It was going to happen sooner or later. Maybe the meltdown in the world of finance hastened the trillion dollar deficit, though US governments have been trying hard to breach that milestone. Three months before the end of this financial year it’s happened.
Maybe it’s not such a frightening number in the context of the bailouts – already in the multi-trillions in the US and in Europe. But the symptoms remain a cause for concern – spending beyond the ability to repay. And passing the trillion dollar milestone has drawn attention to this issue. It has highlighted the concern of dollar borrowers that the global reserve currency may be losing its lustre. And rightly so. But as with other machinations in the world of money it is not in the players’ interest that the game unwinds too quickly. The dollar will remain a reserve currency for the time being, but it is prudent to diversify exposure, especially for long term holdings.
BBC: US budget deficit at $1 trillion
Economist: China and the dollar: Yuan small step – The dollar’s role as the world’s main reserve currency is being challenged
Fortune’s gauge: 7 metrics that indicate the trend in the US economy. Data in pretty pictures.
I don’t think that the economic contraction has ended yet, but there are signs of a bottoming out of some markets. The US market has been cleaning itself out for six months, though moral hazard remains as do some big skeletons (like the Madoff, Stanford …). The Fed Chairman is concerned about stagflation too. But the market is low and maybe only has another 10% to fall – DJIA bottoming around 6,000.
See this chart from JPMorgan. Thomas Lee, their US Equity Strategist writes: “Believe or not, retracing 12-year lows for the Dow is an incredibly rare event. Besides the retest of 1997 lows seen on Monday, this has only happened two other times, on April 8, 1932, and December 6, 1974.”
China’s National People’s Congress opened today with a speech by Premier Wen Jiabao.
While these presentations are usually quite unrevealing and perhaps a bit propagandist, some interesting things were said. There will be a continued push to stimulate the economy including a € 0.5 trillion investment package. But part of the bdget includes an increase of 14% in military spending. These both aim to achieve social stability – by creating jobs and ensuring that there is the control to manage unrest if things get bad.
There were also statements made about allowing inefficient businesses to fail, about reducing the country’s reliance on low-cost manufacturing of the basics, and about wanting to stimulate consumer spending. These objectives will continue to make the Chinese economy more efficient and productive.
While China is facing difficulties, their financial condition is far stronger than that of Western economies. Their deficit is modest in comparison. And it is likely that their economy will continue to grow, albeit at a reduced rate. China remains an attractive place to invest.
BBC report on opening of NPC
Robert Peston’s blog on China.
Xinhua report on opening of NPC
A cease fire in Gaza has allowed the full scale of death and devastation to be be seen. Hundreds of people killed and wounded, mostly civilians in a few short weeks. Buildings and utilities destroyed. For what? For pride.
There is no doubt that the conflict in Palestine is complex. There is no easy solution. Outsiders will not be able to make a solution, but they can help and they should stop fuelling the bloodshed. The Economist sketches the problems with their leader The Hundred Years’ War here.
There was a global outcry against the bombardment of Gaza by Israel. While observers could sympathise with Israel for the trouble they feel on their borders, they knew that the belligerent response was primitive, futile and unjust. (Those with a perspective drawn from the conflict in Northern Ireland, know that to live together in peace is better for all.)
The irony of the ceasefire is that both sides may say they have “won”, though many lives have been lost, reconcilliation has not been discussed and protagonists remain convinced that further violence is the solution.
The solution to the conflict between Arab and Israelis will not be based in politics but in an emotional enlightening in which people are able to forgive and move on. Violence must be removed from the equation. Money must be spent on creating communities, jobs and well-being for all, rather than weapons. But this is unlikely to be realised until those outside the region set an example and grow out of their their long standing prejudices and righteousness. Prayers must be for peace, not for vengeance.
Q&A: Gaza conflict
Gaza conflict map
It is encouraging to see the relationship between China and Taiwan improving. Practical aspects like increased flights and trade will benefit both countries. Maybe China is willing to engage because they envision another “one country – two systems” arrangement evolving which would allow both China and Taiwan to save face while continuing on their current paths. Let’s hope so.
See BBC’s China and Taiwan in landmark deal
As contended in our Financial Crisis 2008 notes, it is likely that Africa will not suffer the same fate as Western economies in this implosion of the financial markets. In this report the BBC asks Can Africa gain in the credit crisis?
I see a number of issues in Africa’s favour:
- It is coming from a low level of economic activity so there is plenty of room to grow industry and consumption.
- It has tremendous resources – mineral, land and people – which can be managed better,
- It is increasingly stable and benefitting from educated, experienced returning Africans.
- It has developed productive relationships with China which provides appropriate technology for its level of development and requires the mineral commodities that Africa offers. The cultures know how to deal with one another and there is little stigma of colonisation or exploitation.
- There is tremendous commercial interest from investors.
There remain serous risks as in any emerging market. And some countries’ political risk is grossly unattractive. But overall, Africa is looking like a good bet. But go there with a friend, do your due diligence and don’t overpay.
A new film shows the reality of life for people in the middle east. A simple story of students breaking curfew to go to a school reunion it brings to life the tension and impossibility of humanity in the middle east. It will not be released till April, but this review gives a sense of the film and its story.
India has banned somking in public. This is a bold move. On the upside it will reduce deaths and illness from both passive and active smoking, will encourage healthier lifestyle and will also support a transition to a more enlightened social dynamic (as the “cowboy” image is depreciated). But it will not be easy to implement in such a chaotic and diverse culture. There may even be a tendency to abuse the new law. It is certainly a bold, pioneering step in teh right direction.
Indian ban on smoking in public by BBC
Commentary Indians told to stub it out in public by BBC
So, the media leads with the headline that China’s economy slowed during the olympics because businesses were closed to help clear the atmosphere.
But its important to get the detail. The rate of growth remains high. Far beyond what western economies are experiencing.
- industrial output growth of 12.8% in August
- retail sales up at an annual rate of 23.2% in August
- and the economy grew at 10.1% for the second quarter of this year.