BoJ's cause

Nobody expected anything important to be announced at the Bank of Japan's monetary policy meeting yesterday, but one thing looks like worth mentioning. The BoJ, as expected, held its key policy interest rates unchanged at 0 to 0.1%, and unveiled the details of "comprehensive monetary easing" put forth in early October, including the purchase of low-graded corporate bonds.

One has to notice, however, that the Japanese central bank moved up its next meeting to November 4-5, which was originally scheduled to be held in November 15-16. The BoJ said the reason for change is "to discuss and decide the principal terms and conditions for the purchases of ETFs and J-REITs with a view to promptly starting their purchases." But given that the Fed is likely to start QE2 at the FOMC meeting in November 2-3, it should be read that the BoJ's true intention is to make a quick response to prevent the yen from appreciating further after the Fed's additional monetary policy easing, probably adding another round of bond purchase.

Coincidentally, both the Bank of England and European Central Bank will announce the result of their monetary policy meeting in November 4. But their position is different from the BoJ's, and they wouldn't consider the Fed's policy as too critical to be factored in their monetary policy decisions.

First, Britain's third quarter GDP beat market expectations by a wide margin, and S&P has just changed its outlook for Britain's long-term sovereign bond from negative to stable, which by no means hastens the BoE's policy change at this time.

Second, Germany is estimated to grow by more than 3% this year due to weak euro, placing itself as one of the fastest growing economies among rich nations. The ECB would feel content as Europe's largest economy is in a good shape, though having fiscally feeble countries like PIIGS yet.

BoJ's cause, though covert, is distinct from its peers in that it has to take strengthening currency as detrimental to a deflation-riddled, debt-overloaded and export-dependent country.

SKorea slows. Greek deficit grows while Spain cuts

A quick look at some news.

First, South Korea's GDP grew by 0.7% in the third quarter, short of market forecasts due to export slump, which would signal for the coming slowdown in the world economy. Asia's fourth largest economy is heavily dependent on external demand. In that sense, South Korea might want to take part in the circle of "a canary in a coal mine" along with Japan.

South Korea's economy slowed in the third quarter as export gains and global growth cooled, signaling more room to pause interest-rate increases and paring a recent surge in the nation's currency.

Gross domestic product advanced 0.7 percent from the previous three months, when it gained 1.4 percent, the central bank said in Seoul today. That was less than the 0.8 percent median forecast in a Bloomberg News survey of 10 economists. From a year earlier, GDP rose 4.5 percent.

The won's 7.2 percent third-quarter climb against the dollar was Asia's highest, adding to threats to exports from elevated U.S. unemployment and European austerity. The currency fell as much as 1.5 percent after today's data, curbing an advance that may damp accelerating inflation and give the Bank of Korea more scope to slow increases in borrowing costs.

Greece's Finance Minister George Papaconstantinou said the country's budget deficit topped 15% of GDP in 2009, which is about 1 percentage point more than previously estimated.

A review of Greece's 2009 budget showed the deficit was above 15 percent of gross domestic product, more than previously estimated, Finance Minister George Papaconstantinou said.

The revision won't affect Greece's drive to cut the shortfall this year, Papaconstantinou said at a conference in Limassol, Cyprus, today. "We are on track for the fiscal target for 2010," he said. The finance minister's budget, released Oct. 4, forecast the 2010 deficit at 7.8 percent of GDP.

"After the final revision by Eurostat to the numbers, which will validate numbers for 2009 once and for all, it will be above 15 percent," Papaconstantinou said. "Last year was a finance minister's nightmare."

Greece had to obtain 110 billion euros ($152 billion) of emergency loans from the European Union and International Monetary Fund in May as borrowing costs soared amid concerns the country wouldn't be able to reduce its budget shortfall. The revision would mean Greece overtaking Ireland as the EU country with the biggest deficit as a percentage of GDP last year. Papaconstantinou estimated the 2009 shortfall at 13.8 percent in his budget.

Eurostat, the EU's statistics service, will release the final figures for Greece's 2009 deficit and debt by Nov. 15.

Banks 'Normalizing'

Papaconstantinou said "things were normalizing" in the Greek economy, with the banking industry, which was "almost completely" reliant on European Central Bank financing, "now standing on its feet."

Greek banks' reliance on ECB liquidity to refinance operations declined in September for a second month, according to the Athens-based central bank. Lenders had a total of 94.3 billion euros compared with 95.9 billion euros in August.

The banks were locked out of markets by concerns about their holdings of Greek government bonds amid fears of a sovereign default.

The Greek government is also seeing a response to the "fast-track" process it's implementing to draw investment, especially from Chinese businesses and China's "clear commitment" to make Greece a hub, Papaconstantinou said.

Chinese Prime Minster Wen Jiabao committed to buy Greek bonds and support the shipping industry as the country sought investment to boost growth and emerge from its second year of recession.

The Greek economy is forecast to shrink 4 percent this year and 2.6 percent next year before returning to growth in 2012, according to the draft budget.

... while Spain is trimming its budget deficit faster than its peers.

Spain is cutting its deficit faster than Ireland, Portugal or Greece, seeking to reassure investors that the nation deserves cheaper borrowing costs than its peers.

Spain's central government trimmed the deficit by 42 percent in the first nine months, compared with 31 percent in Greece and a widening budget gap in Portugal. The figures were released yesterday as budget talks broke down in Portugal, and Greece said its shortfall was bigger than reported, pushing up the yield premium investors demand to hold sovereign debt of the so-called euro peripherals over comparable German bunds.

Portuguese 10-year bond yields rose 27 basis points to 5.96 percent, the biggest one-day advance in more than a month. Greece's yield jumped 73 basis points and Ireland added 32. Spain's yield gained 9 basis points, leaving the spread over bunds near a 10-week low, reached the previous day.

Spain would be happier to say, "Bye-bye, PIIG guys. No more 'S' in the term!"

Britain's surprising GDP

The release of Britain's third quarter GDP surprised the markets, which estimated the economy to grow by mere 0.4% compared to the actual 0.8%. Stock markets reaction seemed muted at best, but the currency markets welcomed the news with a sharp rise in the British pounds.

The result would be a boon for the country which has just launched a bold plan for substantial cut in budget deficit estimated to be above 10% of GDP. The Chancellor of the Exchequer George Osborne was delighted to declare,

What you see today, in an uncertain global economic environment, is Britain growing, growing strongly, the strongest growth we have seen in this part of the year for a decade, and also our country's credit rating being secured. That is a big vote of confidence in the UK, and a vote of confidence in the coalition government's economic policies.

In spite of the government's relief, pundits may raise some questions over the content of growth.

Several analysts are concerned about the durability of construction-led growth, which accounts for half of overall growth in the second and third quarter. Moreover, the government sector contributed one fourth of growth to the economy in the third quarter, which is in turn likely to wane along with public construction if budget cut program begins. Business services and finance contributed the most in the third quarter, but given tightening regulation over finance industry, this sector also could not be counted much in the coming years.

Standard & Poor's lifted its outlook for Britain's triple-A sovereign debt to 'stable' from 'negative' in the same day as GDP release on the notion that

The decisions reached by the United Kingdom coalition government ... reduce risks to the government's implementation of its June 2010 fiscal consolidation programme.

But at least the question over the state of Britain's economy remains unanswered, and the markets would not be fully convinced of how the massive cuts in public spending rock the economy.

Japan as a canary in a coal mine

The recent G20 meeting seems to be no use to stop yen's surge, at least for now. It's not sheer coincidence that Japan's exports tumbled in September. We have to acknowledge that Japan's exports would be a sign foreshadowing the coming shape of the world economy. This time, it would signal for a bad omen.

Japan's exports grew at the slowest pace this year in September, a sign the country is losing its chief engine for growth as demand abroad tempers. Overseas shipments increased 14.4 percent from a year earlier, the Finance Ministry said in Tokyo today.

The median estimate of 21 economists surveyed by Bloomberg News was for a 9.6 percent gain. From a month earlier, shipments fell a seasonally adjusted 0.1 percent.
Today's report adds to signs that Japan's export-fueled rebound is cooling, increasing pressure on Prime Minister Naoto Kan to implement his stimulus plans and on Bank of Japan Governor Masaaki Shirakawa to come up with fresh ways to support the economy. Manufacturers including Honda Motor Co. are also grappling with the country's appreciating currency, which has continued to strengthen even after the government intervened in the foreign-exchange market last month.

"Export growth will slow further and keep depressing the economic expansion," said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. "It's highly likely the economy will contract in the fourth quarter."

The Japanese currency has gained more than 14 percent against the dollar this year, threatening to erode exporters' repatriated earnings from abroad. It traded at 81.10 at 10:29 a.m. in Tokyo compared with 81.33 before the report was released.

Nearly 80% of Japan's overall growth in this century is derived from exports, and one fifth of overseas shipments from Japan these days have been to China, replacing the US as the top trading partner with Japan. The relation between two of the world's biggest economies can't easily be severed in terms of interconnectedness deeply rooted in economic structure, no matter how they don't like each other.

The sluggish growth of Japan's exports was more or less anticipated beforehand, because Chinese economy cooled down in the third quarter to 9.6% growth. Moreover, the yen hit a 15-year high against the dollar, which last month triggered BOJ's intervention in currency markets for the first time in almost 7 years. Some analysts think of the result as beyond forecast, which could usher in easy resilience in the economy. But given that 14.4% growth is the slowest this year, the world economy would now have less room to absorb external demand.

Look at the graph below, the negative relation is obvious between the yen and Japan's exports, as is widely believed.

It's no wonder that Nikkei has grown far less than its counterparts in 2010.

Unknown to many is that Japan's exports are not only a vital engine of the country's economic growth but also playing a pivotal role to presage the world economy. The graph below indicates that shipments from Japan are intensely correlated with industrial production in the US, especially since 2000. In that sense, Japan is dubbed a canary in a coal mine.

This result would be seen as a warning to companies especially operating in China, which have found little demand in domestic markets and searched for thriving business opportunities over the globe.

Who can say "No" to China?

I'm interested in this article, but haven't posted since I found it. The reason? Well, I was going to comment on the article, but did have few time to elaborate. Anyway, it's written by two renowned economists, Alan Auerbach and Maurice Obstfeld. The summary is:

As the debate over China's exchange-rate policy and the US response intensifies, this column argues that a large Chinese revaluation – whether forced of voluntary – will not be a free lunch for the US. Drawing on a theoretical cost-benefit analysis, it suggests that if the US wants to create jobs at the lowest costs, it should first consider further fiscal expansion.

I'm not 100% sure, but I can't wholly agree with the conclusion. What if the US doesn't require Chinese revaluation anymore? Complaints on China's currency policy are coming from not only advanced nations but also emerging countries like India, Brazil or Thailand, which is cornered to think seriously of restraining foreign flows to the country. If the US doesn't say anything, who says? Who else can say "No" to China when China has amassed huge political and economic clout over the globe? I think that currency matter is, like the other economic policy, highly political in the sense that it shouldn't be viewed only from an point of economics.

G20: waste of space?

Nobody anticipated any agreement effective and enforceable enough to stop the tide of competition for weakening currency among major countries at the G20 finance ministers' meeting. So, this result is no nonsense.

A group representing the world's most prominent finance ministers wrapped up a two-day meeting in Korea Saturday with a pledge to not engage in currency wars or other economically protectionist policies.

The ministers from the so-called G-20 nations, who were meeting in Gyeongju, South Korea, discussed a wide array of challenges facing the global economy. But first and foremost was the issue of currency trading.
The United States has been vocally concerned about how some emerging markets nations, most notably China, have allowed their currencies to trade at artificially low levels. The worry is that if such currency manipulation continues, it could wreak havoc on international trade.

In their statement, however, the G-20 ministers said that they would "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies."

The ministers added that the G-20 member nations would "continue to resist all forms of protectionist measures and seek to make significant progress to further reduce barriers to trade."

The G-20 stopped short of outright banning currency manipulation though. U.S. Treasury Secretary Timothy Geithner, who attended the meeting, had urged the G-20 ministers to take strong action to make sure emerging markets nations allow their currency to appreciate in line with the free market.

This weekend's meeting is a precursor to a larger G-20 meeting taking place in Seoul on November 11 and 12. That summit will involve the heads of state from the G-20 nations. President Obama will attend.

Tensions about currency and trade are likely to be high at that meeting as well. The G-20 acknowledged in Saturday's statement that the global economic recovery is currently advancing, but it was doing so in "a fragile and uneven way."

The ministers added that "growth has been strong in many emerging market economies, but the pace of activity remains modest in many advanced economies."

As further evidence of that, China announced earlier this week that its gross domestic product for the third-quarter rose at an annual rate of 9.6%. While that's slower than in previous quarters, it is still far higher than the growth rates of the United States, Japan and nations in Europe.

China's central bank also announced earlier this week that it was raising a key interest rate for the first time in nearly three years. That comes at a time when many expect the Federal Reserve to soon announce more details about how it intends to further ease its own monetary policies.

In a nod to the increased economic clout of China and other emerging markets, such as Brazil, India and Russia, the G-20 ministers also announced a deal Saturday that would give emerging markets countries more seats on the board of the International Monetary Fund.

It's no wonder that one might see the G20 this way.

the G20, hailed only a little while back as an institutional break-through that better reflects the growing geo-political and economic power of the developing world than the old G7, is fast turning out to be a complete waste of space.

I don't think that the G20 isn't worthwhile. Some people might have excessive expectations over the meeting, which doesn't have any organizational system like the UN, the IMF, or World Bank. It would be a signal that the age of a small meeting like the G7 is over and the time is now for finding solutions at international organizations.

Future debate on monetary policy

It seems like the graph below is spreading in the econ-blogosphere. I took it from here. You can also see it here and here. The idea is simple: the US is falling into deflation like Japan.

Yup. It could be.

One might wonder how to avoid deflation, the worst case scenario for all policy makers in the current world. According to the Federal Reserve Act, the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So, the Fed is expected to act against deflation in the US. But should disinflation go on or turn to deflation, discussion would be sharply divided by two on how to do with monetary policy. I call the two "Enough" and "Not enough."

"Enough" camp refers to those who think that monetary policy isn't effective to combat deflation. Most central bankers would belong to this group if they see deflation entrenched despite every policy they make. Central bankers contrive some policy action more often than not at a monetary policy meeting, but they admit that it's no use to relieve the pain. Monetary policy would gradually turn to an excuse for dodging criticism from the parliament which is worried about reelection. They think that fiscal policy or structural reform or combination of both should be much more conductive to shore up the economy. Some of this camp preach more radical reforms like "Any monetary or fiscal policy won't work. Complete restructuring of the whole economy is the only way to survive." But it's not so many.

"Not enough" people are likely to regard deflation as the result of hesitation or inaction by central bankers which they think should give priority to price stability. Analysts or economists in private institutions would be eager to join this group. Whenever central bankers move, they think that it's not enough to root out deflation. Unless deflation is out of sight, they keep saying "It's not enough!", and accusing central bankers of their inertia or even lack of knowledge in basic economics. This group wants central bankers to buy every financial assets, no matter which is stocks, bonds, or REIT, and to degrade central bank's assets. One of the characters of this circle is to almost deny the independence of central banking and to promote the integration of monetary and fiscal policy.

Which party would you think you join?

Germany: the biggest winner in currency war

Today's FT article gave me some food for thought on a currency war now under way. A similar article from Bloomberg,

Germany has faced criticism this year, notably from France, of its large trade surplus, along with calls to increase demand at home to help rebalance wide differences in capital flows across Europe.

Bruederle was keen to reject that. Recent figures show that "the stronger growth component is now the domestic market, and with that the criticism of German strategy or activities is refuted by reality," he said.

Germany is, as I noted before, the biggest beneficiary of weak euro caused by economic crisis in PIIGS this year. Its export has almost recovered the same level just before the Lehman crisis hit the world in late 2008.

Nobody would doubt the importance of weak euro to help lift German export, as is clearly shown in the graph above. Now, you would be surprised to know how much German currency has depreciated this year.

Germany has been the biggest winner in a currency war thus far, benefiting from the effective exchange rate lower than not only G7 countries but also crisis-hit PIIGS. It's no wonder that the government raised its economic growth forecast for the largest economy in Europe.

The German government said the economy will grow this year at the fastest pace since 1991, raising its forecast as exports to China and other Asian countries boom and consumer spending revives.

Europe's largest economy will probably grow by 3.4 percent in 2010 and by 1.8 percent next year, the Economy Ministry said in a report today. The government previously forecast an expansion of 1.4 percent and 1.6 percent, respectively.

Foreign demand for cars and machines dragged Germany out recession in the second quarter of last year. Exports, which made up 41 percent of the country's gross domestic product in 2009, will grow 16 percent this year, the BGA exporters group said on Oct. 19. Sales of goods and services to countries outside Europe will grow 25 percent, the exporters said.

So far this year, according to BIS, China's currency has appreciated by 4% in real terms. Can Germany blame China on its currency policy?

Britain's gamble might pay off

Britain's gamble has just started with 81 billion pounds of public spending cuts which cost half a million jobs in public sector. The Chancellor of the Exchequer George Osborne revealed the plan yesterday.

Britain will cut half a million jobs, lift the retirement age and slash welfare as part of an unprecedented cost-cutting drive announced on Wednesday which will test the strength of the economy and the government.

The long-awaited spending review confirmed 80 billion pounds of cuts, sent unions into a fury and turned up the heat on the Liberal Democrats, the junior coalition partners who campaigned against such sharp fiscal tightening before the May election.

The jury remains out on whether the economy -- just recovering from the worst recession since World War Two -- can survive the squeeze which will cut growth by around half a percent each year. Analysts expect the Bank of England to keep monetary policy super-loose for the foreseeable future.

Nor is it clear whether the cuts -- aimed at bringing down a record budget deficit of 11 percent of GDP -- can actually be achieved. More of the burden has been shifted to the notoriously hard-to-cut welfare bill -- an extra 7 billion pounds on top of the 11 billion pounds cuts already announced.

Conservative finance minister George Osborne said that was the best way and would mean that government departments outside protected areas like health and international aid would only see their budgets shrink by, on average, 19 percent, not the 25 percent announced in his budget.

Britain's budget deficit in 2009 is, according to IMF, 10.3% of GDP, one of the highest among developed nations. George Osborne is right to say, "Today is the day when Britain steps back from the brink, when we confront the bills of a decade of debt", given the huge budget deficit which is less than Ireland, Greece, and Spain but more than Portuguese and Italy. But the question may arise: Can Britain survive a massive fiscal cut?

The analogy can be found with Japan's experience in the late 1990's, when the country slashed public spending and raised consumption tax rates toward fiscal consolidation, ignoring simmering concern that fiscal contraction might sap vigor out of the economy.

Fiscal contraction starting in the late 1997 in Japan gave rise to huge deflationary pressure, which dragged the country into severe recession. It took more than 10 years for inflation rates to turn to positive in terms of the yoy growth rate of GDP deflator. The biggest difference between Japan and Britain is that Japan's GDP deflator grew only by 1.2% yoy when fiscal reform began, while Britain's has just grown by 4% yoy in the second quarter of this year. That's only the third time for Britain's GDP deflator to increase by 4% yoy in 18 years. Given a large buffer against deflation, Britain could keep away from deflation. Britain's gamble might pay off.

China raises interest rates

China suddenly raised its interest rates yesterday. The announcement was made at around 7pm in China time. So, there was no influence on Chinese stock markets in 19 October.

China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects its concern about rising domestic asset prices and stubborn inflation.

It said it would raise benchmark one-year deposit and lending rates by 25 basis points each.

Oil prices fell, stocks pared their gains in Europe and the dollar rose across the board after the announcement as investors were caught off guard by the tightening step.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

A number of leading economists, including some advisers to the central bank, have suggested the central bank increase deposit rates to keep savers' returns in positive territory.

China reported consumer inflation of 3.5 percent in the year to August and economists expect that the pace climbed to 3.6 percent in September.

Still, the increase in rates is surprising given that several top leaders have recently expressed confidence that inflation is under control, and have said that higher rates would potentially suck in speculative capital from abroad.

"They did it now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

China is due to report third-quarter GDP and a suite of economic data for September on Thursday. Economists polled by Reuters expect that economic growth slowed to 9.5 percent year on year last quarter, down from 10.3 percent in the second quarter.

As the article reports, stock prices plunged all over the world while the dollar and bond markets surged. It's because investors feared Chinese economy cooling down and flocked to safe havens. Look at the charts below.

Flight to safety. That's the word heard in the markets in 19 October. But the impact of interest rates rise looks like limited and short-lived. Chinese stock markets gained a little bit today, though real estates lost.

China's benchmark stock index rose to a six-month high on speculation the nation's first interest- rate increase since 2007 will help tame inflation and contain asset bubbles.

China Life Insurance Co. and Ping An Insurance (Group) Co. rose more than 4 percent after Mirae Asset Securities said insurers will outperform in a rising rate environment. Liquor maker Kweichow Moutai Co. and Tsingtao Brewery Co. led gains among consumer stocks that are less dependent on the economy. China Vanke Co. and Poly Real Estate Group Co. slumped at least 6 percent as higher borrowing costs may deter demand for housing.

The rise in interest rates makes me wonder whether China lets the yuan appreciate. The yuan should rise if the spread of interest rates shrink, though China's currency depreciated today. People say that the fear of inflation compelled China to raise interest rates. But I don't think it's the whole reason. G20, delayed currency report, and the US midterm election. There is much left to be explained on China's sudden action.

Germany's two-front war

ECB stopped buying government bonds last week. It's the first time since the program started in May. ECB bought 16.5 billion euros of government bonds in the first week. But since then, the amount has sharply declined, and reached nothing to zero in August. Despite the widening spreads over German Bunds, ECB's purchase has been contained for the last few months.  

ECB President Jean-Claude Trichet exchanged a spat with Bundesbank President and ECB Governor Axel Weber who advocates the early withdrawal from bond purchase program, saying "This is not the position of the Governing Council, with an overwhelming majority."

One may understand why Weber is calling for an end to the bond purchase program sooner than later if Germany's economic outlook is taken into account. IMF raised its economic forecast for Germany in 2010 to 3.3%, a staggering 1.9% point rise from a previous estimate. The reason is: weak euro.

As I showed previously, the euro has lost more than 10% of its value this year in real terms. It's due in large part to economic crisis which hit PIIGS. It's no wonder why export-dependent Germany benefits much from weak euro.

The problem is that the euro is now gaining strength because of the Fed's loose monetary policy, which could drag down Germany's feeble growth. Germany would be content if PIIGS remains weak, but their bond spreads over Germany's Bunds are narrowing since China, whose currency is widely considered to be undervalued, intends to buy Greek debt. Also, the Fed's QE2 could further strengthen the euro, thus denting the economic prospect for Germany.

The US and China. Germany would have to fight on two fronts.

Deflation or Inflation?

So, the Fed is going for QE2. Fed Chairman Ben Bernanke is ready to buy more Treasury. Or at least the markets anticipate it. His concern is now deflation, not inflation.

The longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run. In particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight (the short-term real interest rate is too high, given the state of the economy), and the risk of deflation is higher than desirable. Given that monetary policy works with a lag, the more relevant question is whether this situation is forecast to continue. In light of the recent decline in inflation, the degree of slack in the economy, and the relative stability of inflation expectations, it is reasonable to forecast that underlying inflation--setting aside the inevitable short-run volatility--will be less than the mandate-consistent inflation rate for some time. Of course, forecasts of inflation, as of other key economic variables, are uncertain and must be regularly updated with the arrival of new information.

Then, why are people suddenly worrying inflation, not deflation?

Treasury 30-year bonds tumbled, pushing yields to the biggest weekly increase since August 2009, on speculation that Federal Reserve efforts to spur the economy will reignite inflation.

The 30-year yield rose above 4 percent yesterday for the first time in two months after data showed retail sales rose more than forecast and New York area manufacturing climbed. Fed Chairman Ben S. Bernanke said additional stimulus may be warranted, in part because inflation is too low. The Fed will release its regional economic survey next week. The U.S. sold $66 billion of notes and bonds to lower-than-average demand. 

The spread of both 5- and 10-year yields between conventional and TIPS bonds has been widening since last month. Is it a proof that Bernanke has already made some success in combating deflation? Or is it the wrong time for the Fed to start QE2, thus begetting uncontrollable inflation?

My guess is that knowing rising inflation expectations shown above, Bernanke and Co. is betting on the notion that underlying inflation is "too low." The Dallas Fed once claimed that

TIIS spreads are not a very good guide to inflation expectations because they are sensitive to changes in inflation uncertainty and the demand for liquidity. In particular, the recent increase in TIIS spreads probably overstates the extent to which investors' long-term inflation expectations have risen. It should not carry much weight as evidence for the proposition that the Fed has eased too much in response to the current economic slowdown.

So, according to the Dallas Fed, TIPS spreads are not a reliable measure of inflation expectations, especially when they are rising. It seems like Bernanke counts on more conventional measures of inflation like CPI or PCEPI, which has shown meagre inflation recently.

What Obama expects from China

One might see it as sheer coincidence that the US Treasury Department was scheduled to release a currency report in which China would be accused as a currency manipulator on the same day when China's Communist Party leaders meet to discuss the country's next five-year plan. But Treasury Secretary Timothy Geithner, again, decided to delay the release.

The U.S. Treasury Department said it will delay a report on international currencies, including China's, while citing progress in the acceleration of the yuan's rise.

The report will be delayed until after meetings of the Group of 20 nations in the coming weeks, according to a statement from the Treasury today.

Treasury Secretary Timothy F. Geithner "recognized China's actions since early September to accelerate the pace of currency appreciation, while noting it is important to sustain this course," according to the statement.

Geithner has increased pressure on China to allow the yuan to strengthen, saying last week the nation is contributing to a "damaging dynamic" of countries keeping their currencies weak to spur exports. Record imports from China are fueling calls by U.S. lawmakers for action to protect American jobs as next month's elections approach.

China's yuan has surged by about 2.8% from late July so far. Geithner's message is absolutely clear: we need more. You, China, appreciate the currency much more till the coming big events. At this point, time schedule is important. According to the Treasury statement,

The Heads of State, finance ministers, and central bank governors of the G-20 and the Asia-Pacific region will participate in several important meetings over the coming weeks. These meetings provide an opportunity to make additional progress on the important challenge of securing stronger and more balanced growth.

The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings. 

Hmm, let's check out the schedule.

The Treasury statement shown above implies that the G20 meeting, be it Finance Ministers' or Summit, is important for both the US and the world. But it's no doubt that Obama's priority lies in the US midterm election held in 2 November, which the Democrats are on the brink of losing amid increasing frustration for the administration's economic policy among the public. So, the de facto deadline must be 2 November.

China's Central Party Committee meeting runs through 15 to 18 October. Its main theme is to approve a new 5-year plan for the country. BBC explains:

The ruling CPC is expected to endorse a new economic model of "inclusive growth", a model that stresses not just on GDP growth at any cost, but on balanced development across the different sections of the society and different geographic regions.

A widening wealth gap is fuelling social tensions and threatening the power of the CPC.

So the conference will be discussing improved income redistribution and social reform. At the same time, international pressure is mounting for China to stimulate its domestic consumption rather than relying on exports.

The meeting is also expected to confirm Xi Jinping as the vice-chairman of the party's Central Military Commission, paving the way for him to succeed Hu Jintao as the next leader of China in 2012.

To achieve balanced economic growth, China might endorse another round of yuan's appreciation, which I think the Obama administration expects. We'll see next week.

It's the fundamentals, stupid!

Usually, Japanese politicians are polite enough not to hurl criticism especially against its Asian neighbors. But this time looks like different. Japan's Prime Minster Naoto Kan said yesterday that China and South Korea should stop currency intervention.

Prime Minister Naoto Kan urged South Korea to stop preventing its exchange rate from appreciating and said competition with Japan's rival in the technology and automobile industries is becoming a major issue.

"In many ways, competition is a significant topic for Japan's relations" with South Korea, Kan said in parliament in Tokyo today. "Guiding one's currency lower is against the overall coordination process. We'd like South Korea and China to take responsible actions according to the common rules."

The comments underscore the government's frustration with Asian nations devaluing their currencies to protect local exporters. Japan's own intervention in currency markets for the first time in six years last month to tame the yen's advance to a 15-year high against the dollar brought about criticism from policymakers in Europe and politicians in the U.S.

His words are still well-mannered and controlled, but it wouldn't be much difficult to see irritation over the seemingly never-ending rise of the yen under his callous face.

In the meantime, Reuters saw differently on the G7 and G20 meeting, saying "Japan escapes G7, G20 criticism on yen intervention."

Japan escaped overt criticism from its G7 and G20 counterparts over the weekend for its yen-selling intervention as policymakers focused on broader solutions to tackle currency misalignments.

But Tokyo has little to cheer as global tension over currency valuations raises the bar for Tokyo to intervene again to weaken the yen even after hitting a fresh 15-year high against the dollar on Friday.

Still, the silence from world finance officials on last-month's market foray could keep traders wary of pushing the yen much higher out of fear fresh intervention could follow.

…

Indeed, U.S. and European policymakers gathering for the IMF meetings, and even emerging economy delegates, barely commented on Tokyo's intervention in public, although the International Monetary Fund did offer a mild rebuke.

If any intervention in currency markets isn't permitted at all, then, Prime Minister Kan's remarks would be utterly nonsense because Japan did intervene in currency markets last month. But as is seen from a graph I posted yesterday, the problem here is that the current exchange rates in three Asian nations, namely Japan, China, and South Korea, are far from fundamentals.

Japan's currency increased its value by nearly 5% in real terms this year, while China's currency appreciated just 3%. South Korea has seen mere 0.06% rise in its currency value so far.

On the other hand, the GDP growth rate of China, Japan, and South Korea is estimated to be 11.2%, 0.2%, and 3.8%, respectively, on average over 5 years. It's absolutely clear that the current exchange rates are not in harmony with fundamentals. Which country should have the most valued currency among the three from the point of fundamentals? What matters now is not whether currency intervention itself should be acceptable in principle, but the underlying exchange rates are weaning themselves off the fundamental values.

Bretton Woods II in a new guise

Talk on currency issues has not yet reached the limit. The title of the front page article in today's FT is more sensational: "Fears of currency war rise." Another article indicates that

Between September 27 and October 11, central banks in South Korea, Malaysia, Indonesia, Thailand and Taiwan collectively purchased $28.74bn, according to estimates by IFR Markets.

Simon Derrick at Bank of New York Mellon estimates that the scale of intervention from these central banks means they have accumulated foreign exchange reserves at between two and six times normal rates in recent weeks.

This article put an emphasis on Asian central bank's failure to stem the rise of their currencies, revealing that their currencies have climbed since intervention. Their failure to depreciate the currency is the direct result of the Fed's ultra loose monetary policy. What is worse for them is that the Fed is unlikely to reverse the current policy anytime soon. The minutes from September's FOMC released yesterday showed that

Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation.

Lackluster employment condition in September would warrant the Fed's additional accommodation. So, it's highly likely that the Fed decides some additional accommodation, probably the purchase of Treasury, at the next FOMC meeting in early November.

Given that the Fed's additional accommodation is coming, what would happen?

According to BIS, emerging economies have borne the brunt of market forces which are driving their currencies higher. In real terms, the currency of Indonesia, Malaysia, India, and Thailand all appreciated more than 5% this year, while China's yuan gained mere 3% despite of its gigantic economic prowess. It's no less surprising that dissatisfaction has been mounting among emerging economies which also have to underpin the economy with export. The euro lost nearly 11% of its value mainly due to Greek or other European countries' economic crisis. It has recently regained its momentum though, reaching at the near $1.4. European authorities, especially Germany, would not be glad at that

Asian countries are not set to accept the rising currency, so I think that they continue buying dollars to depreciate their currencies. Familiar with that? Yes. Hefty purchase of dollars would sink the US interest rates, and hence the dollar would keep weakening due to compressed interest rates differentials among major economies along with the Fed's ongoing loose monetary policy.

Money cycles between Asia and the US. Here is Bretton Woods II in a new guise.

Vice Chairman dissents

Janet Yellen said the super low rates would prompt risk-taking.

Janet Yellen, in her first public remarks as the Federal Reserve's vice chairman, said low interest rates may give firms the incentive to engage in excessive risk-taking.

"It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system," the 64-year-old central banker said in a speech today in Denver.

Yellen warned that Fed policies may in some cases be encouraging firms to "reach for yield" and could present officials "with difficult tradeoffs" if "emerging threats to financial stability become evident."

She was just sworn in as vice chairman of the Federal Reserve Board a few days ago, filling a void left by Donald Kohn who served the Fed for 40 years. Earlier this month, Steven K. Beckner of iMarketNews.com suggested that

Yellen has not spoken publicly in months, but hers has been a consistent voice warning about the dangers of excessively low inflation in a weak economic environment.

His assessment on Yellen is consistent with her yesterday's remarks. The question at this moment is; Why now? We have three weeks before the next FOMC, so there is ample time to discuss what to do at the FOMC. But Bernanke looks like sure to head for QE2, and inflation rates are not about to rise significantly for now. Donald Kohn would not dissent from chairman's idea. Is this the new vice chairman's way of steering monetary policy? I have no idea, but we have to see how they cooperate at the FOMC.

Two Nobels (hopefully) in the team

The 2010 Nobel Prize for economics was awarded to three professors; Peter Diamond of MIT, Dale Mortensen of Northwestern, and Christopher Pissarides of LSE.

Peter Diamond has, I think, been among the candidates since at least a few ago. The other two are a little bit surprising, but their pioneering work in search theory deserves the award.

Obama administration is having two Nobel laureates; Obama himself for peace and Diamond for economics. The problem is that Diamond's nomination to the Fed governor has been postponed by the GOP who thinks that there is a "mismatch" between his experience and the Fed's job. Can his theory solve this problem?

Failed attempt to stem currency wars

Headline tells everything.

Telegraph: IMF fails to strike deal over currency frictions

The International Monetary Fund on Saturday night failed to reach agreement on tackling mounting global "frictions" over exchange rate policies despite US calls to deal with the issue more forcefully.

New York Times: IMF doesn't press China on currency

The world's financial leaders failed on Saturday to reach agreement on how to contain an escalating currency dispute that has threatened to undermine global cooperation on economic recovery.

Christian Science Monitor: IMF leaves the question unresolved: Can world avert harmful "currency war"?

World financial leaders agree on the problem. They just don't have a ready solution to the risk that the global economic recovery will be undermined by nationalistic elbowing over exchange rates.

Nobody had even a slight anticipation of cooperation reached at the IMF meeting on how to stop currency war now under way among major economies. So, this result should be no surprise. Even at the G20 meeting later this month, it would be disastrous to expect that the world's major economies cuts an agreement to stem the tide of currency devaluation. No new Plaza Accord, whatsoever.

No countries can escape the responsibility of policy bungle during the early 2000's. Over-consumption supported by the ultra low interest rate and housing bubble in the West held sway in the world. Don't forget that emerging economies took full advantage of it to export their way by depreciating their currencies and buying US bonds, hence lowering the US interest rates. The US is in no position of scolding China for its currency policy.

China, the second largest economy in the world surpassing Japan, shouldn't be an eternal victim of the evil West and Japan. Now is the time to take a responsibility of stewarding the world economy. But as is shown in the Nobel Prize for Peace mess, it would be far away from that position, unfortunately.

Is China really rising yen?

Recently, some analysts have argued that yen is appreciating because China is buying it. Let's see some example. Marshall Auerback said;

The best means of avenging the nation for historical slights and grievance, and making oneself the dominant power in Asia (whilst mitigating the influence of the US through its levers on Japan) is very simple: just buy yen and force the Japanese corporations to hollow out Japan.

China's intention is clear, according to Auerback. He reiterates;

And what does this mean for Japan, which is the canary in the coal mine? With this kind of investment going on in China, the Japanese firms haven't a chance to compete with the yen prevailing at this level. And China knows this so it continues to buy Japanese yen bonds, which keeps the currency high and basically destroys its main Asian competitor. It represents the ultimate revenge for Manchukuo and the Rape of Nanking. And this is a development that could move very fast because the excesses of investment in China are currently so great.

Historical reason. Yeah. It's easy to understand. Yves Smith joins the forces.

Hefty buying by China has pushed the yen to high levels which are particularly damaging to its economy

But we know that China sold Japanese bonds in August. According to Japan's Ministry of Finance,

Data released Friday by Japan’s Ministry of Finance showed China sold a net ¥2.018 trillion ($25.59 billion) worth of Japanese assets in August, selling back most of the net ¥583 billion it bought in July and the ¥2.3 trillion it bought in the first half of the year.

It means that in August, China sold about 90% of Japanese bonds it bought this year. If China is a culprit of yen appreciation, yen should have depreciated in August given that China sold its yen holdings. But wait! Yen appreciated in August, didn't it? Japanese bonds markets also rose in August.

The graph above shows the US dollar/yen trend from July to October. It's clear that yen APPRECIATED in August, not depreciated. So, the question should be: Is China really the driver of yen appreciation? We have to come back to that question rather frequently.

On Dani Rodrik's article

Dani Rodrik is right.

In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced. After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong. But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.

But international trade and finance have both revived, and now we hear an even more ambitious version of the scenario. Developing countries, it is said, are headed for strong growth, regardless of the doom and gloom that has returned to Europe and the United States. More strikingly, many now expect the developing world to become the growth engine of the global economy. Otaviano Canuto, a World Bank vice president, and his collaborators have just produced a long report that makes the case for this optimistic prognosis.

There are many reasons why such optimism is not unreasonable. Most developing countries have cleaned up their financial and fiscal houses and do not carry high debt. Governance is generally improving along with the quality of policymaking. The possibilities of technology transfer through participation in international production networks are greater than ever.

Moreover, slow growth in the advanced economies need not exert a drag on developing countries' performance. Long-term growth depends not on foreign demand, but on domestic supply. Sustained rapid growth is the result of poorer countries catching up to rich countries' productivity levels – not of growth in the rich countries themselves. For most developing countries, this "convergence gap" is wider now than it has been at any time since the 1970's. So the growth potential is correspondingly larger.

But the good news stops right about there. Sustained growth requires a growth strategy, and most developing countries do not yet have one that would put them irrevocably on the path of economic convergence.

For too many of these countries, economic growth in the last two decades relied on a combination of two factors: a natural rebound from previous financial crises (as in Latin America) or political conflicts and civil war (as in Africa), and high commodity prices.  Neither can be relied on for the productive transformation that developing countries need. 

Consider, for example, Latin America's growth model of the last two decades. Global competition has whipped many of the region’s industries into shape and fostered significant productivity gains in advanced sectors, but these gains have remained limited to a narrow segment of the economy.

Worse still, labor has been displaced from more productive tradable activities (in manufacturing) to less productive informal activities (services). In most Latin American countries, structural change has served to reduce rather than promote economic growth.

Because Asian governments have tended to support their modern, tradable sectors to a greater extent, most Asian countries have managed to avoid this malady, and have done much better as a result. But even the Asian model may be reaching its limits.

China, in particular, needs to confront the fact that the rest of the world will not allow it to run a huge trade surplus forever. An undervalued currency, which serves to subsidize China's manufacturing industries, has been a key driver of the country's economic growth for the last decade. A significant appreciation of the renminbi will reduce or even eliminate that growth subsidy.

Regardless of developing countries' growth prospects, there is a deeper question. Will a world economy in which developing countries have substantially greater weight foster the kind of global governance that sustains a hospitable economic environment? Emerging-market economies have not yet shown the kind of global leadership that suggests an affirmative answer to this question.

The global institutions of our day – the International Monetary Fund, the World Bank, and the World Trade Organization – are still largely the creation of American leadership at the end of World War II (though they have obviously undergone considerable change since then). These institutions reflected American interests, but they also codified certain norms of behavior – rule-based decision-making, non-discrimination, multilateralism, transparency – which eventually came to constrain American power as well.

Countries like Brazil, China, India, and South Africa, however, have so far shown little interest in contributing to the construction of global regimes, preferring to remain free riders. Jorge Castañeda, a former foreign minister of Mexico, goes further, arguing that these countries have systematically opposed global rules, in areas ranging from climate change to international trade.

Lest we be too harsh on developing countries, however, let us also remember that political scientists have long worried that greater diffusion of economic power would produce a less stable world economy. If the world economy's center of gravity shifts substantially toward developing countries, this will not be a smooth – and possibly not even a benign – process.

We can be certain of two things: only those countries that adopt growth strategies based on stimulating domestic structural change will do well, and the conundrum of global governance – how to manage a world economy that has become unruly – will almost certainly get worse.

This is one of the most comprehensive assessments ever on the current global economy that I have read. I have nothing to add. But you might want to add Japan to the list of countries which "have so far shown little interest in contributing to the construction of global regimes, preferring to remain free riders." Also, Turkey, a country where the author Dani Rodrik was born, would be willing to be listed.

Does China really want it?

Today, Chinese currency yuan reached at the new high of 6.6830 to the US dollar. It's plain obvious that China's intention is to circumvent criticism from the West at the nearing G7 meeting on its currency policy. It's kind of childish, but China looks like to believe it works.

Nobody believes China seriously wants to appreciate its currency, though China would need it sooner or later if it changes to a more "harmonious" economy. The action just before the international meeting is always China's way to dodge blame and save their face. For example, China announced a massive public spending plan which amounts to 4 trillion yuan just before the G20 meeting in 2008. Also in June this year, a few days before the G20, China suddenly rose its currency. Even recently, China appreciated yuan before Wen met Obama. Who says that China isn't manipulating the currency?

I don't think that the US or Europe withdraws the criticism against China on the currency policy, even though yuan has appreciated a bit. If you appreciate the currency at will, you depreciate the currency in return at will. Also, the core problem in the world isn't excessive consumption, but lack of demand in creditor nations like China. You can't rely on the US or Europe to consume more given their current battered economy. Why is China playing this game? Do they really think that they can persuade the US not to rant them if they change the policy a little bit?

I think that a currency spat only represents part of the problems with China. As I showed previously, China's rise has caused rather tension than reconciliation with neighboring countries. This could be a test case of how China plays a responsible role in the world with its growing might.

China's arrogance revealed (again!)

China hit back at the international criticism on yuan policy.

China stiffened its opposition to a rapid appreciation of the yuan, setting the stage for a confrontation over exchange rates at this week's international monetary meetings in Washington.

Premier Wen Jiabao said China will stick to its policy of gradually increasing the currency's flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.

"Europe shouldn't join the choir" clamoring for a higher yuan, Wen told a business conference yesterday before an EU- China summit in Brussels. "If the yuan isn't stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil."

It's nothing new that China retaliates its claim to let yuan appreciate gradually, not faster or by outside pressure. But I find something different in Wen's words.

Wen is behaving very arrogantly.

That's the same as what I saw in the dispute between Japan and China over Senkaku Islands. Japan released a Chinese captain earlier, but China kept 4 Japanese into custody. China is pushing their national interest boldly and bluntly, taking the world economy as a hostage. His words prove it.

This year, yen rose more than 10%, bearing the brunt of fierce market force along with India and Thailand. It isn't surprising that the Japanese did something to stop it. 

Martin Wolf of FT is very straightforward.

Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

We have to address four questions. Is China a "currency manipulator"? If it is, does it matter? What might China reasonably be asked to do? Finally, can other countries shift China's policies, with limited collateral damage?

The first question is the easiest. If a decision to invest half a country's gross domestic product in currency reserves is not exchange rate manipulation, what is?

Then, what should we do to stop  China's manipulation of its currency?

... Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington's Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets. This idea would also make the Bergsten plan more effective.

Reciprocity. That's what a Japanese politician (I forgot his name) mentioned when he was asked about China's purchase of JGB.

BOJ as Mrs. Watanabe

Today, everybody is talking about BOJ's policy. As I noted yesterday, it should result in vain to bear any fruit in reviving Japan's ailing economy. Politicians touted it as "decisive", but what matters to BOJ is how decisive it looks. The more decisive it looks and the more people talk about it, the more pressure BOJ hopes politicians feel to act, thus evading further criticism from politicians including whether BOJ should play a sole role as a monetary policy steward. It doesn't matter whether it actually works or not.

We also have to notice that BOJ's main target this time is not bond markets or even banks. They are focusing on the currency markets. BOJ has already abandoned any efforts to influence bank lending through bond markets. There has been no monetary policy in Japan since the dawn of this century.

Japan intervened in the currency markets to lower Yen last month. It looks like there have been few effects so far. US dollar is traded now at 83.2 Yen. It's a little bit higher than 82 Yen which Japan intervened last time. Given that US is betting on the weak currency and beginning QE2, it would be very difficult to turn the trend around.

IMF chief Dominique Strauss-Kahn is quoted as warning on the looming currency war among nations.

Countries risk undermining the global economic recovery if they use their currencies to try to boost domestic growth, the head of the International Monetary Fund warned on Tuesday in a newspaper interview.

IMF Managing Director Dominique Strauss-Kahn made the comments ahead of the fund's October8-10 annual meeting in which currency depreciations by governments to boost exports will be a key issue.

"There is clearly the idea beginning to circulate that currencies can be used as a policy weapon," Dominique Strauss-Kahn said in comments published on the FT website on Tuesday.

"Translated into action, such an idea would represent a very serious risk to the global recovery... Any such approach would have a negative and very damaging longer-run impact," he said.

Brazil, whose finance minister has warned of an international "currency war," on Monday doubled a tax on foreign investors buying local bonds to 4 percent to curb a strong real, boosted by high domestic interest rates and a commodity boom.

"We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side," Strauss-Kahn said.

"I don't think that is a good solution."

He is right to be concerned about the currency battle under way among major countries. The currency war has been a major subject of worry in the circle of notable economists like Michael Pettis. Three largest creditor countries, namely China, Japan, and Germany, should act as an anchor to underpin the world economy by propping up, not holding down, domestic demand.

BOJ cut interest rates

BOJ unexpectedly cut the interest rates from around 0.1% to 0.0-0.1%, and decided to buy 3.5 trillion yen of government debts in today's monetary policy meeting. The markets reacted strongly to this news.

I'm sure that nobody believes this is going to mend Japan's chronicle deflation. BOJ only meant, "We did something, so the ball has been passed on to politicians to tackle the problem." Then, what are politicians going to do? Another round of fiscal expansion? Where is a revenue source? More debt issue?

All has been well heard in the last 20 years. The same policy, the same result. And nothing happened.

Heading toward QE2

The Fed is starting out QE2.

Federal Reserve Chairman Ben S. Bernanke said the central bank's first round of large-scale asset purchases improved the economy and that further buying is likely to help more.

"I do think that the additional purchases -- although we don't have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions," Bernanke said in response to questions in Providence, Rhode Island, at a forum with college students. He said the first wave that ended in March was an "effective program."

Bernanke and other Fed officials have signaled during the past two weeks that the central bank may announce the purchase of more Treasuries as soon as their next policy meeting Nov. 2-3 in an effort to boost economic growth and reduce an unemployment rate persisting at 9.5 percent or higher for the past year.

Separately, Brian Sack, the New York Fed official in charge of carrying out FOMC decisions, said a further expansion of the central bank's $2.3 trillion balance sheet would help stimulate a recovery that is forecast to be "relatively tepid." Smaller steps of purchases may be warranted in contrast to the last round, Sack said in Newport Beach, California.

Richard Berner, co-head of global economics at Morgan Stanley in New York, said a second round of large-scale asset purchases, also known as quantitative easing, is a certainty.

"We're skeptical that you get a lot of bang for the buck because there are a lot of blockages in the transmission channel for monetary policy," Berner said during a radio interview on "Bloomberg Surveillance" with Tom Keene. "Nonetheless, with gridlock persisting elsewhere in the policy environment, it just seems to us like QE2 is inevitable."

The labor markets condition is likely to advance more than a few months ago, and the stock markets are also, albeit very gradually, on the surge. Nevertheless, the Fed seems like thinking that the current recovery is not enough to remove the pain in labor markets. When Bernanke says he'll do it, I'm sure he'll do it.

Rick Sanchez fired

Rick Sanchez was fired.

CNN fired Rick Sanchez on Friday afternoon in response to a radio interview on a SiriusXM radio show during which Sanchez called Comedy Central late-night host Jon Stewart a "bigot" and implied that the media as a whole are controlled by Jews. Appearing on "Stand Up! With Pete Dominick" to promote his new book, "Conventional Idiocy," Sanchez went on to assert that he has been the victim of discrimination at the cable news network.

Everybody is leaving CNN. So is the profit...

China is buying Greece

China is buying Greece.

Greece is starting to emerge from its severe debt crisis, Chinese Premier Wen Jiabao said on Sunday during a visit to Athens.

"It is with joy that we see Greece emerging from the shadow of its debt crisis," Wen told the Greek parliament. "The financial market has started to stabilise, the budget deficit is coming down, investor confidence is increasing and a growth prospect is emerging on the horizon."

"We have every confidence in Greece's future," he said.

China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.

Goldman Sachs was reported to recommend China to buy Greek debt this January in FT. Even after that, several times mass media has noted China's buying spree of Euro debt. One reason is, of course, that China wants to diversify its portfolio to depend less on US bonds. Other sources indicated that the second largest economy in the world is purchasing Japanese and Korean bonds.

Another Evidence of Galápagos

HP named Leo Apotheker as new CEO. Leo Apotheker was CEO at a German software company SAP. The former chief at HP, Mark Hurd, was ousted last month due to sexual harassment. Mark Hurd is now co-president of Oracle, which his friend Larry Ellison founded.

Fujitsu, one of the largest computer hardware and IT services company in Japan, also expelled its CEO, Nozoe Kuniaki, this year. I haven't heard of him get a new job at another firm. Did HP ever think of Nozoe as a candidate for new CEO? I doubt it. I think HP hasn't ever heard of him. The recruitment would not have included any Japanese candidates. Galápagos. Sure, it is.

By the way, HP's revenue is ten times as large as SAP's. It's impossible for anyone here to move to a company ten times larger. Galápagos. Sure, it is.