Fed joins stimulus party as global trade slumps
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All three major blocs of the world economy have shifted gears dramatically over the last month, preparing a fresh blast of stimulus to combat the sharpest contraction in global trade since the 2008-09 crisis.
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By Ambrose Evans-Pritchard
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9:52PM BST 23 Aug 2012
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The US Federal Reserve in Washington DC
The US Federal Reserve in Washington DC Photo: REUTERS


The US Federal Reserve appears poised for a third round of quantitative easing (QE) as soon as early September, joining Europe and China in concerted global stimulus.


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The Fed’s latest minutes show broad support for fresh bond purchases probably mortgage bondsunless signs of “substantial and sustainable strengthening emerge soon. Paul Ashworth from Capital Economics said QE3 looks like a “done deal” since little is likely to change between now and the next Fed meeting.



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The shift in Fed policy caught markets by surprise and comes after the European Central Bank’s chief Mario Draghi opened the door to potentiallyunlimitedpurchases of Italian and Spanish bonds to prevent a euro break-up.



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The most radical moves appear likely from China where the managedsoft-landingrisks spinning out of control, with exports contracting on a month-to-month basis over the summer.


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People should worry less about Europe right now and look more closely at Asia,” said Hans Redeker, currency chief at Morgan Stanley. “We think the Bernanke and Draghi 'puts’ will drive a further rally in global equities. But China represents the biggest risk to our bullish asset call.”
 
 

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The move to full throttle by global authorities comes as the latest shipping data confirmed fears that large parts of the global system buckled in the mid-summer.




Global trade is contracting at the fastest pace since 2008,” said Stephen Jen from SLJ Macro Partners. “The exports of Korea, Taiwan and Japan are contracting, and China is in stark deceleration.”




Container shipping volumes to Europe fell 9pc in June from Asia and 7.5pc from North America. The CPB World Trade Monitor in the Netherlands shows that trade volumes have been shrinking for the last five months. The Baltic Dry Index measuring freight rates for bulk goods has crashed to Great Recession depths.




The long-awaited rebound in China has yet to materialise. China’s HSBC manufacturing index fell further below the contraction line of 50 to 47.8 in July, with export orders plunging and output prices sliding deeper into deflation. “The report is plainly awful,” said Yao Wei from Societe Generale.




Money market rates in China have jumped 20 basis points since July, overwhelming efforts by the central bank to inject liquidity. Capital is fleeing the country,” said Morgan Stanley.




Andrew Roberts, head of credit at RBS, said the moves in the Chinese money markets have become a neuralgic issue in the City. People are asking whether this is the beginning of a credit crunch in China,” he said.




China’s Politburo is taking no chances. It has ditched a key plank of its reform strategy for now, reverting to blunderbuss spending on infrastructure and new factories to keep the crisis to bay.




Earlier this week the city of Chongqing unveiled a $240bn blitz on cars, chemicals and other industries over the next three years, equal to 150pc of its GDP and to be financed by state banks. Tianjin has followed with $240bn (£151bn) over five years on aeronautics, heavy equipment, and energy; Guangdong has listed 177 projects worth $160bn.




In America, the fresh stimulus by the Fed may raise eyebrows. The US economy has recovered slightly after slowing to stall-speed earlier this summer, Goldman Sachs tracking growth of 2.3pc in the third quarter.




Core inflation is above 2pc and the M3broadmoney supply is growing at a robust pace of around 5pc, though this may be distorted by flight to safety. People are still hoarding money because of the chronic lack of confidence,” said Capital Economics’ Mr Ashworth.




These are not normally conditions that call for printing money. The Fed is clearly taking precautions in case of multiple shocks ahead, including a mini-crisis in Washington as the “fiscal clifflooms at the end of the year. The Congressional Budget Office says the US faces a “significant recessionnext year if automatic fiscal tightening equal to 4pc of GDP goes ahead.




Yet the Fed is also acting as a superpower central bank, moving early to head off any risk of a global downward spiral. Chicago Fed chief Charles Evans called yesterday for fresh stimulusaround the world”.



Central banks can certainly buy time and trigger powerful asset rallies. Whether they can counter the deeper malaise of excess global savings – a record 24pc of GDP – or excess manufacturing plant worldwide is a larger question. It tormented economists in the 1930s, and has come back to haunt them today.




A Global Solutions Network
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Jeffrey D. Sachs
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22 August 2012
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NEW YORK Great social change occurs in several ways. A technological breakthrough – the steam engine, computers, the Internet – may play a leading role. Visionaries, such as Mahatma Gandhi, Martin Luther King Jr., and Nelson Mandela, may inspire a demand for justice. Political leaders may lead a broad reform movement, as with Franklin Roosevelt and the New Deal.
 
 
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Our own generation urgently needs to spur another era of great social change. This time, we must act to save the planet from a human-induced environmental catastrophe.
 
 
 
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Each of us senses this challenge almost daily. Heat waves, droughts, floods, forest fires, retreating glaciers, polluted rivers, and extreme storms buffet the planet at a dramatically rising rate, owing to human activities. Our $70-trillion-per-year global economy is putting unprecedented pressures on the natural environment. We will need new technologies, behaviors, and ethics, supported by solid evidence, to reconcile further economic development with environmental sustainability.
 
 

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United Nations Secretary-General Ban Ki-moon is taking on this unprecedented challenge from his unique position at the crossroads of global politics and society. At the political level, the UN is the meeting place for 193 member states to negotiate and create international law, as in the important treaty on climate change adopted at the Rio Earth Summit in 1992. At the level of global society, the UN represents the world’s citizenry, “we the peoples,” as it says in the UN Charter. At the societal level, the UN is about the rights and responsibilities of all of us, including future generations.
 
 

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In the past two decades, governments have come up short on solutions to environmental threats. Politicians have failed to implement properly the treaties adopted at the 1992 Earth Summit. Ban knows that strong government action remains vital, but he also recognizes that civil society must also play a larger role, especially because too many governments and politicians are beholden to vested interests, and too few politicians think in time horizons that extend past the next election.
 
 
 
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To empower global society to act, Ban has launched a bold new global initiative, for which I am grateful to volunteer. The UN Sustainable Development Solutions Network is a powerful effort to mobilize global knowledge to save the planet. The idea is to use global networks of knowledge and action to identify and demonstrate new, cutting-edge approaches to sustainable development around the world. The network will work alongside and support governments, UN agencies, civil-society organizations, and the private sector.
 
 
 
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Humanity needs to learn new ways to produce and use low-carbon energy, grow food sustainably, build livable cities, and manage the global commons of oceans, biodiversity, and the atmosphere. But time is running very short.
 
 
 
 
Today’s mega-cities, for example, already have to confront dangerous heat waves, rising sea levels, more extreme storms, dire congestion, and air and water pollution. Agricultural regions already need to become more resilient in the face of increased climate volatility. And as one region in one part of the world designs a better way to manage its transport, energy needs, water supplies, or food supplies, those successes should quickly become part of the global knowledge base, enabling other regions to benefit rapidly as well.
 
 
 
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Universities have a special role to play in the new UN knowledge network. Exactly 150 years ago, in 1862, Abraham Lincoln created America’s land-grantuniversities to help local communities to improve farming and the quality of life through science. Today, we need universities in all parts of the world to help their societies face the challenges of poverty reduction, clean energy, sustainable food supplies, and the rest. By linking together, and putting their curricula online, the world’s universities can become even more effective in discovering and promoting science-based solutions to complex problems.
 

 
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The world’s corporate sector also has a significant role to play in sustainable development. Now the corporate sector has two faces. It is the repository of cutting-edge sustainable technologies, pioneering research and development, world-class management, and leadership in environmental sustainability. Yet at the same time, the corporate sector lobbies aggressively to gut environmental regulations, slash corporate-tax rates, and avoid their own responsibility for ecological destruction. Sometimes the same company operates on both sides of the divide.
 
 

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We urgently need far-sighted companies to join the Sustainable Development Solutions Network. These companies are uniquely placed to move new ideas and technologies into early-stage demonstration projects, thereby accelerating global learning cycles. Equally important, we need a critical mass of respected corporate leaders to press their peers to cease the anti-environmental lobbying and campaign-finance practices that account for the inaction of governments.
 
 


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Sustainable development is a generational challenge, not a short-term task. The reinvention of energy, food, transport, and other systems will take decades, not years. But the long-term nature of this challenge must not lull us into inaction. We must start reinventing our productive systems now, precisely because the path of change will be so long and the environmental dangers are already so pressing.
 


 
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At the Rio+20 Summit this past June, the world’s governments agreed to adopt a new set of goals on sustainable development for the period after 2015, to build upon the Millennium Development Goals’ success in reducing poverty, hunger, and disease. In the post-2015 era, the fight against poverty and the fight to protect the environment will go hand in hand, reinforcing each other. Secretary-General Ban Ki-moon has already initiated several global processes to help establish the new post-2015 goals in an open, participatory, and knowledge-based way.
 
 
 
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The Secretary General’s launch of the Sustainable Development Solutions Network is therefore especially timely. Not only will the world adopt a new set of goals to achieve sustainable development, but it will also have a new global network of expertise to help achieve those vital objectives.
 


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Jeffrey D. Sachs is a professor at Columbia University, Director of its Earth Institute, and a special adviser to United Nations Secretary-General Ban Ki-Moon. His work focuses on economic development and international aid, was he was Director of the UN Millennium Project from 2002 to 2006. His books include The End of Poverty and Common Wealth.
 
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Copyright Project Syndicate - www.project-syndicate.org



Finland and the euro crisis
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Northern gripes
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The Finns are being hard-nosed because they face their own hardship
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Aug 25th 2012
HELSINKI
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IN THE historic heart of Helsinki, leviathan cruise ships can be glimpsed across the harbour ready for their next trip. Just two hours across the Gulf of Finland is Tallinn in Estonia. Continue due south and a weary traveller will eventually reach Athens. If Greece is the awkward customer among southern Europe’s debtor nations, Finland is the stroppy partner among northern creditor nations. It has insisted on special terms on its contributions to euro-zone bail-outs since mid-2011 by getting collateral on its lending. Government ministers eschew high-flown rhetoric about European unity: the foreign minister recently caused a kerfuffle by saying that Finland has contingency plans for a break-up of the euro.




From one perspective, it is hard to see why Finland is being so obstreperous. The country thrived for the best part of a decade after it joined the single currency in 1999. And although it suffered in the recession of 2008-09 it has since made a robust recovery. Unemployment has come down from a peak of 8.7% in early 2010, to 7.5%. Helsinki’s markets are thronged with shoppers and retail sales across the country have been perky. The recovery has been sustained by strong consumer spending, supported by a sturdy housing market. The financial system is in decent shape.
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Finland’s public finances are healthy, too, certainly compared with those elsewhere in the euro area. Of the six remaining AAA–rated countries in the 17-strong zone, it is the only one not facing the risk of a downgrade, according to Moody’s, a ratings agency. Public debt is only about 50% of GDP, much lower than Germany’s 80%, and the government is running a deficit of about 1% of GDP this year, a paltry amount compared with those being racked up in Europe’s debtor countries.
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But from another perspective, Finland’s performance looks disappointing. An alternative destination from Helsinki on one of those monster cruise ships is due west to Stockholm. Unlike Finland, Sweden chose not to join the euro. Until the crisis, that made little difference. Both countries did well; if anything Finland’s performance was stronger. But over the past five years their fortunes have diverged to the detriment of Finland (see chart).




The Finns suffered a much sharper recession than the Swedes, and Finland’s recovery has been less ebullient. Moreover, the Finnish economy has stumbled of late: GDP fell by 1% in the second quarter in Finland, whereas it rose by 1.4% in Sweden. There were special reasons why the Finnish economy contracted—in effect, growth had been brought forward to the first quarter as consumers bought cars early to avoid a tax rise. But GDP is now likely to expand by about 0.5% in 2012, says Markku Kotilainen of the Research Institute of the Finnish Economy. In contrast, Swedish output will expand by 1.3%, according to Robert Bergqvist of SEB, a bank.




In another telling comparison, Sweden continues to run a hefty current-account surplus (worth 7% of GDP in 2011) whereas Finland swung into deficit last year for the first time since 1993, a phenomenon noted with concern by Erkki Liikanen, the governor of the central bank. And whereas Finland’s public debt was lower than Sweden’s before the crisis, now it is higher.




Some of this reflects setbacks to Nokia, Finland’s falling mobile-phone star (see article), whose share of Finnish GDP has shrivelled to an eighth of what it was at its peak a decade ago. But there are other worries. Mainstay industries, such as wood and paper production, have also been doing badly. The Bank of Finland argues that a crucial reason why exports have been doing badly is a loss of competitiveness: unit labour costs have shot up by 20% in the past five years.




The economy’s longer-term prospects add to the gloom. In a survey of the Finnish economy published early this year, the OECD estimated that GDP would grow by just 1.7% a year between 2016 and 2030. The bills for a rapidly ageing population are coming due, as the bumper crop of babies born after the second world war retires.




The coalition government formed in mid-2011 and led by the conservative prime minister, Jyrki Katainen, has adopted measures to improve the structural budget balance by 2% of GDP in 2015. The fiscal tightening will be especially marked next year, with value-added tax on consumption rising by one percentage point. That is one reason why growth is expected to be a soggy sub-1% in 2013, according to Mr Kotilainen.






But even with this dose of austerity, the ministry of finance reckons there is a “sustainability gap” of 3.5% of GDP a year that will have to be closed to put Finland’s public finances on a secure footing.



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Along with further austerity, painful reforms are required. Finland needs to raise its retirement age. And as the OECD urged in its report, it needs to improve public-service productivity. The government is starting to move in the right direction with its plan to reduce the number of local authorities, which are responsible for crucial public services like health, but plenty more needs to be done.




As times turn hard at home, many Finns bristle at having to bail out what they regard as profligate euro-zone countries that have not played by the rules. Mr Katainen’s demands for collateral stem from a coalition agreement forged after the election in April 2011, which saw the eruption of the anti-bail-out True Finns, now the biggest opposition party. Even so, he is keen to present himself as a constructive negotiator rather than a troublemaker.




And despite the dislike for bail-outs, Finnish public opinion continues to favour the euro, which is also backed by both business and the unions. One reason lies in another destination that the big cruise-ships visitnearby St Petersburg. As Teija Tiilikainen, the head of the Finnish Institute of International Affairs, points out, joining the euro had a security dimension, through binding Finland more closely into Europe and so providing a bulwark against Russia (still its largest trading partner).



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Finns may not be dreaming of a future outside the single currency, but their reluctance to help makes them a prime example of the “rescue fatiguenow afflicting much of northern Europe (including the Netherlands, which has an election of its own next month). That constraint is one reason why markets’ sunny mood about the euro crisis may not last far into the autumn.



August 23, 2012 7:12 pm
 
My night at the rodeo with China’s elite
Ingram Pinn illustration




The other day I spent an evening at a rodeo in the shadow of the Colorado mountains. I was in the company of a delegation from Beijing’s elite Central Party School, a substantial slice of the US foreign policy establishment and a fair smattering of geopolitical thinkers from Europe. We were all wearing cowboy hats.




As the sun set over a spectacular ridge line, I hesitated to imagine the reaction of the rodeo’s riders and roughnecks had they known they were being cheered on by a group of Chinese communists. Even worse, the cadres were in cahoots with a bunch of soggy European liberals.


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Colorado is a swing state in the presidential election but I saw few likely Democrats. The rodeo was in what an American friend calledgun country”. Mitt Romney won the T-shirt vote hands down.




Our host was the Aspen Strategy Group, which a few years ago teamed up with Aspen Italia and the party school to create an informal trialogue of Americans, Europeans and Chinese. Watching the bronc riding and steer roping was a break from two days of discussions about everything from the euro crisis and the role of the dollar to US-China rivalry in east Asia and the rupture in the UN Security Council about Syria. Formality somehow dissolves when you are wearing a Stetson hat.




I cannot say the meeting, the third in the series, put the world to rights. Europeans left as depressed about the euro as when they arrived. The US side reaffirmed America’s place as a Pacific power and the Chinese their demand for due respect for its great power status. Fixing things is not the point of such gatherings. The ambition is to reach beyond political posturing and starched-shirt diplomacy to turn up what people really think. Better understanding, hopefully, promotes mutual trust.




These are tempestuous times in China. The jailing this week of the wife of the deposed politburo member Bo Xilai offered another glimpse of the power struggle accompanying the transition to a new generation of political leaders. Among western diplomats rumours abound of a power grab by the People’s Liberation Army. This is not the moment, Chinese scholars agree, for ambitious politicians to seemsoft” on foreign policy.




On the other side, Mr Romney is also striking a nationalist pose. The Republican candidate accuses Barack Obama of being too accommodating of China’s rise. One of the first acts of a Romney White House would be to retaliate economically against Beijing’s manipulation of the renminbi. Mr Obama’s approach has been to engage and hedge: to deepen bilateral dialogue while refurbishing Washington’s regional alliances – the so-called rebalancing of US policy to Asia. Mr Romney seems to think he can contain China’s rise.




The potential flashpoints are numerous. Taiwan is the most dangerous and neuralgic issue: how can the US support a one-China policy and supply Taiwan with high-tech weaponry was a constant refrain of the Chinese delegation.
 


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I am not sure I heard a convincing US answer. In any event, this really is the “coreChinese interest.




Angry demonstrations across China sparked by a flare-up of the dispute with Japan about a group of islands in the East China Sea fit a recent pattern of muscle-flexing in Beijing. China has grown more bellicose in framing its claims to suzerainty over the waters around its coastline.




Many disputes are not directly with the US. Vietnam, the Philippines, South Korea and Malaysia are among the claimants to various island outcrops in the South China Sea – and to the hydrocarbon and mineral resources below the waters. But to Chinese eyes, US military power underwrites the challenges to Beijing – the more so when US ships and reconnaissance aircraft routinely operate at the very edge of Chinese territory.




Clashes of national interest cannot be wished away. As it happens an overbearing Chinese approach weakens its own position, driving neighbours such as Vietnam into the arms of the US. The big question is whether the unavoidable differences and inevitable competition in the Sino-American relationship can be contained within a framework of strategic co-operation.




The most persistent demand from the US side is for more transparency about China’s rapid military build-up. There is nothing surprising about Beijing spending more on its armed forces.



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As the world’s second economic power its interests and vulnerabilities have expanded accordingly. It inhabits a rough neighbourhood.




The question is how much and to what purpose. As long as the PLA’s capabilities and military doctrines remain cloaked in mystery, others will think the worst. Such secrecy empowers those in Washington who want a faster build-up of US forces in the region and those in the Pentagon who insist the intrusive surveillance operations that so infuriate the Chinese are vital to safeguard the security of US forces.




So far the PLA has shunned offers to deepen significantly its military dialogue with the US. The danger is an obvious one: that ownership of the relationship is claimed by the hawks on either side.




Competition becomes confrontation, ratcheting up the arms race and elbowing aside diplomacy.
Gatherings such as that at Aspen are part of an effort to avoid this. The more people talk, the less the risk of miscalculation. If I heard a shared refrain from the US and Chinese it was that Asia is big enough for two great powers.




Yet my impression is that neither side quite believes it. Building trust is going to be a long process. On the evidence of Aspen, it is too soon to give up. At this level, personal encounters and experiences matter. Heading back to Europe I came across some of the Chinese officials in the airport lounge.


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They were still wearing cowboy hats.



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Copyright The Financial Times Limited 2012.