A country in denial about its fiscal future
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By Robert J. Samuelson,

Published: December 25, 2011



There are moments when our political system, whose essential job is to mediate conflicts in broadly acceptable and desirable ways, is simply not up to the task. It fails. This may be one of those moments. What we learned in 2011 is that the frustrating and confusing budget debate may never reach a workable conclusion. It may continue indefinitely until it’s abruptly ended by a severe economic or financial crisis that wrenches control from elected leaders.


We are shifting from “giveaway politics” to “takeaway politics.” Since World War II, presidents and Congresses have been in the enviable position of distributing more benefits to more people without requiring ever-steeper taxes. Now this governing formula no longer works, and politicians face the opposite: taking awayreducing benefits or raising taxes significantly — to prevent government deficits from destabilizing the economy. It is not clear that either Democrats or Republicans can navigate the change.


Our political system has failed before. Conflicts that could not be resolved through debate, compromise and legislation were settled in more primitive and violent ways.


The Civil War was the greatest and most tragic failure; leaders couldn’t end slavery peacefully. In our time, the social protests and disorders of the 1960s — the civil rights and antiwar movements and urban riots — almost overwhelmed the political process. So did double-digit inflation, peaking at 13 percent in 1979 and 1980, which for years defied efforts to control it.


The budget impasse raises comparable questions. Can we resolve it before some ill-defined crisis imposes its own terms? For years, there has been a “something for nothing aspect to our politics.


More people became dependent on government. From 1960 to 2010, the share of federal spending going for “payments to individuals” (Social Security, food stamps, Medicare and the like) climbed from 26 percent to 66 percent. Meanwhile, the tax burden barely budged. In 1960, federal taxes were 17.8 percent of national income (gross domestic product). In 2007, they were 18.5 percent of GDP.


This good fortune reflected falling military spending — from 52 percent of federal outlays in 1960 to 20 percent today — and solid economic growth that produced ample tax revenue. Generally modest budget deficits bridged any gap. But now this favorable arithmetic has collapsed under the weight of slower economic growth (even after a recovery from the recession), an aging population (increasing the number of recipients) and high health costs (already 26 percent of federal spending). Present and prospective deficits are gargantuan.


The trouble is that, while the economics of giveaway policies have changed, the politics haven’t. Liberals still want more spending, conservatives more tax cuts. (Although the tax burden has stayed steady, variouscuts” have offset projected increases and shifted the burden.) With a few exceptions, Democrats and Republicans haven’t embraced detailed takeaway policies to reconcile Americans’ appetite for government benefits with their distaste for taxes. President Obama has provided no leadership. Aside from Rep. Paul Ryan (Wis.), chairman of the House Budget Committee, few Republicans have.


No one wants to take away; it’s more fun to give. All of 2011’s budget feudsover the debt ceiling, the supercommittee, the payroll tax cutskirted the central issues. There’s a legitimate debate about how fast deficits should be reduced to avoid jeopardizing the economic recovery, notes Charles Blahous, a White House official in George W. Bush’s administration. But the long-term budget problem, as he says, stems from Social Security, Medicare and other health programs.


Any resolution of the budget impasse must repudiate, at least partially, the past half-century’s politics. Conservatives look at the required tax increases and say, “No way.” Liberals look at the required benefit cuts and say, “No way.”


Each reverts to scripted evasions. Liberals imply (wrongly) that taxing the rich will solve the long-term budget problem. It won’t.


For example, the Forbes 400 richest Americans have a collective wealth of $1.5 trillion. If the government simply confiscated everything they own, and turned them into paupers, it would barely cover the one-time 2011 deficit of $1.3 trillion. Conservatives deplorespending” in the abstract, ignoring the popularity of much spending, especially Social Security and Medicare.


So the political system is failing. It’s stuck in the past. It can’t make desirable choices about the future. It can’t resolve deep conflicts.


An alternative theory is that we’re muddling our way to a messy consensus. All the studies and failed negotiations lay the groundwork for ultimate accommodation. Perhaps. But it’s just as likely that this year’s partisan scapegoating implies more partisan scapegoating. Political leaders assume that financial markets won’t ever choke on U.S. debt and force higher interest rates, stiff spending cuts and tax increases.


At best, this is wishful thinking. At worst, it’s playing Russian roulette with the country’s future.


December 26, 2011

China and Japan Agree to New Currency Dealings

By EDWARD WONG



BEIJING — China and Japan have agreed to start direct trading of their currencies, officials announced during a visit here by Japan’s prime minister, Yoshihiko Noda.


The move was among several that emerged from Mr. Noda’s meetings with President Hu Jintau, which on Monday focused on how the two nations could work together to maintain peace on the Korean peninsula.


Japan will also apply to buy Chinese bonds next year, allowing it to accumulate more renminbi in its foreign-exchange reserves.


China is the world’s second-largest economy while Japan is the third largest, and the currency agreement is part of a move away from using dollars.


Chinese officials have said recently they would like to broaden the global use of the renminbi, also known as the yuan, and want to see more countries move away from relying on dollars as the worldwide currency.


Economists say, though, that the renminbi will not compete with the dollar or the euro anytime soon as a dominant currency in international trade.


The meeting was the first between Mr. Hu and a leader of another East Asian nation since North Korea announced the death of its longtime leader, Kim Jong-il, and it underscored the widespread questions about the north’s course without its cultlike head of state.


Mr. Noda had originally scheduled the two-day trip to Beijing to talk about strengthening bilateral ties between China and Japan, an agenda the countries did not abandon despite the focus on Mr. Kim’s death. State news broadcasts in North Korea have been proclaiming Mr. Kim’s youngest son, Kim Jong-un, the “Great Successor.” Mr. Kim is in his late 20s, and he is in transition to becoming the youngest leader of a nation with a nuclear arms program. His uncle, Jang Song-taek, also appears to be playing a prominent role in the shaping of the new leadership.


The Yonhap news agency, based in South Korea, reported Thursday that Kim Jong-nam, the estranged eldest son of Kim Jong-il, had traveled in recent days to Beijing from his home in Macau and was now staying in the Chinese capital under the “protection” of senior officials. The son and father had a falling out after Kim Jong-nam was caught in 2001 trying to enter Japan on a fake passport to see Tokyo Disneyland.


Japan, South Korea and the United States are all looking to China to ensure that North Korea, a communist nation that has endured decades of isolation, remains stable during the transition. The Xinhua report on Mr. Noda’s visit indicates that stability, both inside North Korea and on the divided Korean Peninsula, is also the top priority for China, which is North Korea’s greatest ally and biggest trade partner.


Japanese news reports that appeared before Mr. Noda’s trip here said Mr. Noda would talk to Mr. Hu about restarting the six-party talks, which are aimed at getting North Korea to curb its nuclear program.


China began leading the six-party talks in August 2003. The other countries involved in the talks are Japan, North Korea, Russia, South Korea and the United States. North Korea withdrew from the talks in April 2009 and expelled all nuclear inspectors from the country. Now with the change of leadership in North Korea, questions have been raised about whether there is a chance the six-party talks might be revived.


China has often said that negotiations with North Korea are the way forward.


In 2010, China refused to comply with requests by the United States and South Korea to condemn North Korea following the sinking of the Cheonan, a South Korean warship that officials in Seoul and Washington said had been hit by a torpedo from a North Korean submarine. North Korea has denied any involvement. China also did not publicly criticize North Korea when it shelled Yeonpyeong Island in South Korea in late 2010.


But behind the scenes, Chinese officials worked to try to rein in the North Korean military, the most powerful interest group in the country, according to officials in Washington.



December 23, 2011 7:01 pm

Twist in the tale of bond market’s orphan asset



In characteristic low volume trading ahead of Christmas, the rise in long-dated Treasury yields this week has stood out with 30-year bond yields jumping back over 3 per cent from Monday’s low of 2.78 per cent.

 

Higher yields, accompanied by tumbling prices, have occurred after the US Federal Reserve completed its final bond purchases under “Operation Twistfor this year.


That temporary halt in Fed support only demonstrates the power of central bank buying in keeping long-term interest rates at low levels that, over time, are designed to stabilise the housing sector and ultimately boost the economy.


There is no question that the Fed’s purchases of long bonds that began in August have helped power substantial returns for bond investors with the Barclays Capital index of long-term Treasuries up 28 per cent this year, its best annual run since 1995.


It is a performance very few on Wall Street expected this time last year when the 30-year bond was anchored around 4.50 per cent.


Even by late July, the bond was only a touch lower in yield at 4.30 per cent.


Then came the escalation in the eurozone debt crisis and evidence of much weaker US growth that, in turn, compelled the Fed to start buying more Treasuries.


But the real twist in the Fed’s late summer policy for bond managers was that the central bank did not focus its efforts on the 10-year sector as many investors had expected.


Instead, the Fed under Operation Twist is, in effect, removing 90 per cent of new 30-year bond issuance until its purchases end next June. Buying of that magnitude explains why the Fed’s purchases are viewed by traders as having artificially lowered market yields by at least one 1 percentage point.


As we move into 2012, the resumption of Fed buying should cap the rise in bond yields, but the outlook for another year of big gains for the sector looks slim.


In recent weeks, Wall Street dealers have notably halved their holdings of long-term Treasuries to $8bn after they peaked at $15,155bn in October.


Staying bullish on long bonds requires a gloomy prognosis for the US and global economy along with a complete breakdown of the eurozone next year.


This week, Pimco forecast that the US economy might only expand between zero and 1 per cent in 2012 with growth hurt by Europe’s debt crisis and a slowdown in China.


That may come as no surprise given Bill Gross, co-chief investment officer at Pimco, has taken the Fed’s Twist to heart and heavily weighted his total return fund in favour of long-dated bonds.


But should the US economy falter, expect a proactive response from the Fed that would likely end the Twist and begin a new round of quantitative easing, or QE3.


Another round of QE would likely focus on buying mortgage securities and fan long-term inflation concerns, a key driver of 30-year bonds.


Once the Twist ends, long-term yields should rise as current core inflation sits above 2 per cent and investors need more than a slim 3 per cent coupon on 30-year paper over the long term.


It is worth recalling that before the advent of Operation Twist, the 30-year bond was often dubbed the “orphan” of the bond market as it traded in a world of its own and was only sought by pension and insurance funds seeking to offset long-dated liabilities.


Indeed, these players would certainly like to see higher yields at some stage in 2012 and are likely to wait and see how much the long end backs up once the Fed ends the Twist or embarks on new stimulus that fans long-term inflation worries.

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Investors should be mindful that orphan status and yields heading towards 4 per cent may loom for the bond in 2012, once the Fed no longer corners this sector of the Treasury market.
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Copyright The Financial Times Limited 2011.



HEARD ON THE STREET
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DECEMBER 26, 2011, 2:08 P.M. ET
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New Year Tests for Faith of the Commodities Congregation
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By ANDREW PEAPLE



Commodities face a test of faith in 2012. The tenets that have underpinned the asset class in recent years, strong growth in emerging countries allied to steady demand in the developed world, are under pressure from the euro-zone crisis and signs of a slowdown in China.


Investors are worried already: Hedge funds cut commodities exposure by 50% from May to December, Barclays Capital says, during which time the Dow Jones-UBS Commodity Index has fallen 19%. Some strong signals will be needed to lure back the faithful in 2012.


Europe's troubles don't only have an impact through the Continent's weaker demand for commodities. As European banks deleverage, they are pulling back on providing trading finance, the grease that keeps the commodities engine chugging along. Lower European demand for imports also means weaker export activity in countries like China, where manufacturing activity shows signs of contracting. Meanwhile, China's faltering property market—prices are falling in half its cities—could damp construction growth there and hence demand for metals.


The accumulating risks have already made a mark. Industrial metals have fallen 25% since late July; agricultural products are down 21% since late August. If the macro backdrop worsens, some commodities may have further to fall than others. Copper, for example, is still 85% above the cost of production for the industry's highest-cost producers, according to Barclays Capital. By contrast, the price of aluminum is 22% below the industry's marginal cost. That already is causing some producers to cut supply, meaning aluminum could be close to its price floor.



Similarly, any crude-oil price declines may be arrested by supply cuts in producing countries. Governments like those in Saudi Arabia and Russia need solid oil prices to balance their fiscal positions. The complicating factor will be internal divisions within the Organization of Petroleum Exporting Countries, with Saudi Arabia and Iran locked in a contest for regional supremacy and all members having to make way for rising Libyan and Iraqi oil output.


Among agricultural commodities, soybeans could benefit as more land is given over to corn production. Demand could exceed supply by 1.2%, J.P. Morgan forecasts, the first soybean deficit since 2009.



Unpredictable factors will continue to buffet individual commodities. A repeat of last winter's harsh weather could push grain, coal and iron-ore prices higher. Strikes at two of the world's largest copper mines helped support that metal in 2011. And oil will still move to the rhythms of geopolitics and threats of war.


But a more sustained rise for commodities will require a swift resolution of the euro-zone crisis and evidence that Beijing is managing a soft landing for the Chinese economy. Hopes of this fuel optimism for perennial commodities bulls. Goldman Sachs sees Brent crude closing 2012 at $127.50 a barrel, up 18%, and copper at $9,500 a metric ton, up 28%. Such high expectations may be the domain of the true believers for some time.

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Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved


December 26, 2011

The Hormone Surge of Middle Childhood

By NATALIE ANGIER




VIEWED superficially, the part of youth that the psychologist Jean Piaget called middle childhood looks tame and uneventful, a quiet patch of road on the otherwise hairpin highway to adulthood.


Said to begin around 5 or 6, when toddlerhood has ended and even the most protractedly breast-fed children have been weaned, and to end when the teen years commence, middle childhood certainly lacks the physical flamboyance of the epochs fore and aft: no gotcha cuteness of babydom, no secondary sexual billboards of pubescence.


Yet as new findings from neuroscience, evolutionary biology, paleontology and anthropology make clear, middle childhood is anything but a bland placeholder. To the contrary, it is a time of great cognitive creativity and ambition, when the brain has pretty much reached its adult size and can focus on threading together its private intranet service — on forging, organizing, amplifying and annotating the tens of billions of synaptic connections that allow brain cells and brain domains to communicate.


Subsidizing the deft frenzy of brain maturation is a distinctive endocrinological event called adrenarche (a-DREN-ar-kee), when the adrenal glands that sit like tricornered hats atop the kidneys begin pumping out powerful hormones known to affect the brain, most notably the androgen dihydroepiandrosterone, or DHEA. Researchers have only begun to understand adrenarche in any detail, but they see it as a signature feature of middle childhood every bit as important as the more familiar gonadal reveille that follows a few years later.


Middle childhood is when the parts of the brain most closely associated with being human finally come online: our ability to control our impulses, to reason, to focus, to plan for the future.


Young children may know something about death and see monsters lurking under every bed, but only in middle childhood is the brain capable of practicing so-called terror management, of accepting one’s inevitable mortality or at least pushing thoughts of it aside.


Other researchers studying the fossil record suggest that a prolonged middle childhood is a fairly recent development in human evolution, a luxury of unfolding that our cousins the Neanderthals did not seem to share. Still others have analyzed attitudes toward middle childhood historically and cross-culturally. The researchers have found that virtually every group examined recognizes middle childhood as a developmental watershed, when children emerge from the shadows of dependency and start taking their place in the wider world.


Much of the new work on middle childhood was described in a recent special issue of the journal Human Nature. As a research topic, “middle childhood has been very much overlooked until recently,” said David Lancy, an anthropologist at Utah State University and a contributor to the special issue. “Which makes it all the more exciting to participate in the field today.”


The anatomy of middle childhood can be subtle. Adult teeth start growing in, allowing children to diversify their diet beyond the mashed potatoes and parentally dissected Salisbury steak stage. The growth of the skeleton, by contrast, slows from the vertiginous pace of early childhood, and though there is a mild growth spurt at age 6 or 7, as well as a bit of chubbying up during the so-called adiposity rebound of middle childhood, much of the remaining skeletal growth awaits the superspurt of puberty.


Adulthood is defined by being skeletally as well as sexually mature,” said Jennifer Thompson of the University of Nevada, Las Vegas. “A girl may have her first period at 11 or 12, but her pelvis doesn’t finish growing until about the age of 18.”


The 18-year time frame of human juvenility far exceeds that seen in any other great ape, Dr. Thompson said. Chimpanzees, for example, are fully formed by age 12. With her colleague Andrew J. Nelson of the University of Western Ontario, Dr. Thompson analyzed fossil specimens from Neanderthals, Homo erectus and other early hominids, and concluded that their growth pattern was more like that of a chimpanzee than a modern human: By age 12 or 14, they had reached adult size.


Life for Neanderthals was nasty and short, Dr. Thompson said, and Neanderthal children had to get big fast, which is why they hurtled through adolescence at the equivalent of today’s chapter-book age. Our extreme form of dilated childhood didn’t appear until the advent of modern Homo sapiens roughly 150,000 years ago, Dr. Thompson said, when adults began living long enough to ease pressure on the young to hurry up and breed.


And what an essential luxury item middle childhood has proved to be. “It’s consistent across societies,” Benjamin Campbell, an anthropologist at the University of Wisconsin in Milwaukee said. “In middle childhood, kids start making sense.”


Parental expectations rise accordingly. Kids can do something now,” said Dr. Campbell, who edited the special issue. “They can do tasks. They have economic value.”


Boys are given goats to herd and messages to deliver. They hunt and fish. Girls weave, haul water, grind corn, chop firewood, serve as part-time mothers to their younger siblings; a serious share of baby care in the world is performed by girls not yet in their teens.


Workloads and expectations vary substantially from one culture to the next. Karen Kramer and Russell Greaves of Harvard compared the average number of hours that girls in 16 different traditional cultures devoted each day to “subsistencetasks apart from child care. Girls of the Ariaal pastoralists in northern Kenya worked the hardest, putting in 9.6 hours daily. Agriculturalist girls in Nepal worked 7.5 hours a day.


Then you come to the more laid-back lives of the foragers. The researchers focused on the Pumé, a foraging group in west-central Venezuela, where preadolescent girls do almost nothing. They forage less than an hour a day, significantly less than their brothers, and are very inefficient in what little they do. They prefer hanging out at the campsite. “Pumé girls spend their time socializing, talking and laughing with their friends, beading and resting,” Dr. Kramer said.


But most cultures mark the beginning of middle childhood with some new responsibility. Kwoma children of Papua New Guinea are given their own garden plots to cultivate. Berber girls of northern Africa vie to prove their worth by preparing entire family meals unassisted.


In the Ituri forest of Central Africa, Mbuti boys strive to kill their firstreal animal,” for which they will be honored through ritualized facial scarring. And in the United States, children enter elementary school, for which they will be honored through ritualized gold starring.


In middle childhood, the brain is at its peak for learning, organized enough to attempt mastery yet still fluid, elastic, neuronally gymnastic. Children have lost the clumsiness of toddlerhood and can become physically gymnastic, too, and start practicing their fine motor skills. And because they are still smaller than adults, they can grow adept at a skill like, say, spear-tossing, without fear of threatening the resident men.


Middle childhood is the time to make sense and make friends. “This is the period when kids move out of the family context and into the neighborhood context,” Dr. Campbell said.


The all-important theory of mind arises: the awareness that other people have minds, plans and desires of their own. Children become obsessed with social groups and divide along gender lines, girls playing with girls, boys with boys. They have an avid appetite for learning the local social rules, whether of games, slang, style or behavior. They are keenly attuned to questions of fairness and justice and instantly notice those grabbing more than their share.


The mental and kinesthetic pliancy of middle childhood can be traced at least in part to adrenarche, researchers said, when signals from the pea-size pituitary at the base of the brain prod the adrenal glands to unleash their hormonal largess. Adrenal hormones like DHEA are potent antioxidants and neuroprotectants, Dr. Campbell said, and may well be critical to keeping neurons and their dendritic connections youthfully spry.


Evidence also suggests that the adrenal hormones divert glucose in the brain to foster the maturation of the insula and anterior cingulate cortex, brain regions vital to interpreting social and emotional cues.


In middle childhood, the brain is open for suggestions. What do I need to know? What do I want to know? Well, you could take up piano, chess or juggling, learn another language or how to ski. Or you could go outside and play with your friends. If you learn to play fair, friends will always be there.