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Sunday, June 06, 2010


Hmm. The new Japanese prime minister is Kan, who was the Finance Minister (mostly recently reknowned for his off-and-on-again resignation as Finance Minister).

A) His secondary education is in physics, which probably means he comprehends compound interest.

B) His threatened resignation as Finance Minister worried many, because his credibility regarding finance was important for Japan's bond sales.

C) Now he is running things, and the press is making much of his "man of the people" background.

Japan's public debt is huge (around twice GDP this year), but unlike the US Japan usually runs a trade surplus and Japan's public debt is mostly self-financed at this point. One issue is that as Japanese workers retire and draw down their savings, this may no longer be possible.

The Euro continues its decline, which will probably help Germany's exports. But even Germany has a fiscal problem. This Spiegel article (English!) details some of it. Despite the discussions of austerity, the Bundesrat just reversed some of administration's recent cuts to the solar subsidy.
If you're wondering if solar power is a good fit for Germany, the answer is no. Politically it is going to be very difficult to control spending over the next five years, but Germany probably has some margin to cut and grow if the Euro can hang in the $1.10-$1.18 USD level, which would help manufacturers.

The reason I think there is a Euro floor at around $1.15 USD (over time - who knows who will start drinking next and talking default) is Germany and even France. As the Euro falls, their exports will benefit, and some of the Italian companies will benefit as well.

In the meantime, Foxconn in China just announced another huge wage increase for its workers in Shenzen effective October 1st. One would expect the costs to be passed on to Apple, HP, and a number of other American companies. Shares are going to drop.

In other who'd 'a thunk news - Chinese banks are having trouble raising money.

There is an interesting inexorability about the world's rebalancing. The bottom line is that workers who aren't paid enough to buy mass-market goods they are producing cannot generate a stable economy, just as western economies with aging populations cannot continue their current social welfare policies.

India has chosen a different path. Despite very high inflation, they have the chance to really pull through and generate a strong economy. But a lot depends on this year's monsoon, which started early but has slowed up. If the monsoon is good this year, India will probably be able to generate good growth.

If not.... this is troubling. Sustaining internal growth in demand has been a struggle for the last few years, and how long can the government dump money into banks? I do not know what to make of the government rhetoric versus some of the actions. Articles like this one - sales of bandwith generated payments by private companies to government so large that it affected liquidity in the entire banking system - suggest a balance problem. Over the last few months, the financial news out of India has become increasingly confusing.

PS: Also, this is a funny article from Bloomberg on the issue of a Euro-area ratings firm that would rate sovereign debt. The skepticism abounds.

UPDATE: This morning's headline:
June 7 (Bloomberg) -- German factory orders unexpectedly jumped for a second month in April as the weaker euro boosted export demand and companies increased investment.
YoY orders are up nearly 30%, which considering the '08 crash is not surprising. But still it points out why Germans need not be so distraught, and also why Germans need not be too worried about bailing out the fiscally irresponsible Euro currencies. No, it is FRANCE which desperately needs a Euro bailout, because Germany has a huge manufacturing basis in production machinery. Germany is in the business of making factories and selling them to other countries. This is a high-margin business.

Italy is working on its situation, although I have to wonder if Italy can pull through over time. But France is facing one hell of a political fight over its need to restructure its economy, and France will not get the same benefit from a devalued Euro. Italy may get a net bump from a lower Euro.

In other who'd 'a thunk news - Chinese banks are having trouble raising money.

Shocking!! ;)
I really look forward to your blog posts b/c they synthesize things so well.

I grab bits and pieces from all over the place but I miss so many of the things you catch.

How do you see all these bloomberg articles?What blogs do you recommend? Anytime I go to the bloomberg website I see the same set of articles for most of the day (so I don't get any new 'news').

really enjoy your posts!!!
Let's see, G20 proposing tightening, can the US
consumer lift the world's economy ? I think not.
A lower euro put more pressure on American exports
which in puts pressure on US wages and employment.
Looks like a deflationary spiral in the West and a lower
standard of living. I've got a feeling Chinese wages
may be peaking now only to fall later when demand
can't support current prices
Thanks, mom. Another whirlwind tour of the globe.

Europe is a nice puzzle. The EU tends to take its time figuring things out before it gets to some relatively satisfactory point. Everyone a bit grumbly, but the coffee was rather good.

The image of Merkel with her meaty thighs wrapped round Sarkozi's scrawny neck (my image, not yours!) is ... exhausting.
Austerity is a dish best served cold....

Very amusing! Austerity does seem to fit where revenge does, lol.

The tree of austerity does not carry fruit!

The tree of revenge does not carry fruit - Dutch proverb
Best Title EVER!
MoM,India is confusing to every one,ask any native.And china..I was speaking to a friendly acquiantance and his chinese born wife this weekend and they tel me a LOT of hot money is flowing into the USA and being invested in Real Estate.At least in the SF bay Area chinese seem to invest almost exclusively in a few areas(Fremont and San Francisco are prominent),have no hesitation to buy condo's(!) and seem to deal with a very few brokers.
Mark - Have you been reading Krugman? That is pretty much his refrain.

The problem is that Keynesian economics requires (cough) self-discipline on the part of government and policy-makers. During the good times, one must build up the surplus to be spent as a counter-cyclical force during downturns. To boot, the public spending doesn't yield much if the general population is already debt-loaded; the real benefit of Keynesian doctrine is that it generates increased private sector activity. And when the population is up to its ears in debt, you don't see nearly as much fruit from public stimulus.

PS: My verification word is "pstalin". Hardly a good way to start the morning.
Tom - before this started, Indian money firms in the private sector were buying RE in the states too.
SV Entrepreneur - I read mostly newspapers. And I read them with a blank mind (pretty easy for me) so as to let the underlying patterns emerge on their own.

On Bloomberg, if you go to the news tab you will see a "regions" option. That one will open up a menu in which various countries and regions are listed on the sidebar. It's a good idea to scroll through them a few times a week.

I mostly read a ton of newspapers in Europe and Asia. Most of the Asian ones have english language versions.
Sporkfed - I don't know where Chinese wages are going, but I do know that they have had high inflation for several years, and farm incomes and production incomes have been very eroded due to the inflation. I think wages have to increase to reach inflation.

No one wants these jobs - they are the province of the "internal illegals", the high school graduates, etc. Just recently the Chinese busted another slave labor facility - workers had basically been kidnapped and were kept under guard.

Production jobs in most areas don't provide an income that would generally support a family, which is why the young workers at Hon Hai are living in dormitories and working 60+ hours a week.
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