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The Dow Jones Average in the US went up by 11.3% since August 26, 2010, in anticipation of the Fed's quantitative easing, and the Republican win in the House and a filibuster capable 41 seats in the Senate. But on the eve of the midterm election in the first week of November 2010, the mood is changing. There is considerable concern that the Dow Jones average may have gone too far. Experts question the advantages of gridlock in Washington, especially when strong government action may be necessary in a crisis. And there are questions on how effective the Fed can be this time when the interest rates are already near zero.

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The demand for ships went up so steeply that shipping rates hit the roof, and the prices of ships went up accordingly. Between the end of 2006 and July 2008 , shipyards received enough commissions, says the Economist, that this would double the world's fleet. Just as demand has collapsed and international trade has gone down, about 9000 ships are coming onstream. Now 11% of fleet capacity justs sits on the water, in the seas outside the harbors of Singapore, Hong Kong and other southeast Asian ports. A 150 tonne cape class ship that sold in 2003 for $18.5 million in the used market, when rates for charter were $15,000 a day, had risen by summer 2008, to $85 million with rates of $175,000 a day. These rates went up even more to $300,000 a day, which is 20 times what it was in 2003. And rates today are back down to $15,000 a day, where they were in 2003. This ship, cited by a broker, to give some idea of the extent of this boom and its collapse, was sold for scrap at $7 million. And South Korean shipyards are taking this into account, in their pricing and collection of payment, with 20% demanded upfront, 60% during construction, and 20% upon delivery. The backlog in shipyards is estimated by Clarkson Research, a maritime research firm, at $526 billion, even as banks are leery of lending and concerned about the value of the collateral in the event of default. Some smaller Korean shipyards are closing. Steve Mann, analyst at HSBC, says that half of the orders for delivery in 2010 will be delayed, so that there is work for 2011 and inventory or excess capacity does not pile up on the oceans. Even in this situation China, India and Vietnam continue to support the expansion of their own shipyards. This suggests additional losses for shipbuilders, shipping lines and the banks that lend to shipyards. All this also goes to show that the rush to industrialize, once it gets a firm footing- like it has in the Chinese model of increasing investment and local governments pushing infrastructure, industry and export factories with officials judged on GNP growth numbers- can exacerbate a boom-bust cycle. This is one industry, others include machinery manufacturers, commodity producers, and manufacturers of parts that go into finished products assembled in China for export. This means it would take the world economy down with it, if some external factor like the drop in export demand suddenly slows everything down. Machinery manufacturers in Germany, commodity producers in Brazil, Argentina, Chile, Australia, and manufacturers of the high tech parts in Japan and Taiwan that are shipped to China for assembly, all go down in this boom-bust cycle, in a dramatic manner. ...

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Greg Ip provides useful insights into the nature of the economic recovery in Britain compared to the U.S. by 2015. The recovery in Britain has done better than in the U.S. in job creation, but has lagged behind in productivity gains. The labor force participation rate is 72% in Britain compared to 68% in the U.S., going back up to 2007 levels in Britain, whereas in the U.S. it has steadily declined with some older working class Americans too discouraged to look for work and left behind. Stagnant wage growth is a major issue in Britain, more so than in the U.S. where wage growth is slow. Economic austerity is not the main cause of the economic difficulties as the coalition government of prime minister Cameron relaxed earlier goals for austerity by 2012 with tax revenues and growth below forecasts. The structural budget deficit has been reduced by 6.6% of GDP since the peak, and the Office of Budget Responsibility estimates the UK economy was 1.5%-2% smaller by 2013 because of the austerity policies. Britain was also affected by the eurozone crisis to a larger degree than the U.S. Productivity remains a long term challenge- with needed investments in housing, education and infrastructure, improved lending for new business, and higher tech improvement exports....

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Bond investors are looking to Japan for clues after the U.S. credit downgrade and two years of zero interest rates. William O'Donnell, chief Treasurys strategist at RBS Securities sees similiarities with what happened in Japan- short term rates near zero and long term rates headed down. strategists see the U.S. 10 year Treasury note dropping to less than 2%, from 2.23% today. Japan's 10 year Treasury note yields 1.05%. O'Donnell's forecast is for 10 year rates to be at 1.70% by mid-2012.

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Bernanke's plan to address the deep downturn is very aggressive and he is pulling out all the stops. This includes the purchase of mortgage backed securities, Fannie Mae and Freddie Mac corporate debt and other assets, Since it stated its intention in late November to buy such securities, the 30 year mortgage rates have fallen to 5.2% from 6%, and refinance applications have tripled. Now the purchases will be greatly expanded. See the related link to this in Hubbard and Mayer article based on their research paper, in the WSJ, that shows that at a mortgage rate of 4.5% the housing market prices could stabilize. Next step the Fed will, starting early 2009, pump money into markets for student, auto, credit card ansd small business loans in hoping to bring life to those markets. How much money is involved? Quite a bit. All told the Fed's assets could add up to $5 trillion says Ed Yardeni of Yardeni Research, up from $2.2 trillion now. Its these sweeping moves and decisions that have overshadowed the December 16 announcement cutting the target federal funds rate to a range from zero to 0.25%, the lowest in its history. Whats the thinking behind this? Coy of BW points to Bernanke's research on the depression years and the lost decade years in Japan. In 1999, in a book he contributed to, Bernanke referred to Japan's monetary policy and passive approach as a self induced paralysis, including all the zombie loans that were allowed to continue on company books and no effort to clear up the bad assets quickly. He always thought highly of the aggressive approach taken by Franklin Delano Roosevelt, and felt that more tools available and a better understanding of the market system since FDR's day enabled a lot more actions to be taken to reverse the kind of steep global downturn that might occur. Yardeni's view is that even though this huge asset buildup could lead to inflation down the road, the economy in the medium term faces a deflationary environment, and the only way to cope with this series of bubbles bursting is to create another bubble, rather than risk anything going seriously wrong. Basically Bernanke is making an assessment of the current situation, and he sees bad credit situation getting worse, bad unemployment situation getting worse, consumer spending falling off and getting worse, continued home foreclosures and falling prices, the transition between administrations and lack of policy direction for a few critical months complicating things, and he sees the economies of all trading partners in Asia and Europe weakening in great speed, and sees very tough years for 2009 and 2010 no matter what the administration and the Fed do. Not enough aggressive actions to forestall the worst is as bad as inaction in Bernanke's view. And with all the aggressive moves, including the $1 trillion stimulus and infrastructure spending to create 2.5 million jobs that Obama administration plans, the US and global picture for the next 24 months will still be a long uphill climb. So the risks for Bernanke are all in the region of not doing enough and not doing it vigorously and speedily to get the best results. ...

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When George Osborne took over at the British Treasury the deficit was 10.2% of GDP. Osborne's hope in 2010 was that the budget could be balanced by 2015, now it looks like this will happen in 2019 or later.The forecast for the end of the 2015 fiscal year is a deficit of 5% of GDP. Lower than expected tax receipts are a big reason for the difficulty in lowering the deficit. The Office for Budget Responsibility, the budget agency, has reduced the forecast for tax receipts for 2015-2019 by 87 billion pounds. This means further spending cuts will be needed, according to OBR. Budget surplus is not expected before 2019. This is happening even though lower inflation and lower market interest rates have helped reduce outlays to service the debt. OBR assumes productivity will increase to 2% for the budget to be balanced in 2019. At the average productivity growth rate of 0.5% seen since 2008, the budget deficit will still be 2.2% in 2019, in another scenario of numbers run by OBR.

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Adam Davidson of the NYT's interview with American economist Posen, a member of the Monetary Policy Committee of the Bank of England. Posen says austerity measures have a negative effect on the British economy with high unemployment and lack of economic growth.

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Richard Barley points out that Italy has some breathing room even as the ten year yields on Italian debt reaches 6.15%, up 1.5 percentage points in 2011. Existing Italian debt has an interest rate of 4% and an average maturity of 7 years, according to Morgan Stanley. This means higher interest rates on new debt will take some time to have a serious impact. Fitch's estimates are that if 10 year yields on Italian debt went up to 7%, interest payments would go up to 6.1% of GDP by 2015 from 4.8% of GDP. This gives Italy some time to come up with solutions for competitiveness and growth issues. Italy's growth rate was only 0.1% for the 1st quarter of 2011, and debt is 119% of GDP. Italy also has a primary budget surplus which puts it in a better situation than other southern European economies.

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Mervyn King, the governor of the Bank of England, is coming under increasing criticism for supporting the Conservative-Liberal coalition government's austerity plan, and for lack of efforts to fight inflationary pressures. On a major issue on which King has taken a clear stand- that the largest British banks should increase capital levels exceeding the international standards- not much has happened. Consumer prices in Britain were up at a 3.7% annual rate in December, and the government's austerity policies will also cause pain. In a recent speech King said that the Bank of England had limited ability to fight the higher unemployment and increased inflation. It was an admission of the limits of central bankers in the current situation. King said "a squeeze in living standards is the inevitable price to pay for the financial crisis and the subsequent rebalancing of the UK and world economies.

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The results of a Wall Street Journal analysis of 11 countries shows the risk of a stretched out period of stagnation in the economies of the USA, the UK and Japan. Jobs is a critical area in which this is apparent. In Japan employment is down 3.3% from December 2007, in the UK 2% lower, and in the USA 4.8% lower from December 2007. U.S. household debt is down from 131% in early 2008 to 122%, and poses a big burden. In the UK the household debt is larger than in the USA. And Japan's deficits are over 200% of GDP, creating an overhang that depresses jobs and growth. S. Korea, Taiwan and Australia have benefitted from the recovery since 2008 in China, India and the rest of Asia.

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Keir Starmer of Labour says he stands behind every word in the ad that shows Tories including Sunak are weak in prosecuting crimes against woman and children. Labour says it will halve violence against women and girls. Starmer says- he will "make absolutely zero apologies for being blunt." That Labour will continue to use the Conservatives record on crime as legitimate criticism no matter how squeamish it made some people feel. "For the first time in my lifetime, everywhere you look from the economy to the NHS to the chaos on our streets- we have been set on a path of decline." Starmer said the last decade had seen the UK "become a country where thugs, gangs and monsters mock our justice system and make decent people's lives a misery." Starmer was head of public prosecution in Britain from 2008 to 2013. As early as 2002 he was Queen's Counsel. He was also a human rights adviser for Northern Ireland Policing Board and Association of Chief Police Officers. Starmer cites his work in improvements in Northern Ireland policing as one of the key factors in his decision to pursue a political career. The issue in the ad is a subject in which Starmer has much experience. ...

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The UK Office for National Statistics shows Britain's GDP declined by 0.2% in the last quarter of 2011, compared to the prior quarter. The figures showed a drop in business investment. Polls by ComRes, show 51% of people in Britain see the government austerity cuts as having an adverse effect on the economy, with cuts being larger and coming too quickly.

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David Reilly says the Fed's response to the large volatility in the stock market after the credit downgrade of the U.S. to AA+ makes sense. The Fed's Open Market Committee voted 7-3 on August 9, 2011, to keep interest rates exceptionally low till mid-2013. With credit markets working and the financial system having sufficient liquidity the Fed did not need to take drastic action. Coming only a short period after the end of QE II, a QE III could be seen as an over-reaction. Another reason for the Fed's action- more pressure was needed for the U.S. government and Congress to shoulder responsibility for the economy. In an earlier statement the Fed had pointed out that the Fed by itself can only do so much and this is consistent with that thinking. There are important headwinds from housing, large consumer debt, deficits, and high unemployment that the Fed alluded to in that statement that will take time to reverse with policy action on several fronts over a longer period. In the speech made on June 6, 2011, U.S. Federal Reserve chairman, Ben Bernanke, said "monetary policy cannot be a panacea."...

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The UK's Office of National Statistics said construction output fell by 3.7% in the first quarter of 2012, compared to prior year. Output fell 3%. The revised decline in GDP for the first quarter is 0.3%.

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After suffering a deep depression Greece's economy is in 2019 24% smaller than in 2007. It may not be till 2033 that Greece recovers to its precrisis level GDP, says Oxford Economics, a consulting firm. With the creditors of Greece maintaining a tight control and requiring high taxes and high budget surpluses of 3.5% of GDP excluding interest payments, there is very little financial leeway to reduce taxes as the newly elected government of Mr. Mitsotakis of the New Democracy party has stated. Greece spent 8 years till 2018 under an austerity regime set by the European Union overseen by the IMF with eurozone authorites in return for a financial bailout loan package. Spending cuts and tax increases of 40% of GDP led to drop in GDP of 25%. Greece had misrepresented its official spending numbers to eurozone authorites in the years leading upto the crisis, leading to a lack of sympathy from ordinary German taxpayers for the country's situation. Unlike Portugal which was able to increase exports and find ways to reduce the austerity regime with sympathy from Germany, Greece lags behind in foreign investment and is 72nd in the ease of doing business ranking of the World Bank.  Unemployment is falling very slowly and is at 18%. Greece has returned to bond markets with 10 year bond yields of 10%. Growth is stuck at 2%. Pension spending takes up most of the budget, with little left for investment, education and other needs. No parties talk about cutting pensions anymore as a grandparents pension supports many families. The high taxes have hurt the private sector with the most productive people emigrating to other countries in northern Europe and to other parts of the world. About 500,000 left from 2010 to 2017, most are college graduates, and 64% have postgraduate degrees, a survey shows. Most of them will never return as it  is difficult to live and plan a life on a Greek salary. During the financial crises affecting Latin American countries such as Mexico, Brazil and Argentina for decades, the expression lost decade became common. Some like Argentina had repeat situations of lost decade before recovering. Even the U.S. suffered badly suffering close to a lost decade with faulty mortgages causing a crisis in 2009. Only Greece has proved that this can happen for nearly three decades. Greece's experience also sullied the euro currency's image, that was further damaged by the austerity policies across the eurozone's financially weaker countries. Lack of transparency and insider groups unable to take up the national interest and pursuing narrow interests left Greece in a bad position with little sympathy from stronger northern European countries such as Netherlands, Sweden, Germany. Today's political crisis for the centre right and centre left parties in Germany and other Northern European countries such as Scandinavia, Netherlands, also stems from this flawed entry of countries such as Greece into the eurozone with poorly managed finances. A combination of Tech creating low wage jobs, erosion of working class, failure of centrist parties free market policies to protect the working class, shift of jobs to low wage countries such as China, had already eroded the situation. The humanitarian response to what was both a economic and war related migration from North Africa  to Europe only worsened the image of these parties with working class people alienating them further. The eurozone countries and the European Union are only gradually recovering from these errors.     ...

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Reforms planned by the administration of prime minister, Naoto Kan. Plans to raise the consumption tax, to make changes to social security, and to commit Japan to join the Trans Pacific Partnership. Japan's business community supports the plan to join the free trade community called the Trans Pacific Partnership. This group consists of USA, Australia, New Zealand, Singapore, Malaysia, Peru, Chile. South Korea has signed free trade agreements with the USA and the EU, and Japanese business does not want to be left behind.

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Global austerity measures could lead to a weaker and slower recovery in the absence of other policy actions to tackle the deficits in the medium term.

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This report in The South China Morning Post in Hong Kong, gives insights into the Chinese position in trade war with the U.S.  China has its own internal groups which support China being able to take a leadership role in world affairs. Xi Jinping made giving China a prominent role in the world a feature of his presidency. China  has this internal audience and its own sense that China's resurgence was won with hard work and cooperation, plus dedication of the Chinese people. In the past Japan and South Korea also used state subsidized industries, and subsidies to gain leadership in key business sectors involving high technology. China would see this state subsidies model as its own model of development. From this standpoint the U.S. demands on subsidies as unfair competition could be seen as changing a key part of its economic model.  Asking China to put everything in writing and show tangible proof of enforcement as the U.S. insisted in talks, was too much for the Chinese side. China said trust us to do this, and lift the tariffs based on our verbal assurances. The U.S. having seen decades of no progress on this point, wanted tangible proof before tariffs were lifted. Added to the demands on subsidies were the demands for no more of what the U.S. calls stealing of U.S. technology through forced transfer of technology by U.S. firms as a condition to operate in Chinese markets. With the U.S. lagging in 5G technology and Huawei ahead the issue resonates on the U.S. side. Add to this Mr. Trump's key voter base includes the former Democratic party supporting workers who have shifted to him because of trade agreements and policies of Clinton and Obama that hurt American workers through seemingly endless closure of manufacturing plants from Chinese competition.   ...

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Gordon Brown, former prime minister of Britain from 2007 to 2010, chaired the April 2009 G-20 meeting that came up with ways to tackle the global financial crisis. Brown also led the way by recapitalizing British banks, a step the U.S. followed. He comments on the volatility in financial markets in August 2007 following the S&P credit downgrade of the U.S.. Brown gives an incomplete grade to the tasks the 2009 G-20 set out to accomplish. He points to three goals the G-20 had set in the middle of the financial crisis in April 2009. The first was to prevent a recession from becoming a depression. The other two were to establish a financial stability regime, and a compact for growth. These two became paper promises says Brown. Brown sees the best approach to prevent a lost decade is for U.S. and Europe trading their way out of a downturn as the Asian market absorbs more industrial goods from Europe and the U.S. This includes policies that would keep commodity prices low and ways of coping with currency shocks. Analysts have pointed to an export led recovery as one of the solutions the U.S. was hoping to achieve with a lower value of the dollar. This has had only limited success because of deep structural problems- high consumer indebtedness, bad debt at the banks, weak housing sector following the mortgage crisis, and a rising U.S. deficit- which will take some time to clear. Brown does not come to grips with these underlying imbalances built up during the boom years of the last decade, both in Britain and in the U.S., during which he was the finance minister of Britain....