In certain sensitive, geopolitical regions around the world, heads of state are sitting tight, even though their time up. From Russia through Syria to Senegal, we see the same pattern - 21st century governments deciding to ignore the loud, though unclear, demands of the 99% and reinforcing their political positions against the dictates of the state, utilizing pseudo-democratic tactics to advance their sinister goals. We can expect the socio-economic faultines that have been developed over the last four years to morph into deeper crevices with the potential for great social upheaval unlike anything we have seen post-recession.
Wednesday, 22 February 2012
JP Morgan's recent submission gives us cause to think about the COST of bailing out the world's financial system from the spillover effects of the economic crisis of 2007-2008. Below is a chart released by a JP Morgan commodity analyst showing the assets on the balance sheet of the G-4 central banks as a percentage of their national economic output. This "G-4" includes the Federal Reserve of the United States, the Peoples' Bank of China, the European Central Bank and the Bank of Japan. The co-ordination among the central banks has been remarkable.
- We can expect the spot price of gold and more importantly gold futures to hit records highs as investors and speculative players hedge against inflationary tendencies going from 2012 to 2013. Gold ETFs will experience substantial volatility this year too.
- Apart from the recent Galleon case (and on a lighter note MF Global), no major bank chief has been indicted for directly playing a role in engendering the recent crisis. And so the central banks continue to fan the embers of the MORAL HAZARD problem. To avoid a crisis of confidence and more importantly a re-enactment of the bank run that characterized the GREAT DEPRESSION, these reserve banks may have acted rightly, but its been four years since the recession. On the flip side, in managing the crisis in the Nigerian context, the Central Bank of Nigeria set up a "bad bank" to purchase the toxic assets of the banks and went further to take punitive steps to hold the bank chiefs responsible for their actions.
- Energy costs are going to increase going forward as the action of the central banks of "flooding the world with cheap money" combine with the system-wide reinforcing effect of geopolitical conflict in some oil-producing states. The oil producers, in a bid to shore up their purchasing power against the volatility of the US Dollar, will, without doubt, hike energy prices. The positive feedback effect will only serve to make the entire financial system even more volatile.
- Net oil-importers such as Kenya and Uganda will most likely have a painful period ahead. Last year, the value of the Kenyan shilling fell more than 20%. Kenya has made efforts to secure a $143 million loan from the International Monetary Fund to hedge against this threat. They can only go so far.
- Net oil-exporters such as Nigeria, in the absence of a resurgence of Niger Delta violence, might see a surplus in revenues from oil this year given that the National Assembly is adjusting the 2012 budget oil price benchmark to $75 - way below the volatility range shared generally by commodity analysts. However, the windfall may be of little effect if the upsurge in food imports (growing at 11% annually) is not pared.
- The global equities market has had a generally good start this year - one of the best in years. No thanks to global Quantitative Easing. But as interest rates remain high in emerging and frontier markets, the bond market might have the upper hand this year, trumping the equities markets again. In my native Nigeria, the efforts of the management of the Nigerian Stock Exchange (NSE) to boost the stock market capitalization to pre-crisis levels may not come to fruition this year. Sadly.
- Following from the widening interest rate differential between the developed and emerging/frontier markets, the pace of carry trade will accelerate even further this year, in the absence of substantial fluctuations in exchange rates. As speculative capital continues to besiege the shores of emerging markets such as China for example, any effort by the financial authorities to reduce the surplus external position (comprising the current and capital accounts) by increasing imports may not yield the necessary results.
As for Greece, I assume they have already defaulted and the market discounting mechanism has factored that in as usual. Who will argue that a debtor has not defaulted on a debt commitment if he's asking for some haircut from his creditors?
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Friday, 17 February 2012
Historical: My thoughts on the Chinese Premier's Financial Times article of 23rd June, 2011 [uncensored]
The Chinese Premier, Wen Jiabao's article can be accessed here. My thoughts (November 14th 2011) below:
- I believe that he should have made a distinction between the parts of the world where inflationary tendencies are HIGH and where he sees them LOW (due to reduced consumer spending and confidence). That distinction is very important as it guides monetary policy in any clime. As is obvious from the current state of affairs, inflationary tendencies are dangerously LOW in the US and the Eurozone (still under watch though) ---> the US Federal Reserve maintained the interest rate @ 0.25%, while the ECB lowered theirs by 50 basis points to 1.25%. All they are trying to accomplish is to help SMEs access to credit facilities and boost consumer spending. But apparently, as we can see, that is not enough. But the story is different in emerging markets like China. Inflationary tendencies are HIGH there; the after-effects of the stimulus package that the Chinese government initiated (similar in principle to the Quantitative Easing [QE] initiated by the US Fed).
- He said that his government was going to rein in government spending and in effect reduce deficits to somewhere below 3% of GDP and external debt to 60% of GDP. Simultaneously he intends to adopt a loose fiscal policy, to support a policy of economic development through domestic demand. This double move is CONTRADICTORY. Cutting government expenditure is a sure way to reduce fiscal deficits, but increasing infrastructure spending cancels out the gains. The overall effect might be ZERO change in fiscal policy. My view is that China can handle deficits to some degree for now. Inflation has been hovering around the 6% level since this year, and a contrasting mixture of loose fiscal policy and tight monetary policy will serve to keep inflation in check. China's main worry as it grows economically will continue to be INFLATION. Its also a factor that African economies have not been able to handle that's partly the reason it's difficult to reconcile GDP growth in Africa to SOCIAL improvements (the Ugandan and Kenyan currencies have been brutalized this year, causing interest rate hikes to 23% and 16.5% respectively, to shore up their values. Of course this hasn't helped much). The 4th part of my series on Afro-Chinese matters covers this to some degree, though I focused more on the demographic trends rather than inflation.
- All in all, China has been historically effective in managing inflation. According to Wen's article again, the Chinese strategy to keep inflationary tendencies LOW is to increase IMPORTS. This is good as the SUPPY of non-China goods and services (to the Chinese) will INCREASE, driving costs and prices LOWER. But as data from tradingeconomics.com suggests to me, balancing export volume with import volume will present itself as a major challenge too. [Another story to watch is the new Free Trade Zone (similar to NAFTA) deal being proposed by the US President for the Asia-Pacific region --> 8 countries have indicated interest but China is yet to make a move on that].
Let's go back to the topic of the Chinese Premier's article, it says: "How China Plans to Reinforce the Global Recovery". After reading this article, I believe Wen Jiabao made the following errors:
- he did not understand the IMPLICATION of the TOPIC of his article; because if he did, he would know that it doesn't make sense that your main thrust for reinforcing global recovery would be 'IMPORT VOLUME INCREASE' when developed countries who have the greatest capacity to export to China are still mired in the after-effects of the credit crunch and business confidence is still relatively LOW.
- the article which as stated by the Financial Times is a rare move by CONSERVATIVE China, was written as a DEFENSIVE TACTIC in response to the developed world's call on China to re-evaluate her growth model --> China has been maintaining her fixed exchange rate regime and only allowing it to appreciate slowly (in essence favouring her exports on the international market). China's present currency level is seriously UNDERVALUED. It should be worth more than it presently is. Intellectual Property theft has also been another issue against China altogether. The last paragraph of his article reinforces my argument. Besides the tone of the article to me is that of a CHINESE-ECONOMIC SCORECARD. Like when Nigerian governors celebrate their 100 days in office. It falls short of addressing very critical issues (again, the date of the article is June 23, 2011).