By now quite a few people have noticed the truly impressive annual report from the Bank for International Settlements, the world's central bankers. So far, so good was published on Monday to coincide with its Annual General Meeting. If you have time to read only one report a year on the state of global financial markets, this surely is it.
The good news is that the world economy is on track to deliver another year of
-> subdued inflation and
->robust growth, approaching 4%.
->But there is also "a growing sense of unease that it might not last.
Imbalances are the central theme of the report: "there has been little progress in tackling internal and external imbalances." These imbalances "could unwind with a potentially disruptive impact", and "time might well be running out" to tackle them:
One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms. Among the internal imbalances that compel attention, real policy rates in many industrial countries and in emerging Asia continue to hover around zero. Nominal rates on long bonds, as well as credit spreads and measures of market volatility, are remarkably low. The household saving rate in many industrial countries has been trending sharply downwards, and debt levels are at record highs. House prices in many countries have never been higher. And in China, the investment ratio has risen to a startling 50% of GDP. Finally, external imbalances have never been larger in the postwar period. Any or all of these numbers might well revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid and disruptive. In large part, what happens will be determined by real-financial interactions that we should not pretend to fully understand.
Both Calculated risk and Macroblog have highlighted the report's call for a smaller US budget deficit, by cutting expenditure and raising taxes. Meanwhile the ever-widening US current account deficit:
“US recession much closer than imagined”
The chances of a United States recession or even a decline are closer than imagined warned Bill Gross, an influential financial guru who manages the largest mutual fund in the world with assets of 450 billion US dollars.
“US officials are close to running short of fiscal and monetary fuel (cutting taxes and interest rates) which they have been using to promote growth”, and when options run out, a general softening can be expected.
“Assets could cease to expand at two digits, scarce inflation and meagre economic growth could wither and Rome will be up in flames”, anticipates Mr. Gross adding that if “Rome is up in flames yields of long term bonds will predominate, and that day can be much closer than we expect”.
Mr. Gross believes that United States low interest rates, lower taxes and the overall weakness of the US dollar have caused the real estate and stock exchange markets to soar, as well as boosting consumption.
But there has been no investment or jobs, which have gone instead to Asia.
“The legs of this US recovery are weak because they are based on an appreciation of assets and the appreciation of future assets is intrinsically vulnerable given the debilitated stimuli from interest rates”, argues the mutual fund guru.
A little thought:
EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....
FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."============================================================
A global savings glut is good for growth -- but risks are mounting
Savings. It's an almost mystical word for economists -- the Holy Grail of growth. The more a country saves, the more it has available to invest. And the more it invests -- in computers, factories, or infrastructure -- the more productive its economy becomes and the faster it can grow.
->rising interest rates,
->subpar investment, and
->sluggish economic growth.
But that's not what is happening.
->Long-term interest rates are falling and have now dipped below 4%.
->The total of residential and business investment has been rising and now stands at 16.5% of gross domestic product, well above the average for the 1990s.
->And there are few signs that the economy is stalling.
These surprising events are forcing economists, investors, and policymakers to think more globally than ever before.In just the past few months, they've begun to consider seriously two intertwined and heretical notions:
What really matters for interest rates is the global economy, and there the problem may be too much savings, rather than too little.
->Look around the world, and extra money is piling up in all sorts of places.
->Japanese corporations are recording record profits, but not doing much spending.
->Chinese companies are on an investment tear, but the country is getting so much money from exports that it has billions to spare, including $18.5 billion that China National Offshore Oil Corp. (CNOOC) bid for Unocal.
->The surge in oil prices -- now about $60 a barrel -- is giving oil-producing countries such as
->And the aging workers of
->Even in the profligate
The International Monetary Fund predicts that in 2005 the worldwide savings rate should hit its highest level in at least two decades.
This unexpected surge of savings is like a rose with thorns.
->Low interest rates have the potential to power productivity, build wealth, and raise living standards throughout the world.
->As more and more workers in developing countries join the global economy, cheap money makes it easier to provide the equipment and infrastructure they need to prosper.
->Access to global savings has also enabled the
->The result: guns and butter -- all without boosting inflation or pushing up interest rates.
But the savings glut is creating new risks for the global economy, which is having a tough time absorbing the unanticipated flood of funds.
->Instead of going into productive investments, cheap money may be overheating spending and sending asset prices soaring too high, setting the stage for a future bust.
->"The odds of a catastrophic scenario have gone up," says Kenneth S. Rogoff, former chief economist at the IMF and a professor at
->A unexpected rise in inflation or interest rates could tank the bond market and burst the global housing bubble, which now stretches from
->Doubt about the
-- Prices for cold-rolled steel and ethylene have already dropped sharply, and auto prices have fallen as much as 20% in the past 12 months.
"It's going to be very tough for those guys who own factories," says Morgan Stanley (MWD ) economist Andy Xie, "and a lot of them won't pay the banks." History shows that excess liquidity can disappear overnight if investors start getting skittish and lose confidence, causing severe disruptions to markets that have gotten used to cheap money.
History shows that excess liquidity can disappear overnight if investors start getting skittish and lose confidence, causing severe disruptions to markets that have gotten used to cheap money.
The global savings glut also forces investors to operate without many of the signposts they used to depend on.
->In the past, they could afford to concentrate their attention on what was happening in the
->But now, in a global economy awash with savings, investors have to be much more aware of what's happening outside the
->If the European Central Bank eased credit, that could lead to lower
Global savings -- which the IMF estimates at roughly $11 trillion in 2005, almost the size of the whole
That excess has grown fast in recent years, freeing up resources for investment.
What's more, the increased globalization of capital markets has unlocked national savings, making for an easier flow from one country to another.
But for many investors, the question is not whether there is a global savings glut, but how long it will last.
And on that score, there are plenty of reasons to expect it to continue for a while.
->First, the rise in oil prices worldwide is causing a massive transfer of wealth to oil-producing countries.
->Similarly, most of the Arab stock exchanges are at or near record levels. The UAE market, a combination of the Dubai Financial Market and Abu Dhabi Stock Market, is up 105% on the year. The Saudi stock exchange is up 65%. "High oil prices are producing huge liquidity," says Mustafa Abdel-Wadood, CEO of EFG-Hermes (UAE) investment bank.
For now, most of this money is being recycled to the global financial markets as savings rather than as investments in oil exploration and production or other productive uses.
->Demographic shifts are driving up savings as well, as aging societies in
->The same story also holds in
->The reluctance to consume and invest is fueling enormous trade surpluses in
Surprisingly, the lag in business investment extends to parts of Asia as well, outside of
->For example, a Bank of Korea survey of 5,400 of the country's companies found that they were sitting on a record cash pile of $65 billion at the end of 2004.
->Yet there are no signs that spending on new plants and equipment, up a so-so 3.1% in the first quarter of this year, is accelerating. Indeed,
And then there are the staggeringly large Chinese trade surpluses. For years, economists reassured themselves that
That $70 billion surplus is exactly that -- the extra income that
-> It's all recycled as savings into the global economy, in the form of purchases of U.S. Treasury bonds
-> and, lately, as stepped-up direct investment in
So far, the total impact on the world economy of all the savings sloshing around has been benign.
While demand is weak in some countries, cheap money is working its magic in other places, pumping up everything from investment in Chinese factories to the explosion of housing construction in Spain.
Mortgage rates in
In the future, cheap money also could provide potent fuel for spending on new technologies, as soon as the next wave of innovation gets juices flowing again.
Already venture capital funds, flush with cash, are putting more money into alternative energy startups, an increasingly attractive investment in a world of high oil prices.It's easier for companies to spend money on research and development when the cost of capital is low.And the boom of the 1990s shows just what can happen when a technological breakthrough -- in that case, the Internet -- arrives in a period when there's ample savings.
Economists, though, worry that the good times are built on shaky foundations and wonder when they will end. "We're in a highly unstable equilibrium," says Martin Barnes, managing editor of The Bank Credit Analyst. "There are so many things that are three standards of deviation from normal."
What worries economists is that most of the savings is going to one country.
The result: a current-account deficit totaling $668 billion last year, or 5.7% of the country's GDP. And a further rise this year looks likely. Economists fret that at some point foreign investors and governments may tire of putting big sums into the
So far, of course, that hasn't happened. Indeed, the dollar has risen 7% against a basket of major currencies this year, in part aided by Europe's woes.But New York University's Stern School of Business professor Nouriel Roubini says that is only delaying the day of reckoning and sees a danger of a bumpy landing for the dollar and the U.S. economy in 2006.
It's not only the sheer size of the
Unlike in the late 1990s, when the
->much of today's borrowing goes to pay for the federal budget deficit and
->to fund a surge in house prices that many experts believe can't last.
Fueled by ultralow interest rates, house prices jumped a record 12.5% in the first quarter from a year ago.
The surge in prices has put homes out of the reach of the first-time buyers who are the lifeblood of the housing market.
"We have real problems in the housing sector that will [eventually] cause the economy a great deal of stress," writes
"The deterioration in credit quality in 2003 and 2004 could well show up in increased defaults in 2006 and 2007," says Martin Fridson, head of FridsonVision, a bond research service.
If global savings is channeled in the right ways, it can be a great boon for the world economy, enabling the sort of investment and risk-taking that fuel growth. But there's far too much evidence right now that low rates are encouraging behavior that could cause trouble. Hold on to your hats.
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