Blogs: Kathleen M. Packard
Writing about the legacy of former Fed Chairman Ben Bernanke, the Wall Street Journal editorialized: “One way to think about the Bernanke era is to divide it into three parts: before, during and after the financial panic. His record before the crisis was a clear failure. He deserves good marks for his actions in the eye of the storm. As for his extraordinary monetary exertions since the recovery began, the legacy will depend on how it all turns out.”
And how it all turns remains very much to be seen. Bernanke himself joked in January: “"Well, the problem with QE is that it works in practice but it doesn't work in theory.”
Floyd Norris noted in the New York Times: “The Federal Reserve financed most of the government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities. The American private sector appears to have ben a net seller of Treasuries in 2013, but the foreign private sector was a substantial buyer.”
“China is now estimated to own $1.27 trillion in Treasuries, and Japan to own $1.18 trillion. Between them, they control 42 percent of the $5.8 trillion held by foreigners,” wrote Norris. “Long-term Treasury yields began to rise in 2013, as the American economy seemed to strengthen. That led some American financial institutions to avoid such securities, whose market values will decline if rates continue to go up. Over all, the American public, including banks as well as private investors, is estimated to have reduced its holdings of Treasuries by $4.7 billion in 2013.”
The after-effects of Quantitative Easing may take a while to reveal themselves. E.S. Browning blogged for the Wall Street Journal in January: “Like any heavy-duty medicine, stimulus has unwanted side effects. It has made some investors overconfident because they expect the Fed to step in during any crisis and rescue markets. That feeling, known to analysts as moral hazard, has helped inflate stock values, particularly those of small companies with questionable underpinnings. It has enticed weak companies to issue stock earlier than they might have otherwise and reinflated demand for several kinds of high-risk bonds that were popular before the financial crisis.”
One consequence of Bernanke’s stimulus, noted Don Lee in the Los Angeles Times, is “that inequality, which narrowed some during the recession as the stock market plummeted, has widened again and exacerbated a long-running problem that has surged to the forefront of public discourse for the rich and powerful gathered last week at the World Economic Forum in Davos, Switzerland, as well as for U.S. policymakers and ordinary Americans.”
Such is Bernanke’s rich legacy.
The smog in China hides a lot of sins, but it can’t hide the underlying problems of the Chinese economy.
“China's Xi Jinping has cast the die. After weighing up the unappetising choice before him for a year, he has picked the lesser of two poisons,” Ambrose Evans-Pritchard has written in the London Telegraph. “The balance of evidence is that most powerful Chinese leader since Mao Zedong aims to prick China's $24 trillion credit bubble early in his 10-year term, rather than putting off the day of reckoning for yet another cycle.
This may be well-advised for China, but the rest of the world seems remarkably nonchalant over the implications. Brazil, Russia, South Africa, and the commodity bloc are already in the cross-hairs.
Earlier, reporting from Davos, Switzerland, Evans-Pritchard wrote: “China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and are – buying up nearly completed buildings from distressed developers for a song.
The shadow banking system has risen to 30pc of all lending from 20pc in barely more than a year. The growth generated by each extra yuan of credit has fallen by three quarters from 1.0 to 0.25 in five years, evidence of credit exhaustion.
The Wall Street Journal’s Nicole Hong and Fiona Law have noted: “China's central bank determines a daily reference point for the yuan, also known as renminbi, then lets it trade 1% higher or lower. Since 2005, it has gradually moved the rate up, allowing the yuan to strengthen 33%. A linked currency, called the "offshore" yuan, trades freely in Hong Kong.
It isn't clear how much the recent decline in the yuan reflects economic fundamentals and how much may reflect a concentrated effort from the Chinese government. The economy slowed somewhat in the fourth quarter, to 7.7% year over year, from 7.8% in the third quarter, which is the way the government measures gross-domestic-product growth. On a quarterly basis the slowdown was even sharper, and analysts say the economy is likely to continue to decelerate in the early part of this year.
Curiously, in the midst of the world’s economic turmoil, China has buying one key commodity – gold. “The surge in buying saw China overtake India as the world’s top consumer of physical gold, importing 1,066 metric tons of the metal to India’s 975 metric tons in 2013, according to new data from the World Gold Council,” reported the Wall Street Journal’s Laura Clark and Yue Li. Gordon G. Chang wrote on Forbes.com: “Last year, China imported and mined far more gold than its citizens and businesses purchased. Some think there was substantial back-channel hoarding of the metal due to uneasiness over the economy while others speculate that the People’s Bank of China , the central bank, secretly acquired the metal for its foreign reserves. A few believers of the second scenario argue that Beijing will attack the dollar by soon announcing a new gold-backed currency.
This month, the China Gold Association released data showing that the country’s consumption of the yellow metal in 2013 reached 1,176.4 metric tons, an increase of 41.4% over 2012. Yet that tonnage is far less than the total of mine production—428.2 tons—and imports from Hong Kong, 1,158.2 tons. The discrepancy: 410.0 tons.
There is always a mystery about China’s economy – now it has a gold patina – visible even through the smog.
For years, Castro’s Cuba has exported communism. The exports continue but the economic crows have come home to roost...even while Cuba’s economy floats only because of the generosity of Venezuelan oil exports.
Ironically, as Cuba has fallen apart, admirers of its economic mismanagement have kept the country from going bust. Keith Johnson has noted in Foreign Policy: “Cuba and Venezuela are linked as foreign policy challenges for many lawmakers because of the close ties between the two socialist regimes. Former Venezuelan strongman Hugo Chávez was an unabashed supporter of Fidel Castro, and helped ensure that Venezuela used its oil wealth to help prop up Cuba’s ailing economy. Chávez repeatedly sought medical treatment for the cancer that eventually killed him in Cuba, and the close relationship between the two countries has continued even as both have moved on to other leaders. Nicolás Maduro was one of the feted guests last summer when Cuba celebrated the 60th anniversary of the start of the Cuban revolution.”
Cuba still has political friends despite its economic foibles. As Moises Naim wrote in The Atlantic that Cuba “has long been the source of bad political and economic ideas in Latin America—from the disdain for democracy to the cult of the centrally planned economy. A different government in Cuba, one willing to make political openness and deeper economic integration with the rest of the world as much a priority as “exporting the revolution” has been during the long Castro era, would have significant consequences for Latin America. Cuba’s harmful continental influence would wane without Venezuela’s free oil. And, incredibly, this seminal change may hinge on the success of students who are still in the streets even after more than a week of brutal repression.
Cuba’s problems are evidenced by the cutbacks in recent years in the massive state payroll. The Miami Herald’s Juan O. Tamayo has written: “Cuba has slashed 596,500 workers from its bloated state payrolls, but remains far short of its initial goals for cutting public spending and making its economy more efficient, according to official figures.
The campaign to cut back on government and state enterprise jobs, launched in earnest in 2010, has been part of ruler Raúl Castro’s efforts to make the Soviet-style economy more efficient by opening the doors to more private enterprise.
There is some hope, according to the New York Times’ Damien Cave: "Many of the first Cubans to leave after Fidel Castro took over are beginning to come back, reuniting with the island they left in bitterness and anger, overcoming decades of heated opposition to its leaders, and partnering with Cubans in direct, new ways.”
Some are educating a new crop of Cuban entrepreneurs to take advantage of the recent limited openings for private enterprise in Cuba. Conservative Republican exiles in Miami have also helped finance the renovation of Cuba’s most revered Roman Catholic shrine. Young heirs to the Bacardi family, which fled Cuba after the revolution, leaving behind luxurious homes and a rum business that employed 6,000 people, are sending disaster relief and supporting artists. And Alfonso Fanjul, the Florida sugar baron, recently acknowledged that he had gone back to Cuba twice, meeting with Cuban officials and later declaring that he would consider investing under the “right circumstances.”
But Cuban President Raul Castro is still singing the same old tunes. He told the Cuban Workers Association at the end of February: “We must never forget that the economic system that will prevail in socialist, independent and sovereign Cuba will continue to base itself in the people’s ownership over the fundamental means of production and that State companies will continue to be the main form of organization of the domestic economy – and that the building of our socialist system will depend on their performance.”
Argentina is floundering. Brazil is struggling. Colombia is growing. Colombia is now the third largest economy in Latin America, according to Capital Economics. The Wall Street Journal’s Darcy Crowe and Taos Turner wrote recently: “After Argentina’s economy dwarfed Colombia’s for decades, economists say the trend reversed in January as the sliding value of Argentina’s peso made its economy smaller in dollar terms. Argentina’s evaluation later in the month erased any doubt, economists say.”
They quoted an Argentine economist, Juan Jose Cruces: “Currency rates fluctuate all the time. The really meaningful thing is that for several years now Colombia has embarked on a steady path to development by respecting private-property rights and setting clear policies.”
Peter Hall, Chief Economist for Export Development Canada, has written in the Huffington Post; “Prior to the global crisis, Colombia's growth numbers were impressive. From 2004-2007, economic activity increased at an average pace just shy of 6 per cent. It paused in 2008, but quickly resumed a decent clip, notching a 6.6 per cent gain in 2011, and back-to-back 4 per cent gains in the past two years. Real GDP now stands 24 per cent above the 2008 level, an enviable record. Colombia is already very much on the move, suggesting that higher world growth will only enhance its prospects.”
Colombia is expecting GDP growth this year above four percent. Inflation was less than two percent in 2013 and expected to be less than three percent in 2014.
While elsewhere in the developing world, interest rates have been on the move, Colombia’s have been steady for almost a year. According to Colombia’s Central Bank: "The gap between observed inflation and the bank's target, the weak pass through of nominal depreciation to the level of consumer prices, and a low level of unhedged foreign exchange positions in the economy make it possible for the exchange rate to absorb the effects of the international situation without generating trauma in the Colombian economy and without putting compliance with the inflation target at risk".
The Dow-Jones reported at the end of February: “Colombia's central bank left its main interest rate on hold at a near-record low for an 11th straight month, as healthy economic growth combined with very mild inflation allowed it to continue providing monetary stimulus without concerns of a spike in consumer prices.”
Neighboring Venezuela could learn a few lessons from Colombia. Unfortunately, it won’t.
Et tu, Matteo? Italy’s government was overthrow by its own political base. The Wall Street Journal’s Deborah Ball, Christopher Emsden and Giada Zampano noted that Florence Mayor Matteo “Renzi has for months criticized the Letta government for its inability to pass significant economic and political reforms. Tensions between the two rivals came to a head this week when Mr. Renzi decided to pull his support of the premier. [Enrico] Letta made a last-ditch effort to win back Mr. Renzi's support by presenting a revamped agenda, but Mr. Renzi instead pushed to topple the government.
Mr. Renzi has quickly ascended to lead Italy's left since bursting onto the political scene with his election as Florence's mayor in 2009. He has since won national attention for his calls for an older generation of leaders to step aside. His outsider status have struck a chord with a public frustrated with a political class tarnished by frequent corruption scandals and blasted as out of touch.
In December, the maverick Renzi emerged victorious in an election to choose the leader of the Democratic Party. The New York Times’ Jim Yardley noted: “Italy spent much of last year veering from one political crisis to another, with a nervous Europe worrying that instability might ripple outward across the Continent. Mr. Letta regularly preached the politics of stability, arguing that his awkard government, a coalition of left and right parties, was a responsible bulwark against anti-austerity, anti-Europe sentiment express by figures like [Sylvio] Berlusconi and Beppe Grillo, the leader of the Five Start Movement.”
Renzi is playing a bold game. The London Telegraph’s Josephine McKenna wrote: “Professor Sergio Fabbrini, director of the School of Government at Luiss University in Rome, likened Mr Renzi’s approach to a poker player who was betting on his capacity to change Italy but the risks were high.”
“He is a young man who is outside the political establishment and this is his strength,” Professor Fabbrini told The Telegraph.
“But he has to govern with the same thin majority in the Senate as Mr Letta. The only way for Mr Renzi to survive is to rush through change – by firing upper echelons of the bureaucracy and introducing electoral reforms.
“He may become a prisoner of the small political parties as often happens in Italy. If he is unsuccessful he can also dissolve parliament and call elections.
The Wall Street Journal’s Simon Nixon argued that Renzi “must convince Italians of the need for reform. Italy stands out among crisis-stricken countries in the euro zone for its reluctance to recognize that its misfortunes are largely homegrown, preferring to blame outside forces – whether Germany, Brussels or the financial markets.” Nixon noted: “The conventional wisdom is that reforms are very hard to deliver with a coalition government or in the absence of market or external pressure, or a clear electoral mandate.”
"People are losing faith that things can change. That's the problem with Italy," said Beppe Severgnini, one of Italy's leading political commentators. "Renzi is the last chance. If he fails, I'm really worried," he said. Perhaps, ‘Osservatore Romano said it best: “So with Renzi, the moment has come in which the whole of Italy needs to turn a new leaf, after 20 years in which little of us has been achieved.” The question, is Renzi’s personality enough to change Italy’s self-injurious economic policies.
BY KATHLEEN M. PACKARD: