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The NYT editorial questions the wisdom of letting the banks like JP Morgan Chase and Goldman Sachs repay money to the government to avoid the executive compensation and other government restrictions. THe NYT says it fears that things may unwind, and the banks face more losses on commercial real estate and the effects of rising unemployment would affect economic conditions and the banks balance sheets adversely. The government bailout money was one of several supports that were provided to the banks, and this includes favorable loans fromthe Fed, debt guarantees and incentive payments for modifying mortgages. The whole exercize appears a bit phony as without those supports these repayments would not have been possible. The pay restrictions were a result of excessive compensation that incentified risk taking. The Obama administration's credit reform, says the NYT was an apparent trade-off for the administration's hands off approach to a larger proposed reform that would have allowed bankruptcy judges to help homeowners facing foreclosure. The heavy lobbying by the banks which continues and may not be in the best interests of the country as a whole, and the administration's willingness to let it affect decisionmaking and policy, is an unhealthy sign. ...

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Russia's parliament voted to ratify Russia's entry into the World Trade Organization by a vote of 238 to 208. Opposition was led by the Communist party. The head of the Economic Expert Group in Moscow, Evsey Gurvich, says the new rules are important for Russia as Russia has no rules of the game today, the new rules will enhance competition. President Putin described the change in this way: "We joined the WTO because our economy is highly dependent on the external market in terms of both production and consumption. Excessive protectionism invariably leads to stagnation, low quality and high prices." The result from loss of revenue with lower tariffs is a loss of revenue of $5.7 billion in 2013, and $7.8 billion in 2014, according to Economic Development minister Belousov. The financial crisis of 2008-2009 convinced Putin that Russia had to participate in the decisions about the world economy because of the direct impact this has on Russia.

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In April 2012 the PBOC widened the trading range for the yuan to 1% from 0.5%. In Feb. 2014 the PBOC is expected to widen that trading range to 2%, as part of the PBOC's plan to gradually let the yuan trade freely. Increasing capital flows into China in 2013 and beginning of 2014 have led to appreciation of the yuan. To control one way appreciation the PBOC bought about $45 billion in foreign exchange in Dec. 2013, for the fifth month of net purchases. The yuan was at 6.1248 per dollar on Feb. 26, 2013. It has declined by 1.2% against the dollar from the beginning of 2014 to Feb 26. In 2013 the yuan gained 2.9%. The PBOC policy statements indicate that it sees the yuan at an "equilibrium level," or fair market value. The new policy to decrease its value slightly is designed to widen the trading range close to 2% and make trading a two way bet.

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The S&P is up 1.3% for the 1st quarter of 2014. The Dow Jones Industrial Average declined by 0.7% in the 1st quarter. Tech IPO's, biotechnology stocks, solar energy stocks and junk bonds pulled back in March 2014 after what were seen as excessive gains in trading. In the bond market the Barclays U.S. Aggregate bond index was up by 1.8% in the 1st quarter, as investors responded to dampening economic news and the emerging markets crisis. Analysts point to the 10.6% rise in S&P 500 earnings in the 4th quarter of 2013 over the prior year quarter, as giving earnings a chance to catch up to the higher P/E's and boosting prospects of stocks in the latter part of 2014. S&P 500 stocks trade at 15.2 times the next 12 months expected earnings figures, according to FactSet, compared to 13.2 and13.8 average for the last 5 and 10 years.

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Russia experts Robert Nurick of the Atlantic Council, and Graham Allison of the Belfer Center of International Affairs at Harvard, see a sea change in attitudes to Russia following the interventionist policies of president Putin. The Obama administration will now focus on limiting Russian influence for the remaining two years of Obama's second term. There is a loss of faith in Putin on the part of Obama and close advisors. Russia is seen as a regional power, and the Ukraine crisis is seen as having a serious impact on the Russian economy through decline in trade, foreign investment and capital outflows. Russia is a regional power because it is not the same as the old Soviet Union, it is much smaller, with a declining population, and dependent on oil revenues, and in this sense not the Russia U,S, president Truman and Kennan faced during the Cold War. Obama advisors see Putin's actions as counterproductive for Russia, as the economy is now seen as contracting in 2014, making its actions in Syria, and in Ukraine, unwise foreign policy moves that hurts Russia's economy and future prosperity. Democratically elected leaders in Turkey and Russia with control over the media and shutting down the opposition using control of the judicial process, have shortchanged democratic ideals, and in the process concentrated powers in one leader. This creates risks of arbitrary exercize of power without the checks and balances that are built into a truly functioning democracy, with foreign policy errors eventually leading to a resolution of the conflicts created as these policies are increasingly called into question. Putin and Erdogan were reelected because of economic growth- a contractionary economy or steep declines in growth put everything at risk. A footnote on Kennan, American diplomat and linguist, is appropriate. A quick reading of Wikipedia's excellent account of Kennan will show that Kennan was in favor of a nuanced approach to Russia based on changing conditions. He observed that policies that were seen as anti-Russian actually helped Russian leaders throughout history solidify autocratic type rule, which actually hurts Russia's normal evolution and development. Normal development and evolution similiar to ways Germany and other nations left behind Prussian history and traditions for a open, free society, and in the ways even the U.S. left behind older practices such as slavery in the south and limited representation democracy. In fairness to Kennan it should be said that containment of the Cold War was more a Truman-Acheson doctrine- continued under Eisenhower by Dulles-Nitze, and under Kennedy by Rusk-McNamara- which has roots in Soviet intentions of destabilizing war ravaged western Europe starting with Greece, following similiar efforts in Eastern Europe. Truman was right in aiding Greece, but the U.S. needed to be aware of changing conditions and not take a rigid stance, and get locked into supporting client states just because they were "our guys," a lesson Kennan emphasized throughout his life. Putin and Erdogan use appeals to Russian and Turkish nationalism to improve electoral support and stifle free expression of ideas necessary for growth in any society. This also provides a way to have a discussion with our German friends on engagement and economic relationships, without the rigid outlook of a Wilsonian or Acheson-Dulles kind. ...

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Munich Security Conference is being organized by Christoph Heusgen, the conference chair, who was an adviser to Angela Merkel and previous German  Representative at the United Nations. It will be held Feb 14-16 at the Bayerischer Hof hotel in Munich. JD Vance will be attending for the US with alarge delegation including Keith Kellogg US DJT envoy to Ukraine and Zelensky of Ukraine. German federal elections are on Feb. 23, 2025 with CDU's Merz holding a lead. Pete Hegseth Defense Secretary is not attending the conference. Hegseth has expressed views skeptical about Ukraine. Mark Rutte, the former Dutch PM is attending as Secretary General of NATO. The Munich Security Conference Report cites DJT and says- "Indeed, the notion of 'resource scarcity' has become a central premise of Republican foreign policy thinking." Germany barely spends 2% on defense. DJT wants to see 5%. DJT's comments are published in the Munich Security Report- "We were being ripped off by European nations both on trade and on NATO." "If you don't pay, we're not going to protect you." ...

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Bret Stephens articulates an idea presented earlier by Robert Kagan, Walter Mead and others, about the world of western liberal democracies needing the U.S. as a leader. He points out that the policies of U.S. president Bush committed the U.S. to activist policies worldwide following 9/11 terrorist attacks, followed by a backlash in the form of president Obama's policies that have reversed these policies to the other extreme leaving entire regional neighborhoods such as the Middle East to unravel, and undoing the very gains made under Bush at so much cost. Stephens says the "broken windows" theory for keeping streets in cities safe -by regular patrolling and making sure broken windows or other appearences of disorder and breakdown do not send the wrong signals to passersby and those with inclination to break the law- has application and lessons for America in the regional neighborhoods of Asia and Eastern Europe.

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The Bureau of National Labor Statistics in China says China's GDP growth for 4th quarter 2008 was 6.8%. Private economists expect growth to slow to something like 5% in 2009 as the full brunt of the housing downturn and the drop in exports manufacturing is felt this year. Housing and exports were the two engines that helped China to reach 12-13% growth rates for 2007 and 2008. 2008 was also the year of the Olympics, and it now appears that by excessive growth and production capacity in many industries and increasing exports China may have created severe imbalances in the world economy. One way this happened is through the huge and ever increasing trade deficits with the US. By reinvesting the money in US Treasurys, China made a huge wave of liquidity and cheap credit possible in the US creating a bubble economy. The other is through the inflated demand in commodities like oil from the Middle East and countries like Russia, and demand for iron ore and other metal commodities from places like Brazil and Australia. This put upward pressure on the prices of commodities, creating a bubble in the price of oil. With the bursting of these bubbles the economies of Russia, Brazil and Australia and other countries are in a deep nosedive. The effects have operated in myriad ways, including a circular effect of the bursting of the credit bubble in the US leading to a collapse of demand in the US market for Chinese goods. In turn the collapse in demand for German and Japanese goods in China with declining demand, as the effects moved through the channels of the international trading system. The decline in Chinese demand also affects the US ability to make a export driven recovery....

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The limited options the US has to get China to appreciate the value of its currency, the yuan. Some of the options depend on getting the IMF or the WTO to prod the Chinese, others depend on a Plaza type Accord.

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Two realities are affecting exchanges. One is that trading commodities and derivatives is a $600 trillion business worldwide and is more profitable than trading in corporate shares. This shows in the value of ICE and NYSE in the stock market. In April 2011 ICE was valued at $1.5 billion less than NYSE, in Dec 2012 ICE was valued at $4 billion more that NYSE as it makes its bid to merge with NYSE. The other is that the Dodd-Frank financial system overhaul in the U.S. after the 2008 financial crisis has created a new model for derivatives trading providing advantages to regulated electronic exchanges and clearinghouses that handle derivatives trades with transparency. Jeffrey Sprecher, CEO of ICE, the IntercontinentalExchange, which handles derivatives trading through its clearinghouse operations, says: "For the past decade, our solutions made our markets increasingly electronic and increasingly clear. Today, financial reform is imposing that vision on many markets through a rule-making process." Bart Chilton, a member of the CFTC which regulates derivatives trading says Dodd-Frank legislation supports the business model of derivatives exchanges. This is especially true for Mr Sprecher and ICE. Sprecher has a good relationship with regulators with whom he talks directly, and is supportive of CFTC efforts to close loopholes as he is confident he can make money as long as the rules are clear. His confidence stems from his model which is technology based from day one, with its own clearinghouse and technology based transparency of the ICE data vault, information it shares with regulators. Sprecher stumbled upon this opportunity. He is an executive in the power industry. Working on developing power plants Sprecher found it was difficult for power firms to hedge investments in energy with financial contracts because there was no well organized, clear and transparent market for such contracts. This he set out to do by buying a little know exchange in Atlanta for buying and selling electricity, later getting the the backing of BP, and investment banks such as Goldman Sachs and Morgan Stanley, to form ICE in 2000. Banks liked the idea of a having an organized clear place to buy and sell derivatives in oil and other commodities, and having an alternative to the Chicago Mercantile Exchange in futures trading. Swaps trading under Dodd Frank supervision is converting to old style futures contracts where there is less competition for ICE's futures trading creating new opportunity. ICE setup its own clearinghouse, and acquired the Clearing Corporation, which was the base for a derivative called credit-default swap. To make derivatives trading transparent and reduce systemic risk Dodd-Frank legislation required exchanges to provide information to data warehouses which would then share the information with regulators. ICE setup its own data warehouse to do this called ICE Trade Vault. Dood-Frank rules envisioned the formation of clearinghouses and exchange such a ICE to provide a clear process, transparency and reduce systemic risk in derivatives trading. ICE under Sprecher by making this vision its own and using technology has created new opportunity. ...

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The Europeans led by France and Germany demand stricter regulation and a financial regulatory system that oversees the entire financial system, and oversees all the larger countries. The US in contrast wants to see a lighter regulatory system, and lighter regulation of parts of the financial system like hedge funds. For the USA where the crisis originated, the emphasis is on larger stimulus spending. For the Europeans which have a larger safety net that they would like to see considered as part of their stimulus- and their social arrangement such as reduced hours in Germany to avoid layoffs, and the presence of a large public sector in France that is about 52% of GDP- the situation as they see it does not require breaking the EU's committment to control large deficits. The cultural and historical roots are also different. Germany was hit by hyperinflation in the period between the two wars, and there is thought there that this helped the rise of demagogic leaders and the collapse of democracy there. At that time the issue was war reparations that Germany found difficult to absorb in an economy devastated by the first war, which strained German finances. France and Germany also have no foreclosure crisis, and car sales and consumer spending are not in the deep decline that is seen in the USA. In fact car sales have increased in the two countries with the refunds for scrapping old vehicles, with no such plan in place in the USA. Making there is a credible position on the European side. Germany does see itself hit by the collapse in international trade. Germany and France face the prospect of helping their banking systems deal with the large bad loan situation facing them in Eastern Europe. At the same time Germany and France want to save some firepower for coming to the aid of key parts of the European community like Spain, Greece, and Ireland, which are facing a worsening crisis. In short both sides have credible positions, and some form of accomodation as events unfold may be a better desired outcome than some unified outcome. And little has been said of the position of the other countries in the G20, the emerging countries like Brazil, India, China, Russia, Indonesia, Argentina and others, and the position of the World Bank speaking for the poorest countries. These countries may favor stronger stimulus, and would favor the stricter regulation and supervision of global financial systems favored by the Europeans. This is because they may rightly feel that the messups in the global financial system have stolen their chance, at just the point where they were turning the corner in their efforts at bringing better standards of living to their peoples....

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Analysts fear an oil shock in 2012 similiar to that in 2008. There is similiarity in the situation now and in 2008- as in 2008, the surge in oil prices comes at a time of higher tensions with Iran and shrinking spare capacity. Spare capacity is at 2.5 million barrels a day on average for January and February 2012, according to the Energy Information Administration. This compares with 3.7 millon barrels a day for the same period in 2011. Part of the reason is that global oil demand is increasing in 2012 by 1 million barrels a day, to 89 million barrels a day. Technical and political problems have shutdown another 750,000 barrels a day. The problems begin to kick in during the second half of 2012. The U.S. ban on dealing with the Iranian central bank for oil trades starts in June 2012. According to the International Energy Agency, the EU embargo and U.S. sanctions will take 1 million barrels a day of Iranian crude out of the market. The result will be that demand exceeds supply by the third quarter by 1.1 million barrels a day, according to the U.S. Energy Information Administration. Use of existing reserves in Europe, the U.S. and other countries will make up the gap. The effect will be to put pressure on oil prices. May Brent crude on the ICE Futures Europe exchange was up to $125.81 a barrel, on March 16, 2012, and prices for April delivery were at $107.06 a barrel on the New York Mercantile Exchange....

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This Journal editorial which advises patience, comes on the day after the U.S. Senate voted 79-19 to move forward with a bill on sanctions against China for undervaluation of the yuan. The editorial says the Chinese currency has come down 30% since 2005, and inflation in China is reducing the advantage China gains by keeping its currency valuation low. Over time the editorial suggests China will see a decline in trade surpluses similiar to the experience with Japan, and emphasizes the importance of the two leading trading nations U.S. and Britain not repeating the experience of the 1930's with the Smoot-Hawley retaliatory tariffs legislation. The Journal quotes American economic historian Charles Kindleberger: "When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all."

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Competing interests of the U.S. and China on issues such as jobs, currency and trade. Chinese stalling over currency revaluation.

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The process leading to the credit rating downgrade for the U.S., including S&P's $2 trillion error in estimating the total U.S. deficit in the next ten years, is causing both Republicans and Democrats to agree on the need for greater public scrutiny of the agencies. Congressmen from both parties in Congress now agree that ratings firms need to play a smaller role in the financial system than they have in the past. It now appears certain that there is no chance that Congress will allow a change in the Dodd-Frank legislation provision that requires regulators to take out references to ratings from their rules. Banking trade groups had been pushing for a change in the provision. Karen Petrou of advisory firm Federal Financial Analytics says this event will also make U.S. regulators look for ways in which changes can be made to international financial agreements that require credit ratings. This includes the capital and liquidity requirements laid out by the Basel Committee. The credit ratings firms say they support efforts to decrease reliance on their ratings in the rules....

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Yale Prof. Fair says that evidence from his model shows the yuan appreciation having a positive effect on American jobs looks better than it really is. Two negative effects are in play. The first is that Chinese output decreases will have an effect on Chinese imports that will affect US exports. And the other effect that will come into play is the increase in US prices. His conclusion is that it unlikely we will see a large increase in American jobs from the appreciation of China's currency.

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Hong Kong street protests take place to oppose a new law that allows extradition from Hong Kong to mainland China. Carrie Lam who heads the government in Hong Kong continues to support the legislation.

This happens as China and the U.S. are engaged in a trade war with tit for tat tariffs and the U.S. takes action to prevent flow of sensitive technology to China from American companies. The U.S. and China are increasingly at odds in trade and business policies, and the U.S. sees China as a rival to its post war position in Asia, and in technological leadership. China sees human rights in the context of its own history and struggles with colonial powers, and efforts to stall its modernization efforts in the last 3 decades.

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87% of the American people support sending back to their countries illegal entry migrants who have committed crimes or offenses in the US in a Pew Research poll and similar in a NYTimes poll. How many of these countries in Latin America allow illegal entry without visas? None. WSJ reports Colombia turns back 2 C-17 military flights Mexico 1 in midair on Jan 27, 2025. This led to a diplomatic standoff with DJT imposing 25% tariffs on increasing in a week to 50% on imports from Colombia entering the US. Colombia agreed to take back the immigrants after the US tariffs.  In 2024 Colombia accepted 124 deportation flights into the country from the US. Yet president Petro objected to these flights on military aircraft and responded on X. DJT responded on Truth Social: "I was just informed that two repatriation flights from the United States, with a large number of Illegal Criminals, were not allowed to land in Colombia. This order was given by Colombia's Socialist President Gustavo Petro, who is already very unpopular amongst his people." DJT then instructed for 25% tariff on Colombian imports into the US which would be raised to 50% if Colombia did not accept the flights in 1 week. DJT said this is just the beginning and also imposed a travel ban to the US. DJT stated this was a threat to the national security of the US. Colombia then accepted the military flights.  Trade two way is $54 billion and Colombia exports coffee, sugar and oil. Colombia imports about $25 billion and exports about $29 billion to the US. Oil exports from Colombia to US are $6 billion, flowers $1.2 billion and coffee $1.6 billion.  ...

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Inflation in China and rising wages are pushing up costs for American manufacturers. The pressure on China, most recently in Congress, is helping to push up the value of the yuan. This combined trend is making it attractive for some manufacturers to bring factories home to the U.S. A trend in the U.S. towards non-unionized labor and the new trend to a two-tier wage level- with lower wages for entry level workers- and the shedding of legacy health care costs, is creating a more cost competitive labor force in the U.S. This extends from older industries such as furniture and auto components to newer industries and technology. The new factories setup in the U.S. use technologies that require a smaller number of workers, in most cases less than half the number of workers that were employed earlier. This adds another element in cost efficiency, though it means fewer jobs are created with new plants.

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Krugman says China's inflation is raising labor costs in China, and in this way gradually reducing the undervaluation of the yuan vs the dollar. But he cautions this would take a long time, 4-5 years. The U.S. faces the costs of high unemployment close to 10% today, and this requires serious efforts now to reduce the undervaluation. It alone will not solve America's problems. It is one of a number of actions that need to be taken and not put off again.

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Powell at the Fed, the US central bank, and DJT have different views on reducing interest rates. Most of the business community and heads of banks see it as essential that the Fed be able to decide independently when to lower interest rates. Jay Powell was selected by DJT in the first term and Biden continued with Jay Powell. Powell carefully monitors the economy, the cost of living, supply chain inflation, jobs reports, and the international situation, to come up with his view, which is that inflation is moderating and job situation and the economy are good, so that the Fed does not need to take action at this time.  In this situation where the president wants to see lower interest rates to lower the interest burden on government borrowings for the larger defense budget and other priorities., including trade action, Bessent has stepped in. His advice to the president as he did earlier on tariffs is to show flexibility. The president listens.  Earlier with Liberation Day tariffs Bessent advised DJT to give financial markets confidence in the new policies by a willingness to reduce them or pause them. ...