs and take bolder steps to curb the threat of climate change.
While the turnaround in Beijing's attitude may be temporary, the change points to indecision among the leadership about China's role in the world, especially its crucial but fraught ties with the U.S., and about keeping the Chinese economy humming amid a still anemic global recovery.
"We are in a time of reassessment by Beijing about China's foreign policy," said Russell Leigh Moses, a Beijing-based political analyst. "There is no overarching slogan or concept guiding the decision-making process in foreign affairs these days here."
Though Washington likely welcomes the toned-down rhetoric, China's overall reticence befuddles the U.S. and others looking to Beijing to provide constructive leadership. The country's economy, after all, will soon be the second largest and is increasingly entwined in the world order.
Though China warded off the worst of the economic turmoil, the government is now dealing with the aftereffects of its remedies, $1.8 trillion in bank lending and government stimulus.
With the economy awash in money, housing prices are soaring and inflation is rising. The domestic demand created by supercharged investment may flag as the stimulus winds down, leaving China still partly in need of export markets in the U.S. and Europe. The Chinese currency—which the government pegged to the U.S. dollar at the start of the crisis—has come under attack from the U.S., Europe and other trading partners as undervalued, thereby allowing China to flood the world with cheap exports.
Worries are growing, too, that some of the bank loans may sour. Liu, the banking regulator, announced an aggressive plan Sunday to assess the safety of loans to local government-backed investment companies.
Those problems loom as Chinese President Hu arrives in Washington on Monday to attend a summit on nuclear safety. It's an issue Beijing dislikes being out front on. With a nuclear arsenal estimated at about 100 warheads, China says the U.S. and Russia should lead on disarmament, given their huge stockpiles. Beijing has also been reluctant to push ally and neighbor North Korea or Iran, a willing supplier of oil and gas to China.
Yet the economic disputes are also tricky for Hu. Calls have risen in Congress to punish China if it does not revalue the yuan. Though U.S. Treasury Secretary Timothy Geithner briefly stopped in Beijing last week to take some of the heat out of dispute, China also does not like to be seen bowing to foreign pressure. The value of the yuan, Chinese officials and economists repeatedly said at the Boao forum, was a matter of national sovereignty.
At the Boao meeting, senior Chinese officials parried calls from Geithner's predecessor, Henry Paulson, among others to mount a higher-profile, energetic response to global problems. Central bank governor Zhou Xiaoquan said Beijing still followed three-decade-old policy guidance "to keep a low profile" on foreign affairs.
"The Chinese voices may become higher and higher," Zhou said. "But we respect the global players from other countries."
Canada’s Dollar Trades at Parity for First Time Since July 2008
By Chris Fournier and Benjamin Levisohn
April 6 (Bloomberg) -- Canada’s dollar traded equal to the U.S. currency for the first time since July 2008 on the back of the rising price of crude oil and the prospect of higher interest rates.
Canada’s dollar, dubbed the loonie for the aquatic bird on the C$1 coin, last traded at par with the greenback on July 22, 2008, 11 days after crude, the country’s biggest export, reached a record $147.27 a barrel. Oil traded near a 17-month high.
“It’s a perfect storm for the Canadian dollar,” Jonathan Gencher, director of foreign exchange sales at Bank of Montreal in Toronto. “Canadian rates are higher and Canada will be moving before the Fed. Oil is higher. The fundamentals suggest we’ll hang around here for a while.”
The currency gained as much as 0.2 percent to C$1 per U.S. dollar, and traded at C$1.0008 at 7:30 a.m. in Toronto, from C$1.0022 yesterday. One Canadian dollar buys 99.92 U.S. cents.
Crude oil for May delivery was unchanged near a 17-month high at $86.62 a barrel in electronic trading on the New York Mercantile Exchange.
The six-month overnight index swap rate, a measure of the average overnight rate expected by traders during that time, rose to 0.5280 percent, the highest in more than a year. The central bank next meets on April 20 to determine monetary policy.
Canadian employers added 25,000 jobs in February, the third straight monthly gain, according to the median of 21 forecasts in a Bloomberg survey. Statistics Canada releases the report on April 9 at 7 a.m. in Ottawa.
The loonie traded on a one-for-one basis with the U.S. currency in September 2007 for the first time in three decades, capping a five-year run on the back of booming demand for the nation’s commodities.
Trade Relationship
Canada, the largest trading partner of the U.S., has benefited over that period from rising demand for copper, gold, wheat and oil from the U.S. and emerging economies such as India and China. The country is the world’s largest producer of uranium, the second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East. Canada is also the world’s second-largest exporter of wheat.
The central bank will boost its target overnight rate by 2 percentage points to 2.25 percent by the middle of next year, according to the weighted average of eight economists in a Bloomberg News survey of economists.
Canada is on course to be the first Group of Seven nation to erase its budget gap after the global financial crisis. Finance Minister Jim Flaherty presented on March 4 a budget that forecasts the budget deficit narrowing to C$1.8 billion ($1.78 billion) in 2014 from a record C$53.8 billion last year.
Washington Post Staff Writer Monday, April 5, 2010
Evidence of the federal government's growing influence on Washington area commercial real estate is illustrated in big deals it is working on both sides of the table: auctioning a 127,000-square-foot Bethesda building previously occupied by the National Institutes of Health and moving to snatch up vast spaces in buildings on the private market that have been vacant for months.
The General Services Administration is seeking to unload the 10-story building that the NIH vacated in 2002 when it consolidated offices into other buildings in Bethesda. The recommended opening bid for the online auction, which runs from April 30 to July 2, is $14 million.
At the same time, federal leasing activity is expanding, according to Jones Lang LaSalle, the real estate firm representing the government. The government signed deals for 750,000 square feet of space in the District in the first quarter of 2010, compared with 670,000 square feet in the city for all of 2009.
The government is taking advantage of the abundance of space in newly constructed buildings going for bargain prices. As leases are up and the government embarks on renovation projects, it is moving agencies into offices in such areas as NoMa, a neighborhood near Capitol Hill that was up and coming before the financial crisis ratcheted down demand for space.
"This is an example of how the government is giving space back in one area while absorbing space in others," said Rob Hartley, research manager for CoStar Group, a real estate research firm based in Bethesda. "The government is an economic driver" in the commercial real estate market.
The GSA decided to sell the 46-year-old former NIH building at 7550 Wisconsin Ave. in Bethesda eight years ago. "We have a process we have to go through before we sell a building. We have to offer it to homeless housing, to local government," said Bob Peck, commissioner for the GSA's Public Buildings Service.
Bethesda's vacancy rate has more than doubled during the recession, to 14 percent in the first quarter of 2010 from 6.6 percent in the first quarter of 2007, according to Jones Lang LaSalle. It has lost Chevy Chase Bank's headquarters and Hanger Orthopedic Group, and will lose CoStar later this year when it relocates its headquarters to the District.
The Bethesda business district's high vacancy rate will probably push any new owner of the former NIH property to offer substantially reduced rents to draw tenants, experts said.
Expansion of the government's role in the nation's financial markets, increased defense spending and the new health-care law are driving its demand for more space. The government is expected to increase its Washington area payroll by as many as 100,000, according to Partnership for Public Service, a nonprofit group that helps the federal government find workers.
"The government spent 2009 planning for the growth. We're going to see the growth materialize in 2010," said Scott Homa, research manager for Jones Lang LaSalle.
The government also is overhauling many of its buildings, making them energy efficient. As a result, several agencies will need to lease space in the commercial market for five years or so during renovations.
For instance, real estate officials said, the GSA plans to lease about 300,000 square feet in the Constitution Square building in NoMa. Several defense agencies will likely need swing space when they begin making security upgrades to their buildings. The Securities and Exchange Commission is expanding next to its headquarters in NoMa, and the FDIC signed a lease in Arlington.
"This is a good time to expand leases," Peck said. "The rates are as low as they're going to be for a while."
European court rules Google's ad model is legal
12:08pm EDT
* Google has not infringed trademark law
* Ads should not confuse customers about origin of goods
* Google, Louis Vuitton both claim victory
* LVMH shares up 0.9 percent, Google down 1.8 percent (Adds Google shares, updates LVMH shares, adds Google policy on counterfeiting)
By Michele Sinner and Georgina Prodhan
LUXEMBOURG/LONDON, March 23 (Reuters) - Europe's highest court ruled Google Inc <GOOG.O> did not infringe trademark law by selling keywords to trigger ads after Louis Vuitton <LVMH.PA> and others said the practice undermined their brands.
The Court of Justice of the European Union said on Tuesday advertisers were free to buy keywords identical to trademarks of rivals as long as consumers were not confused on the provenance of goods and services by the way ads were displayed online.
The court said that in cases where ads could confuse consumers, brand owners should invoke their rights against the advertisers concerned, not against Google -- unless Google failed to act on a complaint or actively manipulated keywords.
The ruling validates the AdWords paid-search business at the core of Google's $23 billion online advertising operations, as well as the way competitors like Yahoo! Inc <YHOO.O> sell ads, and gives brand owners a way to protect their trademarks.
"It's a good decision in large parts," said Fabian Ziegenaus, an intellectual property lawyer at Linklaters.
"It does not forbid Google per se to sell trademark keywords, so the business model is not at stake, and brand owners are also protected through the decision."
Advertisers often buy brand names of their competitors as keywords to trigger their own ads. Google says the practice is in the interest of consumers, who do not want their search results to be limited to a single brand.
Brand owners can also bid for their own brand names as keywords and the order in which sponsored links are displayed online is determined mainly through this auction process.
Google used to block advertisers from buying others' brand names as keywords but changed its policy in North America in 2004 and four years later extended that to Britain and Ireland.
It says it will honour valid complaints from brand owners and prevent their rivals from using a trademarked keyword in their ad text.
VICTORY CLAIMS
Both Google and LVMH, the world's biggest luxury-goods group, claimed the court's decision as a victory.
"Trademarks ... are key for companies to market and advertise their products and services. But trademark rights are not absolute," wrote Google's senior litigation counsel for Europe, Harjinder S. Obhi (googlepolicyeurope.blogspot.com).
"We believe that user interest is best served by maximising the choice of keywords, ensuring relevant and informative advertising for a wide variety of different contexts."
LVMH Vice Chairman Pierre Gode told Reuters: "We are very happy with the decision. We consider the decision is very important as the liability of advertisers is well established."
LVMH shares were up 0.9 percent at 87.60 euros at 1603 GMT. Google shares were down 1.8 percent at $547.28 on the Nasdaq.
The ruling will, however, make it more complicated for brand owners to pursue legal complaints, as they will have to go after advertisers one by one.
"It's a bit of a disappointment for the brand owners because they're going to have to police their brand in a more active way than they'd have to do if it were just Google they had to deal with," said John Mackenzie, partner at law firm Pinsent Masons.
The summary of the court judgement did not explicitly address the issue of counterfeit goods, but it did offer more clarity than expected on the misuse of trademarks in search results displayed to consumers.
"If the trademarks are actually used in the results that are shown to users and the advertiser does not own the trademark, that is likely to be deemed infringement," said Thomas Vinje, a partner at Clifford Chance specialising in European Union and intellectual property (IP) law.
"That would seem to defeat counterfeiters ... that would be to the advantage of the trademark owners," he said.
The European Brands Association, which represents 1,800 brand companies in 22 countries, said: "By confirming trademark rights online and holding sellers of keywords liable for illicit material, such as counterfeits, this ruling seems positive."
Google says it investigates complaints and may disable ads that promote counterfeit goods and/or terminate the advertiser.
The court said the matter of whether consumers were likely to be confused by the way search results were displayed was a matter for national European courts to decide case by case. The LVMH case, for example, will now go back to France's top court.
LVMH scored a victory last month when a Paris tribunal found eBay Inc <EBAY.O> guilty of misleading consumers by using misspelt versions of its brand as search engine keywords to redirect users to eBay website links. [ID:nLDE61A2V2]
National courts guided by the principles in Tuesday's ruling will also have to decide whether in fact Google, eBay and others are as passive as they appear to be in the administration of their automated services.
If they are found to take a more active role, they will not be exempt from liability. "There are potential traps here for Google and eBay and all other Internet providers," said Nicola Dagg, head of IP for law firm Allen & Overy in London.
Several cases brought by brand owners are pending against advertisers at the ECJ, the first of which will be ruled on this week. Google also faces eight cases in the United States over the sale of trademarked keywords. (Additional reporting by Foo Yun Chee in Brussels and Alexandria Sage in San Francisco; Editing by David Holmes, Sharon Lindores and Matthew Lewis)
March 14, 2010
Chinese Leader Firmly Defends
Currency and Trade Policies
BEIJING — Premier Wen Jiabao
sharply defended China’s
currency and trade policies on Sunday against what he called foreign
“finger-pointing,” charging instead that the developed world seeks to
force unfair changes in those policies “just for the purposes of
increasing their own exports.”
Mr. Wen’s remarks, which echoed a rebuke on Thursday by one of China’s
central bankers, were perhaps the sharpest yet in a brewing disagreement
between Beijing and Washington over the two nations’ economic
positions.
In a more than two hour news conference at the close of China’s annual
legislative session, Mr. Wen repeated that China will keep its currency,
the
renminbi, “basically stable” despite calls by the United States and
other developed nations to let its value increase.
He also repeated the concerns he voiced a year ago, at China’s last
legislative session, that the United States is failing to rebuild its
own economy and maintain the value of the dollar. Protecting the dollar,
which dropped sharply since the global crisis began in late 2008, is a
matter of “national credibility” for the United States, he said.
“Any fluctuation in the value of the U.S. currency is a big concern for
us,” he said. “I hope the United States will take concrete steps to
reassure investors. It is not only in the interests of the investors,
but also the United States itself.”
Chinese leaders fear that the United States’ vast budget deficits will
lead to inflation that effectively devalues the dollar, and thus the
value of China’s vast foreign-currency reserves. Those reserves exceeded
$2.4 trillion at the end of 2009, with nearly $900 billion of that in
dollar-denominated Treasury bills.
Mr. Wen’s most pointed remarks, however, were aimed at critics of
China’s economic policies, led by the United States. Those critics
accuse China of keeping the value of its currency artificially low, so
that its exports will remain cheap compared to other nations’ competing
products. That boosts China’s economy, but at the expense of other
trading partners, they say.
China has pegged the renminbi to the declining value of the dollar since
the economic crisis began in late 2008. Were it to let the market judge
the renminbi’s value, critics say, the currency — and the cost of
Chinese products — would rise.
In Sunday’s news conference, Mr. Wen bluntly rejected that view.
Instead, in remarks that seemed aimed at the United States, he accused
unnamed competitors of trying to bail out their own slumping economies
by hamstringing the Chinese juggernaut.
“I understand some economies want to increase their exports,” he said,
“but what I don’t understand is the practice of depreciating one’s own
currency and attempting to force other countries to appreciate their own
currencies, just for the purpose of increasing their own exports.”
That amounts to trade protectionism,
he said, and “all countries should be fully alarmed by such
developments.”
Some economic analysts were struck by the comments.
“I think it’s my first time hearing government officials saying that.
Basically, Premier Wen said it’s a kind of protectionism to ask other
countries to appreciate their currency and depreciate their own
currency,” Shen Minggao, the chief China economist for Citibank in Hong
Kong, said in a telephone interview. “In that sense, it’s a new
understanding of currency policies.”
Mr. Wen argued that the renminbi is not unfairly valued, citing
government calculations that suggested that, measured in real terms,
China’s currency had actually risen in value at the height of the
economic crisis.
One leading Chinese economist, Bai Chong-En of Beijing’s Tsinghua
University, said in an interview on Sunday that for a broad range of
technical reasons, he does not believe that the renminbi is seriously
undervalued. But he also suggested that Western jawboning to revalue the
currency is having the opposite effect.
“The greater the outside pressure, the more difficult it is for the
Chinese government to raise the exchange rate, and the more difficult it
is for the Chinese people to accept a revaluation of the Chinese
currency,” he said. “People don’t like to be forced to change things.
They have be willing to do it.”
In his wide-ranging news conference, which drew on both Chinese and
foreign questioners, Mr. Wen repeated some boilerplate government
positions — China is an underdeveloped nation that will need a century
or more to reach advanced status, he said — and a few new ones.
Addressing a chorus of complaints by foreign investors, he said China
will “put in place institutional arrangements to level the playing
ground” for foreign companies in China, and promised to personally meet
with foreign business leaders during his final years in office. Some of
China’s economic stimulus measures, such as subsidizing purchases of new
automobiles and home appliances, applied to products by foreign as well
as domestic manufacturers, he noted.
He also said that he had been excluded from a crucial meeting of world
leaders at last year’s Copenhagen conference on climate change, and had not deliberately
skipped the meeting, as some at the conference charged. Mr. Wen’s
absence from that session, which was attended by President
Obama and other leaders, has been touted by critics as a symbol of
China’s intransigence on climate issues at the conference, which ended
without reaching many of its key goals.
“Why was China not notified of this meeting? So far no one has given us
any explanation about it, and it still is a mystery,” he said.
Mr. Wen’s news conference was broadcast nationally, but in Beijing, that
reply and several following minutes of the broadcast were abruptly cut
off by what was described as a loss of the television signal.
A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.
Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.
“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”
An almost identical advisory to the one being sent out can be read on page 22 of Citbank’s Client Manual effective January 1, 2010, which can be read here from Citibank’s own website.
“We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts. We currently do not exercise this right and have not exercised it in the past,” states the manual.
According to the Future of Capitalism blog, Citigroup originally claimed that the warning was only sent nationwide as a result of a mistake, but that the measures do apply to account holders in Texas.
However, in a statement, Citigroup confirmed that they had reserved the right to impose the new 7 day rule on all account holders nationwide, but claimed they had no plans to enforce it. The bank stated that they had been forced to enact the new policy as a result of federal regulations.
“When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future,” reads a statement released by the bank.
As we reported back in 2008, the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000, only has about $50 billion to “insure” about $1 trillion in assets across the nation’s financial institutions.
This revelation prompted fears that an accelerating amount of bank closures could absorb FDIC funds and leave holders of money market and traditional savings accounts exposed.
The euro will face bigger tests than Greece
By George Soros Published: February 21 2010 18:40 | Last updated: February 21 2010 18:46
Otmar Issing, one of the fathers of the euro, correctly states the principle on which the single currency was founded. As he wrote in the FT last week, the euro was meant to be a monetary union but not a political one. Participating states established a common central bank but refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in the Maastricht treaty and has since been rigorously interpreted by the German constitutional court. The euro was a unique and unusual construction whose viability is now being tested.
The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro. Mr Issing admits that he was among those who believed that “starting monetary union without having established a political union was putting the cart before the horse”.
The European Union was brought into existence by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient and require further steps in due course. But for various reasons the process gradually ground to a halt. The EU is now largely frozen in its present shape.
The same applies to the euro. The crash of 2008 revealed the flaw in its construction when members had to rescue their banking systems independently. The Greek debt crisis brought matters to a climax. If member countries cannot take the next steps forward, the euro may fall apart.
The original construction of the euro postulated that members would abide by the limits set by Maastricht. But previous Greek governments egregiously violated those limits. The government of George Papandreou, elected last October with a mandate to clean house, revealed that the budget deficit reached 12.7 per cent in 2009, shocking both the European authorities and the markets.
The European authorities accepted a plan that would reduce the deficit gradually with a first instalment of 4 per cent, but markets were not reassured. The risk premium on Greek government bonds continues to hover around 3 per cent, depriving Greece of much of the benefit of euro membership. If this continues, there is a real danger that Greece may not be able to extricate itself from its predicament whatever it does. Further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt-to-GNP ratio. Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.
The situation is aggravated by the market in credit default swaps, which is biased in favour of those who speculate on failure. Being long CDS, the risk automatically declines if they are wrong. This is the opposite of selling short stocks, where being wrong the risk automatically increases. Speculation in CDS may drive the risk premium higher.
Recognising the need, the last Ecofin meeting of EU finance ministers for the first time committed itself “to safeguard financial stability in the euro area as a whole”. But they have not yet found a mechanism for doing it because the present institutional arrangements do not provide one – although Article 123 of the Lisbon treaty establishes a legal basis for it. The most effective solution would be to issue jointly and severally guaranteed eurobonds to refinance, say, 75 per cent of the maturing debt as long as Greece meets its targets, leaving Athens to finance the rest of its needs as best it can. This would significantly reduce the cost of financing and it would be the equivalent of the International Monetary Fund disbursing conditional loans in tranches.
But this is politically impossible at present because Germany is adamantly opposed to serving as the deep pocket for its profligate partners. Therefore makeshift arrangements will have to be found.
The Papandreou government is determined to correct the abuses of the past and it enjoys remarkable public support. There have been mass protests and resistance from the old guard of the governing party, but the public seems ready to accept austerity as long as it sees progress in correcting budgetary abuses – and there are plenty of abuses to allow progress.
So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one? It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised eurobond market would be desirable. The question is whether the political will for these steps can be generated.
The writer is chairman of Soros Fund Management and author of the Soros Lectures, published by PublicAffairs this month
Moody’s warns US of credit rating fears
By Michael Mackenzie in New York and Gillian Tett in London
Published: February 3 2010 19:53 | Last updated: February 3 2010 19:53
In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”.
Steven Hess, senior credit officer at Moody’s, said the deficits projected in the budget outlook presented by the Obama administration outlook this week did not stabilise debt levels in relation to gross domestic product.
“Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” the rating agency added in an issuer note.
This week, the White House forecast a $1,565bn budget deficit for 2010, which represents 10.6 per cent of gross domestic product and is the highest such ratio of debt to GDP since the second world war.
While the budget gap is forecast to fall to about 4 per cent by 2013, it is based in part on economic growth not falling below government expectations, Congress agreeing to tax rises and a spending freeze on non-security discretionary spending.
Crucially, projections of the overall debt-to-GDP ratio for the US are seen rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020.
Moody’s, however, says this understates the overall US debt level.
“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 per cent in 2020.”
The issue of sovereign risk dominated many discussions in the Davos World Economic Forum last week. While much attention focused on the fiscal crisis in Greece, considerable concern was also voiced about the outlook for countries such as the US and UK.
“Everyone has reason to be concerned about the US economy right now and the US dollar,” said Tony Tan, deputy head of the Government of Singapore Investment group. “We still think that the US economy is the most diversified and resilient in the world, but it is going through a difficult time.”
At the heart of investor concerns is whether countries such as the US with its rising debt burdens has the political will, or the sense of consensus, to take decisive measures to cut debt.
Some investors at Davos suggested it might be helpful if the credit rating agencies were to step up their threats about a potential future downgrade in countries such as the US and UK, since it would force politicians to act – and turn the issue into an election topic.
US treasury bonds were relatively steady on Wednesday with the yield on the 10-year note rising 3 basis points to 3.67 per cent.
Beware the 4 new asset bubbles
By Shawn Tully, senior editor at largeJanuary 25, 2010: 3:01 PM ET
NEW YORK (Fortune) -- Here we go again.
Less than two years after the housing market collapsed, the U.S. economy is threatened by a new bubble in asset prices. This time, four billowing balloons are hovering: two commodities -- gold and oil -- stocks, and government bonds.Don't be fooled into thinking that last week's 5% drop in the S&P, and the recent sell-off in oil, remotely makes them fairly valued, let alone bargains. Equities and commodities, as well as Treasuries, which actually rallied as stocks dropped, still have a long way to fall. The reason: They've already seen huge run-ups that put their prices far above their historic averages, and far above the levels justified by fundamentals.
Two examples: Most companies can't possibly grow earnings fast enough to support their lofty valuations, and oil and gold are so expensive that we'll see what high prices always bring, a surge in new supply. That makes a price-pounding glut inevitable.
Since the start of 2009, oil has returned to the danger zone by jumping 63% to $75 a barrel, and gold has risen more than 20% to set astounding new records by climbing above $1,100 an ounce. After briefly returning to historically normal valuations in March, stocks are now selling at price-to-earnings multiples 40% above their historic range of 14, and 10-year Treasuries are so pricey that they yield 1.5% less than they did in 2007.
What's causing this resurgence of speculative fervor? One view blames the same policy that caused the real estate rampage -- incredibly low interest rates that are flooding the banks with cheap funds that, in theory, are available for loans. (The current Fed target rate is between 0 and 0.25%.)
"Investors can borrow at extremely low rates to buy assets," says Brian Wesbury, a monetary specialist at mutual fund manager First Trust. "So they're using cheap debt to bid up prices. The Fed's expansionary policies are making assets look a lot less risky than they really are."
Other prominent economists dispute that we're in bubble territory, at least right now. Allan Meltzer, the distinguished monetarist at Carnegie Mellon, argues that even though banks are loaded with cheap money, they aren't lending -- which is why we have a credit crunch. "I would be a lot more concerned if loan demand were higher," says Meltzer.
The one asset that definitely isn't bubbling is housing. There, prices have fallen to a level where new buyers buy a house for the same total monthly cost as rental. That's gravity operating.
So how do you spot a bubble? My view is that we're now seeing the same signs that exposed the frenzy in real estate: prices flying far above their historic averages, measured either in inflation-adjusted dollars (commodities) or as a ratio of the income they produce (stocks and Treasuries). Watch for gravity to take over, just as it did in housing.
Treasuries
The rate on the 10-year Treasury is now a mere 3.6%, well below the 5.5% rate that it averaged between 1993 and 2007, a period where inflation ran at an annual 3% clip, meaning that the "real rate" after inflation, stood at about 2.5%.
So let's assume that future inflation also averages 3%, about where it stood in the second half of 2009. At today's prices, Treasuries are offering a real yield of just 0.6% -- 1.9 points below our 14-year average.
But as the economy recovers and the threat of inflation causes the Fed to tighten monetary policy by raising rates, the yield could rise to 5.5%, handing investors a big loss. Reminder: When yields rise, bond prices fall.
Yet even that scenario is optimistic. Given the huge deficits from the bailouts, it's likely that investors will want a far bigger cushion for expected inflation -- which suggests, says Wesbury, that the yield on 10-year bills could go over 6% in 2011.
Oil
At around $75 a barrel, oil may look like a bargain compared to the record of $147 in July 2008 (see editor's note). But we've simply moved from an immense bubble to a moderate one.
For oil, as in all commodity markets, the highest-cost unit that customers are willing to buy to "clear the market" sets the price. Indeed, prices can go far above cost for short periods, since it takes time for producers to drill new wells or because they hoard inventories.
So how much are oil companies paying to produce the world's most expensive barrels of oil? A good estimate is $55 to $60 a barrel. That's what it costs Anadarko Petroleum (APC, Fortune 500) to extract oil from deep wells in the Gulf of Mexico, according to Anadarko CEO Jim Hackett.
Hence, the world's highest-cost producers are now earning 30% to 40% margins. It won't last; to take advantage of the prices, oil companies will ramp up production, and that extra supply will cause prices to fall back into the $55 range, or even lower.
Gold
Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.
Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.
The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.
When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.
Stocks
Let's assume that investors want a 10% return from stocks (a 7% real return plus 3% gains from inflation). But at current prices, there is no way that the S&P can deliver those kind of gains in future years.
Here's why: Think of the S&P as one company that provides a total return in two components, a dividend yield and a capital gain. Together, the two should equal 10%. But the two are inversely correlated. The lower the dividend yield, the higher the earnings growth rate must be to get you to that 10%. When yields are extremely low, those growth rates become mathematically impossible.
Right now, the P/E multiple for the S&P is an extremely high 20, based on a formula developed by economist Robert Shiller that removes the constant gyrations that can under or overstate the ratio, and the dividend yield is just over 2%. So to hit that 10%, earnings must rise 8% -- assuming 3% inflation, 5% annually in real terms.
But earnings tend to track GDP, which rises about 3% a year over long periods, though far more slowly in a recession. So 3% real GDP growth isn't nearly enough to lift profits 5%. That implies that stock prices must drop sharply: A fallback to their historic P/E of around 14 would require a 29% correction, taking the S&P from its current level of 1,092 to around 770.
"Stocks will disappoint us if we buy them when they're expensive and delight us if we buy them when they're cheap," says Rob Arnott, chief of asset manager Research Affiliates. Now, they're extremely expensive, and destined to disappoint.
Dollar Reaches Breaking Point as Banks Shift Reserves
By Ye Xie and Anchalee Worrachate
Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.
“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”
Sliding Share
The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.
America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 75.77 last week, the lowest level since August 2008 and down from the high this year of 89.624 on March 4. The index, at 76.431 today, is within six points of its record low reached in March 2008.
Foreign companies and officials are starting to say their economies are getting hurt because of the dollar’s weakness.
Toyota’s ‘Pain’
Yukitoshi Funo, executive vice president of Toyota City, Japan-based Toyota Motor Corp., the nation’s biggest automaker, called the yen’s strength “painful.” Fabrice Bregier, chief operating officer of Toulouse, France-based Airbus SAS, the world’s largest commercial planemaker, said on Oct. 8 the euro’s 11 percent rise since April was “challenging.”
The economies of both Japan and Europe depend on exports that get more expensive whenever the greenback slumps. European Central Bank President Jean-Claude Trichet said in Venice on Oct. 8 that U.S. policy makers’ preference for a strong dollar is “extremely important in the present circumstances.”
“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks. China is America’s largest creditor.
Dollar’s Weighting
Developing countries have likely sold about $30 billion for euros, yen and other currencies each month since March, according to strategists at Bank of America-Merrill Lynch.
That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.
“The diversification out of the dollar will accelerate,” said Fabrizio Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People are buying the euro not because they want that currency, but because they want to get rid of the dollar. In the long run, the U.S. will not be the same powerful country that it once was.”
Central banks’ moves away from the dollar are a temporary trend that will reverse once the Fed starts raising interest rates from near zero, according to Christoph Kind, who helps manage $20 billion as head of asset allocation at Frankfurt Trust in Germany.
‘Flush’ With Dollars
“The world is currently flush with the U.S. dollar, which is available at no cost,” Kind said. “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency.”
The median forecast in a Bloomberg survey of 54 economists is for the Fed to lift its target rate for overnight loans between banks to 1.25 percent by the end of 2010. The European Central Bank will boost its benchmark a half percentage point to 1.5 percent, a separate poll shows.
America’s economy will grow 2.4 percent in 2010, compared with 0.95 percent in the euro-zone, and 1 percent in Japan, median predictions show. Japan is seen keeping its rate at 0.1 percent through 2010.
Central bank diversification is helping push the relative worth of the euro and the yen above what differences in interest rates, cost of living and other data indicate they should be. The euro is 16 percent more expensive than its fair value of $1.22, according to economic models used by Credit Suisse Group AG. Morgan Stanley says the yen is 10 percent overvalued.
Reminders of 1995
Sentiment toward the dollar reminds John Taylor, chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, of the mid-1990s. That’s when the greenback tumbled to a post-World War II low of 79.75 against the yen on April 19, 1995, on concern that the Fed wasn’t raising rates fast enough to contain inflation. Like now, speculation about central bank diversification and the demise of the dollar’s primacy rose.
The currency then gained 26 percent versus the yen and 25 percent against the deutsche mark in the following two years as technology innovation increased U.S. productivity and attracted foreign capital.
“People didn’t like the dollar in 1995,” said Taylor, whose firm has $9 billion under management. “That was very stupid and turned out to be wrong. Now, we are getting to the point that people’s attitude toward the dollar becomes ridiculously negative.”
Dollar Forecasts
The median estimate of more than 40 economists and strategists is for the dollar to end the year little changed at $1.47 per euro, and appreciate to 92 yen, from 90.38 today.
Englander at London-based Barclays, the world’s third- largest foreign-exchange trader, predicts the U.S. currency will weaken 3.3 percent against the euro to $1.52 in three months. He advised in March, when the dollar peaked this year, to sell the currency. Standard Chartered, the most accurate dollar-euro forecaster in Bloomberg surveys for the six quarters that ended June 30, sees the greenback declining to $1.55 by year-end.
The dollar’s reduced share of new reserves is also a reflection of U.S. assets’ lagging performance as the country struggles to recover from the worst recession since World War II.
Lagging Behind
Since Jan. 1, 61 of 82 country equity indexes tracked by Bloomberg have outperformed the Standard & Poor’s 500 Index of U.S. stocks, which has gained 18.6 percent. That compares with 70.6 percent for Brazil’s Bovespa Stock Index and 49.4 percent for Hong Kong’s Hang Seng Index.
Treasuries have lost 2.4 percent, after reinvested interest, versus a return of 27.4 percent in emerging economies’ dollar- denominated bonds, Merrill Lynch & Co. indexes show.
The growth of global reserves is accelerating, with Taiwan’s and South Korea’s, the fifth- and sixth-largest in the world, rising 2.1 percent to $332.2 billion and 3.6 percent to $254.3 billion in September, the fastest since May. The four biggest pools of reserves are held by China, Japan, Russia and India.
China, which controlled $2.1 trillion in foreign reserves as of June 30 and owns $800 billion of U.S. debt, is among the countries that don’t report allocations.
“Unless you think China does things significantly differently from others,” the anti-dollar trend is unmistakable, Englander said.
Follow the Money
Englander’s conclusions are based on IMF data from central banks that report their currency allocations, which account for 63 percent of total global reserves. Barclays adjusted the IMF data for changes in exchange rates after the reserves were amassed to get an accurate snapshot of allocations at the time they were acquired.
Investors can make money by following central banks’ moves, according to Barclays, which created a trading model that flashes signals to buy or sell the dollar based on global reserve shifts and other variables. Each trade triggered by the system has average returns of more than 1 percent.
Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’s largest bond fund, said in June that dollar investors should diversify before central banks do the same on concern that the U.S.’s budget deficit will deepen.
“The world is changing, and the dollar is losing its status,” said Aletti Gestielle’s Fiorini. “If you have a 5- year or 10-year view about the dollar, it should be for a weaker currency.”
Bernanke Says Jobless Rate May Be Above 9% in 2010
By Scott Lanman
Oct. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said U.S. economic growth next year probably won’t be strong enough to “substantially” bring down the jobless rate, which may remain above 9 percent at the end of 2010.
“Most forecasters including the Fed are currently looking at growth in 2010, but not growth so rapid as to substantially lower the unemployment rate,” Bernanke said at a House Financial Services Committee hearing today in Washington. Growth of 3 percent means the rate would “still probably be above 9 percent by the end of 2010,” Bernanke said.
Fed policy makers said Sept. 23 they plan to keep the benchmark interest rate near zero for “an extended period,” suggesting Bernanke may not withdraw the central bank’s unprecedented monetary stimulus until he secures a recovery.
“Is there anything else we should be doing to make sure that we bring the unemployment rate more quickly?” asked Representative Leonard Lance, a Republican from New Jersey. Bernanke replied, “I don’t have any magic bullets to offer. If I did, I would have offered them by now.”
The former Princeton University economist said one of his top concerns is the “exceptionally high” number of people out of work for more than six months, who are at risk of losing their job skills.
Bernanke’s comments mark little change from the most recent projections of Fed policy makers, in June, for the jobless rate to average 9.5 percent to 9.8 percent in the fourth quarter of 2010. Officials predicted economic growth of 2.1 percent to 3.3 percent at the time.
Tightening Credit
Some Fed officials may not want to wait for unemployment to decline before tightening credit, with the Fed’s main interest rate in a range of zero to 0.25 percent since December.
In an interview today, Richmond Fed President Jeffrey Lacker said the central bank will need to raise interest rates when the economic recovery is “firmly” in place, even if unemployment lingers near 10 percent.
“I think the growth outlook, particularly the consumer spending outlook, are more fundamental than labor-market conditions,” he said.
Bernanke said at the hearing that the commercial real estate market, while posing “a very serious problem,” is unlikely to cause another financial crisis.
“We are concerned both because the fundamentals are weakening, and because the financing situation is bad,” Bernanke said. Loans may cause “a lot of stress” for “small and regional banks,” he said.
Watch Carefully
Asked by Representative Gregory Meeks, a Democrat from New York, if there’s a “crisis brewing,” Bernanke said, “I don’t think so, but we’ll have to watch it carefully.”
The Fed in August extended by six months an emergency program aimed at cushioning the commercial real-estate industry from rising defaults and falling prices. So far, it’s failed to meet the goal of supporting issuance of new commercial mortgage backed securities.
Bernanke said he doesn’t see an “immediate risk” to the U.S. dollar’s status as the world’s main reserve currency. Asked in the hearing to comment on remarks this week by World Bank President Robert Zoellick, Bernanke said he also agrees with the official that “if we don’t get our macro house in order, that that will put the dollar in danger and that the most critical element there is long-term fiscal stability.”
Reserve Status
Asked about the effect of losing reserve status or the rise of a possible “super-currency,” Bernanke said such changes “would weaken the dollar clearly, and we would have to watch for any inflationary consequences from that.”
“But again, I want to reiterate that I don’t see this as a near-term risk, so long as we as a country take the appropriate steps to manage our fiscal position and keep inflation low,” he said.
In Bernanke’s prepared testimony, the Fed chief told lawmakers that protecting consumers of financial services is “vitally important,” while omitting prior criticism of an Obama administration proposal to shift such powers from the Fed to a new agency. “Strong consumer protection” helps preserve savings and promote confidence in financial firms and markets, he said.
Bernanke didn’t discuss the proposal for a separate agency in the testimony, after saying in July that there would be disadvantages to creating one. That may soften a clash with Representative Barney Frank, the panel’s chairman, who said at a hearing yesterday that the Consumer Financial Protection Agency must be created because the Fed and other bank regulators did little to police lending abuses.
“I wouldn’t pretend to tell Congress what to do” on a consumer agency, Bernanke said under questioning.
by P.Parameswaran P.parameswaran Thu Sep 24, 7:45 am ET
PITTSBURGH, Pennsylvania (AFP) – The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.
The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis.
"Though not clear how the plan would be enforced, it would involve measures such as the US cutting its deficits and saving more, China reducing its reliance on exports and Europe making structural changes to boost business investment," analysts at French bank Societe Generale said in a report.
Some argue that the financial crisis resulted from imbalances between savings and investment in major economies, which have led to large current deficits, as evident in the United States, and surpluses, as enjoyed by China.
Beijing was the first to call for a new global currency as an alternative to the US dollar as the US deficit rocketed -- the White House estimates it could reach nine trillion dollars over a decade.
Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country's huge US bond holdings now worth more than 800 billion dollars, making it the largest creditor to the United States.
Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world's largest, raised the stakes by calling for a new reserve currency in place of the dollar.
He wanted the new reserve unit to be based on the SDR, a "special drawing right" created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.
"These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own," said Richard Cooper, a professor of international economics at Harvard University.
But he said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF's synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.
"The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn't a feature of many other economies," said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.
Some groups, he said, were buying euros and other currencies from time to time, "but not in amounts that threaten the dollar's primacy."
Even the Chinese are stuck with nearly a trillion dollars worth of US bonds and are not likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets, Stelzer said.
But what is baffling analysts is that a key UN agency -- the United Nations Conference on Trade and Development, or UNCTAD -- has joined the chorus of calls for a new reserve currency.
An UNCTAD report this month endorsed a proposal that IMF-issued SDRs "could be used to settle international payments."
Until the current global economic crisis, SDRs issued by the IMF have been used by IMF member nation states "primarily as a reserve account to support international trade transactions, not as an alternative international currency available to settle international debt transactions in danger of default," said political scientist Jerome Corsi in "Red Alert," a global financial newsletter.
China, meanwhile, continues to flex its muscle.
It has proposed that the G20 economies consider setting up an international wealth fund that would invest a portion of its members' current-account surpluses in developing economies.
"These comments reinforce their desire to diversify out of dollars and to encourage other nations to do so as well," said Kathy Lien, chief strategist for Global Forex Trading.
A few Chinese deals were recently seen accepting payment in the currency of the buyer rather than in dollars, especially with Brazil, which the Asian giant is wooing as a future oil supplier.
In addition, China -- the first nation to sign an agreement to buy IMF bonds -- took the unsual step of paying for the papers equivalent of 50 billion dollars with its yuan currency rather than dollars, which Beijing uses for much of its trade and other foreign transactions.
Carl Weinberg, chief economist of High Frequency Economics, said he was surprised by the move but did not see it having any major impact on the dollar.
"The transaction can now be clearly seen as a political move by Beijing to get more traction in the governance of the IMF, not as an effort by the PBOC (Chinese central bank) to reduce the share of dollars in its reserve asset," he said.
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