Why Sarah Palin is backing an underdog challenger against a sitting GOP senator.
By JOHN FUND
Sarah Palin has made news of late by endorsing what she calls her "mama grizzlies," strong conservative women who are trying to break the glass ceiling of GOP primaries.
Ms. Palin has endorsed Carly Fiorina for Senate in California and Susana Martinez for governor in New Mexico. She has made a recorded call supporting State Rep. Nikki Haley's campaign for governor of South Carolina in which she dismisses allegations about Ms. Haley's personal life as "nonsense," adding that she knows something about below-the-belt political attacks.
But when it comes to female Republican candidates in her home state of Alaska, Ms. Palin is striking out on a different path. She has declined to endorse Alaska's sitting GOP Senator Lisa Murkowski. Instead, she has conspicuously thrown her weight behind attorney Joe Miller in the August Republican primary. She calls Mr. Miller "a true Commonsense Constitutional Conservative."
The two women have a history. In 2006, Ms. Palin ended the political career of Frank Murkowski, the father of Senator Murkowski, by decisively beating him in the GOP primary for governor. One of the controversies dogging Gov. Murkowski at the time was his 2002 decision to appoint his own daughter (over Ms. Palin and other potential candidates) to the U.S. Senate seat he was vacating to become governor. The cloud lingered two years later when Ms. Murkowski sought a full term in her own right. She scored only an anemic 58% showing in the 2004 Republican primary.
In office, Senator Murkowski has carved a middle-of-the-road path in relation to her GOP colleagues, marred by a flirtation with limited climate change regulation. She has also continued the tradition of lobbying for pork-barrel projects for her home state, a stance raising the hackles of many conservatives. In a posting on Facebook, Ms. Palin accused Senator Murkowski of becoming "part of the big government problem in Washington," citing in particular her unwillingness to push for repeal of ObamaCare and support for taxpayer funding of abortion.
Sarah Palin is clearly taking a political risk by backing an underdog challenger against a sitting GOP senator. Ms. Murkowski has $2 million in her campaign treasury, and her approval numbers among Alaska Republicans rival those of Ms. Palin herself. She also has the power of incumbency. But then not many election years have been more promising for outsiders seeking to overthrow established incumbents. Mr. Miller, a former judge, has a compelling campaign style and will be able to draw on Ms. Palin's network of grass-roots supporters in Alaska to turn out the vote in what is traditionally a low-turnout primary.
Pelosi's Loss
Pelosi's Loss Could Be Obama's Gain
A pivot to the center (and re-election) would be easier without the House speaker.
By FRED BARNES
In Washington these days, President Obama is rumored to be hoping Republicans capture the House of Representatives in the midterm election in November. There's no evidence for this speculation, so far as I know, but it's hardly far-fetched. If Mr. Obama wants to avert a fiscal crisis and win re-election in 2012, he needs House Speaker Nancy Pelosi to be removed from her powerful post. A GOP takeover may be the only way.
Given the deficit-and-debt mess that Mr. Obama has on his hands, a Republican House would be a godsend. A Republican Senate would help, too. A Republican majority, should it materialize, could be counted on to pass significant cuts in domestic spending next year—cuts that Mrs. Pelosi and her allies in the House Democratic hierarchy would never countenance.
Nancy Pelosi and Barack Obama
Though Mr. Obama's preferred solution to his fiscal predicament would probably be a very large tax increase, it's a nonstarter. He needs spending cuts to assuage both markets and voters. It was the surge in spending—the stimulus, omnibus budget and the health-care legislation—that prompted the tea party protests, alienated independent voters, and caused the rapid decline in his popularity.
The test is whether Mr. Obama can restrain nondefense discretionary spending. That's the spending over which Washington exerts the greatest control. Even small cuts in entitlement spending are difficult to enact, but the president and Republicans might reach agreement there as well. That would be a political bonus for Mr. Obama, softening his image as a tax-and-spend liberal. Again, this would be impossible if Ms. Pelosi still runs the House.
Over the past 50 years, it should be no surprise which president has the best record for holding down discretionary spending. It was President Reagan. But who was second best? President Clinton, a Democrat. His record of frugality was better than Presidents Nixon, Ford and both Bushes. Mr. Clinton couldn't have done it if Republicans hadn't won the House and Senate in the 1994 election. They insisted on substantial cuts, he went along and then whistled his way to an easy re-election in 1996.
Here are the numbers: Average nondefense discretionary outlays per year under Nixon and Ford increased 39.7% over those of Presidents Kennedy and Johnson, followed by another 39% boost under Mr. Carter, a 14% drop under Mr. Reagan, a 12% jump under the first Mr. Bush, a 7.6% hike under Mr. Clinton, and a 31.2% increase under the second Mr. Bush.
Only four times in the past half century have nondefense discretionary expenditures in real terms decreased in a two-year congressional cycle. And only Reagan's first Congress—controlled by Democrats—cut more (15.5%) than the Republican Congress that Mr. Clinton faced after the 1994 election (3.7%). The other two reductions came under Reagan (2.5%, the 1986-87 budgets) and the younger Mr. Bush (.01%, the 2006-07 budgets).
If defense spending, which is also discretionary, is included, the result is the same. Mr. Clinton, working with a Republican majority, is second to Reagan. And in his new book, "Never Enough, America's Limitless Welfare State," William Voegeli of the Claremont Institute found that "welfare state" spending since FDR increased less under Mr. Clinton than under any president except Reagan.
Let's assume Mr. Obama recognizes that the fiscal and economic peril facing the country because of trillion dollar deficits is a problem for him as well. At the moment, the 10-year deficit tab is pegged to be as low as $6 billion (Congressional Budget Office) or as high as $13 trillion (Heritage Foundation). Either way, the public is alarmed.
Mr. Obama's re-election to a second term is heavily dependent on his ability to deal effectively with the fiscal mess. He could try to push a big tax hike, like a value-added tax, through a lame duck Congress after the November election. But that's very much a long shot. Besides, higher taxes—on top of those from expiration of the Bush tax cuts—could infuriate voters all the more.
For Mr. Obama, serious spending cuts are the only sensible means of dealing with a potential debt crisis or at least an unsustainable fiscal situation. However, he may not be able to rely on reductions in military spending, as liberal Democrats usually prefer. Mr. Obama has already included deep defense cuts in his budget, and Republicans are unlikely to go along with even deeper cuts.
Mrs. Pelosi won't be any help. She's committed to enacting the Democratic Party's entire liberal agenda, and next to the president she is the most powerful person in Washington. When the president flirted with scaling back his health-care bill last January, Ms. Pelosi stiffened his spine, and the bill passed. As long as she is House speaker, bucking her would be painful, especially if Mr. Obama proposes to eliminate a chunk of the spending she was instrumental in passing in 2009 and 2010.
But if Republicans win the House, everything changes. Mrs. Pelosi's influence as minority leader would be minimal—that is, assuming she's not ousted by Democrats upset over losing the majority.
Mr. Obama would be in a position to make his long-awaited pivot to the center. With Republicans in charge, he'd have to be bipartisan. He'd surely have to accede to serious cuts in spending—even as he complains they are harsh and mean-spirited. Mr. Obama could play a double game, appeasing Democrats by criticizing the cuts and getting credit with everyone else by acquiescing to them.
Mr. Clinton did this brilliantly in 1996. He fought with Republicans over the budget, winning some battles, losing others, as he lurched to the center. He twice vetoed Republican welfare reform bills, then signed a similar measure. He was hailed as the president who overhauled the unpopular welfare system.
In recent months, the president has met repeatedly with Mr. Clinton. We can only guess what they talked about. But given Mr. Clinton's own experience, I suspect he suggested to Mr. Obama that Republicans could be the answer to his political prayers. In 1994, Republicans freed the president from the clutches of liberal Democratic leaders in Congress. In 2010, they can do it again.
Mr. Barnes is executive editor of the Weekly Standard and a commentator on Fox News Channel. Weekly Standard intern Peyton Miller provided research for this article.
Tax Hikes and the 2011 Economic Collapse
Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market
By ARTHUR LAFFER
People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.
It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.
Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.
More
People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, "high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994."
Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said.
On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.
Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.
Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.
Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.
In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.
But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.
Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.
In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what's going to happen to tax rates, this conversion seems like a no-brainer.
The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.
Mr. Laffer is the chairman of Laffer Associates and co-author of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).
Paying Back America's Debt
Paying Back America's Debt
by Jeffrey A. Miron
As countries around the world struggle to get their fiscal houses in order, the crucial debate is whether to raise taxes or cut expenditure. Either approach generates winners and losers, so it might seem difficult to choose. Yet tax hikes differ from expenditure cuts in one key respect: tax increases will shrink the economic pie, but expenditure cuts can expand it.
A fundamental conclusion of economic theory, consistent with common sense and mountains of evidence, is that high tax rates are bad for the economy. Taxes on wages or salaries discourage work versus leisure, while taxes on capital income — interest, dividends, and capital gains — discourage savings relative to consumption. The implication is that taxes distort economic decisions, implying a less efficient economy and a lower level of output.
Thus higher tax rates raise revenue for any given amount of output, but this is partially offset by lower output. Research by my colleagues Greg Mankiw and Matthew Weinzerl, for example, suggests that the increased revenue from capital income taxes might be only 50 percent of what would be raised absent the output-depressing effects of these taxes. Mankiw and Weinzerl do not account for tax evasion and avoidance, moreover, which would lower net revenue even more. Large tax hikes can even reduce revenue by moving the economy to the wrong side of the Laffer curve.
Jeffrey Miron is an Economics Senior Lecturer and the Director of Undergraduate Studies in the Department of Economics at Harvard University. He is also a Senior Fellow at the Cato Institute and author of Libertarianism, from A to Z.
More by Jeffrey A. MironTax hikes are therefore a terrible way to address a fiscal crisis. The right expenditure cuts, in contrast, can both enhance economic productivity and shrink the debt, so they make sense independent of the fiscal outlook.
A higher age of eligibility for Social Security, for example, would both scale back federal expenditure and spur people in reasonable health to work longer. This is desirable from an efficiency perspective because it pushes people to work until their productivity declines. Under Social Security, many people retire when their productivity is still high because taxpayers are subsidizing this retirement.
Phasing in a higher age of eligibility — say by the increase in life expectancy since Social Security began in 1935 — would also restore Social Security to its original goal: providing a backstop for people who have outlived their own productivity. A similar adjustment in Medicare would reduce expenditure still further and have the same beneficial impact on the incentive to work. People whose productivity declines before the higher age of eligibility would fall back on Disability Insurance and Medicaid, as occurs now.
A different way to reduce expenditure while raising productivity is to incorporate more co-pays and deductibles into Medicare. A crucial problem with insurance is that when patients do not pay the full price of procedures, tests, and medications, they demand anything their doctors recommend without regard for cost. This means excessive use of scarce health care resources and a less efficient health care sector.
Private insurance moderates this moral hazard problem with co-pays and deductibles. Medicare includes these, but it could do far more without imposing an undue burden. Hospital stays, for example, have a deductible of only about $1,100 and no co-pays for stays of up to 60 days. Since the poor are covered by Medicaid, not Medicare, it is both efficient and reasonable to insist that Medicare recipients kick in more of their own dollars. This reduces expenditure directly and encourages health care decisions that balance costs and benefits.
Many other cuts, such as for agricultural subsidies or pork barrel spending, can also improve economic efficiency while shrinking the deficit. Some of these programs are small potatoes, but since they are bad for the economy regardless of the debt, cutting them is a no-brainer. Other significant cuts — in drug prohibition enforcement or the occupations of Iraq and Afghanistan — should also be on the table, although these will be more controversial.
A fact everyone must accept is that the United States has made promises to future generations that it cannot keep, so someone has to take a hit to restore fiscal balance. In choosing where to impose this burden, we should recognize that expenditure cuts expand the economic pie, while tax hikes shrink it. That should make the choice easy, from both economic and political perspectives.
Maryland Wiretapping Law Needs an Update
Maryland Wiretapping Law Needs an Update
by David Rittgers
Anthony Graber is facing felony charges today. His crime? Recording a traffic stop with a video camera — supposedly prohibited in Maryland under an archaic "anti-wiretapping" statute that is well past due for a revisit by the General Assembly.
Mr. Graber was riding his motorcycle on I-95 in Maryland, speeding and popping wheelies and recording the experience with a helmet cam. An unmarked car cut him off as he slowed for traffic, and a man in a sweatshirt and jeans jumped out with a gun in his hand. Five seconds after the armed man exited his vehicle and approached Mr. Graber, he identified himself as a Maryland state trooper. But for the first four seconds of the encounter, it looks like a carjacking. Mr. Graber accepted a speeding ticket.
That was the end of the story until Mr. Graber posted video of the encounter on YouTube. Then six state troopers showed up with a search warrant, seized two computers, two laptops and a camera. The officers served the warrant at 6:45 a.m. on a weekday, detaining Mr. Graber's family for 90 minutes and forbidding his mother from leaving for work and his younger sister from going to school until the search was complete. Mr. Graber says he was shown a copy of a search warrant with a judge's signature on it but was only allowed to keep an unsigned copy — because the judge's identity is being kept secret.
Prosecuting those who capture police misconduct on tape thwarts the rule of law and makes civil servants into bullies.
Mr. Graber, who serves in the Air National Guard, was detained for 26 hours in the Baltimore County jail before seeing a judge to set his bond.
How is this possible? Because the Maryland wiretapping statute makes it a crime to record any conversation without the consent of all parties — a "unanimous consent" law. Maryland is one of a dozen states with such a statute; most jurisdictions are less strict. The penalty can be up to five years in prison and up to a $10,000 fine. When the prosecutor asked for a $15,000 bond for a $10,000 crime, the judge questioned both this maneuver and the use of the law against Mr. Graber.
The judge was right to ask how Mr. Graber came into custody. Maryland courts have consistently held that where there is no reasonable expectation of privacy, there is no violation of the wiretapping law. An assistant attorney general confirmed this reading of the law in a letter to the state legislature last year. Mr. Graber's conversation with the officers giving him a speeding ticket, on a public highway and observed by hundreds of motorists, could not have been in a more public setting. It seems certain that even if Mr. Graber is convicted he will win on appeal and have the verdict thrown out because of the state's overbroad reading of the wiretapping statute.
The deterrent to recording police is still established. Mr. Graber faces long hours and thousands of dollars in attorney's fees. Even if he sues the police for violating his civil rights and wins monetary damages, he has been put through the wringer enough to make citizens pause before pushing the record button. In short, you may beat the rap, but you won't beat the ride — the ride to the station house and into court.
This boils down to "contempt of cop," as it is known in civil liberties circles. The police are, in effect, telling Mr. Graber and anyone else who might record police activity in Maryland that they have little interest in police transparency and accountability.
David Rittgers is an attorney and legal policy analyst at the Cato Institute. His e-mail is drittgers@cato.org.
More by David RittgersThis comes at a time when four Prince George's County officers have been relieved of duty and face both county and federal investigations for beating a University of Maryland student during a post-basketball victory celebration. Video of the beating made all the difference in that case. But if it had caught any conversation between the officers and the student, prosecutors could have treated it as a felony instead of what it was: a necessary bit of transparency in policing.
The Maryland wiretapping law is itching for an update. The police work for the citizens of Maryland, and there is no reasonable argument that the citizens are not owed a transparent accounting of police actions funded by their tax dollars and potentially infringing on their liberties. Prosecuting those who capture police misconduct on tape thwarts the rule of law and makes civil servants into bullies. The legislature should amend the law and let Maryland law enforcement officers know that if they're doing good police work, they should not be worried about getting caught on tape.
The Tea Party and the Drug War
The Tea Party and the Drug War
by Jeffrey A. Miron
Voter dissatisfaction with Republicans and Democrats is at historic levels, and the tea-party movement is hoping to play kingmaker in the November elections. The country's current breed of discontent is ideal for the tea parties, because economic concerns are foremost, allowing the movement to sidestep the divisions between its libertarian and conservative wings.
As the elections near, however, voters will want to know where the party stands not just on the economy but on social issues. A perfect illustration is drug policy, where conservatives advocate continued prohibition but libertarians argue for legalization. Which way should the tea party lean when this issue arises?
If the party is true to its principles — fiscal responsibility, constitutionally limited government, and free markets — it must side with the libertarians.
[D]rug prohibition is not remotely consistent with fiscal responsibility.
Fiscal responsibility means limiting government expenditures to programs that can be convincingly said to generate benefits in excess of their costs. This does not rule out programs with large expenditures, or ones whose benefits are difficult to quantify; national defense is guilty on both counts, yet few believe that substantial military expenditure is necessarily irresponsible.
Any significant expenditure, however, should come with a credible claim that it produces a benefit large enough to outweigh both the expenditure itself and any ancillary costs. From this perspective, drug prohibition is not remotely consistent with fiscal responsibility. This policy costs the public purse around $70 billion per year, according to my estimates, yet no evidence suggests that prohibition reduces drug use to a significant degree.
And prohibition has unintended consequences that push its cost-benefit ratio even farther in the wrong direction. Prohibition generates violence and corruption by pushing drug markets underground and inflating prices. Prohibition inhibits quality control, so users suffer accidental poisoning and overdoses. Prohibition destroys civil liberties, inhibits legitimate medical uses of targeted drugs, and wreaks havoc in drug-producing countries.
Jeffrey A. Miron is senior lecturer and director of undergraduate studies at Harvard University and senior fellow at the Cato Institute. He is the author of Libertarianism, from A to Z, from Basic Books.
More by Jeffrey A. MironDrug prohibition, at least when imposed at the federal level, is also hard to reconcile with constitutionally limited government. The Constitution gives the federal government a few expressly enumerated powers, with all others reserved to the states (or to the people) under the Tenth Amendment. None of the enumerated powers authorizes Congress to outlaw specific products, only to regulate interstate commerce. Thus laws regulating interstate trade in drugs might pass constitutional muster, but outright bans cannot. Indeed, when the United States wanted to outlaw alcohol, it amended the Constitution itself to do so. The country has never adopted such a constitutional authorization for drug prohibition.
Finally, drug prohibition is hopelessly inconsistent with allegiance to free markets, regardless of the level of government. Free markets should mean both that businesses can operate as they please and that individuals can purchase and consume whatever they want, so long as these actions do not harm others, even when such decisions seem unwise. Drug prohibition interferes with precisely these activities.
Thus, if the tea-party believes in its principles, it must choose the libertarian path on drug prohibition.
Chips off the block
Asian currencies
Chips off the block
Currencies around Asia are more flexible than you think
AMID all the diplomatic ding-dong over China’s yuan, it is easy to lose sight of emerging Asia’s other currencies. There is not much din over the dong, for example. While China has kept the yuan pegged to the dollar since July 2008, ignoring complaints that it is artificially cheap, Vietnam’s currency, the dong, has depreciated by 13% against the greenback over the same period, unremarked and unprotested. South Korea and Taiwan, the only countries besides China ever to be labelled currency manipulators by America’s Treasury, have seen their currencies cheapen by 17% and 6% respectively.
China’s critics justify their preoccupation by invoking a “yuan block”. China’s neighbours and rivals are reluctant to allow their currencies to rise too far against the yuan, for fear of losing China as a customer, or losing out to it as a competitor. Thus although China accounts for only 19% of America’s imports, its peg, it is argued, frustrates a broader realignment of currencies in the region.
Does such a yuan block exist? For over a decade before July 2005, it was impossible to say. Since the yuan did not move independently of the dollar, it was hard to know if China’s neighbours were in thrall to its currency or America’s. But for the following three years, China allowed the yuan to crawl slowly upwards against the dollar. A 2007 study by Chang Shu, Nathan Chow and Jun-Yu Chan at the Hong Kong Monetary Authority took advantage of this interlude to measure the influence of China’s yuan on other regional currencies.
Using a method popularised by Jeffrey Frankel of Harvard University and Shang-Jin Wei of Columbia, they looked at the fluctuations of Asian currencies against the Swiss franc. Insofar as the Thai baht and the dollar mirrored each other’s moves against the Swiss currency, the authors could conclude that the baht was under the dollar’s spell. But if the baht and the yuan strengthened against the franc when the dollar did not, they could identify the separate pull of China’s currency.
That pull was strongest on the Korean won, Thai baht, New Taiwan dollar and Singapore dollar. But it also seemed to reach as far as the Indonesian rupiah and even the Indian rupee. The economists’ results suggested that if the yuan were to appreciate by 1%, independently of the greenback, the Singapore dollar, New Taiwan dollar and the Thai baht would rise by 0.58%-0.68% in sympathy. The Korean won would strengthen one for one.
Since July 2008 the yuan has not moved an inch against the dollar. Does that mean that other members of the yuan block have also stood still? Hardly. Malaysia untethered its currency from the dollar one day after China in July 2005. But unlike China it did not retether it during the crisis. The ringgit fell by 15% from April 2008 to March 2009, before regaining much of that ground over the next 14 months. The won’s wobbles have been even greater. It lost 40% of its value from February 2008 to March 2009, and remains 25% below its pre-crisis peak.
Most of emerging Asia’s currencies strengthened against the dollar this spring. The ringgit rose by 8% from February to May, after Malaysia’s independent-minded central bank raised interest rates in March and again on May 10th. In April Singapore’s Monetary Authority said it would allow a “gradual and modest” appreciation of its currency. But since the debt crisis in Greece unnerved investors, these currencies have mostly lost value again.
This block isn’t scared any more
The flexibility shown by Asia’s currencies is noteworthy, even if most of their flexing has been downwards. Economists used to accuse the region of a “fear of floating”. In 2003 Michael Dooley of the University of California, Santa Cruz, with David Folkerts-Landau and Peter Garber of Deutsche Bank argued that a de facto dollar standard prevailed in much of the region, akin to the “Bretton Woods” regime of fixed dollar parities that emerged after the second world war. But a paper published on May 19th by Ila Patnaik and her colleagues at the National Institute of Public Finance and Policy in Delhi documents a gradual thinning out of the Bretton Woods II regime.
They use a similar method to Messrs Frankel and Wei to show how closely Asia’s currencies track the dollar, euro, yen and pound. They give each country a Bretton Woods II score, based on the rigidity of its currency, especially relative to the dollar. In 2003 the average score in Asia was about 0.85 (a score of one represents a hard peg to the dollar). But the score has since dropped steadily to 0.75.
The new flexibility should stand Asia’s economies in good stead. Their ties to the dollar once guaranteed stable prices at home, as well as competitive exports abroad. But America’s monetary policy, suited to an economy with flat prices and high unemployment, is too loose for a region now growing so rapidly. As Asia’s recovery outstrips America’s, the region’s central banks will have to raise interest rates, as Malaysia, Vietnam and India have already done. Their currencies will appreciate as a result.
This appreciation will be easier to stomach if the yuan also strengthens. But China’s neighbours should not wait for this to happen. Even members of the so-called yuan block should not let the yuan block their progress.
America and Israel
America and Israel
Support remains strong but is no longer unquestioning
Washington, DC
FROM Barack Obama’s point of view, the timing could not have been worse. The administration has been pushing hard in the Security Council for new sanctions against Iran and had invested heavily in the Israeli-Palestinian “proximity talks” brokered by Mr Obama’s special envoy, George Mitchell. Both of these efforts are now in jeopardy. Moreover, the Israeli raid came soon after Mr Obama had decided to rescue America’s relations with Israel from the ditch into which they fell in March, when Israel announced plans for a Jewish suburb in occupied East Jerusalem just as the proximity talks were about to begin.
During that confrontation Mr Obama asked Binyamin Netanyahu to freeze Jewish settlement in Jerusalem, an undertaking the Israeli prime minister refused to give. Mr Netanyahu received a frosty reception at the White House in March. But for one reason or another the Obama administration decided several weeks ago that it was time to make up. Mr Netanyahu was invited back and was supposed to drop by this week. After the raid he flew directly home to Israel from a visit to Canada.
Whatever the private thoughts of Mr Obama, America has refused to join the international outcry against its wayward ally. In New York American diplomats ensured that a special meeting of the UN Security Council did not condemn Israel and called only for an impartial investigation of the facts. In a telephone call with Turkey’s enraged prime minister, Mr Obama was cautious. He expressed his condolences and affirmed the need to provide humanitarian assistance to the people of Gaza—but, according to a White House summary of the conversation, “without undermining Israel’s security”.
As ever, domestic politics have played a part in shaping Mr Obama’s responses. Israel’s friends on Capitol Hill have pushed back hard since the March spat. A letter affirming the value of a close relationship with Israel was signed by 334 of the 435 members of the House, and a similar one by 76 of the 100 senators. Despite the emergence of J Street, a feisty and doveish pro-Israel lobby, AIPAC, the American Israel Public Affairs Committee, has far more muscle and is not afraid to flex it.
Even in Congress, however, support for Israel is not rock solid, and is showing signs of change. Dan Senor, a senior fellow at the Council on Foreign Relations, noted recently that there were “real divisions” among congressional Democrats over Israel, “and those divisions are widening and cementing in ways not seen in decades”. For most Republicans, on the other hand, supporting the Jewish state remains, literally, an article of faith.
With mid-term congressional elections due in November and the Democrats braced for a drubbing, this would be a tricky time for Mr Obama to pick a fresh fight with Israel. That may be why, since early May, the White House has been labouring to correct what Rahm Emanuel, Mr Obama’s chief of staff, has described as the administration’s flawed “messaging”. A posse of senior officials have stressed that the ties to Israel are unbreakable.
That said, the influence of domestic politics can be exaggerated. Despite the pre-flotilla thaw, Mr Obama has made it abundantly clear in recent months that Israel can no longer take American support for granted. He seems genuinely to believe that the United States can and should bring about a two-state solution in Palestine. Mr Netanyahu says that is his aim too, but in his case there are strong reasons to doubt whether he is sincere. So long as both leaders remain in office, with their convictions unchanged, that will be a recipe for growing estrangement.
What the new iPhone probably won't include (but should)
What the new iPhone probably won't include (but should)
LONDON
AS THE futurologist Paul Saffo likes to observe, most ideas take 20 years to become an overnight success. The basic technology is often worked out, but without someone to champion it, it spreads only slowly. Then, eventually, a big company takes the technology in question and builds it into its products, thus endorsing the idea and giving it scale. Suddenly, it takes off. It seems to be an overnight success, but it has actually taken much longer than that to reach the mainstream.
Over the years Apple has blessed several technologies in this way and brought them to a mass audience: the graphical user interface with the Mac, the digital music player with the iPod, mobile internet-browsing and multi-touch screens with the iPhone, tablet computers with the iPad. In each case there were previous examples of the technology, but Apple showed how it should be done, and it then took off. There's another such technology that has been around for several years and is ready for lift-off; it just needs the endorsement of a big company like Apple to make it happen. The technology in question is "near-field communication" (NFC) chips, which can be used to make contactless payments, among other things.
If you use a contactless card as your office pass or public-transport ticket (prominent examples are Octopus in Hong Kong and Oyster in London) then you'll already be familiar with the basic idea: you hold the card near a reader (I keep my Oyster card inside my wallet) and the ticker barrier opens. There are also contactless credit cards in several markets (though not very many retailers accept them yet), and contactless key fobs, using the same technology, which let you pay for petrol with a swipe. This technology has been slowly spreading for years.
What an NFC chip does, however, is enable a mobile phone to emulate one of these contactless cards. The phone is then able to replace a wallet-full of such cards, and accompanying software on the phone lets you check the balance on your rail pass, for example. This is in fact commonplace in Japan, where thousands of people routinely use their mobile phones as their railway tickets, and renew their tickets right on their phones, using the phone's mobile-internet connection. For a while this was easily the biggest mobile-commerce application on Earth.
All the nuts and bolts have been worked out, in other words. But the technology is still stuck in the starting blocks. The banks were pushing contactless credit cards quite hard in some parts of the world a couple of years ago, but the financial crisis has understandably distracted them. Handset-makers such as Nokia have also produced handsets with NFC support, but if only one or two phones in the line-up support NFC, that's not enough phones to encourage retailers, railway companies and so on to adopt the technology.
If Apple announced that every iPhone would henceforth support NFC, however, then the picture would change overnight. There would be a flood of apps to support the emulation of various contactless cards. Within a few months there would be a critical mass of tech-savvy users willing to adopt the technology, giving retailers, banks and other companies the confidence to pile in. And iPhones are quite expensive handsets, with relatively price-insensitive buyers, so nobody would really notice the small added cost of an NFC chip.
Understandably, given that it makes perfect sense, there have been persistent rumours that Apple might be thinking of putting NFC chips into the next iPhone, which is due to be announced on June 7th. Tellingly, the company has filed a couple of NFC-related patents. But the next-generation iPhones that have escaped into the wild in recent weeks, and have then been taken apart, do not seem to include the technology. Moreover, Apple has approved an iPhone case, made by DeviceFidelity, that includes an NFC chip connected via the dock connector, and which then talks to an app on the phone. I doubt Apple would do that if it were about to announce direct support for the technology itself; but perhaps it's a bluff to divert attention from plans to do just that. On balance, though, I don't expect the new fourth-generation iPhone HD, or whatever it is called, to include NFC. But perhaps the fifth-generation one will?
Goldman Sachs May Explain PPT’s Vanishing Act
Goldman Sachs May Explain PPT’s Vanishing Act: Caroline Baum
Commentary by Caroline Baum
June 7 (Bloomberg) -- Where are they? What’s keeping them? Stock markets across the globe are getting hammered, and there’s no sign of the Plunge Protection Team.
Sure, there were some sightings of the bond vigilantes in places like Greece over the past month. But a worldwide equity meltdown is a job for real men, for the PPT.
Otherwise known as the President’s Working Group on Financial Markets, the PPT was established after the 1987 stock- market crash to ensure the financial markets have adequate liquidity to function. Members include the U.S. Treasury secretary, the chairman of the Federal Reserve, the chairman of the Securities and Exchange Commission and the chairman of the Commodity Futures Trading Commission.
Somehow this group morphed into a government/private-sector cabal -- Goldman Sachs always figures prominently -- that secretly intervenes to prop up the stock market.
You know those gut-wrenching dives in the Standard and Poor’s 500 Index that are miraculously erased and turn into gains by the end of the day? The PPT.
So where are they when we need them? I started by checking some of the conspiracy theorists’ websites. If anyone knew what was up with the PPT, it would be the black-helicopter crowd.
Alternative Acronyms
Nothing. Nada. I tried a Google search. That’s when I really started to worry. A search for “PPT” produced nary a reference to our would-be saviors. The results directed me, in this order, to: Microsoft’s PowerPoint home page; the Pink Poogle Toy, which describes itself as a “resource for Neopets players”; and the Pittsburgh Public Theater. The first reference to my kind of PPT came at the bottom of the fourth page of the search results.
The last update on the PPT blog was July 9, 2008: “The return of the Plunge Protection Team coming soon.”
Not soon enough.
Then it hit me. Of course! The PPT had come out of the shadows and into the daylight. When the Fed first invoked the “unusual and exigent circumstances” clause of the Federal Reserve Act in March 2008 to lend to almost anyone, it removed the need to operate sub rosa.
Man in the Market
Stocks (S&P futures are the PPT’s preferred vehicle) weren’t included in the panoply of assets the Fed was authorized to buy or markets it was empowered to nurse back to health. Still, the Treasury and Fed bailout was tailor-made for the CTs. It reinforced what they already believed -- that the Fed and Treasury have always manipulated the market with the help of Goldman Sachs -- and the rest of us were too naive to see. Now it was out in the open.
What’s more, with Goldman’s wings clipped by an SEC lawsuit and status shrunk by public wrath, who was going to act as the PPT’s man in the market?
I wasn’t ready to give up all hope for some PPT undercover operations, although the accumulating evidence wasn’t on my side.
Where was the PPT when U.S. stocks lost more than half their value between October 2007 and March 2009? Was then- Treasury Secretary Hank Paulson too preoccupied with TARP improvisations to brief Tim Geithner, his successor, on proper intervention procedures? I had always assumed the only reason the Obama administration rushed Timmy’s nomination through the Senate after it was learned he cheated on his taxes was because he was already in the loop as president of the New York Fed. I guess not.
One-World Order
My last hope that the PPT would rescue the stock market, which was sinking again after Friday’s disappointing employment report for May, lay elsewhere. The U.K. press was rife with stories about a weekend meeting of the Bilderberg Group.
This annual event, where the global elite convene at great hotels to discuss the world’s problems, is shrouded in secrecy. The press isn’t invited.
That doesn’t mean no press coverage. One website said the agenda this year would include approaches to provoking the kind of economic breakdown that could “justify the establishment of a full-scale world economic governance.” Another website said the group would discuss manufacturing a global depression to implement their dream of one-world government.
That these assertions sound less wacky than they used to tells you to what extent public and private sectors have become enmeshed and to what degree governments have coordinated their national and regional bailouts.
Was it just a coincidence that Fed Chairman Ben Bernanke didn’t attend the G-20 meeting in South Korea, sending Fed Governor Kevin Warsh in his place? I called the Fed to find out.
Bernanke will not be attending the Bilderberg Group weekend meeting, the Fed told me on Friday. Maybe that’s just what they want me to believe. Has anyone checked Lloyd Blankfein’s calendar?
Rich Women Parachute......
Rich Women Parachute Jump in California Races: Margaret Carlson
Commentary by Margaret Carlson
June 7 (Bloomberg) -- Parachuting into high office is nothing new for wealthy men: former New Jersey Governor Jon Corzine made millions at Goldman Sachs Group Inc., ex- presidential contender John Edwards got his fortune chasing ambulances, and Wisconsin Senator Herbert Kohl built his selling socks and toasters at the family’s department store chain.
The bug hits when they run out of things money can buy -- Kohl already owned the Milwaukee Bucks basketball team before joining the Senate -- or get otherwise bored.
For those with independent means, there is no need to stuff envelopes, serve on the school board or cozy up to precinct captains. You just stand atop your money, shout “I’m running,” and, voila, start at the top. Inexperience, an inability to inspire or stupidity aren’t necessarily fatal drawbacks.
Using that model, two wealthy California businesswomen who barely cared enough to vote, are about to make history: tomorrow Meg Whitman and Carly Fiorina are likely to become the first Republican women ever nominated for governor and senator, respectively, in California.
Whitman, former chief executive of EBay Inc., leads state Insurance Commissioner Steve Poizner by a two-to-one margin heading into the state’s June 8 Republican gubernatorial primary. The winner is likely to face former California Governor Jerry Brown in the fall. Fiorina, who became rich as CEO of Hewlett-Packard Co., is ahead by 20 points in two recent polls and is poised to take on Democratic Senator Barbara Boxer in November.
Spending $80 Million
Multibillionaire Whitman is the far richer of the two, and she’s spent about $80 million of her own money on the race. When she saw Poizner drawing within 9 points of her, she just pulled a checkbook out of her designer bag, purchased perhaps on EBay, and wrote another check.
What both have going for them besides their cash (Fiorina has spent $5.5 million so far) is the country’s sour mood, which gives anyone, even a CEO, a leg up over a career politician. Even failing to vote -- which both of them have been guilty of for most of their adult lives -- barely caused a ripple. The important thing is they’d never passed a law or spent a taxpayer’s dime.
Nowhere is money more important than California, where a campaign rally consists of two people in front of a TV. Whitman is shy and tentative in person, her only laugh a nervous one. But in paid ads, she’s Superwoman, able to erase her frequent on-the-stump blunders.
Blurting Out Proposals
Billionaires get used to people agreeing with whatever they say and so blurt things out with abandon. Whitman had the bright idea that the way to make Sacramento work better is getting legislators to form themselves into teams around specific issues, much as every legislative group, federal or state, is already organized. She also boasted that she would sue folks who should be sued, except that she has no jurisdiction over the state’s top lawyer. She proposed cutting the capital-gains tax and was surprised when it looked self-serving since it would cut her own tax bill by half.
Until recently, Whitman has campaigned generally on safe topics -- schools, jobs, and spending cuts. But she’s increasingly careful about the likeliest primary voters on the right. She’s for a moratorium on efforts to cope with global warming and when Poizner gained on her, she came out with an anti-immigrant ad that would make the governor of Arizona blush. It worked.
Fiorina is a more polished candidate, having learned the hard way -- as a surrogate for presidential candidate John McCain -- to stay on message. When she remarked that neither he nor Barack Obama were equipped to run a major corporation, she was yanked off the air for a while.
Demon Sheep
Her tack in the race has been to make former Congressman Tom Campbell’s political experience a debilitating factor. One of her campaign ads depicts her opponent as a wolf in sheep’s clothing. It shows an actor in a sheep suit with blood-red eyes leading other sheep, not to slaughter but to more spending. The tag line says, “FCINO -- fiscal conservative in name only.” In another ad, Fiorina looks into the camera and asks viewers about politicians: “Had enough?” “Me, too,” she answers.
Fiorina emphasizes her humble beginning as the daughter of a school teacher (a law school professor who became a federal judge) and her stint as a secretary (while she earned her M.B.A.). Degree in hand, she worked her way up quickly at Lucent Technologies and then at Hewlett-Packard where she became CEO in 1999. She says that the chemotherapy and radiation she just went through for breast cancer makes Senator Boxer not the least bit scary.
Face Right
What Whitman and Fiorina have done by moving to the right is succeeding -- if you are thinking about the primary tomorrow. But it’s not without problems if you are thinking about the election in November. Whitman’s ad buy in May beat back Poizner but hurt her among Latinos. In April Whitman led former Governor Brown by three points and she now trails him by six.
Fiorina, who has a Tea Party challenger, has moved even further to the right, going so far as to say in a debate that she would allow people on the No-Fly list to buy guns. She has become pro-offshore drilling, ardently anti-abortion, pro-repeal of health-care reform, anti-tax -- she signed a no-increase pledge -- and describes concerns about climate change as being “worried about the weather.”
When asked about Sarah Palin last year, Fiorina sniffed, “I’ve never met her. Next question?” She’s now happily accepted Palin’s endorsement. This helped the once-moderate Fiorina leap ahead of Campbell who led in polls until a few weeks ago, and keep Tea Partier Chuck DeVore at 16 percent. But it hasn’t helped her against Boxer whom she trails by six points.
In the general election, Fiorina might have an easier time against Boxer than Whitman against Brown. Although a former governor, former mayor, and current attorney general, Brown isn’t your ordinary incumbent. He never moved into the governor’s mansion, lives on roots and berries and eats CEOs for lunch. Whitman, not a good debater, wriggled out of all but one aired at 3 p.m. on a Sunday. He’s the one candidate against which the $150 million she’s pledged to spend won’t be a stake in the heart.
German Factory Orders Unexpectedly Jumped
German Factory Orders Unexpectedly Jumped in April (Update1)
By Gabi Thesing
June 7 (Bloomberg) -- German factory orders unexpectedly jumped for a second month in April as the weaker euro boosted export demand and companies increased investment.
Orders, adjusted for seasonal swings and inflation, rose 2.8 percent from March, when they surged 5.1 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.4 percent drop, according to the median of 34 estimates in a Bloomberg News survey. From a year earlier, orders gained 29.6 percent.
Europe’s sovereign debt crisis has pushed the euro down 20 percent against the dollar since late November, making exports to countries outside the 16-nation currency bloc more competitive. While budget cuts across the region may crimp economic growth, German factories are ramping up production to meet booming foreign orders and a rebound in domestic investment.
“The weaker euro is really kicking in now, and Germany has a dominant position when comes to making the machines that power the global economy,” said Carsten Brzeski, an economist at ING Group in Brussels. “The second quarter will be really strong. European budget tightening will hit German companies later in the year.”
The euro rose half a cent after today’s report to $1.1992.
March Revision
The Economy Ministry revised up the orders increase in March from an initially reported 5 percent. In April, domestic orders climbed 2.9 percent and export sales rose 2.8 percent, driven by a 5.5 percent gain in orders from outside the euro area, the report showed.
Demand for goods such as Siemens AG turbines and Daimler AG cars in emerging economies like China is encouraging companies to add workers. The unemployment rate unexpectedly fell to 7.7 percent in May.
Daimler’s Mercedes-Benz, the world’s second-biggest luxury- vehicle brand, aims to increase second-quarter sales “substantially” as the high-end E-Class sedan attracted customers in April. Deliveries rose 15 percent from a year earlier to 93,100 cars and sport-utility vehicles, the carmaker said on May 11.
While the coldest weather in 14 years suppressed construction over winter, latest reports suggest the economy, Europe’s largest, sprang back to life when building sites reopened with the arrival of spring.
The economy will grow 1.6 percent this year after a 5 percent contraction in 2009, the Bundesbank has forecast. Gross domestic product rose 0.2 percent in the first three months of the year.
G-20 Clash Over Recovery Risks
G-20 Clash Over Recovery Risks ’Sub-Potential’ Growth (Update1)
By Simon Kennedy and Mark Deen
June 7 (Bloomberg) -- Global policy makers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the U.S. warns against pushing exports instead of domestic demand.
At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5, Treasury Secretary Timothy F. Geithner said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand. European Central Bank President Jean-Claude Trichet said fiscal tightening in “old industrialized economies” would aid the expansion by shoring up investor confidence.
Each strategy carries threats for the global rebound that the G-20 said faces “significant challenges.” Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could worsen unemployment. Relying on exports leaves the world prone to trade wars and competitive currency devaluations as countries seek to give their companies an edge.
“The world may end up in a period of sub-potential growth for two or three years,” said Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore. “We need to accept that all of us cannot simultaneously grow our way out of trouble.”
The fragility of the recovery from last year’s worldwide recession was evident as the G-20’s finance ministers and central bankers gathered to shape the agenda for this month’s summit of their leaders in Toronto.
Stocks Tumble
The Standard & Poor’s 500 Index closed at a four-month low on June 4 after government figures showed U.S. employment rose less than forecast in May. The euro today fell to as low as $1.1889, its weakest level since 2006 amid concern Hungary is nearing a debt crisis.
G-20 officials signaled deeper concern about the economic and fiscal outlooks than when they last met in April. In a statement released after their talks ended June 5, they promised to “safeguard recovery,” yet replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth-friendly measures to deliver fiscal sustainability.” Countries can still fan domestic growth “within their capacity,” they said.
Capital Standards
Officials separately targeted deadlines of November to design new rules to raise the quality and quantity of capital held by banks and December 2012 to introduce them. Chancellor of the Exchequer George Osborne was among those to say the process for enactment may be extended. A European and U.S. proposal to tax banks globally to cover the cost of bailouts was defeated.
Banks have warned that the capital proposals may impinge on credit and growth. UBS AG, Switzerland’s biggest bank, has estimated the proposals may force banks to raise as much as $375 billion in fresh capital.
In a sign of tension among the world’s economic policy chiefs, Geithner flagged concern that others are turning to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength.
“Stronger domestic demand in Japan and in the European surplus countries” is needed, Geithner said in a June 5 press briefing in Busan. “The value of the G-20 is to help each of us individually recognize the importance of economic policies that are in our broad collective interest.”
The conundrum is that governments are all trying to harness a rebound in trade, which the Netherlands Bureau for Economic Analysis last week estimated grew 3.5 percent in March, more than double February’s pace.
Pernod, Toshiba
Companies from French beverage maker Pernod Ricard SA to Japan’s Toshiba Corp. and Nissan Motor Co. are counting on foreign demand to stoke earnings. Pernod said last month that for every 1 percent drop in the euro versus the dollar, its earnings before interest and taxes rise 12 million euros ($15 million).
Toshiba, Japan’s biggest memory-chip maker, said May 11 it aims to quadruple profit in three years as foreign sales climb. Nissan, Japan’s No. 3 automaker, the next day forecast earnings to more than triple in a year on North America and China sales.
In the U.S., President Barack Obama aims to double exports over five years, while China is refusing to bow to international pressure to allow an appreciation in the yuan, which it has held at 6.83 per dollar for almost two years to help its exporters.
Japan’s Kan
Japan’s new prime minister, Naoto Kan, enters office with a reputation for favoring a weak yen after saying as finance minister that he wanted the currency to fall “a bit more.” French Prime Minister Francois Fillon said June 4 the euro’s drop below $1.20 is “good news” after a gain that was “penalizing our exports.” Britain’s Osborne said last week in Beijing he is “keen” to make the U.K. more trade-driven.
“If everyone’s expecting to export their way out of trouble, who will be buying?” said Alvin Liew, a Singapore- based economist for Standard Chartered Plc. “Countries may resort to inward-looking policies and protectionist sentiment.”
China, the world’s fastest-growing major economy, has been a source of global demand to date, with a surge in imports helping narrow the nation’s trade surplus. The excess shrank to $8.2 billion in May from $13.4 billion a year ago, according to the median forecast in a Bloomberg News survey ahead of a government release this week.
China’s Limit
At the same time, measures by Premier Wen Jiabao’s government to slow the expansion and avert asset bubbles mean China’s ability to pull the global economy will be limited, Stephen King, chief economist at HSBC Holdings Plc, said in an interview with Bloomberg Television today.
“Where does demand stimulus come from -- not from China, China has already been growing too quickly,” King said.
The upshot for a global economy chasing weaker exchange rates is a “zero-sum story,” according to Michala Marcussen, head of global economics at Societe Generale SA in London. She calculates that while a 10 percent depreciation of the euro boosts euro-area growth by 0.7 percentage point, that is offset by weakness in the U.S. and China, leaving overall world GDP just 0.2 percentage point stronger.
Governments are looking overseas for growth because they need to pare fiscal deficits at home. The International Monetary Fund calculates the G-20 nations’ budget shortfalls will average 6.8 percent of gross domestic product this year, up from 0.9 percent in 2007.
“For the vast majority, addressing finances, budget consolidation, is priority No. 1,” French Finance Minister Christine Lagarde said in Busan. “There are some voices, definitely a minority, that insist on the need to underpin growth.”
European officials said June 5 in Busan that budget tightening must come next year, while Geithner advocated a “mid-term” horizon for deficit reduction.
IMF Managing Director Dominique Strauss-Kahn said at a press briefing that a study by the fund showed fiscal consolidation, without market deregulations that would bolster domestic demand, could shave as much as 2.5 percentage points off global growth and cost 30 million jobs.
Asia Stocks, Metals Fall
Asia Stocks, Metals Fall; Euro, S&P 500 Futures Pare Losses
By James Poole and Candice Zachariahs
June 7 (Bloomberg) -- Asia stocks dropped the most in 15 months and commodities declined after a smaller-than-estimated increase in American jobs led to a rout in U.S. equities. The euro and Standard & Poor’s 500 Index futures pared losses.
The MSCI Asia Pacific Index slid 3.3 percent to 109.73, the biggest decline since March 30, 2009, and the Stoxx Europe 600 lost 1.6 percent at 8:52 a.m. in London. Standard & Poor’s 500 Index futures decreased 0.6 percent after dropping as much as 1.3 percent. Oil fell 1.2 percent to $70.62 a barrel and copper dropped 2.8 percent. The Hungarian forint strengthened after depreciating 3.9 percent on June 4, while the euro pared losses to trade 0.2 weaker against the dollar.
Investor sentiment deteriorated in Asia, catching up with U.S. markets after the government said private-sector employers added 41,000 jobs in May, below the 180,000 median forecast of 35 economists in a Bloomberg News survey.While stocks fell in Europe, the forint stabilized as Hungary’s government said June 5 that there’s no danger of default. The currency lost 7.3 percent last week on concern that Europe’s debt woes were spreading beyond countries participating in the euro.
““The market is groaning under the weight of excessive debt levels and there’s a lot of concern over the state of European banks,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. “Hungary is just another straw being piled onto the camel’s back.”
Stocks Plunge
Only 54 of 983 stocks in the MSCI Asia index rose. The benchmark has slumped about 15 percent from its high this year on April 15 on growing concern over the European debt crisis and Chinese measures to curb property prices. The Nikkei 225 Stock Average sank 3.8 percent and Australia’s S&P/ASX 200 Index dropped 2.8 percent. The Kospi index lost 1.6 percent in Seoul and Taiwan’s Taiex index lost 2.5 percent. The S&P 500 dived 3.4 percent to a four-month low on Friday.
Canon Inc., a camera maker that gets 78 percent of its revenue outside Japan, slid 5.3 percent. KB Financial Group Inc. slumped 3.1 percent in Seoul, leading declines among financial companies. Melbourne-based BHP Billiton Ltd., the world’s largest mining company, declined 3.8 percent.
Hon Hai Precision Industry Co., the world’s largest contract electronics manufacturer, declined 5.6 percent, the most in more than four months, after the company announced the base wage for workers at a China factory will double following a spate of employee suicides.
The euro dropped 0.6 percent to 109.39 versus the yen and touched a four-year low against the dollar. The yen gained against all 16 of its most-traded counterparts.
Currencies
“Markets have to price for lower growth than what they had previously,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. “The yen will probably maintain a bias toward strength.”
Hungary’s government said June 5 that there’s no danger of default, a day after a spokesman for Prime Minister Viktor Orban said it’s not “an exaggeration at all” to speculate that the country may be unable to pay its debt.
The Hungarian forint rose 0.5 percent against the common European currency. The forint traded at 287.89 per euro as of 9:15 a.m. in Budapest, versus 289.35 the previous trading day, according to data compiled by Bloomberg.
Asian currencies fell, with the Malaysian ringgit set for its biggest decline in 12 years and the won sliding the most in two weeks, according to data compiled by Bloomberg. The ringgit dropped 1.8 percent to 3.3328, the most since June 1998. The won weakened 2.8 percent to 1,235.35 per dollar.
“Disappointing U.S. non-farm payrolls and concerns about European debt refinancing are keeping the pressure on risk appetite and Asian currencies,” said Mirza Baig, a Singapore- based currency analyst at Deutsche Bank AG.
Treasuries Rise
Treasuries advanced, sending yields toward a one-year low. Traders cut bets for the Federal Reserve to raise interest rates this year, and economists reduced their yield forecasts. The yield on the U.S. 10-year note slid two basis points to 3.19 percent as of 8:14 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 rose 5/32, or $1.56 per $1,000 face amount, to 102 21/32.
“Fear has taken over,” said Roger Bridges, who oversees $9.9 billion as head of debt at Tyndall Investment Management Ltd. in Sydney. “People are flying to the U.S.”
Asian bond risk gauges jumped the most in almost two weeks. The Markit iTraxx Asia credit swap index of 50 investment-grade borrowers outside Japan rose 12 basis points to 148.5 points in Singapore, according to Deutsche Bank AG. That’s the most since May 25, prices from CMA DataVision in New York show. Japan’s and Australia’s benchmarks also climbed.
“European sovereign fears were very much in focus again,” National Australia Bank Ltd. analysts led by Michael Bush wrote in a note to clients. Hungary’s government “later downplayed the comments as exaggerated, but the damage had been done.”
Crude oil for July delivery has dropped 6.1 percent since closing at $74.61 a barrel on June 3, the biggest two-day decline since May 6. Copper, which entered a bear market last week, extended its decline to the lowest price in more than seven months on concern demand may weaken from the U.S., China and Europe. Aluminum, lead, zinc and nickel and tin also dropped. Three-month delivery copper slumped as much as 3.2 percent to $6,076.25 a metric ton in London and traded at $6,083 a ton.
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