The initial idea of my Blog and its change. (will continue..)

  I started this Blog, as an experience of filtering news from the Web from traditional  news
companies online.
I've started to go to the Reports of Institutions, like the IMF, the World Bank the OECD, and official reports from some countries. Since the beginning I searched for economic debates, about new explanations
or reinterpretations of theoretical approaches of the solutions for the Depression of the 1930's by
economists  like John Maynard Keynes, Milton Friedman,and Hayek , e.g like Adair Turner,who is
one of the living economists, among others of the theorethical authors of the present accomadative monetary policies for economies in special circumstances.

  I will also bring to this blog debates of the relationship between debt and growth for countries
 or of urbanization as a means to fight poverty in developing countries,or
the new approach to the net Financial Assets of countries done by Helen Rey.

So things have changed from what I initially thought, and  I'am very glad that things have changed for
the better. Yes, I follow the international markets and the global macroeconomics developments,we
are in a very interdependent world. But I'am not a momentum market player,nor a program trader
even less a day trader. As Jim Rogers says I'am not  smart enough, maybe you can find in CNBC,
Bloomberg,CNN,etc the answers for the price movements of shares in a particular day an hour or a week. And maybe you like to be in front of your computer all day long, and listening to a Bloomberg
or CNBC show, and follow the market by the minute, and expecting Breaking news.

  As you will realise afterwards, my country has had all kind of experiences, in terms of testing all kind
of economic models,and political regimes,hyperinflation plus two terrorist groups the Sendero Luminoso The Shining Path and the MRTA(Movimiento Revolucionario Tupac Amaru). Who generated
a bloodshed between 1980 and 1992, and  traumatized  our country. We had them all!!!!

  I do know when stocks are cheap,imagine I live in small country with an open economy, where the
mining industry is very important, now even more, +60% of our exports are metals. And the mining
industry has always been and will be a cyclical industry. We are in a particular long term trend of
strong prices because of the Urbanization of China. But if China has a hard landing, it is very clear   for me that precious metals will go lower,and the prices of copper, lead and Zinc also.
 Peru has experienced all kind of economic models,free market, Cepal infant protected industry model, from 1968-75 there was a  military coup d'etat lead by Juan Velasco Alvarado and a leftist,nationalist, and extremely protectionist Goverment ensued.

China's turbulent interbank market

China’s spiking rates create winners and worriers

By John Foley

 

JUNE 14, 2013

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

"China’s biggest banks have thumbed their noses at the government. The Ministry of Finance sold just two-thirds of the 15 billion yuan ($2.5 billion) of bills it offered on June 14, according to Bloomberg. The failed auction is not a vote of no confidence, or a sign that interest rates are too low, but a reflection of reality: banks can get better returns lending to each other.

Tight liquidity has pushed up rates in China’s turbulent interbank market, creating winners, losers and worriers. The winners are banks with money to spare. The likes of China Construction Bank and Agricultural Bank of China can make a profit through interbank lending or bond repurchases. Together, those two activities made for a $31 trillion market in 2012. Rates for short-term transactions have almost doubled in recent days.

The losers are those who have to pay up or go without. For now, that includes the Ministry of Finance itself. The 3.8 percent yield on the 273-day bills it hoped to sell is unappealing when banks can charge each other almost 7 percent for overnight loans.  Many smaller local banks are strapped for funds and have no choice but to borrow.

Why have interbank rates risen so high? One reason is that there’s less money flowing in from exports – the central bank soaked up just $10 billion of foreign exchange in May, a quarter of the amount in April . As the end of the quarter nears, banks also scramble to dress up their balance sheets. Many have issued short-term wealth management products that mature close to key dates. Banks need liquidity to repay those products: it’s no coincidence that the 21-day bond repo rate began to spike in early June.

This is a short-term spike, not a systemic freeze. Nevertheless, the failed auction is a reminder that, even in a closed, state-controlled system, the unexpected can happen. That’s a worry for central bankers, who would have to step in if a bank got into trouble. It should also concern regulators, whose job it is to know where the counterparty risks sit in China’s increasingly complex financial system. As bank-to-bank rates rise, so must their disquiet".

Economic Debate: Helicopter Money as a Policy Option. Part 1

Introduction by Reichlin

Since the crisis central banks have implemented a variety of non-standard monetary policies aiming at stabilising nominal demand in the presence of major disruptions in financial markets. These policies had different intermediate objectives: market making, controlling long term interest rates or asset prices, support of credit via subsidies. They had a role in stabilising financial markets after the collapse of Lehman Brothers and the banking crisis which followed. Their effects on the real economy, however, are uncertain.¹

Notwithstanding this uncertainty the Bank of Japan has recently engaged in bold action, announcing that it will double the monetary base and its holding of government bonds in the next two years.

• Some think that quantitative easing will fuel the next financial bubble and that exiting will create financial instability (see Stein 2013).
• Others think that more should be done to sustain the real economy.

Adair Turner has recently put a different option on the table (Turner 2013): “helicopter money” or permanent money creation. This is an idea that was discussed in the thirties in the US as a response to the great recession (see Friedman 1948 and Simon 1936) and more recently by Bernanke in relation to the zero lower bound problem in Japan (Bernanke 2003). As Bernanke has suggested it can be implemented via transfers to households and businesses via a tax cut coupled with incremental purchases of government debt, so that the tax cut is in effect financed by money creation.

Although the idea has been around a long time it is a taboo today. Non-standard monetarypolicies in response to the recent crisis have all led to an increase in the size of central banks’ balance sheets but in the recent experience no central bank, including the Bank of Japan, has purposefully increased the monetary base and committed to keep this additional money in circulation permanently. The idea, however, gets some support from academia.

In his 2012 Jackson Hole speech Michael Woodford suggested a version of flexible inflation targeting whereby the central bank commits future monetary policy to a permanently higher nominal target (such as the path of nominal GDP) and discussed various tools within that framework, including permanent increases in the monetary base via fiscal transfers (Woodford 2012).

In a situation of persistently weak economic conditions it makes sense to consider all options including tools that have stayed long in the closet.
The following is a summary of the questions posed by Reichlin and the answers by Turner and Woodford.

Question one : Adair, can you explain why, in your view, helicopter money is an option for monetary policy that is relevant to today?

‘Helicopter money’ – by which we mean overt money finance of increased fiscal deficits – may in some circumstances be the only certain way to stimulate nominal demand, and may carry with it less risk to future financial stability than the unconventional monetary policies currently being deployed.

The crucial first question is: do we want more nominal demand? The answer should be yes if (i) we are confident that some of the increase will take the form of increased real output or (ii) if some increase in the inflation rate is in itself desirable. These conditions seem likely to apply in some developed economies today, with nominal GDP growth rates very low, depressed by private sector deleveraging in the aftermath of the financial crisis. And if these conditions do not pertain, we should not be trying to stimulate nominal GDP by any means.

So let’s assume that increased nominal GDP growth is desirable. The problem is that other levers may be ineffective or have adverse side effects. Monetary policy, in both its conventional and unconventional forms, may be ‘pushing on a string’. Reducing policy interest rates to the zero bound fails to stimulate credit supply and demand in a ‘balance sheet recession’ in which the private sector is deleveraging. Cutting long-term interest rates by quantitative easing may be equally ineffective. And very low interest rates, sustained for many years, will encourage a search for yield, hence financial innovation and carry trades, which create risks to financial stability.

Fiscal stimulus, in its conventional funded form, financed by bond issues, may be more effective. Fiscal multipliers may be high when central banks are committed to keeping interest rates low for the foreseeable future. But with public debt levels already high and rising, concerns about future debt sustainability may create ‘Ricardian equivalence’ effects with households and companies aware that tax cuts today will have to be offset by tax rises later.

In this specific environment  – ‘helicopter money’ – should be regarded as an available option. Ben Bernanke proposed this for Japan in 2003. If Japan had used it then, it would now have some mix of a higher real GDP level, a higher price level, and lower public debt to GDP.

Question 2: Mike, what in your view are the potential effects of this policy on the economy as compared to traditional quantitative easing and how do you relate it to your framework of targeting the path of nominal GDP?

It is possible for exactly the same equilibrium to be supported by a policy of either sort. On the one hand (traditional quantitative easing), one might increase the monetary base through a purchase of government bonds by the central bank, and commit to maintain the monetary base permanently at the higher level. On the other (‘helicopter money’), one might print new base money to finance a transfer to the public, and commit never to retire the newly issued money. Suppose that in either case, the path of government purchases is the same, and taxes are raised to the extent necessary to finance those purchases and to service the outstanding government debt, after transfers of the central bank’s seignorage income to the Treasury. Assuming the same size of permanent increase in the monetary base, the perfect foresightequilibrium is the same in both cases. Note that the fiscal consequences of the two policies are actually the same. Under the quantitative easing policy, the central bank acquires assets, but it rebates the interest paid on the government bonds back to the Treasury, so that the budgets of all parties are the same as if no government bonds were actually acquired, as is explicitly the case with helicopter money.

The effects could be different if, in practice, the consequences for future policy were not perceived the same way by the public. Under quantitative easing, people might not expect the increase in the monetary base to be permanent – after all, it was not in the case of Japan’s quantitative easing policy in the period 2001-2006, and US and UK policymakers insist that the expansions of those central banks’ balance sheets won’t be permanent, either – and in that case, there is no reason for demand to increase. Perhaps in the case of helicopter money, it would be more likely that the intention to maintain a permanently higher monetary base would be believed. Also, in this case, the fact people get an immediate transfer should lead them to believe that they can afford to spend more, even if they don’t think about or understand the consequences of the change for future conditions, which is not true in the case of quantitative easing.

But while I grant this advantage of Adair’s proposal, I believe that one could achieve a similar effect, with equally little need to rely upon people having sophisticated expectations, through a bond-financed fiscal transfer, combined with a commitment by the central bank to a nominal GDP target path (the one that would involve the same long-run path for base money as the other two policies). The perfect foresight equilibrium would be exactly the same in this case as well; and as in the case of helicopter money, the fact that people get an immediate transfer would make the policy simulative even if many households fail to understand the consequences of the policy for future conditions, or are financially constrained. Yet this alternative would not involve the central bank in making transfers to private parties, and so would preserve the traditional separation between monetary and fiscal policy.

1 For quantitative evidence on the macroeconomic effects for the US see, amomgst others, Khrishnamurthy and Vissing-Jorgensen, 2011. On ECB non-standard policies, see Lenza, Pill and Reichlin, 2010 and Giannone, Lenza, Pill and Reichlin, 2012.

Source: Naked Capitalism, May 2013.

Japan News

Japan highlights role of nuclear power in economic growth strategy

Kyodo -- Jun 14

The Japanese government made clear that nuclear power will continue to play a key role in meeting energy demand as it vowed in its economic growth strategy endorsed Friday to push for the restart of idled reactors.

Once reactors clear a set of new safety requirements that will be introduced soon in the wake of the 2011 Fukushima Daiichi nuclear power plant disaster, the government will "move ahead with" their resumption and "work to win the approval and cooperation" of local governments hosting the facilities, the strategy said.The new regulations are expected to take effect in July, setting the stage for reactors, most of which are now offline, to undergo the Nuclear Regulation Authority's safety assessments.

G-8 leaders set to unite against tax avoidance

Jiji Press -- Jun 16

The leaders of the Group of Eight major countries are expected to unite in tackling tax avoidance by multinational firms at their summit in Lough Erne, a lakeside resort in Northern Ireland, for two days from Monday, sources have said.

The G-8 leaders are seen agreeing to draw up new rules, through the Organization for Economic Cooperation and Development, to rein in tax avoidance although it is expected to take two or three years to come up with specific measures, the sources said.

Source: 

IMF conclusions of the Mission to the United States of America Part I

1. The U.S. recovery has remained tepid over the past year, but underlying fundamentals have been gradually improving. The modest growth rate of 2.2 percent in 2012 reflected legacy effects from the financial crisis, fiscal deficit reduction, a weak external environment, and temporary effects of extreme weather-related events. These headwinds notwithstanding, the nature of the recovery appears to be changing. In particular, house prices and construction activity have rebounded, household balance sheets have strengthened, labor market conditions have improved, and corporate profitability and balance sheets remain strong, especially for large firms. With the sizeable output gap and well-anchored inflation expectations keeping inflation subdued, the Fed appropriately continued to add monetary policy accommodation over the past year by increasing its asset purchases and linking the path of short-term rates to quantitative measures of economic performance, thus helping to maintain long-term rates at exceptionally low levels.

2. However, growth is expected to slow to 1.9 percent this year owing to an excessively rapid pace of fiscal deficit reduction, before accelerating to 2.7 percent next year. 
    The general government deficit will decline by over 2½ percent, subtracting between 1¼–1¾ percentage points from growth in 2013, the debt ceiling will be raised without any disruption to the U.S. and the global economy, and the Fed will continue asset purchases until the end of this year. The unemployment rate is projected to remain around 7½ percent throughout 2013. Employment growth is projected to pick up late this year and in 2014, fostered by an acceleration of output growth. With labor force participation projected to recover somewhat in 2014 as discouraged workers return to the labor force, the unemployment rate is projected to decrease (on average) to 7.2 percent next year. 
   Given the wide output gap, inflation is expected to remain relatively subdued over this year and the next. As the legacy of the financial crisis wanes further, private domestic demand is expected to continue recovering, but weak growth in a number of trading partners is projected to weigh on export growth.

3. Risks to the outlook appear modestly tilted to the downside.

• A stronger impact of fiscal consolidation, a weaker external environment, and higher structural unemployment are the main downside risks.
While private consumption has so far weathered relatively well both higher tax rates and the spending cuts from the “sequester”, both measures might prove to be a stronger headwind to consumer demand over the next few quarters. A slower pace of recovery may in turn delay the normalization of labor market conditions and reduce long-term growth.
External demand may also be held back by a slower pick-up in global economic activity reflecting lower growth in a number of emerging market economies.

"Markets can stay irrational longer than you can stay solvent" John Maynard Keynes

   When there is too much complacency in the  markets, it is always very wise,to ask yourself , what would it happen, if any unexpected negative event suddenly appears?

    The Black Swan scenario, can appear with the burst of the bubble in the bond market,sooner than
later. If the economy of the US keeps improving there will be a return to more normal interest rates,so
in this process there will be periods of high volatility, and significant corrections in the markets
unless Central banks keep for a longer period of time, their accomodative monetary policies.

  The other dangerous scenario is what is happening in Japan with its Abenomics.
   Before the aggressive monetary stimulus announced by the Central Bank of Japan.
  "This country was paying 21% of government revenue on interest payments to support a 236% debt-to-GDP ratio. With annual spending twice as high as its revenue, the government is running a deficit of $455 billion a year and adding to its $11.2 trillion debt. This is all before the monetary stimulus programs announced recently by its central bank.
   The announcement by the Bank of Japan to buy 7.5 trillion yen (about $75 billion) in bonds per month and double the monetary base during the next two years is exponentially higher than anything the country has tried in the past two decades. If you think U.S. Federal Reserve Chairman Ben Bernanke and the Fed's $85 billion monthly purchases is extreme, consider that Japan's economy is a third the size of the United States' and that its growth has stalled in the past decade.

So the bank wants to increase inflation to 2% from its current negative rate of 1% deflation. If they are even partially successful, interest rates on the government bonds could jump. If inflation increases to 1% and the rate on the 10-year bond increased to just 1.5%, the government would need to pay out 65% of revenues just to service the interest.

Kyle Bass of Hayman Advisors recently told Barron's that a debt crisis that will rival Argentina's 2001 collapse is "the most obvious scenario of my adult life. The question is when."

Why should investors care about a country that represents less than 10% of global growth? To put Japan's importance in perspective, Greece's economy is less than one-twentieth of Japan's -- and brought the market to its knees last year.

Like the 10-year Treasury note, Japan's government bond has been used by the market to evaluate risk for more than 30 years. A collapse in this market could send shock waves across markets worldwide". (1)

  While in the short term Japan's stock market has rallied up to 80% in yen terms in six months,
anticipating the election of Prime Minister Shinzo Abe,this rally has had a major correction last week
but even counting with it,the Nikkei index is still up 44%, while the exchange US$ dollar/yen was
in the range of 80-83 since July to November 2012 and now it is at 94.
 How long will this rally last, it is difficult to say but surely it is going to end badly,given their 
236%debt/GDP ratio, the magnitude of this stymulus, and the level of present interest rates.


The third event that could affect global markets, is a hard landing of the chinese economy,which 
would affect sharply the growth rate of the global economy.

(1)Street Authority.
     The next country to collapse isn't in Europe

      Joseph Houge