It seems that Bernanke's plan to help the recession through sparking inflation is already showing signs of success. A hint to this is found through assessing the bond purchases over the last month or so by investors. Investors are paying eight times more than in April for options on interest-rate swaps that protect against rising yields relative to those that bet on them falling; this is an indicator since bonds that compensate for higher consumer prices also show heightened inflation expectations.
It will be interesting to see whether inflation expectations reach the consumer market and spark people to increase their purchases over the next couple months in an attempt to avoid losing value on their money.
Wednesday, November 17, 2010
One Way to Trim Deficit- Cultivate Growth
When there was a large deficit in the 1980s, the presidents in future office raised taxes to fix this. The economy grew rapidly than expected during this time plus the increase in taxes were the reasons for the surplus. This fast growth pushed up incomes and caused more tax revenue to flow into the Treasury. Even though the deficits are very large now, growth could still make a big difference. They are saying that if the economy grew one half of a percentage point faster than forecast each year over the next two decades, the country would have to 40-50 percent less deficit cut than now.
The point that is made is that the best way to make sure that deficit cutting does not affect and cut economic growth as well.
Two ways to do so: put ourselves back into an economic slump by raising taxes and cutting spending or increasing funding to the programs that lead to economic growth...basically raising taxes that do not have a clear record of helping growth and cutting those that do.
Is this plan a good one?
The point that is made is that the best way to make sure that deficit cutting does not affect and cut economic growth as well.
Two ways to do so: put ourselves back into an economic slump by raising taxes and cutting spending or increasing funding to the programs that lead to economic growth...basically raising taxes that do not have a clear record of helping growth and cutting those that do.
Is this plan a good one?
Tuesday, November 16, 2010
Thanksgiving Travel Expected to Jump 11%
With the economy making gains recently, Thanksgiving travel is looking up again. It is expected that 42.2 million people will travel at least 50 miles to get to their respective locations during the five day period from this Wednesday the 24th to Sunday the 28th. This shows an 11% increase in those traveling for Thanksgiving from last year.
Interestingly enough, the travel is expected to increase despite higher gas prices, at almost $0.24 higher then last year--but the article speculated that is because relative to last year families are generally in much better financial situations.
Hopefully the expectations are fulfilled or even surpassed and maybe we will see more trends like this as our economy continues to improve.
Interestingly enough, the travel is expected to increase despite higher gas prices, at almost $0.24 higher then last year--but the article speculated that is because relative to last year families are generally in much better financial situations.
Hopefully the expectations are fulfilled or even surpassed and maybe we will see more trends like this as our economy continues to improve.
Bush Tac Cuts: Cutting Through the Noise
With the Bush tax cuts expiring, everyone is on edge about what decisions are going to be made. Obama, the House, and Senate leaders are scheduled to formally meet to discuss this issue on November 30. Currently, the only thing we are positively aware of is that both parties want to extend the tax cuts for the lower and middle classes. If taxes are raised, many are worried that spending and investment will decline tremendously and right now spending and investment are exactly what we need to stimulate the economy. While extending the tax cuts will increase U.S. debt, the question is whether the long term debt or the immediate stimulation necessary to the economy takes precedence. On the contrary, people are pushed to save right now with the recession just coming to an end and the argument is that the people who have an income of over $200,000 will just save the amount gained from the tax cuts.
UPS Hiring 50,000
With the UPS company seeing holiday shipments up 7.5%, the company plans to hire 50,000 seasonal workers. The UPS Airlines also plans to add 350 daily flights during peak week. The world’s largest package delivery company expects about 430 million deliveries during its peak season, up from 400 million last year as consumer spending rises gradually with a slowly improving economy. In other news, the second largest U.S. package-delivery company, FedEx Corp, expects its holiday shipments likely to rise 11% from last year. According to Adler, online sales have been driving holiday package volume at both companies as shoppers buy more from Web-based retailers as well on Internet sites from traditional chain stores.
Monday, November 15, 2010
Bond Market Defies Fed
Bucking the Federal Reserve's efforts to push interest rates lower, investors are selling off U.S. government debt, driving rates in many cases to their highest levels in more than three months.
The Fed's $600 billion program to buy Treasury bonds began late last week and is kicking into high gear this week, with the central bank buying up tens of billions of dollars of debt.
That should have driven prices up on those bonds and lowered their interest rates, or yields, which move opposite to the price. Instead, yields on almost every Treasury have been rising.
The trend is a potential problem for the economy and the Fed. Rates had fallen sharply for months in anticipation of a Fed buying program, and in a short time much of that effect has been lost, spelling an unwelcome rise in borrowing costs throughout the economy.
That could throw a wrench in what the Fed is trying to accomplish: to use low rates to encourage more borrowing and risk-taking by consumers, businesses and investors, thereby reviving growth.
Still, it is far too early to declare that the Fed's plan is failing, and many rates remain near historic lows.
And recent economic indicators, such as a Monday report on retail sales, suggest the economy continues to recover—which is the Fed's ultimate concern.
"The recent run-up in bond yields is worrying to many," said Dan Greenhaus, chief economic strategist at Miller Tabak, a New York trading firm, but "you need to keep it in context of what happened before the Fed moved."
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The Fed has only begun to put its plan in motion, and many investors are simply cashing out of lucrative bond-market bets they placed in the long prelude to the Fed's announcement of its purchasing program.
Rates in most cases are still far lower than they were in the spring.
Many observers still believe that the power of the Fed's printing press will prove overwhelming and economic growth disappointing. Both forces would eventually drive rates lower.
Still, the recent move in rates has been jarring, raising some market worries that the Fed's program might be ineffective or backfiring. That could damage the Fed's credibility and raise borrowing costs broadly.
The recent move in interest rates may be due partly to the rosier tone of economic data recently, including data released on Monday that showed retail sales at their highest level since August 2008, the month before the fall of Lehman Brothers Holdings Inc. Sales rose 1.2% to $373.1 billion in October, compared with the month before.
If the economy keeps improving, then the Fed's bond-buying program could end sooner than expected. That would be a much happier outcome for the Fed, though most economists still don't expect it.
In an interview conducted last week, the Fed's new vice chair, Janet Yellen, defended the program, given an economic outlook that seemed to portend high unemployment, low inflation and lackluster growth for some time.
The Fed's latest attempt to boost the economy is coming under fire from Republican economists and politicians, who threaten to yank the central bank deeper into partisan politics. Sudeep Reddy, David Weidner and Professor Charles Calomiris of Columbia University discuss. Also, Charles Forelle and Steven Russolillo discuss Caterpillar's purchase of a mining equipment maker and Ireland's push back of EU demands that it agree to a bailout.
"I'm having a hard time seeing where really robust growth can come from," Ms. Yellen told The Wall Street Journal. "And I see inflation lingering around current levels for a long time."
For now, the market seems to be driven mainly by the momentum of investors selling Treasury bonds to take a hefty profit after a rally that began in the spring, gathered steam as the economy weakened this summer and peaked amid talk of a new Fed buying program.
The 10-year Treasury note's yield, which influences most residential mortgage rates, surged on Monday to 2.911%, the highest since Aug. 5. Bond prices and yields move in the opposite direction.
The 10-year note has now more than erased all of the beneficial effects of comments in late-August by Fed Chairman Ben Bernanke in Jackson Hole, Wyo., in which he first hinted at another round of bond-buying.
And on Monday, the yield on the 7-year Treasury note rose to 2.14%, a 2-month high, despite the Fed's buying $7.92 billion in 6- and 7-year Treasury debt in the morning.
Yields were more or less steady while the Fed was buying, but surged through the end of the day.
Several other factors have been working against Treasurys in recent days, including a backlash against the Fed's program overseas and among conservative politicians and economists in the U.S.
Corporate bond issuance has been heavy since the Fed announced its bond-buying plan, which often leads to a temporary selloff in Treasurys.
Moody's Investors Service may have contributed to the punishment late on Monday when it warned that an extension of Bush-era tax cuts, set to expire on Dec. 31, could harm the country's fiscal standing.
Though the tax-cut issue isn't new, and though Moody's said the U.S. credit rating was secure, the bond market is sometimes sensitive to rating-agency comments.
The Fed plans to buy Treasurys every day this week, including 2- to 3-year notes on Tuesday and 8- to 10-year notes on Wednesday. It has committed to buying through the second quarter of 2011.
It also plans to use whatever cash it gets from expiring mortgages on its balance sheet to buy still more Treasurys, taking total purchases closer to $900 billion, according to some estimates.
That, Mr. Greenhaus notes, is more Treasury debt than China owned at the end of August. "Those screaming the end of the bond-market rally might be better served by waiting just a bit longer," he said.
China's 'State Capitalism' Sparks a Global Backlash
BEIJING—Since the end of the Cold War, the world's powers have generally agreed on the wisdom of letting market competition—more than government planning—shape economic outcomes. China's national economic strategy is disrupting that consensus, and a look at the ascent of solar-energy magnate Zhu Gongshan explains why.
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A shortage of polycrystalline silicon—the main raw material for solar panels—was threatening China's burgeoning solar-energy industry in 2007. Polysilicon prices soared, hitting $450 a kilogram in 2008, up tenfold in a year. Foreign companies dominated production and were passing those high costs onto China.
Beijing's response was swift: development of domestic polysilicon supplies was declared a national priority. Money poured in to manufacturers from state-owned companies and banks; local governments expedited approvals for new plants.
In the West, polysilicon plants take years to build, requiring lengthy approvals. Mr. Zhu, an entrepreneur who raised $1 billion for a plant, started production within 15 months. In just a few years, he created one of the world's biggest polysilicon makers, GCL-Poly Energy Holding Ltd. China's sovereign-wealth fund bought 20% of GCL-Poly for $710 million. Today, China makes about a quarter of the world's polysilicon and controls roughly half the global market for finished solar-power equipment.
Western anger with China has focused on Beijing's cheap-currency policy; President Obama blasted the practice at the G-20 summit in Seoul last weekend. Mr. Zhu's sprint to the top points to a deeper issue: China's national economic strategy is detailed and multifaceted, and it is challenging the U.S. and other powers on a number of fronts.
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Central to China's approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. It leverages state control of the financial system to channel low-cost capital to domestic industries—and to resource-rich foreign nations whose oil and minerals China needs to maintain rapid growth.
China's policies are partly a product of its unique status: a developing country that is also a rising superpower. Its leaders don't assume the market is preeminent. Rather, they see state power as essential to maintaining stability and growth, and thereby ensuring continued Communist Party rule.
It's a model with a track record of getting things done, especially at a time when public faith in the efficacy of markets and the competence of politicians is shaken in much of the West. Already the world's biggest exporter, China is on track to pass Japan this year as the second-biggest economy.
Bloomberg News
Charlene Barshefsky, the U.S. trade representative under President Bill Clinton, says the rise of powerful state-led economies like China and Russia is undermining the established post-World War II trading system.
Charlene Barshefsky, who as U.S. trade representative under President Bill Clinton helped negotiate China's 2001 entry into the World Trade Organization, says the rise of powerful state-led economies like China and Russia is undermining the established post-World War II trading system. When these economies decide that "entire new industries should be created by the government," says Ms. Barshefsky, it tilts the playing field against the private sector.
Western critics say China's practices are a form of mercantilism aimed at piling up wealth by manipulating trade. They point to China's $2.6 trillion in foreign-exchange reserves. The U.S. and the European Union have lodged a series of WTO cases and other trade actions targeting Beijing's policies, and hammer China's refusal to let its currency appreciate more quickly, which they argue fuels global economic imbalances.
Top executives at foreign companies have started griping publicly. In July, Peter Löscher, Siemens AG chief executive, and Jürgen Hambrecht, chairman of chemical company BASF SE, in a public meeting between German industrialists and China's premier, raised concerns about efforts to compel foreign companies to transfer valuable intellectual property in order to gain market access.
Some observers think Beijing's vision is rooted in a desire to avenge China's "century of humiliation" that started with the 19th-century opium wars. Such critics believe that China's focus on "indigenous innovation"—nurturing home-grown technologies—entails appropriating others' technology. China's high-speed trains, for instance, are based on technology introduced to China by German, French and Japanese makers.
"The Chinese have shown that if they have the ability to kill your model and take your profits, they will," says Ian Bremmer, president of New York-based consultancy Eurasia Group. His book, "The End of the Free Market," argues that a rising tide of "state capitalism" led by China threatens to erode the competitive edge of the U.S.
So far, though, multinationals aren't staying away, because China remains a vital source of growth for companies whose domestic markets are saturated.
China's strategy echoes the policies Japan employed in its economic rise—policies that also rankled the U.S. But China's sheer scale—its population is 10 times Japan's—makes it a more formidable threat. Also, its willingness in recent decades to open some industries to foreign firms makes its market far more important for global business than Japan's ever was, giving Beijing much greater leverage.
Bloomberg News
China's sovereign-wealth fund bought 20% of GCL-Poly Energy Holding for $710 million. Today, China makes about a quarter of the world's polysilicon and controls roughly half the global market for finished solar-power equipment. A company handout shows a GCL control room.
Chinese leaders have begun to acknowledge the backlash. At the World Economic Forum in Tianjin in September, Premier Wen Jiabao said that the recent debate about China among foreign investors "is not all due to misunderstanding by foreign companies. It's also because our policies were not clear enough."
"China is committed to creating an open and fair environment for foreign-invested enterprises," Mr. Wen said.
The state has always played a big role in China's economy, but for most of the reform era that started in the late 1970s, it retreated as state-owned collective farms were dismantled and inefficient state industrial enterprises closed. Accession to the WTO in 2001 represented a big bet by the leadership on liberalizing markets further. The gamble paid off, with growth rocketing much of the past decade.
But the state is again ascendant. Many analysts say the pace of liberalization has slowed, and point to vast swaths of industry still controlled by state companies and tightly restricted for foreigners. The government owns almost all major banks in China, its three major oil companies, its three telecom carriers and its major media firms.
According to China's Ministry of Finance, assets of all state enterprises in 2008 totaled about $6 trillion, equal to 133% of annual economic output that year. By comparison, total assets of the agency that controls government enterprises in France, whose dirigiste policies give it one of the biggest state sectors among major Western economies, were €539 billion ($686 billion) in 2008, about 28% of the size of France's economy.
European Pressphoto Agency
Chinese Premier Wen Jiabao acknowledges a foreign backlash, but sais Beijing "is committed to creating an open and fair environment for foreign-invested enterprises."
The government's increased involvement in sectors from coal mining to the Internet has spawned the phrase guojin mintui, or "the state advances, the private sector retreats," among market proponents in China. A January report by the Organization for Economic Cooperation and Development said China's economy had the least competition of 29 surveyed, including Russia's. Prominent Chinese economist Qian Yingyi of Peking University has said he worries over what appears to be "a reversal of market-oriented reforms in the last couple of years."
The state's huge role in the economy gives it enormous sway to pursue its policy goals, which are often laid out in voluminous five-year (sometimes 15-year) plans. These relics of the Mao-era command economy are central to the corporate fortunes of Western giants like Caterpillar Inc. and Boeing Co. that rely on the country's market. China is now one of the biggest sources of revenue growth for Caterpillar, and is the biggest buyer of commercial jets outside the U.S., according to Boeing.
One of Beijing's most important goals: wean China off expensive foreign technology. It is a process that began with the "open door" economic policies launched by Deng Xiaoping in 1978 that brought in waves of foreign technology firms. Companies such as Microsoft Corp. and Motorola Inc. set up R&D facilities and helped train a generation of Chinese scientists, engineers and managers.
That process is now in overdrive. In 2006, China's leadership unveiled the "National Medium- and Long-Term Plan for the Development of Science and Technology," a blueprint for turning China into a tech powerhouse by 2020. The plan calls for nearly doubling the share of gross domestic product devoted to research and development, to 2.5% from 1.3% in 2005.
Bloomberg News
Privately held telecommunications equipment maker Huawei Techologies has long had its overseas expansion supported by China Development Bank, which in 2004 extended a five-year, $10 billion credit line and routinely lends money to foreign buyers to finance their purchases of Huawei products.
One area of hot pursuit: green technology. China's "Torch" program fast-tracks industries, attracting entrepreneurs with offers of cheap land for factories, export tax breaks and even a free apartment for three years.
Take the case of Deng Xunming, a China-born U.S. citizen who is a pioneer of America's solar industry and whose innovations light up the first solar-powered billboard on New York's Times Square.
His company, Xunlight Corp., has been nurtured by U.S. financial aid and embraced by politicians eager for the U.S. to win the race to develop new energy technologies. Xunlight has pulled in more than $50 million in state and federal grants, loans and tax credits, partly aimed at bringing needed jobs to Toledo, Ohio, where the company is based.
But two years ago, Mr. Deng, who left China in 1985 to study at the University of Chicago, set up a Xunlight unit on a giant industrial estate near Shanghai. The company now also makes its thin-film solar panels there and employs 100 workers. The panels are exported back to the U.S.
Mr. Deng says he is trying to keep the Chinese operation "low key." It isn't mentioned on Xunlight's website, and Mr. Deng declined to comment on the China factory in an interview. "China will be a good market for the future," he said. "But right now, the bigger market is in Europe. We're putting our attention on the Europe and U.S. market. But meanwhile we're developing efforts for the China market," which could eventually be bigger, he said.
While the state seeks new technology, it also uses control of banking to feed cheap credit to industries it wants to foster. The government sets interest rates for China's bank depositors low relative to rates of growth and inflation. That means Chinese households, through the banks, effectively subsidize the state's industrial darlings.
Privately held telecommunications equipment maker Huawei Techologies Co. has long had its overseas expansion supported by China Development Bank, which in 2004 extended a five-year, $10 billion credit line and routinely lends money to foreign buyers to finance their purchases of Huawei products. Revenue has risen more than 200% in the past five years, and it has become one of the top three telecommunications companies, along with Nokia Siemens Networks and Telefon AB LM Ericsson.
Sprint Nextel Corp. recently excluded Huawei and fellow Chinese telecom company ZTE Corp. from a contract worth billions of dollars, prompted by U.S. fears that the companies have ties to China's military. The Sprint decision was a setback for Huawei in the one major market it has had difficulty penetrating, the U.S., and shows how mounting concerns over China's policies are starting to exact a cost.
Huawei has also faced complaints in Europe that Chinese government backing gives it an unfair advantage. Both Huawei and ZTE have said their equipment poses no threat to U.S. security, and deny benefiting unfairly from government support.
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Associated PressXunlight Corp. has pulled in more than $50 million in state and federal grants, loans and tax credits, partly aimed at bringing needed jobs to Toledo, Ohio, where the company is based and executives gathered in April at a bridge equipped with solar panels. But two years ago, CEO Deng Xunming, second from left, set up a Xunlight unit near Shanghai. The company now also makes its thin-film solar panels there and employs 100 workers. The panels are exported back to the U.S.
For China, the biggest risks may be internal. Some attempts to generate high-tech breakthroughs by fiat have fizzled. A drive to produce a home-grown microprocessor took years to replicate features of those from Intel Corp. and Advanced Micro Devices Inc., whose products had continued to evolve. A Chinese-developed mobile phone technology has yet to gather significant momentum abroad, despite the government forcing China's largest phone company to adopt it.
Longer term, China faces a host of challenges that threaten growth. They include a population that is aging quickly because the one-child policy limited births in recent decades, and environmental damage resulting from the country's breakneck pace of industrialization.
For now, that pace has the West on guard. "Our competition has gotten tougher during a period for the U.S. of profound economic weakness that magnifies any perceived threat," says Ms. Barshefsky, the former U.S. trade representative. There is a "significant and profound—almost theological—question about the rules as they exist."
China Is U.S.'s 'Central Challenge'
WASHINGTON—The U.S. relationship with China will be the "central American challenge going forward," as the U.S. works to redevelop its economy, White House National Economic Council Director Larry Summers said on Monday.
Reuters
Larry Summers at the 2010 meeting of the Wall Street Journal CEO Council in Washington.
"A reading of the long sweep of history suggests that rapidly transforming economies in a rapidly transforming global system produce histories that are not always happy ones," Mr. Summers said at The Wall Street Journal CEO Council. "Our wisdom, their wisdom, the way in which we interact is going to be of the utmost importance."
"Ultimately, there is going to be one thing that is most important, and that is how the world sees the power of our example. That's going to depend on our success in our strategy of domestic renewal," he added.
At the WSJ CEO Council event in Washington, Larry Summers discusses China's economic influence and how it will affect the U.S.'s global standing.
Mr. Summers, who will leave the White House at the end of the year, said China's rising economic and political might presents the central challenge facing the world.
The history of the early 21st century "will be about how the world adjusted to the movement of the theater of history toward China," Mr. Summers said.
Underscoring the tension between the countries, Min Zhu, special advisor for the International Monetary Fund in Washington and former deputy governor of the People's Bank of China, told the same forum that the weight of global GDP is shifting toward China and other fast-growing emerging economies while richer nations still face high debt and weak growth.
Given current trends, emerging markets and developing countries will account for 60% of global gross domestic product in six years, he said. "It is a different world," Mr. Zhu said.
Robert Diamond, head of Barclays PLC, said U.S. businesses could pick up the mantle but lack the confidence to start hiring because of concerns the country isn't on the right path with spending, deficits and taxes.
Meanwhile, China is moving up the value chain into high-tech capital goods and is poised to account for about a third of global manufacturing of advanced machinery and equipment within a decade, from about 8% today, Mr. Zhu said. "China will probably lead a global manufacturing restructuring. That will be a big impact for advanced economies, particularly for economies that want to export tech goods."
Mr. Summers, facing a group of American executives, many of whom are looking to capitalize on overseas growth, ended his remarks with an appeal to think about their role as "citizens."
The last election was partly a reaction against President Barack Obama's policies, Mr. Summers said, but it was also a "an important rejection of elites ... that were seen as more citizens of Davos than of their countries."
Corporate America should "think very hard about their obligations as citizens of this country and to think very hard about how through their activities they can make it work for all of our citizens," Mr. Summers said.
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