By Rok Spruk, on April 26th, 2010
Barry Eichengreen wrote a thorough defence of China’s exchange rate policy response to the global demands for letting the Renminbi appreciate and thus stimulate the reduction of US trade deficit.
US Treasury Department recently launched a series of initiatives which labeled China as a currency manipulator and a true source of America’s widening trade deficit and loss of manufacturing jobs. I pretty much disagree with this particular assertion. China maintains a fixed exchange rate of Renminbi against the US dollar (6.83 RMB/1 USD). True, it is a very difficult empirical task to estimate the true exchange rate of the two currencies due to the fixed exchange rate. If Chinese policymakers let the Renminbi float freely in global currency market, estimating the real exchange rate would be an easier task.
Low exchange rate against the USD stimulated a large surplus of foreign currency reserves and a large trade surplus from a significant export advantage againist foreign exporters. China’s low GDP per capita is pretty much associated with country’s sizeable share of investment in national income. Gradually, as Chinese GDP per capita will grow, the share of investment in GDP will correspondingly decline.
The macroeconomic cost of Renminbi appreciation is a daunting empirical task. Earlier estimates suggest that Chinese annual growth rate might be lower by 1-1.5 percentage point. Renminbi appreciation would also induce Chinese growth pattern shift from investment and export-driven growth to consumption-based growth. It is only a sheer guess whether Chinese policymakers will embrace lower economic growth and a shift towards domestic consumption as the main engine of growth.
However, it would be foolish to mark China as currency manipulator and an ultimate source of US trade deficit and manufacturing loss. The latter can be solely explained by a change in productivity structure which offshored many of America’s jobs and created even more jobs at home. The only feasible means of reducing US trade deficit is to cut a galloping fiscal deficit which, according to Congressional Budget Office (CBO), is likely to exceed 10 percent of the GDP in the medium term. A move to free-floating Renminbi exchange rate would yield substantial benefits for the world economy. However, China did a great job of ignoring Western political demands without any reliance on sound economic analysis.
By Eldon Mast, on April 26th, 2010
New home sales jumped up in March at the fastest single-month rate since March 1963. The government report released on Friday said buyers gobbled up new houses ahead of the federal tax credit that is just about to expire.
New-home sales rose 26.9% to a seasonally adjusted annual rate of 411,000 in March, compared to a revised annual rate of 324,000 in February.
The surprise jump was significantly better than even the most optimistic professional forecasters had thought. The average economist surveyed said that March sales gains would only amount to an annual rate of 330,000.
The rate gain was the biggest in a month-over-month measure since a 31% gain 47 years ago in March 1963.
Gains in the South were especially pronounced. New home sales there were up 43.5%. The Northeast region also saw a massive 35.7% spike.
“It’s obvious that homebuyers are rushing in to take advantage of the tax credit that’s set to expire,” said Robert Dye, an economist for PNC Financial Services.
In a national housing market that still is concerned about oversupply, the March results also produced significantly declining market inventory. The report showed that at the current rate inventory is now at 6.7 months. That is down sharply from over 9 months of inventory in February.
“It’s a very good sign to see [the inventory] number down,” said Dye. “Firming house prices and an improving jobs market will make recovery felt on Main Street as well as Wall Street,” said Dye. “We’re headed in the right direction.“
By Claus Vistesen, on April 26th, 2010
Earlier this week Edward mused about whether we were about to see movements in the Greek trenches as yields on 10 year bonds rose to a record 7.76 per cent at one point and closed up 26 basis points on the day. Today, as yields on 2 year bonds flirted with the 10% marker Greece opted to call in the outstanding favor from the IMF and the EU at about as 45 billion euros ($60 billion) put up as a financial lifeline (and in an attempt to calm markets) a little over a week ago.
(quote Bloomberg)
Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit. Greek bonds and stocks rallied after the announcement.
“There was no response from the markets, either because they didn’t believe in the political will of the EU or because they decided to go on with speculation,” Papandreou said today. “The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy. All the efforts by the Greek people are in danger of being in vain.”
With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.
Obviously, this is more like to be the end of the beginning than the beginning and as Greece readies itself to receive the loan (which will be tallied at 5%) other countries are sitting in the holding room waiting for the doctor to call them. Spain and Portugal come immediately to mind here and it remains to be seen whether Germany or indeed the EU or the IMF have the will and capacity to take another tête-a-tête with the market as Portuguese and Spanish spreads begin to widen. Of course, we are not there yet and it is still highly doubtful that the current plan will help Greece to avoid a default.
Activating the aid and turning over economic policy to EU and IMF oversight was “a new Odyssey for Greece,” Papandreou said. “But we know the road to Ithaca and have charted the waters,” referring to the return of mythological hero Ulysses to his island home.
We should consequently remember the debt snowball here and my guess is that 5% is still way too high a levy to pay for Greece with the nature of nominal GDP growth the country can expect in the coming years as deflation is imposed on the economy. We will see soon enough, but my feeling is that part of the whole policy rigamole that will now unfold, Greece will have to “restructure” notable chunks of her debt.
Finally and on a brighter note, markets do not seem to be able to decide whether this is good or bad for the Euro. Consequently, Bloomberg’s ever flashing newsstream today pitted CMC Markets’ chief market strategist Ashraf Laidi predicting the Euro to move down to 1.27 to the USD against Commerzbank analyst Ulrich Leuchtmann who predicted the Euro to gain on the “successful” bailout.,
Well, well … place your bets accordingly gentlemen. Unlike in Greek’s case he who ultimately raises the white flag should be able to live another day.
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