The rich world's economy
The gift that goes on giving
A seasonal offering for rich-world governments to give their people—and everybody else
Dec 22nd 2012

THE holiday season is a time for expansive thoughts, and not just about waistlines. It allows people time to step back from the daily grind and think about how they could do things differently. Has lack of imagination blinded them to simple solutions? With a little effort, could they make 2013 a lot better?

For the rich world’s governments, the answer is yes. We offer three ways to improve confidence and increase growth in what otherwise looks like being a pretty bleak year. Regular readers will not be astonished to hear that all three involve trade liberalisation. This is, indeed, a theme we have returned to with some frequency since this newspaper was set up in 1843 to oppose Britain’s protectionist Corn Laws. But the gains to be had from sluggish rich countries opening their borders to each other’s goods and services look enticing. The world is less integrated than most people realise (see article). And trade also offers a chance for liberal democracies to re-establish their credentials as the world’s guides towards prosperity.
On the first day of Christmas my true love sent to me…

According to the IMF, in 2013 America’s economy may grow by around 2%, Japan’s and Britain’s by 1% or so, and the euro zone’s will be lucky to grow at all. Policymakers in each of these economies could do plenty of things to improve this dour prognosis, but most involve unappealing choices. A further monetary boost may help add zip to the recovery, but risks producing asset bubbles. More fiscal expansion could help growth but could weigh governments down with extra debt.

Freer trade, by contrast, does not involve spending any money. It demands nothing of participating governments other than a bit of leg-work and a lot of political courage. And even if some lobbies, such as farmers, will fight hard, the benefits for the overall economy of cutting barriers—the tariffs, subsidies and red tape that gum up international markets—are large. Workers’ wages will go further as the cost of imported goods and services falls, exporters’ markets will expand and productivity will improve as the helpful consequences of freer trade filter through the whole economy.

The three big barrier-bashing opportunities are the Trans-Pacific Partnership (TPP), a free-trade agreement that straddles the Pacific; an Atlantic-spanning free-trade deal between America and the European Union; and a true single market in services within Europe. Each of these initiatives has recently moved from the politically fanciful to the just-about plausible, with serious progress possible over the next year or two. Each in isolation would improve confidence and increase prosperity. Together, they would transform the rich world’s prospects.

In an ideal world a big trade deal would be global, since dismantling barriers for all is far better than lowering them on a bilateral or regional basis (see article). But in the real world, the last set of global trade talks, the Uruguay round, was concluded back in 1994, and its successor, the Doha round, is moribund. Rather than flog a dead horse in Geneva, it is time to make progress in places where trade negotiators have momentum and politicians have interest. And that is across the Pacific and the Atlantic.

The TPP is already well under way. Eleven Pacific countries are taking part in the negotiations, including Mexico, Canada, Australia and New Zealand as well as America. South Korea might join them next year. So, too, could Japan if Shinzo Abe, the new prime minister, is serious about boosting his country’s economic potential. With Japan and South Korea, the TPP countries would account for some 30% of global trade in goods and services. And the TPP has aspirations to do much more than cut tariffs: the goal is to hash out a far bigger joint rule-book, from regulation to competition policy. One study reckons a deal could raise the region’s GDP by more than 1%.

The transatlantic trade agreement is still just an idea, albeit one that is being pushed hard by European politicians, and which has been cautiously embraced by Hillary Clinton, America’s secretary of state. Here, too, there is plenty of potential: to streamline supply chains and raise productivity by getting rid of tariffs and to ease the burden on business by harmonising regulatory standards, so that a car or drug deemed safe in Europe need not be tested again in America. One analysis suggests that just getting rid of tariffs could raise Europe’s GDP by around 0.4% and America’s by a percentage point.

The really big gains will be reaped if these deals spur broader global liberalisation, particularly with the fast-growing big emerging economies. That cannot be taken for granted: the TPP and an EU-US deal could split the world into competing regional blocks from which China, especially, would be excluded. But that can be avoided by making sure that both deals are easily knitted together and easily opened to others. Both should be based on a similar template, should avoid unnecessarily restrictive prescriptions—whether on capital controls or intellectual property—and should create a set of rules that China or India can plausibly embrace.

…a boost for the rich world’s GDP

As for domestic markets, there is no shortage of American industries where Barack Obama could start to remove needless red tape. But the opportunity is greatest in Europe. The single market still largely excludes services, which make up more than 70% of the region’s GDP.

Customs formalities, for instance, add inordinate bureaucracy and costs to the 40% of goods that are shipped within the EU by sea. Rail companies in one EU country cannot operate domestic services in another. The online market is another bugbear: it is often easier for Europeans to buy things online from America than from their neighbours. Depending on how many barriers are dismantled, the EU’s GDP could be raised by 2.5% or more. All the politicians know this; most (outside France) pay lip service to the idea of expanding the single market. Now is the time to act.

By championing freer trade and open markets, the West taught the rest of the world how to grow. Nowadays, globalisation is associated with the surging middle classes of the emerging world, and some illiberal dictatorships. Let 2013 be the year when the West claims back its creed—and its oomph.

No Way Out Of Monetary Madness

December 18, 2012

by: Peter Schiff

By upping the ante once again in its gamble to revive the lethargic economy through monetary action, the Federal Reserve's Open Market Committee is now compelling the rest of us to buy into a game that we may not be able to afford. At his press conference this week, Fed Chairman Bernanke explained how the easiest policy stance in Fed history has just gotten that much easier. First, it gave us zero interest rates, then QEs I and II, Operation Twist, and finally "unlimited" QE3.

Now that those moves have failed to deliver economic health, the Fed has doubled the size of its open-ended money printing and has announced a program of data flexibility that virtually insures that they will never bump into limitations, until it's too late. Although their new policies will create numerous long-term challenges for the economy, the biggest near-term challenge for the Fed will be how to keep the momentum going by upping the ante even higher at their next meeting.

The big news is that the Fed is now doubling the amount of money it is printing. In addition to its ongoing $40 billion per month of mortgage backed securities (to stimulate housing), it will now buy $45 billion per month of Treasury debt. The latter program replaces Operation Twist, which had used proceeds from the sales of short-term Treasuries to finance the purchase of longer yielding paper. The problem is the Fed has already blown through its short-term inventory, so the new buying will be pure balance sheet expansion.

To cloak these shockingly accommodative moves in the garb of moderation, the Fed announced that future policy decisions will be put on automatic pilot by pegging liquidity withdrawal to two sets of economic data. By committing to tightening policy if either unemployment falls below 6.5% or if inflation goes higher than 2.5%, Bernanke is likely looking to silence fears that the Fed will stay too loose for too long. While these statistical benchmarks would be too accommodative even if they were rigidly enforced, the goalposts have been specifically designed to be completely movable, and hence essentially meaningless.

Bernanke said that in order to identify signs of true economic health, the Fed will discount unemployment declines that result from diminishing labor participation rates. It is widely known that a good portion of unemployment declines since 2009 have resulted from the many millions of formerly employed Americans who have dropped out of the workforce. But like many other economists, Bernanke failed to identify where he thinks "real" employment is now after factoring out these workers. So how far down will the unemployment number have to drift before the Fed's triggering mechanism is tripped? No one knows, and that is exactly how the Fed wants it.

A similarly loose criterion exists for the Fed's other goalpost -- inflation. Bernanke stated that he will look past current inflation statistics and look primarily at "core inflation expectations." In other words, he is not interested in data that can be demonstrably shown but on much more amorphous forecasts of other economists who have drunk the Fed's Kool-Aid. He also made clear that rising food or energy prices will never fall into the Fed's radar screen of inflation dangers.

For as long as I can remember (and I can remember for quite some time) the Fed has stripped out "volatile" increases in food and energy, preferring the "core" inflation readings. But in the overwhelming majority of cases, the headline numbers are significantly higher than the core. In other words, Bernanke simply prefers to look at lower numbers. In his press conference, he made it clear that the Fed will avoid looking at price changes in "globally traded commodities," that are all highly influenced by inflation.

These subjective and attenuated criteria give Fed officials far too much leeway to ignore the guidelines that they are putting into place. If the Fed will not react to what inflation is, but rather to what it expects it to be, what will happen if their expectations turn out to be wrong? After all, their track record in forecasting the events of the last decade has been anything but stellar.

The Fed officials repeatedly assured us that there was no housing bubble, even after it burst. Then they assured us the problem was contained to subprime mortgages. Then they assured us that a slowdown in housing would not impact the broader economy. I could go on, but my point is if the Fed is as spectacularly wrong about inflation as it has been about almost everything else, will they be able to slam on the brakes in time to prevent inflation from running out of control? And if so, at what cost to the overall economy?

The Fed is committing to more than a $1 trillion annual expansion in its balance sheet, an amount greater than the total size of its balance sheet as late as 2008. Most forecasters believe that the Fed will have $4 trillion worth of assets on its books by the end of 2013, and perhaps more than $5 trillion by the end of 2014. If conditions arise that require the Fed to withdraw liquidity, the size of the sales that would be required will be massive. Who exactly does the Fed believe will have pockets deep enough to take the other side of the trade?

As the biggest buyer of Treasuries, it is impossible for the Fed to sell without chances of collapsing the market. Surely any other holders of treasuries would want to front-run the Fed, and what buyer would be foolish enough to get in front of the Fed freight train? The bottom line is that it is impossible for the Fed to fight inflation, which is precisely why it will never acknowledge the existence of any inflation to fight.

But perhaps the most absurd statement in Bernanke's press conference was his contention that the Fed is not engaged in debt monetization because it intends to sell the debt once the economy improves. This is like a thief claiming that he is not stealing your car, because he intends to return it when he no longer needs it. To make the analogy more accurate, there could not be any other cars on the road for him to steal.

Without the Fed's buying, it would be impossible for the Treasury to finances its debts at rates it can afford. That is precisely why the Fed has chosen to monetize the debt. Of course, officially acknowledging that fact would make the Fed's job that much harder.

Without the monetization safety valve, the government would have to make massive immediate cuts in all entitlements and national defense, plus big tax increases on the middle class.

As I wrote when the Fed first embarked on this ill-fated journey, it has no exit strategy. The Fed adopted what amounts to "the roach motel" of monetary policy. If the Fed actually raised rates as a result of one of its movable goal posts being hit, the result could be a much greater financial crisis than the one we lived through in 2008. The bond bubble would burst, interest rates and unemployment would soar, housing prices would collapse, banks would fail, borrowers would default, budget deficits would swell, and there would be no way to finance another round of bailouts for anyone, including the Federal government itself.

In order to generate phony economic growth and to "pay" our country's debts in the most dishonest manner possible, the Federal Reserve is 100% committed to the destruction of the dollar. Anyone with wealth in the U.S. dollar should be concerned that economic leadership is firmly in the hands of irresponsible bureaucrats who are committed to an ivory tower version of reality that bears no resemblance to the world as it really is.

viernes, diciembre 21, 2012



Free exchange

Building blocks

Regional deals are the only game in town for supporters of free trade. Are they any good?

Dec 22nd 2012

THE Doha trade talks would be great if only they worked. Multilateral deals mean common standards and lower barriers for all, but the Doha round, launched by the World Trade Organisation (WTO) in 2001, is dead in all but name. Instead, the cause of liberalisation is being advanced by regional trade agreements (RTAs). The number of RTAs has risen from around 70 in 1990 to over 300 today. The latest, between the European Union and Singapore, was announced on December 16th. Bigger deals are on the horizon. A free-trade deal between America and the EU could be struck in 2013, as could a Trans-Pacific Partnership (TPP) between America and countries in Asia and Latin America. How do these not-quite-global deals compare with the real thing?
The simplest way to assess trade deals is to ask how good they are at lowering barriers like tariffs and subsidies. A 2011 OECD study looked at 55 RTAs, to see whether agricultural duties were lowered.
It showed that deals between rich and emerging economies lifted the number of goods traded duty-free from 68% to 87% within ten years.

In deals between emerging economies, the proportion rose from 28% to 92%. (Sectors like sugar and dairy proved resistant even in the best RTAs.) Three out of five deals banned export subsidies. It is clear that RTAs lower these sorts of barrier.
But tariffs are not the only measure of success. Technical and regulatory obstacles are often more important. When rules do not match, trade cannot take place at any price. Some differences reflect big issueshow medical trials for drugs should be run, for example. Others look more like a shelter for entrenched interests. Take alcohol labelling.

Recent WTO meetings have dissected the definition of “liquor” versus “spirit”; whether “London Gin” must come from London; and whether Peruvian pisco is not, in fact, brandy. The evidence suggests that RTAs do target these non-tariff barriers as well. In a 2009 study Roberta Piermartini and Michele Budetta of the WTO found that 58 of the 70 RTAs they examined try to align rules or speed accreditation processes. The proposed transatlantic and TPP deals have similar aims.
The truest test of an RTA, however, is its trade impact. Calculating this can be hard because lots of things, including growth and exchange rates, affect trade. The United States Department of Agriculture (USDA) recently examined 11 big RTAs in operation between 1975 and 2005, focusing on the impact on foods, a particularly contentious area of trade. The RTAs included the EU and the NAFTA agreement between America, Canada and Mexico. The USDA estimated what trade patterns would have looked like in the absence of the relevant RTA, using factors like distance, common borders, language and macroeconomic variables. By stripping away the trading activity that can be explained by all these factors, the authors isolated the impact of the RTAs.
The USDA’s findings explain why RTAs are popular. Thanks to the RTAs, the trade of foods inside the region rose in ten of the 11 cases; in the EU and NAFTA the impact was a rise of at least 3% annually on average. In six of the 11 RTAs outside countries gained, too. Trade between NAFTA members and other countries in “commodityfoods like grains, fruit and vegetables rose by 2% a year. It may be that by gearing up for trade (investing in distribution networks, for example), firms within an RTA are able to exploit efficiencies that boost trade more widely.
Another way to isolate the impact of a trade deal is to study stockmarket reactions. If RTAs really do boost trade, the prospects for firms in an economy will improve when trade talks are announced, or are completed. Because investors look ahead when picking stocks, prices should rise as soon as news breaks.
To test the idea, Christoph Moser of the KOF Swiss Economic Institute, a think-tank, and Andrew Rose of the University of California, Berkeley, collected data on 1,001 announcements relating to 122 RTAs between 1988 and 2009. First, they establish the relationship between national and foreign stockmarkets, using this to strip out any changes in a country’s stocks that are due to global shifts rather than local news. They then study stocks over a window starting the day before each trade announcement and lasting for ten days after it. The findings again support RTAs: they tend to boost markets, especially when member countries are poorer and already trade a lot (so there is more to gain).

Roadblocks and diversions


Despite these benefits, two big concerns about RTAs remain. One is the fear that RTAs boost insiders at the expense of outsiders.

Although the USDA research found that in most cases total trade rose following an RTA, it also found some evidence of “trade diversion”. The EU looks especially clubby. It seems to have stripped 3% a year of trade away from America, and replaced it with intra-EU trade. The ASEAN club of Asian countries had a similar effect on manufactured food (things like breakfast cereal and soup): American firms again lost out. Unlike global deals, RTAs have the potential to shift activity away from efficient producers.
A second concern is that regional deals lack rules stating that all members are equal. Because bigger members are able to dictate terms, firms in smaller countries may have to cope with different regulations for different trading partners. This not only increases their costs. It also risks turning trade liberalisation into a hub-and-spoke model. If a few large blocks form, each with its own rules, it could be impossible to fit the various regional groups together. Trade could permanently segment.
This is why big deals like the TPP and the proposed US-EU agreement are especially vital. If they can start stitching big regional entities into a coherent whole, they will show how the new form of trade liberalisation can be made to work.



Regional Trade Agreements – Treatment of Agriculture”, by L. Fulponi, M. Shearer and J. Almeida, OECD Food, Agriculture and Fisheries Working Papers, No. 44 (2011)
Mapping of regional rules on technical barriers to trade”, by R. Piermartini and M. Budetta, in Regional Rules in the Global Trading System, e-book, CUP (2009)
Reciprocal Trade Agreements: Impacts on U.S. and Foreign Suppliers in Commodity and Manufactured Food Markets, by Thomas Vollrath, Jason Grant and Charles Hallahan, US Department of Agriculture, Economic Research Service, August 2012
Who Benefits from Regional Trade Agreements? The View from the Stock Market”, by Christoph Moser and Andrew Rose (2011)

Getting Technical
Gold Shines Brighter in the Charts
Gold and gold-mining stocks have had a rough two months, but don't count them out just yet.


 Just a month ago, gold looked ready to head back to its old highs following a short-term technical breakout and resumption of the long-term trend (see Getting Technical, "The Trend is Gold's Friend Again," Nov. 26). Then concerns over global deflation knocked the market down hard, negating the breakout and sending prices tumbling.

From analyst calls for gold to drop to $1,200 per ounce to a general feeling in technical circles that this market has topped, the metal's future seems dull. But in any market, the more bearish the sentiment, the more likely that market is close to a bottom.

And according to a sentiment survey by Jake Bernstein, veteran trader, author and proprietor of, sentiment is bearish indeed. He polls traders each day and tracks their responses over time. As of Tuesday, his Daily Sentiment Index (DSI) registered a bullish opinion of just 9% on a scale from zero to 100.

"Based on previous DSI readings," he said, "it is low enough to signal at least a recovery in store for gold."

Indeed, over the past year, each time sentiment was this low, gold rallied for anywhere from four to sixteen weeks.

Let's look at this in the context of the charts. While the long-term trendline from the 2008 low remains intact, it appears that the market is better analyzed in the context of a trading range from late 2011 (see Chart 1). 

Support, or a price floor, is roughly at $1,530 and resistance, or a price ceiling, is roughly at $1,800. For the SPDR Gold Trust (ticker: GLD) the equivalent levels would be $149 at the bottom and $174 at the top. With gold trading at $1,672 and the gold exchange-traded fund trading at $161.72 Wednesday afternoon, they are in the middle of their respective ranges.

Chart 1



One indicator I like to use in a trading range is stochastics, which measures an asset's position and how fast it is moving within that range. At gold's each low within the range, stochastics reached "oversold" conditions and then began to rise. It basically means that the sellers were exhausted and the buyers were becoming more active.

Interestingly, stochastics lows coincided with sentiment lows. Fast forward to current trading and stochastics is approaching oversold conditions in step with a very low DSI reading. In other words, conditions are at or close to where we would expect them to be when buyers get active again.

To be sure, oversold conditions can become more oversold and sentiment can become even more bearish. But historically, the combination now in place has provided a reasonable argument for a bounce in the market.

Gold-mining stocks are also still alive technically although for a different reason. The Market Vectors ETF Trust Gold Miners (ticker: GDX) has been sliding since early September and is now below both its key 50- and 200-day moving averages (see Chart 2). While the short-term trend is down, the pattern for the year has really been a choppy sideways range.

Chart 2

Gold Miners ETF


But beneath the surface, one technical indicator shows that demand for the ETF has not waned. On-balance volume, a study that keeps a running tab of how much volume trades on up days and down days, has held its ground throughout the September to December price decline. In technical analysis, when prices fall and indicators rise it usually means that the price trend is going to change for the better.

I find it interesting that most individual gold-mining stocks, such as Newmont Mining (NEM) and Goldcorp (GG), do not sport rising on-balance volume studies. In my view, investors are eager to own gold stocks but are unsure enough that they prefer to diversify with an ETF.

Gold and gold-mining stocks took a hit over the past two months and may not have seen their respective lows just yet. But sentiment and several technical indicators suggest that those lows are near. Despite the growing fear that gold and gold stocks have topped for good, the evidence does not quite agree.

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