Global reserve currencies come with responsibilities, US currency war!

The U.S. Federal Reserve announced Wednesday it would buy 600 billion dollars of Treasury bonds, effectively printing money to jumpstart the flagging American economy.

The move is a boost to the U.S. economy but risks creating new capital bubbles for other countries.

The U.S. dollar is the most widely held reserve currency in the world today. The devaluation of the U.S. dollar plus an overly loose currency policy that leads to a sharp increase in capital flow will drive large amounts of hot money to newly emerging economies in search of profits.

The International Monetary Fund (IMF) has recently warned that Asia and other emerging markets are facing the double risks of a huge influx of foreign capital and an accumulation of inflation pressure.

Chinese Commerce Minister Chen Deming has also pointed out that "out-of-control" U.S. currency issuance and big international commodity price hikes would probably saddle China with imported inflation.

Ironically, one of the factors driving big international commodity prices up is the depreciation of the U.S. dollar, the main global reserve currency.

In the past few months, a vicious cycle of currency flow became obvious. The Fed launched a round of quantitative easing, causing an overflow of capital (hot money pooled in other countries). This led to imported inflation jeopardizing the economies of other countries, which were then forced to intervene in the foreign exchange market.

From the U.S. perspective, the purpose of increasing liquidity is to inject life into its faltering economy. But the direct consequences of the move might be disastrous to other countries. It might even drag others into financial turbulence.

Some economists did not rule out the possibility the U.S. government was deliberately waging a currency war by quantitative easing, depreciating the dollar, shifting the economic risks to others and pursuing the bonus that comes from having a reserve currency.

According to a report from the Organization for Economic Cooperation and Development (OECD) on Wednesday, continued loose monetary policy in many advanced economies will prompt capital to flow to emerging ones where it risks creating asset bubbles while putting upward pressure on their exchange rates.

OECD Secretary General Jose Angel Gurria said bubbles were generated in the emerging economies, which "still have a high level of inflation or ...(face) pressure of inflation," when advanced economies took advantage of their weaker and more restrictive monetary policies.

Nobel laureate Joseph Stiglitz said that, when trying to reignite the U.S. economy by printing money, the flood of money was almost surely contributing to global financial instability and prompted countries worldwide to intervene. And the result was a "more fragmented global financial market."

Last month, G20 finance ministers and central bankers promised in a joint statement to "pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels."

During the China-U.S. strategic and economic dialogue in May, the U.S. also vowed to adopt a proactive currency policy and pay attention to the impact of its currency policy on the international economy.

The reason why the outside world follow the attitudes of advanced countries so closely is that they are the source of the rivers of hot money.

Whether the world economy can achieve a sustainable recovery largely depends on whether the main global reserve currency countries can put into practice their promises to keep exchange rates comparatively stable and reduce the negative spill-over effect of their currency policies.

At the time when the world economic recovery is still unstable, it is an unshirkable task for the main global reserve currency countries to adopt responsible currency policies for the benefit of all.

Source: Xinhua
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U.S. Fed to buy 600 billion dollars in bonds as quantitative easing, Dollar tumbles!

IMF says fiscal risks elevated in advanced economies

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The global fiscal deficit will fall in 2010 compared with last year, but fiscal risks remain elevated in advanced economies, according to a report released by the International Monetary Fund (IMF) Thursday.

The report said public debt ratios as a percentage of gross domestic product (GDP) were still rising rapidly in some advanced economies.

In its latest edition of the Fiscal Monitor, Fiscal Exit: From Strategy to Implementation, the IMF sees fiscal tightening becoming broader and driven by discretionary measures in 2011, in both advanced and emerging economies, but underscores the need for more clarity on exit plans and reforms to address long-term fiscal costs.

The study, released twice a year, said that "the global fiscal deficit is projected to fall from 6.75 percent of GDP in 2009 to 6 percent this year." This was in line with IMF's earlier projections.

The report also said the global fiscal deficit will fall further in 2011 to about 5 percent of GDP. About 90 percent of countries are projected to record smaller deficits next year (relative to 2010), with most of the deficit decline due to policy tightening. The projected pace of tightening is broadly appropriate, striking a balance between addressing fiscal concerns and avoiding an abrupt withdrawal of support to the nascent recovery.

The IMF noted that "risks for advanced economies, especially those already under market pressure, remain high by historical standards. Among them are the possibility of sovereign rollover problems arising, over the short to medium term, at a regional or global level, and public debt ratios stabilizing, over the longer run, at elevated levels."

"These risks are lower but not insignificant for emerging markets," it added.

The report also said risks arising from macroeconomic uncertainty were generally higher than six months ago, amid concerns that the global recovery might be losing steam. Global market sentiment had improved toward emerging markets but worsened toward those advanced economies that were already under pressure in May 2010, it said.

Source: Xinhua

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U.S. Fed to buy 600 billion dollars in bonds as quantitative easing, Dollar tumbles!

U.S. Fed to buy 600 billion dollars government bonds

Traders work on the floor of the New York Stock Exchange in New York, Nov. 3, 2010. Wall Street swung to gain on Wednesday after the U.S. Federal Reserve announced a plan to buy 600 billion U.S. dollars more in Treasury bonds. (Xinhua/Shen Hong)
U.S. Federal Reserve announced Wednesday it will buy 600 billion dollars more in Treasury bonds, in a move known as the "Quantitative Easing" (QE2) monetary policy to boost the sluggish economic growth.

"The pace of recovery in output and employment continues to be slow," the Fed said in a statement after the policymaking panel meeting.

Federal Open Market Committee (FOMC), the interest rate policy making body of the central bank said that it will "purchase a further 600 billion dollars of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about 75 billion dollars per month."

The Fed also decided to maintain the target range for the federal funds rate at historic low level of zero to 0.25 percent to stimulate the economic recovery.

The central bank cut the interest rate to the current level in December 2008 to tackle the worst recession after the Great Depression in the 1930s. And it has already bought about 1.7 trillion dollars in U.S. government debt and mortgage-linked bonds.

With the U.S. economy growth at only a 2 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed has come under pressure to do more to stimulate business activity.

Bernanke and his supporters argue that the Fed is failing in both fronts of its dual mandate: sustainable levels of unemployment and inflation.




The Dow Jones index is seen in the New York Stock Exchange in New York, Nov. 3, 2010. (Xinhua/Shen Hong)

The Fed said that to expand its holding of government securities is "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."

Latest data showed that core consumer price index, the key figure to measure inflation, grew only 0.8 percent in September on a yearly base. It was lower than the Fed's comfortable level of inflation ranging from 1.5 percent to 2.0 percent.

In fact, the Fed expressed its concern about deflation in recent documents.

On the unemployment front, with 14.8 million Americans unemployed and unemployment rate hovering at double digit, the Fed has been facing criticism.

Aiming at further lowering borrowing costs for consumers and businesses that are still suffering from the worst recession since the Great Depression, the Fed's QE2 policy is widely questioned.

Many economists doubt about the policy's effectiveness and worry about its spillover effect on the rest of the world.

"The Federal Reserve's proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy," Harvard University economist Martin Feldstein said an article published by the Financial Times on Wednesday.


"Although the U.S. economy is weak and the outlook uncertain, QE is not the right remedy," said the former president of the U.S. National Bureau of Economic Research and former chief economic adviser to President Ronald Reagan.

Critics of the policy also argue that although the recovery is painfully slow, markets should be allowed to do their work. They also worry that if the policy fails the Fed's credibility will be wrecked.

Economists consider that economic growth must reach about three percent for some time to significantly reduce high unemployment.

But more than a year after the recession officially ended, unemployment stubbornly stands at high level.

Economists expect that October's jobless rate, which will be reported on Friday, will remain at 9.6 percent for the third straight month.

Source: Xinhua

Dollar tumbles on Fed's stimulus plan

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The U.S. dollar tumbled against major currencies in late New York trading on Thursday after the Fed announced a new round of quantitative easing policy on Wednesday.

The euro rose to above 1.42 against the dollar in late trading session, while the Australian dollar rose dramatically to near 1. 015 against the dollar, its 28-year high, after the Australian central bank announced that it will raise its benchmark rate this week.

The stock market surged as investors anticipated large amount of money would flow into real economy by the Fed's move. The reviving optimistic mood in equity market also pressured on the dollar as high-yield investment appeared to be more attractive to investors.

However, the U.S. employment status still showed weakness. A report released by the Labor Department on Thursday showed initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 457,000 last week, which was much more than previous estimate of increasing by 9,000. In late Thursday trading, the dollar bought 80.66 Japanese yen, compared with 81.29 late Wednesday, and the euro rose to 1.4209 dollars from 1.4103.

The British pound rose to 1.6284 dollars from 1.6107. The dollar fell from 0.9730 to 0.9583 against Swiss francs, and also fell to 1.0034 Canadian dollars from 1.0059.


Source: Xinhua

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• Lamy: Currency no tool for trade imbalance

  

  The World Trade Organization is warning the vulnerable world economy could be hit hard, if the curre...

• Tele interview: Why did ECB, BOE shun US Fed´s path of economic stimulus?

  

  Both the ECB and BOE kept rates on hold. But they shunned the US Fed´s path of more economic s...

• Tele interview: Impact of ECB and BOE´s decisions on interest rate

  

  The European Central Bank has decided to keep interest rates at 1 percent for the 18th consecutive m...

• Economists skeptical about QE2 effect

  

  The US Federal Reserve has launched fresh efforts to support a struggling economy, committing to buy...

• Pascal Lamy: Devaluation may affect world trade and shake economy recovery

  

  As the world economy slowly recovers from the financial crisis, several countries are in dispute ove...

• Studio discussion: How will other central banks react to Fed´s QE2?

  

  The European Central Bank, Bank Of England and Bank Of Japan all hold policy meetings today. So unde...

• Tele interview: Will QE2 trigger further devaluation of USD?

  

  Will QE2 trigger further devaluation of the dollar and lead to a volatility in the currency markets?...

• Studio discussion: Will QE2 create asset bubble?

  

  By giving stocks a boost in the near future, will the plan create an asset bubble?...

Is there a super bull run in 2010?, Mini-bull run soon !

Personal Investing - By Ooi Kok Hwa

Although the economic situation now compares with that of 1993, the last push must come from local retail investors 

THE recent rally in our local bourse has prompted many seasoned investors, especially those who experienced the super bull run in 1993, to wonder whether the current rally is about to turn into a real bull run. Of course, nobody can tell for sure what will happen next, but we certainly can do some homework, comparing the circumstances back in 1993 against the current situation.

In 1991, Tun Dr Mahathir Mohamad unveiled the philosophy of “Malaysia Incorporated” which was a development strategy for Malaysia to achieve a developed nation by 2020. In the early 1990s, despite slowdown in the global economy, as the third largest economy in South-East Asia, after Indonesia and Thailand, Malaysia was supported by relatively strong macroeconomic fundamentals and resilient financial system. With the real GDP growing at 9.9%, ringgit appreciation, strong export growth and the Government’s measures to hold inflation low at 3.6%, the local stock market became an attractive alternative to foreign investors.

Before 1993, foreign investment in Malaysia was mainly dominated by long-term direct investment in the manufacturing sector. However, as a result of measures taken to develop our domestic equity market, coupled with the strong economic backdrop, we saw a massive influx of foreign capital inflow, which helped fuel the super bull-run in 1993. Within the year, the market increased by 98% to reach an all-time high of 1,275.3 points and foreign investors’ participation accounted for 15% of total trading value of our local bourse. This had also driven the market into a highly speculative one, which lured many retailers into the market, thinking of making fast and easy money.

With the presence of new and unfamiliar players, the market became a huge “casino”. Retail investors bought into stocks based on rumours rather than company fundamentals. Among the hottest topics during that time were the awards of government mega projects, privatisation candidates, sector play and regular news on upward revision of corporate earnings. Examples for the highly speculative stocks were Ekran, Ayer Molek Rubber Co, Berjuntai Tin Dredging and Kramat Tin Dredging.

In 1993, with the economy booming, the Government planned several mega projects, including the KL International Airport (RM8bil), Johor-Singapore Second Link (RM1.6bil) and Kuala Lumpur Light Rail Transit (RM1.1bil). The news of contract awarding immediately sent the market into speculative mood on those potential candidates. Similarly, the news of the Government planning on privatising some of the its own corporations, such as Petronas, KTM and Pos Malaysia had also driven these counters into prime trading targets.

Dreaming: Will the super bull run come?

 

Besides, the ease of accessing bank credit by investors also contributed to the market rally. We noticed that a high percentage of loans was channelled to broad property sector as well as the purchase of securities.

As a result of massive inflow of foreign funds and the super bull run in stock market, Bank Negara introduced a number of selective capital controls in early 1994 to stabilise the financial system.

Recently, our Prime Minister Datuk Seri Najib Tun Razak unveiled the Economic Transformation Programme (ETP) with the aim to boost our gross national income (GNI) to US$523bil in 2020 from US$188bil in 2009. The programme is to attract investment not only from the Government, but also (more importantly) from domestic direct investment as well as foreign direct investment. In view of strong economic growth, our GDP growth is anticipated to increase by 6% this year.

In September, we notice that there was a net inflow of foreign funds again in our equity market. Over the past few weeks, the average stock market daily volume had been hovering above one billion shares per day. Almost every day, the top 10 highly traded stocks were those speculative stocks with poor fundamentals. In addition, we noticed that some retail investors had started to get excited again in the stock market.

According to Andrew Sheng in his book titled From Asian To Global Financial Crisis, there were two main indicators to irrational exuberance during the super bull run in 1993. The first was the amah (domestic maid) syndrome. We need to be careful when amahs got excited about the stock market. This was because they did not know what they were buying and would always be the last to sell. The second indicator was when businessmen began to speculate stocks in the stock market. This was because they might neglect their businesses and use some of their cash for speculation.

Comparing our current market situation with the 1993 bull run, there are certain similarities that we see, such as strong economic growth, ringgit appreciation, inflow of foreign capital and ease of credit. However, our local retailer participation is yet to get boiling, which may be the last push factor towards the bull run. Hence, once the participation of the local investors starts to get heated up, together with more inflow of foreign fund, that may be the signs of the market heading for a ‘mini’ super bull run.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

M'sian market set for a mini-bull run this week?

By Danny Yap, Starbiz 8/11/2010

All signs point to Bursa hitting the magical mark soon

PETALING JAYA: The FBM KLCI, which has generally been on the upward trend, albeit slowly, is expected to test the 1,524.69 mark in the weeks ahead.

Analysts say it is not the case of “if” but “when” the it will pass this mark, but chances are slim that it will happen this coming week.

An analyst with K&N Kenanga said much of the good news on the government initiatives, including the Economic Transformation Programme (ETP) roadmap, had been factored into the stock market.

He said Prime Minister Datuk Seri Najib Tun Razak had said in a CNN interview last Wednesday that a slew of multi-billion ringgit projects would be commencing and that the details of mega projects would be revealed “soon.”

“But any good news is unlikely to be announced in the next few days to spur the market significantly,” said the analyst.

He also said it was noteworthy to point out that 1,524.69 was a significant mark because it was the highest point reached before the global financial meltdown, led by the US sub-prime fallout.

“If and when the FBM KLCI crosses the mark it would technically mean that the Malaysian economy would have recovered from the global financial crisis,” the analyst noted.

The FBM KLCI reached its highest point at 1,524.69 on Jan 14, 2008 and had since been on a slow recovery.

The FBM KLCI created a milestone on Oct 29 when it breached the major 1,500-point psychological mark and had been testing the resistance point at 1,520-1,525 mark ever since.

Another local analyst said when the FBM KLCI surpassed the 1,520-1,525 mark resistance point, it would have strong and positive implications.

She said it would not only signify that the Malaysian economy had fully recovered from the financial crisis, it would likely make Bursa Malaysia a more attractive and stable stock exchange in the region in the eyes of investors, locally and abroad.

“It will be interesting to see the performance of Bursa Malaysia when the FBM KLCI breached this point, going forward,” she said.

She said the next thing to watch was the expected announcement by Najib on the specific projects to be rolled out and implemented under the ETP to stimulate and accelerate the economic growth of the country.

“There should be some exciting times ahead for the stock market, especially for companies that have secured projects under the ETP,” she noted.

The analyst remains optimistic about the stock exchange and the Malaysian economy.

“We have strong economic growth, ringgit appreciation and improved inflow of foreign capital, compared with 2009, and ease of credit. Couple with all these goodies, there’s the ETP projects which will be implemented soon,” she said.

So is the stock market heading for a mini-bull run, perhaps not next week, but in the near future?



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Divided We Fail, US midterm elections, 10 worst political ads

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 Divided We Fail

By PAUL KRUGMAN

Barring a huge upset, Republicans will take control of at least one house of Congress next week. How worried should we be by that prospect?

Not very, say some pundits. After all, the last time Republicans controlled Congress while a Democrat lived in the White House was the period from the beginning of 1995 to the end of 2000. And people remember that era as a good time, a time of rapid job creation and responsible budgets. Can we hope for a similar experience now?

No, we can’t. This is going to be terrible. In fact, future historians will probably look back at the 2010 election as a catastrophe for America, one that condemned the nation to years of political chaos and economic weakness.

Start with the politics.

In the late-1990s, Republicans and Democrats were able to work together on some issues. President Obama seems to believe that the same thing can happen again today. In a recent interview with National Journal, he sounded a conciliatory note, saying that Democrats need to have an “appropriate sense of humility,” and that he would “spend more time building consensus.” Good luck with that.

After all, that era of partial cooperation in the 1990s came only after Republicans had tried all-out confrontation, actually shutting down the federal government in an effort to force President Bill Clinton to give in to their demands for big cuts in Medicare.

Now, the government shutdown ended up hurting Republicans politically, and some observers seem to assume that memories of that experience will deter the G.O.P. from being too confrontational this time around. But the lesson current Republicans seem to have drawn from 1995 isn’t that they were too confrontational, it’s that they weren’t confrontational enough.

Another recent interview by National Journal, this one with Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: “The single most important thing we want to achieve is for President Obama to be a one-term president.”

If you read the full interview, what Mr. McConnell was saying was that, in 1995, Republicans erred by focusing too much on their policy agenda and not enough on destroying the president: “We suffered from some degree of hubris and acted as if the president was irrelevant and we would roll over him. By the summer of 1995, he was already on the way to being re-elected, and we were hanging on for our lives.” So this time around, he implied, they’ll stay focused on bringing down Mr. Obama.

True, Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances — namely, if he’s willing to do a “Clintonian back flip,” taking positions that would find more support among Republicans than in his own party. Of course, this would actually hurt Mr. Obama’s chances of re-election — but that’s the point.

We might add that should any Republicans in Congress find themselves considering the possibility of acting in a statesmanlike, bipartisan manner, they’ll surely reconsider after looking over their shoulder at the Tea Party-types, who will jump on them if they show any signs of being reasonable. The role of the Tea Party is one reason smart observers expect another government shutdown, probably as early as next spring.

Beyond the politics, the crucial difference between the 1990s and now is the state of the economy.

When Republicans took control of Congress in 1994, the U.S. economy had strong fundamentals. Household debt was much lower than it is today. Business investment was surging, in large part thanks to the new opportunities created by information technology — opportunities that were much broader than the follies of the dot-com bubble.

In this favorable environment, economic management was mainly a matter of putting the brakes on the boom, so as to keep the economy from overheating and head off potential inflation. And this was a job the Federal Reserve could do on its own by raising interest rates, without any help from Congress.

Today’s situation is completely different. The economy, weighed down by the debt that households ran up during the Bush-era bubble, is in dire straits; deflation, not inflation, is the clear and present danger. And it’s not at all clear that the Fed has the tools to head off this danger. Right now we very much need active policies on the part of the federal government to get us out of our economic trap.

But we won’t get those policies if Republicans control the House. In fact, if they get their way, we’ll get the worst of both worlds: They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts.

So if the elections go as expected next week, here’s my advice: Be afraid. Be very afraid.

US midterm elections 2010: the 10 worst political ads

The US midterm elections of 2010 will be remembered for a flood of toxic advertising. Here's 10 of the worst seen on TV

It used to be that TV attack advertising was the province of the most well resourced US election campaigns. But that changed in the midterm elections of 2010 as a torrent of donations, proliferating cable channels, the internet and falling production costs put the price tag within reach of even the most modest campaign.

The result was airwaves filled with outlandish claims and barely credible accusations from both parties – with corporate political spending unstopped by a recent court decision – obscure interest groups that sprung up almost over night.

Of the hundreds of ads aired on television during the 2010 election season, this can't claim to be a comprehensive list. But here's the 10 worst that we saw.

10. Ben Quayle, Arizona Republican primary

10. Ben Quayle trapped in a dark place Ben Quayle, the son of former Republican VP Dan Quayle, was in a contested primary for an Arizona House seat. His solution? An ad that begins with a ludicrous claim and ends with him wandering off into what could be a gloomy opium den. Just weird.

9. Jim Marshall, Georgia congressional election
9. Those damn San Francisco hippies A lot of ads attacked Nancy Pelosi, the Speaker of the House of Representatives from San Francisco. This one does more than most and even uses cliched images of California hippies. But what's most bizarre is that Marshall is a House Democrat, just like Pelosi. Not that you'd know it from watching this mendacious ad.

8. Carly Fiorina, California Republican primary
8. Carly Fiorina's silly Demon Sheep ad The silliest ad of the season, it became widely mocked as "Demon sheep". It looks as if it was conceived and executed by someone using heavy medication. Fiorina won the primary for California's Senate contest but this ad only harmed her image with mainstream voters.

7. Dale Peterson, Alabama Republican primary
7. Great ad but the wrong race This was a brilliant ad and only makes this list because it was so utterly inappropriate that it was almost a parody. Peterson was running in a primary for Alabama state agricultural commissioner, making this ad way over the top. Otherwise it's a masterpiece – unless you don't give a rrrrip about Alabama. (The voters didn't: Peterson lost.)

6. David Vitter, Louisiana Senate election
6. Why people distrust politicians such as David Vitter Louisiana doesn't share a border with Mexico but that doesn't stop Vitter from stooping as low as possible with these images and distortions aimed at his Democratic opponent Charlie Melancon. Just nasty.

5. Sharron Angle, Nevada Senate election
5. Viagra for sex offenders? Tax breaks for illegal aliens? The Nevada Senate contest between Angle and Harry Reid was toxic and several ads from either side could have appeared on this list. But this is the worst, with the outlandish claim that Reid voted to give Viagra to sex offenders. Other claims in the ad, such as Reid voting to give "illegal aliens special tax breaks" were also false.

4. Pat Quinn, Illinois governor's election
4. This man wants to kill your dog! An entirely vicious ad, claiming Republican Bill Brady wants to gas dogs. With the most glancing relationship to the truth, this is one of the nastiest attack ads of the cycle. And yet Quinn's staff also proved they could do far better and produced one of the best ads of 2010.

3. Christine O'Donnell, Delaware Senate election
3. I'm not a witch. Or a serious candidate Dogged by unwise public statements, including that she had "dabbled in witchcraft," O'Donnell's first ad was a chance for a fresh start. Instead the ad's opening line "I'm not a witch" confirmed in the minds of viewers that she was a flake. And the creepy "I'm you" catchphrase has become a punchline for a disastrous campaign.

2. Jack Conway, Kentucky Senate election
2. Aqua Buddha and Rand Paul Perhaps the dumbest ad of the season, "Aqua Buddha" may even have cost Conway a chance of defeating Republican Rand Paul. Dredging up an obscure event from Paul's student years, this ad lacks any subtleness while making hysterical smears that it couldn't possibly support. Idiotic.

1. Citizen's Against Government Waste, "Chinese Professor"
1. The worst of the worst A nakedly political ad aimed at the Democrats by a supposedly non-partisan organisation, this ad ladles out xenophobia and untruths in equal measures in conjuring up a new Red Menace. The cost of production must have been vast. As an example of the increasing spending power of outside groups distorting US politics, this is a prime exhibit. And a clever parody wasn't far behind.

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