US-China geopolitical struggle, 29/3.

Henry's blog today discusses the US-China geoploitical struggle and how it might be fought out in economic terms, with great damage to innocent bystanders.  This reports a fine paper by Colin Tease on what the failure at Copenhagen really means.

On the pressure on China to raise its exchange rate, as Japan and Germant had been made to do by the USA when their trade surpluses became too great, Colin Tease's thesis is that China's growing economic strength puts it in a position to resist any such pressure.

My own view is that the USA will deal with its debt burden by inflating it away.  While this will do great damage to the US economy, and that of the rest of the American empire, it will be a possibly effective counter to China's ownership of such large amounts of US paper.

To avoid importing inflation, as many nations including Australia did in the late 1960 and the 1970s, China would be forced not to revalue but to float its currency since, as economics 101 shows, such a currency regimes is required to isolate China's inflation from global inflation.

In our private discussion, Colin Tease asserted that a floating currency does not necessarily deal with asset inflation and I was forced to agree that this was an unresolved problem in economics, as I have argued in this column.

In a matter of such vital geopolitical interest, it is odd that economists have not yet clearly fixed the relevant tools of analysis.

Lower unemployment may have negative consequences for the U.S. economy, 25/3.

American productivity may suffer if American unemployment starts to fall according to the Federal Reserve.

The Wall Street Journal Reports, 'Productivity soared in the past year (rising 6.9% in the fourth quarter from the same period in 2008) as employers cut jobs and leaned on their remaining workers for greater output. But that could change as the labor-market turmoil weakens some workers’ skills and ultimately leads to greater churn, says a researcher at the Federal Reserve Bank of Cleveland.

The long duration of unemployment — the average is now 30 weeks — can lead workers to lose skills specific to their industry and occupation. That reduces their productivity when they do land jobs, says Cleveland Fed economist Murat Tasci.

“Once these workers do find a job, data show that their new starting wages stay lower than similarly educated workers and that this disparity continues for a long time,” he writes. “Additionally, many workers might be tempted to take up the first job they find after a long spell of unemployment, regardless of how good a match the job is for them. They will also be more likely to change employers when job prospects improve.

“Since recruiting for workers and looking for a job consume resources, this excessive labor market churning could be detrimental to overall productivity during the recovery. Consequently, lower job finding rates during the recession could lower the standard of living and slow the rate of employment gains during the recovery.”'

Inflation certain, but how does it play out?, 22/3.

Henry has again met the guru who provided in late 2007 the best insight inrto just what was happening in the global economy.

Here is the next installment.

And today's Blog carries the story forward - as India's inflation hits double digits.

British unemployment improves, 19/3.

Unemployment levels in Britain have fallen slightly to 2.45 million, writes the Telegraph.

It reports, 'The number of unemployed people in Britain dropped to 2.45 million, however the good news was dampened by the number of people out of the workplace hitting a record high.

Unemployment fell for the third month in a row, dropping by 33,000 between November last year and January. It has yet to breach the symbolic 2.5 million mark, let alone the 3 million barrier that haunted the recessions of the early 1990s and 1980s.

However, economists immediately expressed caution about the monthly figures from the Office for National Statistics. '

Unemployment highest amongst black Americans, 18/3.

The American recession has disproportionately hurt black Americans writes the Wall Street Journal.

It reports, 'Blacks have always faced higher unemployment rates than whites, but the Great Recession has exacerbated that disparity across demographic lines, including gender, age and education.

A new report from Congress’s Joint Economic Committee looks deep into the Labor Department data and highlights the disparity. Here are some key takeaways:

* The current jobless rate for blacks was 15.8% in February, compared to an overall rate of 9.7%. The broader unemployment rate — the U-6 rate that includes workers who are underemployed and discouraged — shows an even bigger gap. The U-6 rate for whites in February (not seasonally adjusted) was 17.9%, for blacks it was 24.9%.'

Click here for the full article.

Strangling the golden goose, 16/3.

Henry is concerned that well-meaning efforts to 'reform' capitalism, by moderating booms to lomit busts, may be strangling the golden goose of free market capitalism.

Chinese Premier warns of second downturn, 15/3.

Wen Jiabao, China's Premier, has warned his country and the world that the global financial crisis may not be over yet.

The Australian reports, 'CHINA'S Premier, Wen Jiabao, has warned that the world risks sliding back into recession and says his country faces a difficult year trying to maintain economic growth and spur development.

Mr Wen said yesterday China would not give in to foreign pressure to raise the value of its currency or withdraw stimulus measures put in place in late 2008 to pull the country out of the crisis.

In a rare two-hour news conference at the end of China's annual session of parliament, Mr Wen called for more reforms to the world's financial system as China ponders policy choices aimed at fighting rising inflation while increasing domestic demand.

The Prime Minister pointedly highlighted - as he wrapped up the country's once-a-year, 10-day parliamentary session, the National People's Congress - how surging commodity prices had been at the centre of disputes with Australia.

"The unemployment rate of the world's main economy is still high, some countries' debt crises are still deepening, and the world's commodity prices and exchange rates are not stable, which are most likely to become the cause of any setback in the economic recovery," Mr Wen said yesterday in Beijing's Great Hall of the People.'

Toyota faces multi billion dollar payouts, 12/3.

Toyota will be swarmed by U.S. court cases after recalling millions of cars for safety reasons.

The Australian reports the recall looks set to cost Toyota billions of dollars and its reputation as a leading car manufacturer.

'US lawyers are seeking billions of dollars from Toyota to compensate the millions of people who saw the value of their vehicles drop in the wake of a series of mass safety recalls.

And in another development, a man serving eight years in a US prison for a crash of his 1996 Toyota Camry that killed three people is seeking a new trial in light of the safety scandal.

These economic damage class action lawsuits could potentially dwarf payouts for wrongful death and personal injury cases and threaten to embroil the Japanese car maker in a drawn-out legal battle over whether it conspired to hide deadly defects.'

China's exports soar, 11/3.

'CHINA'S exports in February soared for the third straight month and at the fastest pace in three years, underlining the nation's position as the world's leading exporter and adding to pressure on policymakers to pare back stimulus measures adopted during the global recession.

'Overseas shipments last month grew 45.7 per cent from a year earlier to $US94.5 billion ($103bn), the customs bureau said, cementing a turnaround that began in December when a year-long decline in exports ended.

'China's export data is being closely watched for clues to the state of the world's third-largest economy and for signs of recovery in crisis-hit markets such as the US and Europe'.

World trade continues to recover, 10/3.

World trade levels are steadily recovering from the 2008 downturn, writes the Economist.

It reports, 'IS THE glass half empty or half full for world trade? Figures released on March 1st by the Netherlands Bureau for Economic Policy Analysis (CPB), which maintains a close watch on global trade volumes, point to renewed vigour at the end of 2009. Trade volumes rose by 6%, quarter-on-quarter, in the final three months of the year.

But these figures also underline just how severely trade was affected by the global recession. The CPB reckons that volumes shrank by a staggering 13.2% during 2009. They have fallen in only two other years since 1961, when comprehensive data begin. But those declines—by 1.9% in 1975 and 0.9% in 1982—pale in comparison with last year’s huge drop.

Still, a revival is clearly under way. The volume of trade went up by 5% in December alone. Weak growth of 1.2% in October and 1.1% in November might have suggested that the recovery which began earlier in the year was faltering.'

China's inflation rising, 9/3.

China's inflation is on the rise, according to a WSJ article - 2.7 % in the year to February, up from 1.5 % in the year to January.

A guru is quoted as saying: 'Overall, you will be looking at a picture of strong retail sales, strong industrial production and strong investment figures'.

With this would come 'some acceleration in CPI' and agitation on the part of US investors.

US investors are generally nervous at present. Another WSJ writer analyses flows of funds.  US investors pulled $US53 bn out of US equity mutual funds last year, and so far another $US4.6 bn this year.

At the same time, world equity funds have taken in nearly $US 14 bn and bond funds a massive $US 56 bn.

Given the inevitability of a large rises in bond yields as global recovery comes, the latter move at least will seriously burn those same investors.  They will not just be nervous, but positively terrified.

More here in Henry's Blog today.  

U.S. youth unemployment falls slightly, 9/3.

Unemployment amongst American college graduates decreased in February, but it is still a very tough job market.

The Wall Street Journal reports, 'The labor market for young college graduates improved last month, but for youths in general the job market still looks bleak.

The unemployment rate for college graduates between 20 and 24-years-old fell to 8.5% in February from 9.3% a month earlier as those with more education continue to fare better in a tough labor market than those with less.

People in the same age group with only a high school diploma also experienced a drop in their unemployment rate to 21.8% from 22.7%. Their jobless rate is still more than twice as high as the rate for the entire labor force.

Young people as a whole still aren’t doing well. The jobless rate for people 20 to 24-years-old, regardless of education level, was 16.6% in February. For 18 to 19-year-olds it was 25% and for those 16 or 17 years old, it was 27.4%.'

Official figures understate unemployment crisis, 8/3.

Real U.S. unemployment increased to 16.8% in February.

The Wall Street Journal reports, 'The U.S. jobless rate was unchanged at 9.7% in February, following a decline the previous month, but the government's broader measure of unemployment ticked up 0.3 percentage point to 16.8%.

The comprehensive gauge of labor underutilization, known as the "U-6" for its data classification by the Labor Department, accounts for people who have stopped looking for work or who cannot find full-time jobs. Though the rate is still 0.6 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the "U-3" unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

The 9.7% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The actively looking for work definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.'

Wall Street 'soars' on jobs data, 6/3.

'WALL Street stocks jumped on Friday after the government reported that US companies shed fewer jobs than expected in February, with the unemployment rate holding steady at 9.7 per cent.

'The Dow Jones Industrial Average surged 121.98 points (1.17 per cent) to 10,566.12 in final trades, ending the week on an upbeat note.

'The Nasdaq composite added 34.04 points (1.48 per cent) to 2,326.35 while the broad-market Standard & Poor's 500 index gained 15.68 points (1.40 per cent) to a provisional close of 1,138.65.

'Just before the opening bell, the Labor Department said the US lost 36,000 jobs in February and the unemployment rate held at 9.7 per cent despite adverse winter conditions'.

US economy improving 'slightly', 4/2.

'US economic conditions kept improving slightly at the start of 2010, but the blizzards that hit the East Coast in February hurt several areas, the Federal Reserve said in a report today.

'In its latest Beige Book report, the Fed said nine out of its 12 regional districts reported that economic activity improved, but in most cases the increases were modest, with activity held back by the February 4-7 and February 9-11 snowstorms'.

Australian economy defies Anglo-Euro recession, 4/3.

New economic figures show the Australian economy grew 2.7% in 2009, in spite of the Anglo-Euro recession.

The Australian reports, 'THE Australian economy has grown at the fastest pace in nearly two years, prompting Treasurer Wayne Swan to say Australia is the "envy of the world".

The National Accounts today showed that the economy grew a brisk 0.9 per cent in the December quarter, rising from 0.3 per cent in the previous quarter.

That took the annual pace of growth to 2.7 per cent, putting it close to historical trend growth of 3 per cent, and supported the Reserve Bank¡¯s decisions on interest rates.

The Reserve Bank yesterday became the first central bank in the G20 to raise interest rates this year, taking the official rate to 4 per cent and making the fourth hike in six months. The central bank also flagged further rate increases in 2010.

The economy grew at a significantly faster pace in six months of 2009 after the global financial crisis than the Australian Bureau of Statistics had previously reported. Today, it revised up September quarter growth to 0.3 per cent from 0.2 per cent and March quarter growth to 0.8 per cent from 0.6 per cent.'

Wayne Swan jumped on the new data and argued it justified the federal government's economic stimulus policies.

'Mr Swan said: "Overall, today's National Accounts show that Australia's economy continues to strengthen, underpinned in part by the fiscal stimulus, and increasingly by a recovery in private sector demand.¡±'

Could Britain be on the verge of a debt panic?, 3/2.

Throughout the current crisis we have consistently warned that another big crisis would (or should) be no surprise.  Read on, gentle readers ... 

'Mervyn King, the governor of the Bank of England, is considering restarting his quantitative easing program in light of current economic weakness.

'The fiscal crisis in Greece and a growing worry that the coming elections here could result in a hung Parliament, with no political party strong enough to push through unpopular deficit-cutting measures, have sparked fears that Britain will experience its own sovereign-debt meltdown. In such an event, foreign investors would sharply cut back on their purchases of British government bonds, leading to an interest-rate spike and a potential double dip-recession, if not worse.

¡°If you really want a fiscal problem, look at the U.K.,¡± said Mark Schofield, a fixed-income strategist at Citigroup. ¡°In Europe the average deficit is about 6 percent of G.D.P. and in the U.K. it¡¯s 12 percent. It is only just beginning.¡±

RBA raises rates - see Henry's Blog today for more.

The Governor said: 'At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.0 per cent, effective 3 March 2010.

'The global economy is growing, global financial markets are functioning much better than they were a year ago.

'Labour market data and a range of business surveys suggest growth in the [Australian] economy may have already been at or close to trend for a few months. There are some signs that the process of business sector de-leveraging is moderating ... Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. ...

'Inflation has, as expected, declined in underlying terms from its peak in 2008, ... [Goods and services]Inflation is expected to be consistent with the target in 2010.

'With the risk of serious economic contraction in Australia having passed, the Board moved late last year to lessen the degree of monetary stimulus that had been put in place when the outlook appeared to be much weaker. Lenders generally raised rates a little more than the cash rate and most loan rates rose by close to a percentage point'. Fed gains Senate support for greater powers, 1/3.

The Federal Reserve may be granted new powers as part of banking reforms proposed by the U.S. Senate.

The Wall Street Journal reports the Fed may play a greater role in regulating the banking industry.

'WASHINGTON¡ªThe Federal Reserve is gaining support in the Senate and could emerge from the overhaul of financial-market rules as the primary regulator of the country's largest financial firms, according to people involved in the negotiations.

Several weeks ago, the Fed seemed to be headed for a political knee-capping as senators from both parties were pushing to narrow its authority almost exclusively to monetary policy.

The momentum swing comes after a lobbying push by Fed and administration officials, including Treasury Secretary Timothy Geithner. He has shown a willingness to compromise on key parts of financial-overhaul legislation but has pushed hard for the central bank to be the top supervisor of the largest, most complex financial firms in the country.'

China's balancing act, 27/2.

'BEIJING: China's macroeconomic management would be put to the test both by the domestic and international markets in 2010, said Chairman of National Development and Reform Commission (NDRC) Zhang Ping Friday.

'The country's fiscal and monetary policies would be tested given the uncertainties of 2010, Zhang said.

"As to monetary policies, if the bank continues to provide easy loans, inflation may occur. But if the government tightens monetary policies too soon, the economy may relapse into recession." said Li Daokui, director of the Center for China in the World Economy, Tsinghua University.

US fiscal gridlock a vast risk, 26/2.

Anatole Kaletsky says in what is a most important contribution: 'TODAY'S summit is crucial to policy and economic prospects in the US and the West.
 
'You may not have noticed, but today is a very important day for US politics, world economic prospects and even for the global balance of power between Western democracy and benign dictatorship along Chinese lines. Why? Because today marks either the beginning of the end of Barack Obama' presidency, or the end of the beginning.

'At 10am US eastern time, he will host an all-day "summit", broadcast live on nationwide TV, with his Republican congressional opponents and his wayward Democratic supporters, to try to establish some kind of political consensus on the top priority of his presidency -- reform of the ruinously expensive US healthcare system. Medicine now absorbs 17 per cent of US national income, double the average in other advanced economies'.

'If nothing is done to change the US healthcare system, it can be stated with mathematical certainty that the US government and many leading US companies will be driven into bankruptcy, a fate that befell General Motors and Chrysler largely because of their inability to meet retired workers' contractually guaranteed medical costs. ...

'But even more troubling would be the economic and financial effects. Gridlock over healthcare would imply similar stalemates on taxes, public spending, the budget, macro-economic stimulus and financial reform. As a result, an active response to any future financial crisis might become impossible.

'Even worse, any important action to control US government borrowing could be ruled out. If the financial markets seriously reached this conclusion, all the debates about government debt and public spending in Britain, Greece and other countries would be a waste of breath. A genuine loss of confidence in America's fiscal outlook would create a financial crisis so horrific that actions by the British or European governments would be swept away like beach huts in a tsunami. And precisely this possibility must be taken seriously if Mr Obama fails to break the healthcare deadlock. The issue at the heart of America's present political polarisation almost guarantees that government deficits will continue to widen if he cannot create some kind of consensus. For the deadlock over healthcare is just one instance of a more generalised paralysis on economic issues'.

Sir Wellington Boote steps into the firing line with his plan for a vast reduction of government claims on the taxpayer

And Henry's editor faces the CEDA Trustees and hundreds of their special friends in Melbourne today.

Global fiscal tightrope, 19/2.

Martin Wolf spells out the choices before us - credible fiscal retrenchment, mass bankruptcies or inflation.

The first is greatly to be desired, but implausible; the second is unthinkable, back to the Great Depression scenario; by elimination, inflation is inevitable.

Henry's blog today elaborates.

Cop this great graph from The Economist.

  Courtesy The Economist

US Fed raises discount rate, 19/2.

'Asian shares mostly declined Friday as the U.S. Federal Reserve's decision to raise its discount rate pushed the dollar higher but hurt investor sentiment and commodity prices, with Hong Kong stocks falling the most.

'Regional stocks were tentative in early trading, but the fall accelerated as shares tied to the economic cycle declined and gold prices fell amid rising expectations that a hike in the Fed's main policy rate could follow sooner than many had anticipated.

"The timing is not good. Although this is a sign of the U.S. economic recovery, the Fed's hiking of the discount rate can give a short-term shock to the market that has been under downward pressure [from early this year] due to concerns over China's tightening moves," said Bae Sung-young at Hyundai Securities. "The Fed's move will certainly revive [concerns in equity markets] that the global tightening moves may come earlier than expected."

'Late Thursday, the Fed raised the rate it charges banks for emergency loans by a quarter percentage point to 0.75%, a move that was signaled for some time'.

RBA Chief states the obvious, 19/2.

'INTEREST rates in Australia are no longer at emergency levels, although there is still some way to go before they return to a normal setting, Reserve Bank of Australia governor Glenn Stevens said today.

'Borrowing rates paid by business and for household mortgages are between 50 and 100 basis points below the decade average, the governor told politicians in a semi-annual testimony in Canberra.

'Still, he noted that rates were a "fair bit closer to normal" than when he last testified to the House of Representatives economics committee last August, especially given additional moves by commercial banks on top of any official cash rate target rises.

'By starting early in hiking rates, the RBA had the luxury of pausing in February, he said'.

New dangers for the world economy - inflation only way to bail out profligate governments, 16/2.

The US financial sector has been bailed out except, puzzlingly, Lehman Brothers.

Massive fiscal stimulus is in place everywhere, but unemployment is still rising, except possibly in the USA and the miracle economy of Australia.

The Economist opens a leader on 'New dangers for the world economy' as follows:

'LAST year it was banks; this year it is countries. The economic crisis, which seemed to have eased off in the latter part of 2009, is once again in full swing as the threat of sovereign default looms.

'Europe¡¯s leaders are struggling to avert the biggest financial disaster in the euro¡¯s 11-year history (see article)'.

Greece has been in the firing line but investors are also worried about the ability of Spain, Ireland and Portugal to repay debts.  Spain already has almost 20 % of its workforce unemployed and another 20 % (Henry's guess) underemployed, and fiscal austerity is an unlikely policy anytime soon.Henry's blog today sees inflation as the big problem, once bank debt, sovereign debt and policy fatigue are overcome.

More today in Henry's blog, where the temptation of governments to bail out fiscal policy with inflation is likely to prove overwhelming.

IMF enters policy debate, 15/2.

The international agency is asking most of the right questions but its draft answers don't meet with Australia's case, asserts Henry and his journalist colleagues.

The answers can't be right until they fit the world's most successful developed nation, judged by performance in the Crash of 2008.

Henry's blog today sets out the questions and offers answers.

Debate will be joined at a yapfest in Seoul shortly.

Inflation becomes more of a problem, 11/2.

Inflation throughout is increasing becasue of higher food prices writes the Wall Street Journal.

'HONG KONG¡ªThe rising cost of food is driving Asian inflation rates higher, increasing the stakes for a successful harvest this year in a region still bruised by the 2008 food crisis.

Prices for rice, sugar, milk, and in some places, fruits, vegetables and cooking oils, have risen in recent months, putting pressure on overall consumer prices. The region's most important economies, including India, China, Thailand and Indonesia, are all grappling with how to handle rising prices without snuffing out their economic rebounds. Food-price increases are leading to higher inflation rates across much of Asia, though energy costs and tighter labor markets are also putting pressure on prices.

Asia was hit hard in 2007 and 2008 when shortages of foodstuffs, especially rice, led to hoarding and riots. Armed guards were dispatched to protect rice warehouses in Thailand and the Philippines; Indonesia deployed border agents to prevent smuggling.

Some analysts warn that the structural issues that caused the 2008 food emergency¡ªtoo much demand and not enough food¡ªare still in place.'

Australian unemployment falls again, 11/2.

'THE Australian unemployment rate fell to 5.3 per cent in January, nearly a one-year low, as employers hired nearly 16,000 full-time workers.

'The better-than-expected employment figures showed Australian employers created a total of 52,700 jobs, seasonally adjusted - 15,900 full-time jobs and 36,900 part-time jobs.

'That helped push the jobless rate to 5.3 per cent, down from an unrevised 5.5 per cent in December, and compared with market expectations of 5.6 per cent'.

Another sign that economics is a less-than-perfect-science.

For a larger example, see Henry's Blog on the defects in the thinking on the bigger issues by the gods of Olympus.

Greece tries to avoid defaulting, 10/2.

It is only a matter of time before Greece defaults on its debts writes the Wall Street Journal.

'ATHENS¡ªThe Greek government, facing pressure from financial markets on one side and union protests on the other, Tuesday announced measures to cap public-sector salaries and reform the country's tax code in a bid to fix the country's finances.

"The outlines of the [public sector] wage policy, as well as the tax reform policy, are part of the broader effort to reform our public finances," Finance Minister George Papaconstantinou said at a news conference. "We all know what a difficult position the country is in."

The measures include freezing public-sector salaries and cutting supplemental incomes to civil servants by an average of 10%. They also include a freeze¡ªand in some cases a reduction¡ªin salaries and bonuses for the prime minister, senior government officials and officials at state-owned enterprises.'

Lord make us pure, but not yet, 9/2.

China has no chance of controlling its economy properly unless and until it allows its currency to float.

Its current 'managed' currency is like Australia's 'crawling peg', described in its day by the Reserve Bank juniors as a 'crawling pig'.

Today, Henry receives heavy-duty support, from the OECD as reported by Michael Stutchbury.

All involved demonstrate their knowledge of international economics 101.

Share price correction, 8/2.

Wall Street was well down again on Friday, but recovered to be about square.

From the peak early this year, US shares have now fallen around 10 %, depending on the measure.  This is the generally accepted measure of a 'correction', but not a 'bust'.

Australian shares have suffered a bit more than US shares, as is usual since the Australian economy is classified by share and currency traders as 'high beta' - ie unusually volatile.  The Aussie dollar, recently seen as heading for parity, was in the US$86 cent area, as commodity prices were suffering along with share prices.

Henry's Blog today discusses what should be done about asset bubbles.  By implication, this provides guidance about what to do about asset busts. Perhaps the share price correction provides a rationale for last week's pause in the tightening by the Reserve bank.

US jobs - more signs of stabilisation, 6/2.

'The unemployment rate unexpectedly dipped to 9.7 percent in January, from 10 percent in December, the government reported Friday, buoying hopes that the worst job market in at least a quarter-century is finally improving.

'But a different survey in the Labor Department¡¯s report found that the economy lost 20,000 net jobs during the month, muddying the picture and underscoring the formidable struggles still confronting millions of Americans. Yet with the pace of decline slowing, most experts focused on signs that the economy was recovering after the longest recession since the Great Depression.

'Manufacturing added 11,000 jobs in January, the first monthly increase since November 2007, while the length of the average workweek rose slightly at factories. The economy added 52,000 temporary workers, and average wages increased modestly, amplifying the view that commercial activity is reawakening after two years of hibernation'.

The coming new global economic model, 5/2

Anatoly Kaletsky writes: 'THE most important statements are often those that are left unsaid. Among the millions of words spoken at last week's World Economic Forum in Davos, the comment that nobody quite dared to utter was clear. After the crisis of 2007-09, the global capitalist system is in a period of transition comparable with the great transitions of the 1930s and 1970s.

'The question that nobody wants to raise is whether the new model of capitalism that emerges to dominate the world will be a radically reformed version of the Western democratic system or some variant of the authoritarian state-led capitalism favoured in China, Russia and some other emerging economies.

'As a leading US diplomat told me: "Since the crisis, developing countries have lost interest in the old Washington consensus that promoted democracy and liberal economics.

"Wherever I go in the world, governments and business leaders talk about the new Beijing consensus -- the Chinese route to prosperity and power.

"The West must come up with a new model of capitalism that's consistent with our political values. Either we reinvent ourselves or we will lose."

Read on here.

American job losses continue, 4/2.

America is still losing jobs according to figures cited by the Wall Street Journal.

It writes, 'NEW YORK¡ªThe labor market showed positive signs of recovering in January. Private-sector jobs in the U.S. fell by 22,000 in January, the smallest drop since February 2008, and service jobs continued to rise, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

A separate report indicated that the U.S. service sector resumed expansion in January.

The ADP loss is slightly below the 30,000 drop projected by economists in a Dow Jones Newswires survey. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000.

The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers.'

If true, these stastics may strengthen Obama and the Democrats' push for a jobs focused stimulus.

More stimulus spending planned for 2010, 3/2.

Federal Democrats are planning another stimulus package to reduce American unemployment from rising further.

The Wall Street Journal reports job creation has become Obama and the Democrats' new priority for 2010.

'Senate Democrats are preparing to release a roughly $80 billion jobs program this week, but its prospects are uncertain in a political landscape where voters are angry about unemployment yet fuming about federal spending.

Senate leaders are proposing that part of that money come from funds originally allocated to the financial-sector bailout effort, the Troubled Asset Relief Program, or TARP. But top Democrats have decided to slice the jobs initiative into smaller chunks in the face of Republican attacks on big federal economic-stimulus programs.

Action on the jobs measures will be a warm-up for the larger debates over federal spending proposed in President Barack Obama's 2011 budget plan released Monday. Both sides agree that jobs are a national priority. With Republicans on the cusp of 41 votes in the Senate, Democrats need some GOP support to avoid procedural obstacles that could doom their effort. If Republicans do block their initiatives¡ªparticularly proposed tax breaks for businesses¡ªDemocrats are prepared to blame the minority party for seeking election-year political advantage at the expense of hard-pressed workers. '

Is China a threat to the US economy?, 3/2.

A recent US Congressional report concludes: '... from an economic perspective, describing China¡¯s economic rise or its economic policies as an economic ¡°threat¡± to the United States fails to reflect that China¡¯s growth poses both challenges and opportunities for the United States. ...

'The main challenge for U.S. policymakers is to press China to quicken economic and trade reforms, and to fully transform itself into a market-based economy. The United States on a number of occasions has provided technical support to China on such areas as rule of law, IPR protection, pollution control, and banking and currency reforms. The expansion of such programs into other areas could help induce China to quicken economic reforms, especially if Chinese officials believe that doing so will not lead to political upheaval' 

Elephants at play in Davos, 2/2.

The world's leading journalists have been mingling with the great and the good at the Davos yapfest.

Michael Stutchbury sums up: 'THE dissonance was striking. The high priests of globalisation, gathered for their annual summit in the Swiss Alps resort of Davos, were relieved that they had pulled the world economy back from the brink of collapse.

'But their worshipped North Atlantic financial capitalism was in the stocks for causing the worst economic crisis since the 1930s. Worse still, the peasants were revolting against those cufflinked Wall Street bankers who had taken their taxpayer bailouts and then ripped out massive bonuses for themselves'.

There were other, more specific fears to reduce the usual sense of high-octane self regard.  Anatole Kaletsky says 'The elephant in the room tiptoed out at Davos'.

More here.

PD Jonsob's evaluation of the causes of the Crash of 2008 and the challenges ahead has also been posted overnight.

Obama stimulus fails to create jobs, 1/2.

Barack Obama and Congress' stimulus spending has failed to create jobs according to a federal government website.

The Wall Street Journal reports, 'Recipients of economic-stimulus money said 599,108 workers were being paid by the funds in the last quarter of 2009, fewer than the number of jobs attributed to the package in the seven months after it was enacted.

The recipients' reports, published on the official government Web site recovery.gov late Saturday, are likely to fuel further controversy over the impact of the $787 billion package, as Democrats craft new jobs-creation proposals to address the country's 10% jobless rate. Many opinion polls suggest that most voters don't believe the current stimulus program, which was passed last February, is working.

White House press secretary Robert Gibbs, speaking on CNN's "State of the Union" Sunday, said the administration was seeking a jobs bill that would cost approximately $100 billion. "The president hopes that the next order of business the Senate will take up is this package," he said.'

American economy surges 5.7% in Q4 2009, 30/1.

The American economy grew 5.7% (annual rate) during the last quarter of 2009, according to new government figures.

The Wall Street Journal reports, 'White House economic adviser Lawrence Summers said U.S. fourth-quarter growth figures were ¡°favorable,¡± but it will take years for the economy to return to its full potential.

'The 5.7% rise in gross domestic product ¡°confirms what we¡¯ve recognized for some time, that the president¡¯s policies have moved the economy back from the brink of depression and have created a basis for economic growth.¡±'

Summers said Obama now wanted to focus on job creation, reducing the deficit and protecting the value of the American currency.

'When asked about the dollar¡¯s status as a reserve currency, Summers said that¡¯s for the market to determine, but he said he believes the dollar will ¡°have a very central role in the international financial system for a very long time to come.¡±

For the dollar to remain a reserve currency, however, U.S. policymakers must pursue measures that create strong fundamentals, the former Treasury secretary said.

¡°That¡¯s why the emphasis on budget deficit reduction was such an important component of the president¡¯s State of the Union [on Wednesday],¡± said Summers.'

Bernanke wins second term, 29/1.

The Senate overnight gave Ben Bernanke a second term as chairman of the Federal Reserve.

The WSJ reports Bernanke's appointment carried 70-30, but not without fierce opposition from some Congressmen.

'The Senate voted 70-30 to reappoint Ben Bernanke for a second four-year term as chairman of the Federal Reserve.

Earlier, senators voted 77-23 to end debate, clearing the way for a final vote. During more than two hours of debate on the Senate floor, Bernanke backers warned that voting him down risked sparking turmoil in U.S. and foreign markets and thwarting a budding economic recovery. They said the Fed chairman deserved an opportunity to finish what he started.'

World trade levels improve, 28/1.

World trade increased 1.1% in November 2009 hinting at a continued global economic recovery.

The Wall Street Journal reports, 'LONDON¨CWorld trade volume increased for the third straight month in November 2009, indicating that the global economic recovery is gaining traction.

Figures compiled by the Netherlands Bureau for Economic Policy Analysis¨Calso known as the CPB¨Cshowed Wednesday that trade volume rose by 1.1% in November. The CPB also revised up its growth estimate for October flows to 1.4% from 0.8% previously.

The CPB's figures are closely watched by policy makers, including a number of central banks, because they provide the earliest available measure of global trade.

World trade flows plummeted in the final months of 2008 and the early months of 2009, declining at the sharpest rate since the Great Depression and to the greatest extent since World War II. Flows began to level out in the second quarter of last year, and now appear to be on the increase.

The recovery in trade flows was cited by the International Monetary Fund as one reason for its decision to raise its growth forecast for the global economy Tuesday.'

IMF raises growth forecasts, 27/1.

The International Monetary fund (IMF) has raised its global forecast for growth in 2010.

Like the early British socialists, the IMF believes it is important to forecast early and forecast often.

Last October it predicted global growth at 3.1 %; now it is 3.9 %.

For Australia it's bold prediction has gone from 2.0 % to 2.5 % of Australia's role at the front of the developed nation pack.

Henry's blog today develops the theme.

Banking reform drives Obama agenda, 25/1.

Barack Obama has announced he will introduce new banking regulations in response to America's current economic woes.

The Wall Street Journal adds this move may trigger new banking regulations across the world.

'International efforts to regulate financial institutions gained renewed momentum Friday in the wake of the Obama administration's proposals to curb the size and spread of the biggest U.S. banks, leading regulators said Friday.

The U.S. moves, announced Thursday, are likely to make financial regulation one of the top items on the agenda at next week's gathering of world political and business leaders in Davos, Switzerland. The news hit bank stocks around the world Friday as investors concluded banks would face tougher government actions.

Until now, many investors had expected Washington to resist tough action on banks. Instead, the administration of President Barack Obama, responding to popular pressure, appeared to move into a leadership role with its proposals, jumpstarting a debate on global financial regulation that had begun to falter. '

Goldman Sachs posts record profit, 22/1.

Goldman Sachs made a $US 4.95 billion profit in the final quarter of 2009, its best result ever.

The Australian reports Goldman's profit was much greater than other American investment banks who received federal government bailouts.

'The most profitable bank on Wall Street yesterday capped off a record year with quarterly earnings of nearly $US5 billion ($5.5bn), an amount that eclipsed the combined returns of rivals JPMorgan, Morgan Stanley, Citigroup and Bank of America. It also highlights Goldman's revival from a financial crisis that toppled some of its competitors.'

The profit comes as Obama and the Congressional Democrats begin work on a new set of bank regulations. (See Henry's blog today.)

'But the results also revealed that Goldman is being swayed by the intense criticism about gilded pay packages after the government's massive bailout of the banking industry. It also comes as President Barack Obama proposed yesterday limits on the size and risk-taking of the nation's biggest banks, including ending bank's ability to engage in proprietary trading, hedge funds and private equity.'

Markets hate uncertainty, but Australia's consumer confidence surges, 21/1.

Markets hate uncertainty, and the latest geopolitical news adds significant uncertainty to the global situation.

China's lending has to slow, Obama has had either a B+ first year (Obama's view) or a C- (the score of a grumpy Republican) and Obama's Healthcare bill may now be in trouble with a Republican winning Ted Kennedy's seat.  Iran is said to be ripe for revolution, Haiti needs rebuilding and much of the Eurozone is mired in recession and some of its banks look seriously suspect..

Plenty of room for serious uncertainty.

Right on cue, 'The Dow Jones Industrial Average this morning trimmed its losses late but still ended with a 122.28-point decline, the biggest drop since December 17.

'The blue-chip measure tumbled 1.1 per cent from its 15-month closing high set in the previous session to end at 10,603.15. Investors focused on a possible cutback in lending by Chinese banks and the hefty price that Greece may have to meet to bolster its troubled economy.

'The US dollar soared, while major stock indexes and commodities were hit hard as investors sought safety. Such skittishness across the financial markets has rarely been seen in 2010's early going; though some traders and analysts believe it may become the norm in the weeks ahead.

Australians seems largely immune to all this news.  Consumer confidence has surged after two months of falls due, we were told, to rising interest rates.  But odds on another rate hike when the Reserve Bank meets in a week or so have risen to the point where the old lady of Martin Place would be swabbed if she failed to deliver.

Productivity growth drives economic debate, 20/1.

The Rudd government is struggling to achieve the productivity growth it promised in the 2007 election.

The Australian reports more economic deregulation is needed, not greater infrastructure and research and development spending.

'The submission says little of the the $17.5bn that government spends each year on industry assistance, including farm subsidies, research and development funding, and protection for industries such as automotive and textiles has been subject to review.

It says subsidies, such as those offered by the Rudd government for the motor industry, "dull competition".

"With the further substantial industry assistance forthcoming as part of Australia's greenhouse policy response, it will also be crucial that this is rigorously assessed to ensure that it does not unduly detract from productivity growth," the submission says.'

Tony Abbott also attacked Rudd for failing to increase productivity.

'Tony Abbott condemned Mr Rudd's productivity goal as a "confession of failure".

"It was typical Rudd: talking about what we needed to do but not talking about how we were going to do it; talking about what ought to happen by 2050 when Mr Rudd will be long gone, not talking about what he's going to do this year that will actually make a difference," the Opposition Leader said.'

Coping with China boom, and low productivity growth, Australia's main challenges, 19/1

'THE latest stunning job numbers again confirm that our most pressing economic challenge is not the feared collapse in demand that prompted last year's huge government fiscal stimulus and its continued wasteful spending.

'Instead, the biggest economic policy issue is how to accommodate the growth demands of our renewed China-led Asian export boom. Rather than offsetting deficient demand, this decade's challenge will be managing excess demand from the rest of the world'.

Hear, hear to this post-holiday meditation by Michael Stutchbury.

Henry's blog today focusses on Australia's low productivity recovery - perhaps just as important.

What about the trillions to be borrowed by western governments?, 18/1.

John Mauldin's latest newsletter starts as follows:  'Last week we delved into the uncertainties that face us and that make forecasting for 2010 problematical. Will the government actually increase taxes as much as they say, with unemployment still likely to be at 10%? Or will cooler heads prevail? Would such an increase cause a recession? Will the markets anticipate the effects of such a major increase in advance? How will the mortgage market react when the Fed stops buying mortgage securities at the end of March?'

Last year, 'Foreigners bought about $300 billion of the $1.5 trillion in new government debt. The rest came from the US, courtesy of the Fed buying mortgages. But that program stops (theoretically) at the end of March. The government still plans to run yet another $1.4-trillion-dollar deficit (give or take a few hundred billion). The question is, who will buy the debt? Foreigners will kick in another $300 billion, unless they decide to stop selling us stuff, or buy other less liquid or physical assets. So far there is no sign of that'.

This year, the budget deficit is expected to be around $1.4 trillion.  Foreigners may again buy $300 billion of new debt.

'But (Mauldin continues) ... who is going to buy the multiple trillions in government debt that the G-7 countries want to issue? Who is going to buy another $1 trillion here in just the US? That is 7% of GDP. That means that consumers and businesses will have to save an additional 7% of GDP just to finance government debt at the federal level, not counting state and local debt'.

More here at Henry's Blog today.  

Aussie inflation rising, 18/1.

'AUSTRALIAN inflation pressures continued to increase during December - the second consecutive month consumer prices have risen - indicating a long period of disinflation has ended, according to the TD Securities-Melbourne Institute monthly inflation gauge issued today.

'In December, the TD-MI gauge rose 0.3 per cent on month, following a 0.3 per cent rise in November, bringing the on-year rise to 2.6 per cent, well within the Reserve Bank of Australia's official 2 per cent to 3 per cent target inflation band.

'The up-tick in price pressures reflects relatively robust demand as the economy continues to recover from a shallow downturn but likely won't be enough to fuel concerns a major inflation breakout is imminent'.

Henry comments that 0.3 times 12 is 3.6 %. as is 0.6 times 2.  Absolutely no room for complacency here.

US economy to 'roar' in 2010, 14/1.

Henry's blog today discusses Anatole Kaletsky's predictions for 2010.

'So there you have it, gentle readers, an optimist on the US economy , the US dollar and equity prices'.

Australian jobs rise strongly, 14/1.

The number of people employed in December increased by 35,200 to 10.906 million, seasonally adjusted, the ABS reported, driven by a rise in part-time employment, up 27,900 persons to 3.271 million together with a rise in full-time employment, up 7,300 persons to 7.635 million.

The Australian unemployment rate was at 5.5 per cent in December, the Australian Bureau of Statistics announced today. The seasonally adjusted unemployment rate fell 0.1 per cent, from the revised 5.6 per cent in November.

John Durie comments: 'RBA chief Glenn Stevens will be able to shift monetary policy gears back to neutral sooner rather than latter thanks to today's evidence of jobs growth, with employment increasing at annualised rate of 3.8 per cent over the last four months.

'The December employment report was boosted heavily by increases in part time jobs which accounted for nearly four times as many new jobs than full time employment, but then the trend is all in the same direction ¨C upwards'.

Financial markets immediately raised the odds of a February rate hike to 75%.

May we remind gentle readers of our comment from last Friday?

'The Roy Morgan estimate of real unemployment has fluctuated between 1 and 3 percentage points ahead of official (ABS) data, but has now  clearly began to fall.  In the month of December Australia¡¯s total unemployment as measured by Roy Morgan was 773,000 (6.8%), down substantially from the estimated peak of 8 per cent in February 2008.  Perhaps not so incidentally, this was about the time of maximum market pessimism, given that global share markets hit their low point in March.

'This confirms the strength of Australia¡¯s labor market and probably foreshadows falls in the ABS series, the next reading of which will be available next week'.

Imagine the money making opportunities for Henry's readers inherent in this observation.

Wall Street bankers savaged, 14/1.

'WALL Street's biggest banks acted like used-car salesmen knowingly selling lemons to consumers, the head of a commission investigating the financial crisis said yesterday, as top bank executives came under fire on Capitol Hill'.

China ups fight against inflation, 13/1.

'WEAK earnings and higher borrowing costs in China dented the US stock market yesterday, leaving major indexes with modest but broad-based declines'.

The weak earnings mentioned here are from Alcoa and Caterpillar, the anticipation of which previously were used to 'explain' the market surge.

'Buy the rumour, sell the fact' is one of Wall Street's more reliable bits of advice. 

'China ups fight against inflation' is another gobbet of global information.

'CHINA¡¯S central bank has ordered banks to set aside more cash and raised a key market rate, pushing down commodities and the Australian dollar'.

One expert has said this is not just a fight against inflation (as normally defined) but also against asset inflation.  Smart people, the Chinese.

China's exports surge, 11/1.

'China¡¯s exports rose in December for the first time in 14 months, providing fresh evidence of recovery in the global economy but also placing renewed pressure on Beijing to appreciate its currency.

'Following strong export figures last month from South Korea and Taiwan, China said on Sunday that its exports climbed 17.7 per cent, well ahead of the modest increase that economists had predicted. These numbers put China on track to overtake Germany as the world¡¯s largest exporter.

'China to overtake Germany as biggest exporter - Jan-09China-US ties face challenge - Jan-07Chinese imports surged by 55.9 per cent in December, the latest indication of buoyant domestic demand in China, although the figures are also likely to increase concerns about potential inflationary pressures'.

Australian job ads rising fast, 11/1.

THE total number of job advertisements in Australian newspapers and on the internet rose 6 per cent in seasonally adjusted terms in December compared to the previous month to an average of 149,063 ads per week.

This 'contributed to' (implied) a 22.6 per cent annual decline, Australia & New Zealand Banking Group, which compiles the data from major newspapers, said today.

ANZ acting chief economist Warren Hogan said job advertisements are now well past the low reached in July 2009 and are continuing to improve month-on-month.

US December jobs loss disappoints, 9/1.

THE US economy shed 85,000 jobs - much higher than expected - in December and the unemployment rate remained at a painful 10 per cent.

This was a great disappointment after November's flat jobs performance suggested the US economy was stabilising.

Luca di Leo reports that Labor Secretary Hilda Solis said in an interview with Dow Jones Newswires on Friday the data were consistent with a moderation in job losses.

"We have seen contraction of job loss over the last four months, and if you think back to January of last year we were losing 700,000 jobs."

Still, Ms Solis said that 10 per cent unemployment was "too high."

US economic recovery gains momentum says US Fed, 7/1.

Dow Jones reported overnight on the minutes of the mid-December meeting of the US Fed Reserve.

'US Federal Reserve officials last month acknowledged the economy is gaining momentum, but judged the recovery as not being strong enough to change their view that interest rates must stay at a record low.

Read the full minutes here.

Aussie economy 'bloody good, very, very good', 7/1.

Housing approvals and vehicle sales were both strong at the end of 2009, buoyed by specific policy initiatives.  Retail sales for November published later today will probably confirm the recovery trend.  Jerry Harvey of Harvey Norman looked especially manic on the ABC news last evening as he told us business is 'bloody good, very, very good'.

A reader offers a suggestion on tax policy for Tony Abbott and warns of financial system re-regulation in 2010.  AIG chief Heather Ridout warns of need for 'flexibility' in Australia's system of award wages.

See Henry's Blog today for more on all this economic news.

Bankruptcies surge in 2009, 6/12.

Bankruptcies across the world surged to more than $1.5 trillion in 2009. This was a significant rise over previous years according to the Wall Street Journal.

'The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filling. A "means" test, for example, was introduced to separate those who could afford to repay their debt from those who couldn't. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured.'

The scale of bankruptcies is hardly surprising given Americans massive public and private debt and failure to save.

However, the bankruptcy crisis is not limited to America. Throughout the world, more than $1.5 trillion was lost to bankruptcy last year.

IMF predicts commodity buoyancy in 2010, 6/1.

'Commodity prices were surprisingly buoyant in 2009, and are expected to increase further in 2010 as world activity expands after the global crisis'.  This is the judgment of the International Monetary Fund (IMF).

The initial buoyancy came from 'the perception that the worst of the global recession was over and that the wide-ranging public intervention had succeeded in lowering uncertainty and systemic risks in the financial sector'.

'At the same time, improving financial conditions provided for increased credit availability for inventory financing at more normal costs while rising inflows into commodity funds likely facilitated the hedging of inventory positions'.

Later 'impetus came from the buoyant recovery in emerging Asia and, as the year progressed, stronger-than-expected global activity more generally'.

Looking ahead, strengthening demand should provide more impetus, a judgment supported by commodity futures.

'The effects of the crisis have been to reduce prices somewhat below their 2008 peaks, but demand is expected to continue rising at a solid pace as industrialization continues in emerging and developing economies'.

This is the new consensus forecast, and it foreshadows great opportunities for Australia.

Henry's Blog today discusses risks and opportunities.

US Fed and asset bubbles, 5/1.

The obvious policy issues for 2010 is how fast to remove fiscal and monetary policy stimulus and how best to reform financial regulation.

The chief policy change already signaled is the US Fed's new willingness to lean into the wind on asset bubbles.  We cannot attribute this to our nagging alone, but the pressure has been from a number of directions.

'THE US Federal Reserve must be open to raising interest rates to pop future asset bubbles, even though stronger regulation remains the best solution to prevent a repeat of the crisis, the Fed chief said today.

'Fed chairman Ben Bernanke said all efforts should be made to strengthen the US regulatory system to prevent a repeat of a financial crisis that Bernanke described as possibly the worst in modern history.

"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous build-ups of financial risks, we must remain open to using monetary policy as a supplementary tool," Mr Bernanke told an annual meeting of the American Economic Association.

'Critics have said the Fed kept interest rates too low for too long in early 2000, helping to fuel a housing bubble at the root of the recent financial crisis.

'The same critics now see a risk that, with the Fed's key short-term rate at a record low close to zero since December 2008, a new bubble may already be forming.

'Although admitting that monetary policy was accommodative in early 2000, Mr Bernanke said lax supervision of toxic mortgages by the Fed and other bank regulators, as well as excessive flows of capital around the globe, were the main reason behind the housing bubble'.

Debt crisis looms in Europe, 1/1/2010.

Debt is the greatest threat to European economies according to the Wall Street Journal.

The WSJ reports debt is out of control in half of all European economies and the problem is only getting worse.

'After two years of crashing banking systems and economic recession, the euro zone enters 2010 with a full-blown debt crisis.

The European Commission warns that public finances in half of the 16 euro-zone nations are at high risk of becoming unsustainable.

Governments will spend the next year and beyond balancing the urgent need to fix public-sector debt and deficits -- without imperiling what appears to be a feeble economic recovery.'

Fixing Europe's debt crisis will be especially difficult because most countries already have high taxes, rising unemployment and are welfare states with costly entitlement programs.