The Economix blog at the New York Times describes a new book on the economics of pirates -- The Invisible Hook: The Hidden Economics of Pirates by Peter Leeson. Who knew such a perfect confluence of the interesting and the awesome existed?
It focuses on the heyday of piracy in the late 17th and early 18th century -- back when the Barbary pirates spurred the young United States to its first military engagement, off the coast of Tripoli. The NYT summarizes:
During this age, there seem to have been between 2,000 and 3,000 pirates, which is large relative to the Royal Navy (which had 13,000 seamen) but small relative to the number of movies subsequently made about piracy. The pirates were, unsurprisingly, youngish men (generally in their mid-20s) from England or its colonies. The majority of mischief that has been done throughout history has been done by young people with XY chromosomes. Their ships were often quite large, containing crews that could reach 200 souls, and the profession was lucrative. While merchant seamen earned 25 pounds a month (about $6,000 in current currency), a pirate could earn 4,000 from a single conquest. Mr. Leeson reports that some pirates were earning 100 pounds a month.
Admittedly, piracy was dangerous, but so was all seafaring. Maybe my children are showing good sense in their attraction to the piratical lifestyle. Those high wages meant that, unlike the British navy, pirates rarely had to rely on conscription. Although captured pirates often claimed to be serving against their will, in reality, pirate ships rarely had trouble finding voluntary recruits.
China's reserve currency proposal might be getting the big financial headlines today, but for millions of online games, the People's Republic's crackdown on imaginary gold is a much bigger story.
If you were a level-three dwarf but had insufficient magic points to defeat that nine-headed dragon, what would you do? Many online multiplayer gamers would probably whip out their credit card, buy a few hundred gold pieces for $5 and pump themselves full of magic before venturing into the dragon's lair. Until now.
The practice of intentionally earning and hoarding game currency -- with the ultimate aim of selling it to others for real money -- was declared illegal this week in China, where as much as 80 percent of the world's so-called "gold farming" takes place. The gold farming craze has spawned "an enormous Chinese workforce earning 30 cents an hour playing MMOs and harvesting treasure to supply the major retailers."
In all, InformationWeek reports, nearly $150 million in virtual currency was traded last year. Worldwide, the industry rakes in some $1 billion a year from players eager to make their mark on their favorite fantasy universe online.
Buying gold from the farms might come off as cheating when compared to the honest players who earn gold through their own hard work. But to look at it another way -- isn't this all about entrepreneurial spirit?
Yesterday, the World Bank concluded that Russia will be one of the countries hardest-hit by the recession, including not returning to precrisis levels until 2012. But Russian communists believe that the cure lies in a blast from the past:
Russian communists have put up giant billboards of Soviet dictator Josef Stalin in a southern city, promoting his tough methods as the best remedy for the world economic crisis.
Stalin killed millions of people during his 30 year rule until his death in 1953, but many in recession-hit Russia have grown nostalgic for his strong leadership, and he was voted the third most popular historical figure in a nationwide poll.
"Everybody knows that under Stalin our country achieved the highest rate of economic growth and development in other spheres, and the great victory (over Nazi Germany)," Sergei Rudakov, a senior Communist party official in the town of Voronezh, told Reuters by telephone.
Because what the world economy needs right now is a good ol' fashioned purge.
The New York Times reports:
Two years after [Australian] Prime Minister Kevin Rudd drew worldwide applause for reversing Australia’s longstanding refusal to ratify the Kyoto protocol on global warming, the government’s ambitious plan to change the way Australians use energy is facing major obstacles, raising the prospect of an early election with climate change as the central issue.
Two key points to note here: first, new elections could give the liberal Labor party a serious leg up on the climate change issue and increase the chances for the passage of future green legislation. But if Rudd wants to hold elections and gain that edge before the world meets to talk about climate change in December, that means losing today's battle to win the war.
Second, and more importantly, is this plan as "ambitious" as Australian officials are making it out to be? It proposes a cut in carbon emissions by "at least" five percent of 2000 levels by 2020. Granted, Australia is responsible for only two percent of the world's carbon output, but if it wants to be seen as a leader on climate change (as Rudd allegedly wants), it'll have to do better than that.
From an L.A. Times article on the still atrocious human rights situation in Zimbabwe:
Amnesty International said Thursday that serious human rights abuses continue in Zimbabwe and criticized members of President Robert Mugabe's ruling party, saying they regard violence as a useful political tool."Ending attacks on human rights defenders, lifting restrictions on the media and allowing public protests do not require more money. They only require political will," she said in a statement.
After a six-day trip to Zimbabwe, the group's chief, Irene Khan, dismissed the government's explanation that it lacked the funds to make improvements on human rights.
This raises a question though, which is also very pertinent given the events in Iran this week: is it cheaper to have a dictatorship or a democracy?
At first glance, Kahn's statement makes intuitive sense. Allowing demonstrators to protest, journalists to write what they want, and NGOs to function is cheaper than monitoring and suppressing them. Police states cost money.
But as Paul Collier points out, if you're a dictator, the problem with making your country more democratic is that you might lose. And if you don't want to lose you have to keep your population happy, which generally costs money. Why spend your hard-earned tax revenue/natural resource wealth/foreign aid money on schools and hospitals when you can just buy new batons for your riot police and send the rest to your Swiss bank account?
For what it's worth, this NationMaster table doesn't show much of any correlation between regime type and government spending as percentage of GDP. There are some very expensive totalitarian regimes (Cuba: 57 percent of GDP) and some very cheap ones (Turkmenistan: 13 percent of GDP). Zimbabwe's percentage is quite high, but the fundamentals of the country's economy are so completely screwy that this probably doesn't mean much of anything.
Still, though, I think Kahn's statement is wrong. The Zimbabwean state is currently set up with the primary goals of repressing its citizens and accumulating wealth for elites. Converting it into a democracy whoe goal is promoting the welfare of its citizens is not going to be cheap.
This is not to defend Mugabe's regime or any other authoritarian state. But those of us rooting for democratic change, whether in Harare or Tehran, need to understand the costs, both economic and political.
The United Nations' tally for people around the world suffering from hunger will hit a new milestone this year: one billion, or fully one-sixth of the world's population.
The new data comes from the Food and Agriculture Organization, whose director-general believes hunger represents a grave threat to "world peace and security," the BBC reports:
The UN said almost all of the world's undernourished live in developing countries, with the most, some 642 million people, living in the Asia-Pacific region.
In sub-Saharan Africa, the next worst-hit region, the figure stands at 265 million.
Just 15 million people are left hungry in the developed world"
A combination of the global recession and rising food prices are largely to blame for the increase in world hunger, the UN says.
New U.S. employment numbers out this morning indicate things are getting worse at a less-breakneck pace. A mere 345,000 Americans lost their jobs in the month of May.
The New York Times sunnily reports that the numbers are "a welcome sign that the decline in the job market would not continue forever."
People will say this means the recession is bottoming out. They will call it a green shoot. They will glass-half-full it. Pollyannaism is Pollyannaism.
But the report is dismal: that graph on the front web page of the New York Times shows change, not the absolute unemployment. The employment-to-population ratio is under 60 percent, the underemployment number is 16.4 percent, and unemployment is worse than the provisional numbers used the stress tests.
Plus, a Deutsche Bank report notes, "the length of the workweek declined by 0.1 hour to 33.1 hours, which is the aggregate hour equivalent of an additional loss of about 350k jobs" -- making May look much more like April.
Still, there are signs that even if the employment numbers in the U.S. are really bad, things worse elsewhere. Here's a fascinating graph from Stratfor:
The chart is missing a few key countries, most notably China. (Stratfor says it did not include China because its economy is too different to compare. Fair point.) Stratfor argues the recession is hitting the U.S. much more softly because "the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography."
It makes some sense: each country's economy grows to take advantage of its geography. Russia, with its massive oil and gas reserves, benefited from the massive surge in commodity prices through 2008; it has been hit hard since because the economy is highly dependent on that one industry. The U.S. economy is much more resource- and industry-diverse.
I wonder what Robert D. Kaplan would have to say about all of this...which countries' have advantageous geographies for downturns? Is this why Australia seems to be doing relatively well?
Remember U.S. Treasury Secretary Timothy Geithner's plan to ease the credit crunch, the byzantine "Legacy Loans" program released to much hand-wringing this winter? It was, perhaps, the most ambitious, most confusing, most surprising governmental response to the Great Recession.
The idea was to help price and start a market for mortgage-backed assets on the banks' books. The government would assess and tranch the assets to sell at auctions to public-private investment partnerships; the government would eat the losses if the assets went sour.
Remember hearing about it recently? No?
That's because it's dead in the water, the New York Times reports.
The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.
In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Part of me thinks: goodness, isn't this the best of all worlds for everyone? The banks will be forced to mop up their own mess, and mark down the proper (low but existant) value of these assets at some point. (The i-banks' counterproductive and unethical desire to mismark and misprice concerns me a lot on this point, to be fair.) But if they want to wait for the assets to mature rather than moving them now, spreading their losses out over several years -- that's fine with me.
The government won't have to cajole hedge funds into participating, promising them some oversight concessions in return. That means hedge funds and the like can use their free capital, hopefully, on more productive investments. The government also won't have to subsidize the banks' losses on these assets, leaving those precious funds for other better purposes.
Plus, if the Geithner plan was always in part a confidence thing -- born of the perceived need to reassure banks that the government would not let them fail and would help ease the credit crunch -- this part of the plan seems to have worked. And without costing anything.
Here's looking forward to the other pieces, though.
Despite a recession dramatically affecting some of the biggest and most robust economies in the world, Australia has managed to have an economic improvement. In the fourth quarter, not only did the GDP creep up 0.4 percent while others stalled or fell, but stocks rose and the value of the Australian dollar increased to 82.40 U.S. cents, the highest it's been in several months, thanks to generous government cash handouts intended to stimulate spending.
Craig James, the chief equities economist at Commonwealth Bank of Australia explained:
"Rumors of the death of the Australian economy have been highly exaggerated... Much of the credit for Australia's resilience must be given to the swift actions of the Reserve Bank and government in stimulating our economy."
So even though China is on the verge of buying out a huge portion of the country's natural resources, and its soldiers are the world's pickiest eaters, Australia does seem to be doing something right.
Writing in The Nation, David Cay Johnston takes liberal interventionism to a new level with this modest proposal:
President Obama proposed on May 4 to crack down on offshore tax cheating; that proposal does not go nearly far enough. Instead of settling for a dime on the dollar, as Obama's plan would do, let's get serious about offshore tax cheating, both legalized and criminal. Let's do what we did to halt the imagined threats of communists in Grenada, depose a drug-dealing president in Panama and find those imaginary weapons of mass destruction in Iraq. Let's invade the Caymans!
The islands, which belong to Britain, have no military and just 300 or so police. An invasion force composed of tax lawyers, forensic auditors and a handful of computer technicians could execute a hostile takeover without firing a shot.
The Caymans are not really a country; they are a law firm posing as one. More than 12,000 "companies" operate out of a single building known as Ugland House, home to the law firm Maples & Calder.... There is $1.9 trillion in bank deposits in the Caymans--money actually invested in the United States and other countries but invisible to the IRS.
I could certainly think of less pleasant places to invade. Though if we head down this path, the U.S. should probably start preparing for EU forces to make an amphibious assault on Delaware.
David Rogers/Getty Images
This is one weird commercial:
Yes, that's noted humanitarian and alleged former rock star Bob Geldof (along with physicist Stephen Hawking, feminist scholar Germaine Greer, and businessman Alan Sugar) trying to sell Britons on National Savings & Investments. NS&I is a state-owned savings bank serves as a lender to the British government. It describes itself as a way to "raise cost effective financing for the government and to reduce the cost of government borrowing to the tax payer."
So after more than two decades of raising money for famine relief and pushing for debt cancellation in Africa, Geldof is now raising money for the exchequer to cover its debts. Not sure if that says more about Geldof or about the current state of the British economy, but either way, like I said, weird commercial.
Want to get a sense of just how bad things are? Take a spin on Google Earth.
The above image, pulled today from Vesseltracker.com's Google Earth file, shows container ships languishing off the Singapore coast. Welcome to the largest parking lot on Earth. International Economy explains:
The world's busiest port for container traffic, Singapore saw its year-over-year volume drop by 19.6 percent in January 2009, followed by a 19.8 percent drop in February. As of mid-March 2009, 11.3 percent of the world's shipping capacity, sat idle, a record.
It's a rough time to be an Asian tiger, or to be in the shipping business. The IMF projects that Singapore's economy will shrink significantly in 2009. Globally, bulk shipping rates have dropped more than 80 percent in the past year on weak demand, and orders for new shipping vessels are cratering. In Busan, South Korea, the fifth-largest port in the world, empty shipping containers are piling up faster than officials can manage.
"Things have really started to get bad -- laborers spend their entire day waiting for a call from the docks that they have a job," Kim Sang Cheul, a dockworker at Busan, told Bloomberg. "People spend all day staring at their phone as if staring at it can make it ring. You’re lucky if you get a call."
Green shoots? Not so much.
(For another view of Singapore's port, you can check out Vesseltracker's Microsoft Virtual Earth mashup map.)
Today, U.S. Treasury Secretary Timothy Geithner and President Barack Obama laid out a plan to create and enforce stricter tax regulations for U.S. corporations. Obama's opening salvo from the presser:
Most Americans meet their responsibilities because they understand that it's an obligation of citizenship...and yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs.
He went on to describe the U.S. tax code as "full of corporate loopholes that [make] it perfectly legal for companies to avoid paying their fair share."
That's right. He was talking about "tax havens": not just countries in which major U.S. corporations hide from U.S. taxes, but a big fat open season sign for fire and brimstone metaphors and sword of Damocles swinging. Democratic speechwriters must adore tax havens. They're like the Newt Gingrich of tax policy: always there to beat up.
Rhetorical fury aside, tax havens really do allow U.S. companies to shore up a whole lot of money, money which Obama hopes to use to revamp the U.S.'s healthcare system, among other things. Interesting factoids from the Treasury release:
The closing of three major tax haven loopholes should garner $190 billion in tax revenue for the government in the next ten years.
Another big beneficiary of the changes? Lobbyists. Corporate America isn't going to like this -- and they're going to pay a lot of money to see the repeal of these changes.
Again, very, very bad news for the U.S. economy: after contracting at a 6.3 percent annual rate in the final quarter of 2008, it contracted at a 6.1 percent rate in the first quarter of 2009.
That means the economy shrank 2.6 percent compared with last year's first quarter. It's a point-and-a-half higher annualized rate than economists predicted.
What's most worrisome is that the recession isn't easing at all, yet -- there's no real bottom there. We aren't close to talking about the economy growing again. We're still waiting for it to shrink less quickly.
The only green shoots: economists believe that inventory and production are so anemic that any rise in demand will force businesses to grow -- that would be a good thing. And consumer spending rose 2.2 percent.
One question. The Wall Street Journal reports, "Federal government spending decreased 4.0%, after rising in the fourth quarter by 7.0%. State and local government outlays fell 3.9%, after going down by 2.0% in the fourth quarter."
Even with cuts in military spending, shouldn't that number go up?
Brazil's Lula may blame "white people with blue eyes" for the global financial crisis, but in financially-crippled Iceland, many women in finance and government feel they have to clean up the mess left by the country's boys-club power elite. One former government official who, according to Der Spiegel, runs Iceland's only still-successful investment firm, put it this way:
"The crisis is man-made," claims banker Halla, 40, who like all Icelanders, is only addressed by her first name. "It's always the same guys," she says. "Ninety-nine percent went to the same school, they drive the same cars, they wear the same suits and they have the same attitudes. They got us into this situation -- and they had a lot of fun doing it," she says. Halla criticizes a system that focuses "aggressively and indiscriminately" on the short-term maximization of profits, without any regard for losses, that is oriented on short-lived market prices and lucrative bonus payments. "It's typical male behavior," says Halla, who compares it to a "penis competition" -- who has the biggest?
Now Iceland's women are rising to the top ranks -- in politics, too -- and they want to make everything better. Writer Hallgrimur Helgason says the new star is Johanna Sigurdardottir, 66, a Social Democrat, who had previously been known to most Icelanders as an honest and unimposing politician. "My time will come," she once railed at her opponents angrily almost 20 years ago.
Halla credits her success to bringing "female values into the financial world."
Sigurdardottir, currently prime minister in an appointed caretaker government, is widely expected to win big in an early election this weekend. She is not only her country's first female prime minister, but the world's first openly-lesbian head of state.
Perhaps Iceland too -- as The Onion brilliantly summed up the last U.S. election -- is now "finally shitty enough to make social progress."
The complete IMF World Economic Outlook, the most detailed and exhaustive examination of the global effects of the Great Recession, is out. It's long, it's complicated, and it's important, so I'm going to take some time reading it this morning, but at first blush:
Liberia, with the aid of the World Bank, has been negotiating with vulture funds holding $1.2 billion of its debt. You know what vulture funds are, right? They’re evil hedge-fund types who buy up debt at pennies on the dollar, and then sue for repayment in full, with interest and penalties and everything.
Just look at the deal they drove in this case! Liberia, one of the poorest countries in the world, is going to have to pay them, er, nothing at all. The World Bank is kicking in $19 million, a few rich countries are matching that sum, and the vultures are walking away with a not-very-princely-at-all $38 million, or just 3 cents on the dollar. Which probably barely covers their legal fees, let alone the amount they paid for the debt in the first place.
Let's read that again: the World Bank and Liberian government negotiated a deal so that vulture funds holding $1.2 billion in debt ended up with a check for $38 million -- three percent!
It's distressing that Liberia got in such a bad fix. It needed to raise funds and banked on future growth to make the payments -- but a bloody civil war meant it couldn't. The original lenders decided to sell the loans off to vulture and hedge funds who drove a hard bargain. Which meant that at one point, Liberia owed seven times its national income to creditors.
So, the balance sheet -- in redux:
Ultimately, though, Liberia isn't the story here. Emerging market and developing economies, like Liberia, will be among the hardest-hit in the Great Recession. Unlike OECD countries, they won't be able to issue debt or raise funds easily. They'll need the help of the international community -- and especially international organizations -- to ensure that their loans come with advisement and affordable repayment options.
The hero here's the World Bank. Suddenly, it and the IMF -- especially the IMF, perhaps -- have become the world's most important international organizations.
Dan Kitwood/Getty Images
My question yesterday about which countries might be next to come forward for IMF loans has been amply answered!
Today, the IMF announced Poland would seek a $20.5 billion flexible credit line, to insure against any future problems and help it meet its financial commitments.
Now, the New York Times has a story up about how Britain may require IMF assistance. It faces a deficit likely to reach 11 percent of its gross domestic product and rising unemployment. Worryingly, it failed to sell its full offering of government bonds at an auction last month. The NYT article reads:
...Britain’s deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country’s economy was on its knees.
As remote as that possibility might be, it underscores the financial bind Britain is in and represents another humbling comedown for a country that once had ambitions to overtake New York as the world’s financial capital.
The IMF has tried to alleviate the stigma attached with seeking a loan, usually provided to truly failed economies. And Poland's received plaudits for seeking aid from the IMF; the finance minister said, "This is the reflection of our cautious and responsible economic policy."
Thus, the question becomes: if the IMF offered a loan that cost less than borrowing in other ways, would once-strong and still-responsible governments still turn them down? That is, would politics stand in the way of economics?
"Scholars on the Sidelines," by Joseph S. Nye Jr. in the Washington Post. Referencing FP's "Inside the Ivory Tower," Nye argues that American academics are "paying less attention to questions about how their work relates to the policy world" and that more scholarship should have "real-world relevance."
David Gardner asks a provocative question in this weekend's Financial Times: Is the West's fear of political Islam condemning the Middle East to a generation of poor leadership? Political Islam is the new communism, he argues; the United States fears it so much that it prefers despots to even the most moderate Islamists. The Middle East, by implication, might be going through the same bout of poor leadership that afflicted Latin America and Africa as the Cold War contest played out in their regions.
"War By Any Other Name." Joe Queenan takes a look at the ripples of the Obama administration's "semi-official" move to revamp the vocabulary for "the war on terror" and the attempt to distance itself from the Bush administration's "fierce" rhetoric. Money quote: "From now on, the bad guys will be referred to as 'the ostensibly malefic.' We'll get back to you when we have a new term for 'the good guys.'"
(Bonus pick: Presidential Pets. Couldn't resist...)
Walter Benn Michaels's essay "Going Boom," in the February/March issue of Bookforum. According to Michaels, boom time for markets is bust time for literature, which turns back to unhappy but irrelevant periods of the past when there's not enough drama in the present day (the 1990s-2000s spike in popular fiction about the Holocaust), or focuses boringly inward (the memoir, anything Oprah's Book Club recommends). But, during an economic collapse, Western novelists will have enough material to deal relevantly with the present, and financial crisis fiction will blossom. (Hat tip: Paper Cuts)
U.S. Office of Management and Budget Director Peter Orszag blogs that crime has fallen in New York City during the recession. Indeed, Orszag says economic bad-times tend to spur property crimes, but not violent crimes. "One reason may be that alcohol use tends to decline during recessions (another potentially surprising finding), and that the reduction in alcohol use reduces violent crime," he notes. (Hat tip: Tapped)
Nouriel Roubini puts a brake on all the sanguine predictions for China’s 2009 recovery prospects in a report titled "Outlook for China's Economy in 2009 and Beyond." In the analysis, Dr. Doom tells investors not to get ahead of themselves, as the Chinese economy has not seen a true rebalancing toward domestic consumption, but he also notes one major positive: The country's trade surplus might finally be shrinking.
Today's big story on the high seas are the Somalian buccaneers, but the future of naval warfare may be developing in another part of the Indian Ocean. While India is taking measures to protect its vulnerable coast from terrorist attacks, China is preparing to make a major announcement at the 60th anniversary of the People's Liberation Army Navy (PLAN) on April 23rd. Writing in Time Magazine, Howard Chua-Eoan describes the brewing naval rivalry developing between Asia's two aspiring superpowers.
The current Great Recession is a global one, with even the most buoyant economies struggling. Reports today suggest that Japan may follow Georgia, Ireland, Switzerland, and Spain in suffering from deflation. Economic woes caused the collapse of the government of the Czech Republic. And dozens of other countries face similar specters.
All of which means the IMF, the international lender of last resort, has become very, very, very important. In the past, the IMF provided loans to countries out of ways to solve their own economic problems. In return for the loan, the IMF imposed strict conditionalities, requiring governments to clean up their act, sell assets, change tax policies, etc.
But the realities of the global recession mean that even countries with responsible policies may need IMF loans -- and may not want to accept them, for fear of the conditionalities and the optics. (See: Brown, Gordon.)
And the IMF, with its new $1 trillion budget, figured that out quickly. So, they changed the rules:
The IMF’s intention is to do away with procedures that have hampered dialogue with some countries, and prevented other countries from seeking financial assistance because of the perceived stigma in some regions of the world of being involved with the Fund.
To this end, the IMF announced the creation of a "flexible credit line" policy.
[It is an] insurance policy for strong performers, mainly emerging market countries. Access to the FCL is restricted to countries that meet strict qualification criteria. But once a credit line has been approved, a country can draw on it without having to meet specified policy goals, as is normally the case for IMF loans.
Mexico has already applied for the FCL loan, a $47 billion "precautionary credit line," last month. Question is, with new scary data emerging, which countries will be next to approach the IMF?
Last month China recorded its largest-ever surge in bank loans, the government reported over the weekend.
While the rest of the world begs for lines of credit and U.S. policymakers struggle to unclog the financial system, Beijing has announced that it will need to "strictly control lending," especially to certain areas of the economy such as "high-polluting, high-energy consuming industries and...those with overcapacity."
Part of the Chinese government's concern is that money from their stimulus package, announced last November, is getting stuffed into various industries that may eventually produce a spate of overly risky loans. They also worry about the onset of inflation in 2010, if too much money gets dumped into the economy now. Remember the good old days (as far back as summer 2008) when Beijing's biggest economic worries were high inflation and over-heating? Well, even if we don't, the Chinese certainly do. And they plan to avoid revisiting them.
In a related announcement on Saturday, Chinese Prime Minister Wen Jiabao explained that the Chinese economy was performing better than expected, building on recent positive projections from a variety of analysts, including some at the World Bank. A day earlier, U.S. President Barack Obama gave a press conference at which he expressed "glimmers of hope" for the American economy, but comparatively, the evidence for his prognosis seemed much more meager.
And it's safe to say that the Chinese noticed that fact as well. In fact, while reading this China Daily (one of China's state-run newspapers) report, it's hard not to detect a sense of schadenfreude coming out of Beijing when it compares Chinese prospects:
'Despite the year-on-year slowdown, the Chinese economy has posted a strong recovery on a quarterly basis, making us more upbeat about the country's economic prospects,' said Frank Gong, senior economist, JP Morgan, who predicted China's quarter-on-quarter GDP growth has rebounded to about 5 percent in the first quarter from only 1.5 percent three months earlier."
to American prospects:
US President Barack Obama said last Friday that the US economy was beginning to show 'glimmers of hope,' as mortgage interest rates declined to historic lows, while refinancing has shown significant pick-up. But some analysts said the largest economy in the world and also China's major trade partner is far from bottoming out, given the severe stress of financial malaise and job losses."
One hopes that China will use this growth potential not just to expand its regional influence and national interests, but also to continue to take positive steps in global cooperation. After all, they certainly still have great interest in the health of the American economy.
Photo: Frederic J. Brown/Getty Images
Speaking with the New York Times, a top Chinese economist explained why China is cutting its holdings of U.S. bonds by quoting John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”
With that reasoning in mind, China sold U.S. Treasuries and other foreign bonds in the first two months of the year; it returned to buying them in March. Around two-thirds of China’s foreign reserves are held in dollars.
That bulk holding has complicated relations between the two economic super-powers during the Great Recession. Chinese Premier Wen Jiabao and the central bank governors have expressed concern about the U.S. economic situation and their exposure to it -- though the resumption of purchases in March suggests they may believe the outlook is better.
Still, numerous economists and policy experts have suggested careful, controlled, slow draw-down would be a good thing for both countries.
If you only think of genocide when you hear the name "Rwanda," it's time to think again.
Today, Rwanda is moving forward, fervently set on rebranding itself into one of Africa's most investment-friendly havens. And it appears to have some of America's most recognizable names in business in its corner. A just-published article in Fast Company counts the CEOs of Starbucks and Costco as two of the Rwanda's most influential supporters, along with the likes of Google CEO Eric Schmidt, former British PM Tony Blair, and Pastor Rick Warren of "Purpose-Driven" fame. All seem to praise the Rwandan government -- and especially President Paul Kagame -- for being serious about making the country's business climate as streamlined and free of bureaucratic hassles as possible, which is certainly an anomaly in much of the developing world. (Registering a business in Rwanda apparently takes less than 48 hours.)
An article in Fortune called "Why CEOs love Rwanda" offers this money quote from Chicago financier Dan Cooper (who is credited with introducing Kagame to Costco CEO Jim Sinegal):
We came away saying, this is the most undervalued ‘stock' on the continent and maybe in the world. Here's an African nation that's reaching out, not to governments so much, but to corporate America. They want to work. They want U.S. business to bring innovation to their country."
But is this too good to be true? The country's new model of economic development is an interesting one; it's almost as if Kagame has torn a page out of Beijing's handbook. While Kagame can be credited with cracking down hard on government corruption and creating a competent administration in the country's capital of Kigali, there's always the problem of restricted political rights and civil liberties, which critics of the regime never fail to point out. The issue is certainly important, especially given Rwanda's long history of political violence.
But that said, the country's clearly moving forward. And apparently, the business world isn't the only one taking notice. Last year, the United States signed a bilateral investment treaty with Rwanda -- the first such treaty signed between the U.S. and any Sub-Saharan African country in almost a decade.
Fifteen years after genocide, this is Rwanda rising.
Hat tip: Africamusings
GIANLUIGI GUERCIA/AFP/Getty Images
The Private Sector Development blog at the World Bank has a cool post on the effect of labor laws on computer use. Social scientists have theorized that the stricter the regulations on hiring and firing workers, the more companies turn to computers and technology.
Turns out that conventional wisdom is correct, a World Bank study shows:
Amin (2009) tests this hypothesis on 1,948 retail stores in India using data from Enterprise Surveys, a regular World Bank survey on firm performance, firm characteristics and the business climate....The study finds that the percentage of retail stores that use computers rises by 6.2 percentage points as we move from the state with the least to the median level of rigid labor laws. This is a large effect given than only 19% of the stores in the sample use computers.
The PSD blog cautions against reading too much into the results, though:
That is, to properly understand the computers/productivity relationship one needs to distinguish between the motive of saving labor because of labor regulations and the motive of enhancing efficiency through computer usage. To what extent these effects hold remains to be empirically ascertained - an important task given that the use of computers and other modern devices is fast spreading across the globe.
But there's a nice synergy there. And I wonder whether the same scientists have studied the corollary between India as an outsourcing hub and an IT giant.
Reuters reports on the details of Japan's largest-ever economic stimulus plan, revealed by Prime Minister Taro Aso. He intends to make cultural products 18 percent of Japan's exports, up from around 2 percent now.
Aso waved glossy magazines from China and Taiwan featuring Japanese pop stars on their covers.
"Japanese content, such as anime and video games, and fashion draw attention from consumers around the world," he said.
"Unfortunately, this 'soft power' is not being linked to business overseas ... By linking the popularity of Japan's 'soft power' to business, I want to create a 20-30 trillion yen ($200-300 billion) market by 2020 and create 500,000 new jobs."
The proposal seems a bit pie-in-the-sky -- Japan's exports have more than halved this year. But the country's certainly on a mission to expand its cultural importance (including in all things cute). Nota bene, Gwen Stefani.
Photo: Flickr user dogonthesidewalk
At the Boston Globe, economist Laurence Kotlikoff joins Jeffrey Sachs in indicting the Geithner bank bail-out plan on the grounds that investment banks and the like will simply game the system -- allowing a government-sanctioned and epically unfair socialization of losses and privatization of gains. Kotlikoff writes:
It's one thing for the U.S. Treasury Department to overpay banks for their toxic assets on the prayer that bank shareholders will do something besides pocket it -- something that will help the economy. It's another thing to set up a complex leveraged auction scheme to surreptitiously make the transfer. And it's yet a third thing to set up a scheme that will lead the banks to overbid for their own toxics to garner even larger windfalls and end up with the toxics still in their hands.
He outlines one way for banks to game the Geithner plan, which lets banks auction off their bad (but not totally toxic) assets to investors who earn most of the possible upside if the asset makes money, while the Treasury accepts the loss if it doesn't.
Kotlikoff notes that it's a pretty easy move for banks: they set up and fund subsidiaries to buy the mortgage-backed securities -- effectively insuring against any losses that asset might accrue. The Treasury has promised that investors won't be able to buy their own assets in this way -- officials won't let them. But there still plenty of ways to get around it.
But there's a big problem -- not with the details of Sachs' and Kotlikoff's arguments, but with their very premise.
First, there's no incentive for a bank to buy its own bad debts as opposed swapping with someone else's. Say Goldman Sachs' hedge fund, GSAM, buys J.P. Morgan's assets, and a J.P. Morgan subsidiary buys Goldman's. There's nothing wrong with that, and it's effectively the same as the banks buying their own. A recent report shows that i-banks are still major global hedge fund players -- the government needs those funds to play.
Second, the gaming proposal presumes that the banks have cash to buy up the assets at auction at all. But most of the banks who will sell bad assets really don't have a lot of cash floating around -- anywhere. Many are in debt, and nobody will lend to them, so theorizing that they'll fund a bunch of subsidiaries to nick taxpayer money seems far-fetched. Even if they do it, the scale would be limited by their available capital.
Finally, in a macro sense, the Geithner plan is set up precisely to recapitalize the banks, create a market for the bad assets, and to get the assets off the banks' books. Gaming the system does recapitalize the banks. It does bolster the market for the bad assets. And it does sequester the assets in spin-off companies -- a kind of good-bank/bad-bank scenario.
In short: the Geithner plan might not be fair. It, in some sense, props up and rewards companies that took massive risks and now need taxpayers and the government to bail them out. But, taking the Geithner plan as it is, gaming doesn't seem so bad.
On his New York Times blog, Nobel-prize winning economist Paul Krugman has reponded to a VoxEU post showing that the current Great Recession might be accelerating deeper and faster than the Great Depression. Krugman writes:
What hasn’t happened — at least not yet — is any counterpart to the catastrophes of 1931: the wave of bank runs in the US, the failure of Credit Anstalt in Austria, and the great perverse response of central banks that was triggered by the death spasms of the gold standard.
What Eichengreen-O’Rourke show, it seems to me, is that knowledge is the only thing standing between us and Great Depression 2.0. It’s only to the extent that we understand these things a bit better than our grandfathers — and that we act on that knowledge — that we have any real reason to think this time will be better.
Eichengreen and O'Rourke convincingly argue that two indicators, trade volume and stock values (they don't take on other indicators, like global GDP or unemployment), are plummeting. But they also show the alacrity and force of governmental responses -- the only option for staunching the bleeding and returning the world economy to health.
For months now, economists and finance experts have been speculating about what shape an economic recovery will take. Will it be V-shaped, as the optimists hope? U-shaped, with a longer trough? Or L-shaped, like Japan in the 1990s?
Nope, investor George Soros told Reuters Financial Television, it will be "an inverted square root sign":
You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down—step down."
"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said. He expects some U.S. growth in 2010.
At VoxEU, economists Barry Eichengreen and Kevin O'Rourke compare the current global recession and the Great Depression -- or, more accurately, parse the comparisons. They note that many commentators, like Paul Krugman, include only U.S. stock and economic indicators, in which case, some evidence suggests this downturn may be shorter and milder.
But, they argue, the Great Depression was a global phenomenon; it originated with the U.S. stock crash and soon engulfed the world economy. The current recession, likewise, is one of a globalized world. The U.S. led the fall, but didn't fall alone.
So, they write: "the global picture provides a very different and, indeed, more disturbing perspective than the U.S. case...which as noted earlier shows a smaller decline in manufacturing production now than then." And they demonstrate the effect, with a series of compelling and frightening graphs.
Here's the global stock market, the blue line representing its value during the Depression and red during the current recession:
And here is global trade volume, another indicator. They write, "This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression."
The one bright spot, they note: the policy responses have been far, far better this time around. Central banks have slashed interest rates earlier and lower, and increased the money supply more and faster. And, globally, there is heightened government deficit spending, intended to arrest decline.
Still, Eichengreen and O'Rourke's analysis demonstrates that the global recession may be worse than people think, even if the U.S. manages a recovery.
Today, the U.S. Bureau of Labor Statistics released a frankly horrific set of numbers. The unemployment rate hit 8.5%, the highest in more than 25 years; 663,000 workers lost their jobs in March alone; 25 million are underemployed; and over the course of the recession, the U.S. has bled more than 5 million jobs.
Certainly, the U.S. has fewer social safeguards against the disruptions of unemployment than many other high-income economies, meaning fewer protections against lay-offs and less-generous unemployment benefits. (FP looked at the best places to lose your job last month.) This generally means more volatility in the unemployment rate.
But is the U.S. really doing worse than, say, France and the United Kingdom, countries with historically high unemployment?
The short answer is yes; the U.S. recession has gone on for longer and is deeper than in Europe, and therefore has sapped three times as many jobs. The unemployment rate in the U.S. is higher than in the U.K., and close to France's. (The U.K. and French numbers above are estimates.) And the job-losses are accelerating faster in the U.S. than in other countries.
Here's hoping for it to bottom-out soon.
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