Small doubt in two articles

(This post is a little bit dated now, because I made a first draft last week. But anyway I'll post it below.)

I've got a small doubt in two articles (Washington Post, Bloomberg) that I found on Abnormal Returns, which compactly summarized them as

Consumers are reducing indebtedness while corporations begin to spend their cash hoards.

Is that really so?

First of all, I'm not intending to blame Abnormal Returns. It only summarized two articles into one sentence. That's it.

I have a problem in each of two articles.

Let's see a consumer's side, first.

Washington Post claims that

Climbing out of debt, Americans are saving more

The recession that just rocked the U.S. economy happened in part because Americans were borrowing and spending more than they could afford. Now, three years after the downturn began, families are moving faster than many analysts had expected to put their finances in order by paying down debt and boosting their savings.

Not bad as a start. Then, a story goes on.

Compared with the summer of 2008, when consumer debt peaked, Americans now have 7 percent less mortgage debt, 12 percent less in auto loans and 15 percent less credit card debt, according to the Federal Reserve Bank of New York. Loan payments last year were at their lowest level in a decade.

Meanwhile, Americans are saving at nearly triple the rate they did between 2007 and 2009, setting aside 5.3 percent of their disposable income in December, according to the Commerce Department.

It's true that Americans have slashed spending, payed loans back, and increased savings since the financial meltdown in 2008, which has so far curtailed several million jobs.

But at the very moment, Americans resumed borrowing again, and savings rate is slightly declining. In fact, consumer credit compiled by the Fed increased for three consecutive months, the first time since the mid 2008. Moreover, savings rate declined to 5.3% in December, a nine-month low since last May. As the economy turns up, Americans have stopped a thrift life, and returned to the "good old days", though it's very modest compared to the housing bubble period in the early 2000's.

Second, while no one denies that corporations has just started spending again in the US, Bloomberg's reason is questionable.

Corporate America is putting its cash hoard back to work.

In the first decline since mid-2009, Standard & Poor's 500 companies reduced cash and short-term investments to $2.4 trillion from a record $2.46 trillion, according to data Bloomberg compiled from their most recent quarterly reports. Capital spending increased $22.3 billion, the biggest quarter- to-quarter jump since the end of 2004, to $142.8 billion, the highest level in two years.

Budgets are rising for new plants, distribution centers and stores from S&P bellwethers Cisco Systems Inc., General Electric Co. and Coca-Cola Co. While some of the money is being spent abroad, company officials say they are opening the purse strings at home now too. A rebound in economic demand, President Barack Obama's efforts this year to court business leaders, and Republican gains in Congress have helped build confidence to invest and start adding jobs, executives and investors said.

Really? Are you sure?

In my opinion, it's a mysterious theory that companies expand capital spending because the President pleads. If so, the President could readily manipulate the economy through corporate spending in his favor, especially just before the election. It looks like the US is a communist, dictatorship nation.

The fact is, I think, that companies build up investments because the stock market, hence economic prospect, rises.

Look at the graph above, and you'll find that the stock market has a positive correlation with corporate investments. A democratic, capitalist society wouldn't be easy for corporations to increase spending even if it's the President's order.

Be coherent. Think broad.

US foreign policy after the former Bush administration's blunder looks like increasingly tough for anybody to have a say in a critical moment like the current turmoil in the Middle East. Having said that, though, it shouldn't be an excuse to stumble upon one of the most significant public uprisings in the recent history now unfolding in the nations once thought to be under ever unchanging autocratic regimes.

If the Obama administration fails now, it would miss the vital opportunity to regain US's lost image and influence over the region in the past several years, and the later generations of the US as well as the entire globe would have to pay a huge penalty in terms of both political and economic stability in the oil rich region.

Nevertheless, incoherence and uneasiness have been felt among the current team on the Middle East, which isn't a welcome sign to signal that the US has thoroughly changed tack and is now wholly on the side of people, not a corrupt, despotic regime, for mutual benefits defined not by bold national interests but by principle.

The reason is that there is no consensus among policymakers on how to tackle the events. So, everybody talks on what he wants, no matter how different from the chief. State Secretary Clinton especially like to dissent from Obama. It could compromise any efforts to send a clear and coherent message to the region. In the case of Egypt:

Contradictory Language

From his first public remarks Jan. 28, the president sided with calls for change. Speaking after Mubarak's resignation Feb. 11, Obama praised the "moral force" of peaceful protests "that bent the arc of history."

"There are very few moments in our lives where we have the privilege to witness history taking place," Obama said. "The people of Egypt have spoken, their voices have been heard, and Egypt will never be the same."

While Obama's words have been clear and consistent, the message was muddied by multiple U.S. officials who reacted to confusing events in sometimes contradictory language.

On Jan. 25, Clinton said the Egyptian government was "stable." Two days later, Biden declared Mubarak was not a dictator and needn't resign.

The following night in a hastily arranged address, Obama said he told Mubarak to "take concrete steps and actions" toward democracy. Clinton appeared on that Sunday's news shows insisting on an "orderly transition." On Feb. 1, Obama said he told Mubarak that a transition "must begin now."

Stable Transition

The message was repeated for a week before Wisner, whom the administration sent to Cairo to urge Mubarak to step down, told a security conference in Munich that a stable transition might benefit from Mubarak staying in office while elections were planned.

The president was angered by Wisner's message, according to an administration official who requested anonymity to discuss the president's private reaction. It marked a low point in the administration's response, said another official, who also requested anonymity.

Though the administration disavowed Wisner's remarks, Clinton suggested Feb. 6 that an orderly transition would be harder if Mubarak were to resign, acknowledging she had been unaware that his departure might trigger elections in 60 days.

At first, it looked like that Obama has no clue on how to address the sudden uprisings in Egypt, but finally crystallized a position to favor a prompt transition from Mubarak in support of Egyptian's protests. However, his aids including Clinton seemed like to back away from recognizing the fall of a long-time US ally in the region, as much as saying Egypt is "stable". The contradiction of words among the administration can also be seen in Iran's case.

President Obama addressed the Iranian demonstrations Tuesday with a large measure of caution, calling on Iran's leaders to allow protesters to express their grievances but stopping short of calling for a change in government.

…

"We were clear then and we are clear now that what has been true in Egypt should be true in Iran - that people should be allowed to voice their opinions and their grievances and seek a more responsive government," Obama said. "What's been different is the Iranian government's response, which is to shoot people and beat people and arrest people."

…

"Each country is different, each country has its own traditions, and America can't dictate what happens in these societies," Obama said, adding that his administration would lend "moral support to those seeking better lives."

This time, while Obama was reluctant to navigate the change in government for Iran, hence showing tepid support for protesters, Clinton quickly expressed her views strongly in favor of demonstrators. Their reaction is opposite to Egypt's case.

Mrs Clinton said they deserved to have "the same rights that they saw being played out in Egypt" and that Iran had to "open up" its political system.

…

Later in Washington, Mrs Clinton told reporters that the US administration "very clearly and directly" supports the protesters.

"What we see happening in Iran today is a testament to the courage of the Iranian people, and an indictment of the hypocrisy of the Iranian regime - a regime which over the last three weeks has constantly hailed what went on in Egypt," she said.

Mrs Clinton said the US had the same message for the Iranian authorities as it did for those in Egypt, where President Hosni Mubarak was forced to step down after 29 years in power by nationwide mass protests.

"We are against violence and we would call to account the Iranian government that is once again using its security forces and resorting to violence to prevent the free expression of ideas from their own people," she said.

"We think that there needs to be a commitment to open up the political system in Iran, to hear the voices of the opposition and civil society," she added.

Obama has a reason why he is careful not to provoke Iranian government.

Obama's caution stems from the same fear that appeared to guide his response in June 2009: that a clear U.S. call for regime change in Iran would allow President Mahmoud Ahmadinejad to cast the protest movement as a creation of Western governments and Israel.

NYT claims that the administration's handling of Iran is at least better than Bahrain, another important US ally across the Persian Gulf, where tens of thousands of people, mainly the Shi'ite, took to the streets, demanding more say in politics in a country dominated by the minority Sunni.

President Obama accused Iran's leaders of hypocrisy for first encouraging the protests in Egypt, which they described as a continuation of Iran's own revolution, and then cracking down on Iranians who used the pretext to come out on the streets. He then urged protesters to muster "the courage to be able to express their yearning for greater freedoms and a more representative government."

But speaking to other restive countries, including Bahrain, Mr. Obama directed his advice to governments, not protesters, illustrating just how tricky diplomacy in the region has become. He said his administration, in talking to Arab allies, was sending the message that "you have a young, vibrant generation within the Middle East that is looking for greater opportunity; and that if you are governing these countries, you've got to get out ahead of change. You can't be behind the curve."

This ambivalence through inconsistent messages threatens to undermine the credibleness of the US government, which is required at the very moment. People might see that attitude as an unshakable evidence that they have still been maneuvered by the US (and Israel, if necessary). It looks like that they have made a firm decision not to be, or to be regarded as, a puppet of the US and Israel. Now it's time for the US administration to show a clear stance that the US is firmly on the side of local people, not a dictator. Clinging to narrow interests would undermine the whole interests. Think broad.

Frightening estimates for Japan

Japan's real GDP contracted 1.1% in the last quarter on an annualized basis, according to Cabinet Office.

Fine.

It isn't supposed to be fine, for God's sake. Contraction is a problem. But Japan's markets, be it stock, currency, or bond, shrugged it off as if nothing important happens. Recently, they have reacted only to overseas events like US's economic data or China's monetary policy, etc. Domestic news is little to nothing for them.

There is a reason this time, of course: the current quarter is going to be fine, so investors don't have to worry about the past data. Maybe or Maybe not. Rather, headline news focused on China as the world's second largest economy instead of Japan.


By the way, there is a very close correlation between population and GDP. As you see, Japan is losing its population.

Then, what if Japan keeps losing its population as estimated? What about GDP?

The National Institute of Population and Social Security Research published the future population projections for Japan in 2006. Projections based on the assumption of "high fertility, medium mortality" have fit well to the actual data so far. According to that, Japan's population is estimated to keep declining and fall under 100 million in 2053, the first time since 1966.

If so, what about GDP? Well, using the estimation in the graph above, we have a frightening figure for Japan.

According to the estimation, Japan's GDP is forecast to be negative in 2046!!

Of course, this is a stupid calculation. But right now it's very hard to paint a bright picture, if any, for Japan's future.

In defence of Brazil (and US) against China

This isn't the first time for a South American country to charge an Asian counterpart with its cheap currency. In fact, as my previous post shows, Brazil, one of the significant emerging powers, repeatedly voiced strong concerns for China's currency policy.

Looking at how its currency, real, is valued in the markets, you'll see Brazil's complaint is well-founded. The real is now one of the most overvalued currencies among major economies. According to the BIS, the real has appreciated nearly 40% in real terms since the start of 2009, while the yuan, China's currency, once devalued 6% in the midst and has not yet recovered the level of the start of 2009. Who could say Brazil is paranoid?

However, Brazil has a problem blaming China: China is now Brazil's number-one export partner, and Brazil has recently had a huge trade surplus with China. It means that a cheap real would help exporters, especially commodity firms, thrive more in the world's fastest growing economy, but increased trade surplus would cause a trade dispute with China, a country that Brazil is fast deepening a tie with.

One of the reasons of Brazil's clamor is that the country's overall trade surplus has abated since 2006. Last year, it's little more than 20 billion US dollars, less than half of 2006, which a strong real supposedly brought about.

FT blog claims that the real's strength comes from breakneck economic growth fuelled by government spending. In that sense, Brazil's problem looks like homegrown. Taking into account that domestic inflation is rising due to the rise of commodity prices over the globe, however, the country has no choice but to raise its policy interest rates to curb inflation, which in turn helps the real appreciate more.

Brazil is planning to slash its government spending to ease pressure on the central bank to raise interest rates, and hence an upward pressure on the real. But the share of government spending in GDP is 19.5% in 2009, no bigger than 20 to 23% in the 1990's. It's questionable that only the cut in government spending could achieve the goal of a stable currency.

Inflation is also rising in China, which has recently led the country to hike its interest rates. Yet, the speed of the yuan's rise has been stubbornly slow so far. Even though the Obama administration refused to label China a currency manipulator, the tide of requirement for yuan's rise looks like not ebbed among US policymakers. Brazil, together with the US, has every reason to grumble over China's currency when no country dares to get on China's nerves.

Bye Bye Deflation, Hello Inflation

As several of my recent posts show, inflation is sneaking upon a daily life around the globe, which has so far provoked riots and protests over the Middle East. This is and should be surprising given that deflation was a major threat facing the world economy for a while ago, and policymakers at the time clamored a slogan "Don't be like Japan." What a change!

In fact, the word "deflation" has been losing an attention of general public, and fading away to a trivial word which isn't searched much on the net. According to Google, the word "deflation" is now searched less than one-fourth of the word "inflation" all over the world. It looks like that deflation is getting back into a category of antiquated, exotic terms which only the Japanese dully look for.

It doesn't mean that pressures are so mounting that prices jump, say, 20% in every corner of the world like the 1970's. In fact, price pressures are still and will be subdued in most advanced economies, because there are too many slacks in resources which are supposed to work to suppress price increase over the economy.

However weak they are, it's important to note that inflation pressures do exist, reflecting two major factors that are now pushing prices upward: food and oil. The situation is not a demand-pull but a cost-push inflation. The primary industry may flourish due to rising sales, but it's uncertain that the effects can spread to the secondary and tertiary industry amid a moderate price increase of final products.

Two-year moving correlation between the CPI growth and two inflation factors (oil and food) shows that price pressures are about to increase and be factored in consumer prices in the US and Europe. So as long as food and oil prices stay high, consumers are going to feel a price increase, however small it is, in a near term.

On the post-Mubarak Egypt

This blog is meant to be written for topics related to, mainly, economics, not politics. Politics is not my first choice, but the crisis unfolding in Egypt gave me a food of thought on the post-Mubarak era, which I think is rarely mentioned or imagined in the media.

We have to think of a new factor in assessing the Middle Eastern politics, which is rapidly emerging in the region. It's people, not authoritarians. What do Egyptians think now? Information available now on Egyptian protesters is pointing to one palpable feature: they hate the US, irrespective of fundamentalists or secularists. In fact, Anderson Cooper, CNN's renowned newscaster, and several of his crews were punched several times in Egypt, and other journalists from BBC or ABC news are also reported to be roughed up in the crowd. The reason is simple: those journalists are from the West which Egyptians hate.

Many analysts have a point to see that the Obama administration is so totally unprepared for the situation that their reaction is belated and awkward facing people's sudden anger, at a loss of which way to go. This analysis isn't unwarranted, but we have to think ahead of it. The thing is that even if Obama team moves fast to make its position clear to anyone, the situation wouldn't change so big: Egyptians hate Americans.

It doesn't mean that Obama should back up falling Mubarak, ignoring and if necessary suppressing people's demand for the resignation of a longtime ruler for the sake of regional stability. It's the worst way to respond to the crisis, and would ignite people's anger so much that another extreme regime is inevitable in African continent. Even so, it looks like that given Egyptians hatred against the US, the post-Mubarak government, be it fundamentalists or secularists, has little choices but to distance itself away from the US, which gets a room for China and Iran to have a say in Egypt's politics. Or the post-Mubarak Egypt would at least slightly lean toward the two countries, not to provoke the West.

In fact, Iran has already voiced support for the uprising, triumphing its Islamic revolution in 1979. On the contrary, China hasn't done anything but to issue a short statement in hope of stability and order. The country fears that uprising fans out to their own, which could undermine their polity, so it has no intention to get into other countries' turf right now.

However, if Egypt alienates itself from the US, now Egypt's top export partner, China might fill in the blank after the US leaves. Europe has no ability or intention to do that. China would be satisfied with a country as long as it's a good partner with China in trade or politics no matter how badly it governs.

The US should be ready to deal with anti-West Egypt and the resulting disruption of oil markets. It's time to think realistically.

Egypt, Inflation, Revolution

Inflation is, among others, conceived to be the biggest risk facing the current economy around the world. Or policymakers think so. Egypt is not an exception. Protesters are ostensibly demanding the resignation of President Hosni Mubarak, who has ruled the country for nearly 30 years. But we have to think twice what angered Egyptian people.

It's not necessarily wrong to claim that Egypt's tumult has been just inspired by the ouster of Tunisia's President Ben Ali, who ran the country for more than 20 years, in response to the uprising of protesters. There wouldn't be no protesters on the streets in Egypt without Tunisia's overthrow. But more careful consideration would be required to figure out the true cause behind the scene. That's inflation.

Economics isn't always the cause of everything. Nonetheless, Egyptian's grumble over corruption and stagnation under the prolonged reign of the current president wouldn't reach the turning point without skyrocketing inflation in the country. In fact, prices rose 13.5% in 2008 in the Middle East, a 13-year high since 1995. Among them, prices jumped 16% in Egypt in 2009, the highest in the region.

This all happened despite the good track record of Middle Eastern economy, whose growth doesn't pale in comparison with ASEAN countries, or even excels South America. It wouldn't be difficult to imagine that higher inflation, which lessens real income, leads to people's discontent.

This "inflation theory" doesn't apply to Tunisia, whose inflation has recently been lower than the region. Nevertheless, world policymakers, especially those in dictatorship, might want to learn very important lessons from the crisis under way in the Middle East.