Weekend Reading of Interest

9 March 2014

Weekend Reading of Interest:

End of globalization- Will emerging markets come back? – (Michal Pettis) I pointed out that in the past 200 years we had experienced a number of globalization cycles, driven largely by deep changes in monetary conditions, that followed a pattern regular enough to allow us to make some fairly confident predictions. 

To put it schematically:

1.      {C}Before the crisis the world had already over-invested in real estate and manufacturing capacity based on unrealistic expectations of consumption growth.

2.      {C}The global crisis forced consumption growth to drop. This should have meant that if investment levels were too high before the crisis, they were even more so after the crisis.

3.      {C} Instead of cutting back on investment, however, the developing world reacted to the drop in rich-country demand by significantly increasing investment, driven at least in part by worries that the consumption adjustment in Europe and the US would cause a collapse in export growth which would itself force unemployment up to dangerous levels.

Clearly this wasn’t sustainable, and not surprisingly soaring debt is now forcing this investment surge to end. http://blog.mpettis.com/2014/03/will-emerging-markets-come-back/

Global Debt Soaring Still (Bloomberg) The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements. http://www.bloomberg.com/news/2014-03-09/global-debt-exceeds-100-trillion-as-governments-binge-bis-says.html

The Debt/GDP debate (Economist) Can countries imperil their growth prospects by having too much debt?  A new IMF paper now poses a more substantial challenge to Ms Reinhart and Mr Rogoff’s thesis.  http://www.economist.com/news/finance-and-economics/21597933-new-research-suggests-debts-trajectory-affects-growth-more-its-level-breaking

George Soros is criticizing Germany’s economic policy again (The Telegraph) Mr Soros also says he believes the single currency has transformed the European Union from a voluntary association of equal states to one which is now no longer voluntary and has Germany as its leader. http://www.telegraph.co.uk/finance/10685035/George-Soros-Germany-is-self-righteous-and-hypocritical.html

Natural Gas – (Financial Times) Poland, Hungary, the Czech Republic and Slovakia have urged the US Congress to help them buy American natural gas and reduce their dependence on Russia by loosening US export limits.

In an unusually bold step, the four countries’ ambassadors to Washington sent joint letters to top lawmakers in the Senate and the House of Representatives urging them to assist in expediting exports of liquefied natural gas (LNG) to Europe.

The Ukraine crisis has revived concerns over Russia using its natural gas as a geopolitical weapon, and the ambassadors noted that their countries bought between 70 per cent and 100 per cent of their gas from the country.

Japan and Abenomics (Financial Times) Japan Inc doubled profits last year – the best performance since 2007 – but rather than selling more goods more profitably, much of these gains were simply a reflection of dollars and euros translating into more yen.

…Thus for manufacturers, still the backbone of the economy, the lower yen accounted for up to 80 per cent of their rise in net profits.

…The trouble with such foreign exchange-fuelled rises is that they are not sustainable. Indeed, with expectations of far more muted depreciation this year, the advantage could be wiped out, analysts say.