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Another useful piece giving insights to the way China has approached the economic development tasks and what this means for the future. China's development is very capital intensive because the cost of capital is really low. Inputs like land and energy costs are also kept low by the government. Cost of labor is low and this has resulted in the share of wages as a percentage of GDP to drop from 53% in 1998 to 41% in 2005 and it is dropping further. In America wages to GDP is 56% and includes investment income which in China is lessthan 2% but much larger in the USA. The pool of surplus labor in China does work to depress wages. The percentage of consumption to GDP in China has fallen from 47% in early 1990's to 36% in 2006, the lowest of the large economies. But this does not reflect a higher savings rate. In fact the household savings rate also has fallen as a percentage of GDP. According to World Bank's Beijing office this has fallen from 21% in mid 1990's to 15% in 2006, relative to personal disposable income it has fallen from 30% to 25%. This is lower than India's household savings rate. So what is going on. The Economist points to the lower share of wages as a percentage of GDP because the large pool of surplus labor has depressed wages from where they might otherwise be so that consumption is not where it could or should be for China to move away from manufacturing led export driven economy to one that depends on the domestic market for growth. Higher consumption and a bigger domestic market would make it easier to sustain strengthening of its currency, a key demand of western countries. This would also provide a fair deal to millions of migrant workers and reduce labor unrest. It would also reduce pollution as the economy would not be focussed on production at all costs. It appears that the existing model has worked well for China in bringing millions of people from the villages into cities and growing manufacturing industries, and in urbanizing China. But China is so large that there are millions another 200 million who would migrate from villages and rural areas into cities as migrant labor to 2020 according to what the Government envisions ( see article in this issue of the Economist "Barefoot Doctors"). But this model needs fixing or changing as the pollution costs are already severe and can prove catastrophic if continued, and the western countries are demanding strengthening of the yuan to correct imbalances in the trade deficits as a result of this model of development focussed on manufacturing and export industries and short on consumption in the domestic market enough to drive the economy. ...

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The FSB, or Federal Security Service, and the power structure under president Putin, that includes former KGB or security and intelligence officers from the soviet era. In effect the power vacuum created after soviet collapse was filled by a power grab by individuals and interests able to do so from the soviet era. These used the security people from the soviet era. Then came Putin and brought together most of the former security and intelligence officers from the soviet era that he was closely associated with especially those he knew from his St. Petersburg days under the FSB, and filled the power vacuum left by the exit of the socalled oligarchs or those who had captured chunks of the economic anf business interests. These economic and business interests were now brought back into government control.to serve what the former soviet era officials and officers see as the interest of the country and the public. See the account in the Economist about this August 25, 2007, which describes the origins and influence of the FSB. The above account is of differences among the different security officers, as some of them are engaged in business and economic interests that they feel are threatened. ...

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Awareness about climate change is increasing. A poll in 2017 shows 61% of people in 38 countries seeing it as a big threat. Only terrorists inspired bigger fear. Even with the U.S. withdrawal from the climate change agreement many cities and states in the U.S. including California and New York are committed to the goals set in the Paris Accords. China is making a shift away from coal and fossil fuels. Yet the huge demands in Asia, particularly India as it shifts from a rural to an urbanized economy, mean that the shift away from fossil fuels is going to be very difficult. In the last decade 2006-2016 energy demand in Asia increased by 40%, according to the Economist, oil and coal use increased by about 3% a year and natural gas at 5.2% a year. Solar energy and wind power use is increasing and solar becoming cost efficient. Yet Asia still depends on fossil fuels. Even the use of electric cars in China as it pushes for higher numbers of electric vehicles means use of energy coming from a electricity grid powered two thirds by coal, producing more carbon dioxide than some very efficient gasoline driven car models. There are short term costs in the shift from coal but this comes with a better cleaner air demanded by urban residents, and less costs in health. In certain countries like India the costs are to be balanced with the need to tackle rural poverty.   ...

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The shocks to the UK banking system resumed Monday with the announcement on January 19 that RBS faced losses of a huge magnitude, of 28 billion pounds for 2008 with fresh losses in 2009. RBS shares went down 66%, and at closing on on January 21, 2009, were at 12.5 pence. Lloyds Banking Group shares are at 45.1 pence, at 66 pence. Barclays which has avoided taking government money saw its shares drop 25% on January 16. The government is hoping that its plan to provide insurance that would limit bank's losses on bad loans and investments will work, but uncertainty on how the insurance will be priced is raising doubts about the plan's effectiveness to restore confidence. Especially when RBS is collapsing. The government owns 70% of RBS and 43% of Lloyds. The next step would be nationalization of the banks. According to WSJ nationalization would mean that taxpayers have new liabilities of about $3 trillion or $4 trillion, an amount far exceeding the UK's entire annual economic output.

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Hernando De Soto, a prominent economist, heads the Institute for Liberty and Democracy. He has an intimate knowledge of the workings of the Egyptian economy, and describes the socio-economic marginalization of large parts of Egyptian society as Economic Apartheid. Simply put Egypt has fallen behind the times, way behind the economic progress in large developing countries.The Institute was hired by the Egyptian government in 1997, with the financial support of the US Agency for International Development, to look into what reforms were needed. It presented its 1000 page report in 2004- after years of work involving 120 Egyptian and Peruvian technicians, participation of 300 local leaders and interviews with thousands of ordinary people- to the Egyptian cabinet. The then Finance Minister Hassanein supported it and the cabinet approved it. What followed was a cabinet shakeup, and blocking of any reforms by hidden interests wanting to protect the status quo. De Soto's objective was to find out how many people were marginalized in Egypt, and how much of the economy operated outside the legal system- small business that did not have the protection of property rights or access to normal business tools and credit, that makes businesses grow. He found that 9.6 million people were employed in this sector operating "extralegally" with no protections. This being the largest sector of employment in Egypt. His action plan was intended to remove the legal impediments to these people and businesses urban and rural, so that they could grow. He says the value of these businesses outside legal protections is $248 billion or 30 times larger than the total value on the Cairo stock exchange, and 55 times greater than all the foreign direct investment in Egypt since 1800 including Suez Canal and Aswan Dam. De Soto says that because of burdensome, discriminatory and bad laws it takes 500 days to open a small bakery, getting a legal title on a vacant piece of land would take 10 years of red tape. This barrier of bad laws, poorly trained bureaucrats, inertia of the status quo, prevents people from legalizing their property and business. As a result whereas one of these types of small businesses is now India's largest company called Reliance Industries, and another Infosys is the second largest software company, most Egyptian enterprises are stuck being small and relatively poor, and do not generate jobs for the demographic surge of young people. De Soto's point is that Egypt will need good leadership to pull off this task of legal reform, and democracy alone will not be enough. Empowering the large majority of the Egyptian people operating outside the legal protections will mean giving property rights for $400 billion of assets, De Soto says. And this would unlock an amount of capital hundreds of times larger than what foreign direct investment and aid has brought to the country....

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The WTO setimates that global merchandise trade will decline by 9% in 2009. Betweeen 1990 and 2006 these trade flows increased by 6% a year, outstripping the growth of world output which remained at 3%. See the chart showing GDP and world trade growth year over year. Because of vertical supply chains products were shipped across borders and imported back into the country that exported a product, till the product was finally assembled in some third country like Mexico, in the case of automobiles. This interlinking of countries worsens the effect in adownturn, by bringing output down in many countries at once in any particular industry with these supply chains. And conversely positive effects are exaggerated in a upturn or boom cycle like that which was witnessed in recent decades. It makes a 1930's like situation less likely, where trade dropped by over 25%, because now all countries are affected, America's car industry exports as well as imports the same item as it is processed in several countries, and imported to the USA as a semifinished product and then assembeled in Mexico, as one example. Leaders of the G-20 agreed to fight protectionism athe the London meeting in April 2009. Is this enough? Should the Doha Round of talks be resumed? Arvind Subramanium of the Peterson Institute, and Aaditya Mattoo of the World Bank, argue that the Doha Round is too ambiious, as it tries to open markets for rich countries manufactured goods just when the crisis has hit developing countries making this ahard sell. At the same time DOha Round does not exclude Buy AMerica provisions and subsidies to fialing industries like the auto industry support measures taken by both the EU countries and the USA. So they sugggest anew "crisis round" of talks to replace Doha, and this makes sense as the items on the agenda can now be tailored to the pressing needs of a different time from when Doha round was conceived, and thus more realistic in its approach. And in the meantime all WTO members would commit to astandstill and take no measures that are protectionist. The Economist says the new "crisis round" would not do any better as there may not be the same level of interest in another round. It suggests that agood start would be for the leaders of the G-20 to be specificabout what protectionist measures it sees as unproductive and unhelpful in containing this crisis. Draw up a comprehensive list of protectionist measures that go beyond tariffs and export subsidies. The WTO would then be asked to monitor the countries based on this list and publish alist of offending countries, letting embarassment of these countries act as a kind of policing. And in addition an agreement should be reached on coordinating fiscal policy, so that it would reduce fears of leakages abroad. ...

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Olivier Blanchard, chief economist of the IMF says that as government borrowing around the world surges, interest rates will go up. Governments borrow by selling bonds to investors, and to attract investors the government competes with stock and corporate bond markets for investor's money, leading to rising yields for investors. As the confidence has returned to corporate bond markets this is already happening. From the end of 2008. the yield on the benchmark 10 year Treasury note has increased by one and ahalf percentage points, rising to 3.54% from 2%, the sharpest upward movement in 15 years. In Germany the yield on German 10 year bonds has also risen, rising to 3.57% from 2.93%. Similiarly British bond yields have risen to 3.78% from 3.41%. Congressional Budget Office estimates are that net government debt for the USA will rise to 65% of GDP at the end of fiscal 2010, from 41% at the end of fiscal 2008. In 2009 and 2010 the US government will sell $5 trillion in new debt, according to Citigroup. A decade from now the government's outstanding debt could equal 82% of GDP, or about $17 trillion. Every one point rise in interest rates costs the Treasury $50 billion annually over a few years, and Kenneth Rogoff estimates that this could reach $170 billion annually if the average yield on 10 year Treasury note goes up to 4.7%, as the Congressional Budget Office estimates. This will dampen the effects of stimulus spending. It is a big issue says Rogoff. A year ago under old policy and assumptions before the financial crisis the Congressional Budget Office projected outstanding debt at $5.3 trillion in 10 years. Now the estimate is $17 trillion, which is triple the old number and an increase of $11 trillion. A recovering economy would make these numbers less relevant. But with struggling industries like autos and banks needing more help from the government, and with consumers having to reduce a mountain of debt, a weak economy for a long time and small growth for a decade would make this a story that won't go away. Rogoff says its like what happened to the subprime borrowers, people assuming that the funding is always going to be there. In 2009 and 2010 Citigroup says, the Euro zone countries will sell nearly 1.6 trillion euros or $2.6 trillion in new debt, and Britain will offer 490 billion pounds or $799 billion in new debt. Over the next decade this would slow Europe's recovery and prolong the downturn. Britain faces a bigger problem in the near term as Britain's governmetn debt equals 55% of GDP, and Standard and Poors estimates it could approach 100% by 2013. South America and Eastern Europe will also face the situation of rising rates. Asian countries like China with lower levels of debt are in a better situation, IMF's Blanchard says....

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Everything is moving in the wrong direction in terms of sustaining growth according to Nicholas Lardy of the Peterson Institute of International Economics. China's exports dependent economy will see a serious downturn as export markets in the USA and Europe dry up in 2009 as the deep recession takes shape. This could lead to growth rates going down to 6-7%.Other areas that propelled Chinese growth areinfrastructure investment and housing construction. Worried about rising housing prices the government last year out in place measures to dampen housing purchases, with tighter restrictions on second mortgages by banks and tighter lending for first mortgages. With house prices flat or falling now in Chinese cities many buyers are holding off for a better price in the future. Slower growth in housing will mean less demand for migrant labor and less demand for imports of cement and steel from other countries. China's lower imports of machinery, machine tools and heavy equipment for industry and infrastructure building will affect especially the German and Japanese economies. Germany has become the world's largest exporting nation in part by selling industrial equipment to China, its second most important market for machinery. In the first 7 months of 2008 these exports were still expanding at 20%. But these exports are likley now expanding at a rate of 10% and may slip to single digit growth in 2009, according to Olaf Wortmann, an economist with the VDMA engineering association. A good example of what is happening is the German manufacturers of textile machinery which derive 95% of their sales from overseas and mostly from China. These orders were down 42% in the first 7 months of 2008. With declining consumer demand in the US demand from China's exporting factories is declining. These figures and the accelerating slowdown in the US consumer markets suggest there will be a serious downturn in Chinese exports of textiles and other goods. The impact on German growth rates which are going below 2% in 2008 is to lead to 0% or declining growth in 2009. A similiar situation is ocurring for imports of heavy equipment from Japan. Orders of Japanese machine tools by China declined by 25% in September according to the Japan Machine Tool Builder's Association and Komatsu's shares have declined by 70% since their June peak. Part of the Chinese impact on global growth is mitigated by the fact that at market exchange rates China's economy is still only 6% of the world economy at market exchange rates and 10% at purchasing power parity. Chinese domestic consumer demand is $1.2 trillion for 2007 compared to the USA's $9.7 trillion, which also suggests how heavily China was dependent on the American consumer and how the missing American consumer will be hard to replace and the growth rates of 10-12% may be a thing of the past, with 6-7% being more realistic. ...

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The euro approaches parity with the U.S. dollar by November 2016, with the surge in the dollar following the U.S. presidential election of 2016. The euro closed at $1.058 on Nov 17, 2016. It was down 4% following the election. The euro was down in early 2015. This time it is chiefly down against the dollar. This time both monetary and fiscal policy is expected to diverge with the EU, and inflation expectations are up in the U.S. Analysts expect parity to be reached in 2017. 

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Schlesinger says Kuroda now appears to be behind the curve when he announced quantitative easing measures in Japan to fight deflation tendencies. With Japan in recession stronger action may be needed.

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U.S. oil exports are expected to average 1 million barrels a day for all of 2017. In 2016 in some months the average was 1 million barrels a day. U.S. oil exports make up 1% of global oil volumes, yet the added inventory has helped keep prices in the range of $46  to $55 a barrel in mid 2017. American crude is at a $2.50 discount over the Brent crude benchmark, making it profitable to export to far away locations. Back-haul economics also helps as tankers coming back from the middle east can now take crude back with a stop in Europe. Oil exports go to China and Europe. Production declines in China have led to China importing from the U.S.

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Samuelson says the bill in the U.S. Senate is symbolic because it allows companies to cite the undervalued renminbi as an illegal subsidy and have the Commerce Department impose duties on Chinese products. This would have to be done on a case by case basis, making it largely ineffective in dealing with the large trade deficit with China. He also cites the differences among economists that show a range between 1 million and 2.8 million jobs lost. The 2.8 million jobs estimate is from the Economic Policy Institute for the period 2001-2010. The 1 million is an estimate for 1990-2007, which estimates a loss of quarter of all manufacturing jobs. By WTO rules subsidies that are not targeted at specific industries or firms are allowed, according to lawyers. Which means China could appeal to the WTO, and impose retaliatory duties. In the meantime the trade deficit with China, with imports of $364 billion in 2010, and $86 billion in exports, would remain largely unaffected. This is the reason some Senators, including Republican Orrin Hatch (Utah), see this move as political posturing by President Obama and the Democrats, because the administration has no new proposals to address the trade deficit and the gradual erosion of America's manufacturing base. Samuelson cites Arvind Subramanium of the Peterson Institute, and his book "Eclipse: Living in the Shadow of China's Economic Dominance." Subramanium says what is at stake is not a temporary imbalance in world trade a happened with Japan in the 1980's, but a gradual shift to a system of trade in which China has preferential access to raw materials (oil, grain, minerals), subsidizes exports in new industries as it moves upscale from shoes and textiles to automobiles, aircraft and alternative energy, and changes the very nature of the global trading system as it becomes the dominant trading nation in the world. By Subramanium's estimate China's share of global trade increased from 1.6% to 9.8% in the 2 decades from 1990 to 2010. In two more decades he estimates China could increase this to 15% of global trade, significantly larger than the U.S. In a response to Congressmen, businessmen and policymakers wary of starting a trade war, Samuelson says there already is a trade war as a "fixed" system of trade undermines America's manufacturing and industrial base. The only difference being that today only one side is fighting that war, and America is slow to grasp the implications or its policymakers are clueless how to respond....

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There is overwhelming evidence of atrend to lower cost value oriented purchansing habits, and emphasis on essential purchases, that companies should pay attention to. Out of 46 economists surveyed by WSJ 43 agree that a fundamental change is underway, that will last for years, into the next decade and beyond, in the way consumers in the USA save and spend. And a couple of fundamental facts which won't just go away, are shaping things this way. American households doubled their outstanding debt between 2000 and 2007, to $13.8 trillion. In 2008 total debt went down for the first time since World War II. $13 trillion in wealth has been lost since the recession began. And this number will grow as the economy goes deeper into this downturn. The confidence in the capitalist system has been shaken. People want to get debt free. AlixPartners, found in asurvey, that Americans plan to save 14% of total earnings once this downturn ends. Two thirds of those surveyed say they plan to buy less in the future, and more than halfplan to buy less expensive things. There is a fundamental mood change from those who have been interviewed like Mr Bailey here in Boise, Idaho, a small business owner stuck with a lot of debt and no income. His goal: to get rid of debt and concentrate on making just enough money to enjoy myself and my family, and not trying to get rich anymore. So he goes out and sells his SUV to eliminate a $800 monthly payment and replaces it with a used minivan paid for in cash, he sells off a vacation home he built, sells another home to renters, cuts his staff to a handful. Many like Mr Bailey remember how their parents lived and heard the stories passed down from parents who lived through frugal times in the 40's and 50's, when America was still largely rural and peopled by families with modest incomes especially in most of the south and west. Its this change and shift in attitude and mindset from wanting to be rich to just wanting to be happy for themselves and their families, valuing the really important things, not piling up material acquisitions that the latest advertising is getting them to buy, in taking pride like their fathers and mothers before them in thrifty behaviours and saving, that may lead to a very different economy than seen before. Something like this is happening in Germany and Japan where consumers tend to save. ...

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The corn crop estimate for 2008 by USDA economists is 13.1 billon bushels vs 12.1 in 2007 a drop of 7.3%. Ethanol industry will use 4 billion bushels of this from the crop collected in autumn. This corn crop will be used by food companies into late 2009 for everything fom feeding cattle and pigs and dairy cows to making soft drinks and breakfast cereal and a host of other fod products. USDA forecasts a price of $5.50 per bushel for 2008 compared to $4.40 for 2007. USDA expects Consumer Price Index for food to go up 5% in 2008. Other experts expect it to be higher and go into 2009. At the same time the FDA forecasts that for grain the world will produce more grain in 2008 than it will use helping build stockpiles for wheat and rice. Reason for this is that governments are responding to current shortages by attracting more investment and freeing up more land for food production. In the US land will shift from corn and cotton to more profitable crops like wheat and soyabeans.

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Treasury Secretary Paulson meets Germany's Economics minister and the President of the European Central Bank Mr Trichet as there are indications that the situation in Europe is not looking much better. An influential survey of purchasing managers points out that manufacturing activity shrank in the 15 country euro region in June. The situation in Europe is uneven as some countries Like Spain and Ireland are seeing sharp declines in economic activity, whereas Germany is doing much better. German unemployment dropped to 7.8% the lowest it has been since 1992. Manufacturing activity contracted in June in Fance, Italy and Austria. In the midst of this Claude Trichet has to make a decision about inflation, the ECB's target inflation is 2%, and inflation in the euro region is about 4% with higher food and energy costs. Economists expect the ECB to raise rates to 4.25% this week. This will widen the difference between USA interest rates at 2% and Euro region rates at 4.25% and also affect the USA dollar....

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Bank of Spain Gov. Miguel Angel Fernandez Ordonez said Spain finds itself in an "exceptional situation," as it goes "back into recession," and only exports acting to contribute to gains in GDP.

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Brian Sack joined the New York Fed in 2009 and became the head of the markets group. In this position he managed the expansion of the Fed's securities portfolio first in the early days of the fianncial crisis, and then under QE 1 and Operation Twist to its current level of $2.6 trillion. He has a PhD. from MIT and has co-authored papers with Fed chairman Ben Bernanke. Sacks is now leaving this position at the Fed.

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France's finance minister Christine Lagarde met with Brazil's finance minister, Guido Mantega, in Brasilia. She gave assurances that as head of the IMF she would go ahead with efforts to give emerging market countries such as China, India and Brazil a greater say in the running of the IMF. She said she would speed up the reviews- that now take place only every five years -on recalculating the weight member countries have in the management of the IMF.