US trade deficit widens
Forget shopping, this could turn into a crash
As the dollar's fall continues, the US must decide between growth or curbing inflation Larry Elliott, economics editor
Monday December 4, 2006
Guardian
The last time the pound was at this level against the dollar was in the uneasy days of 1992 between John Major's April election victory and the cataclysm of Black Wednesday, when the markets realised that Britain's economic policy was based on smoke and mirrors.
With the economy deep in recession and unemployment heading to 3 million (again), Britain badly needed deep cuts in interest rates to stimulate growth. Yet the foundation stone for the government's anti-inflation policy was membership of the Exchange Rate Mechanism, which required rates to be kept high to defend the pound's value.
Policy was pulled in two directions at once but the government's credibility was at stake, so it talked tough and hoped the financial markets did not spot that it was acting weak. But the markets latched on immediately, sensing that Major and his chancellor, Norman Lamont, would not follow through on their blood-curdling public statements to do whatever it took to maintain the pound's ERM parity because that would have killed off any hopes of economic recovery. Once the markets woke up to the fact that the Tories were paper tigers, Black Wednesday was inevitable.
It's hard not to feel a sense of deja vu now, with the Federal Reserve facing a milder version of the dilemma that troubled the Treasury and the Bank of England 14 years ago. There are real differences between Britain then and the US now: the dollar is floating, rather than fixed; it is underpinned by its status as a global reserve currency; and the US economy has not been mired in recession for two years.
Even so, Ben Bernanke, the Fed's chairman, knows his credibility is on the line. Inflation is high enough to make the central bank nervous and that ought to mean the 18th rise in interest rates since the trough of 1%, taking them to 5.5%. But the deflating housing bubble is now affecting the rest of the economy. Friday's manufacturing snapshot was a lot weaker than Wall Street expected, with an index of below 50 suggesting that industry's output is falling.
Dean Baker, of the Centre for Economic Policy and Research in Washington, is predicting a recession in the next year, with the economy contracting by 0.7% and more than a million added to the dole queues. Most analysts are not that gloomy - at least not yet - but most expect this year's slowdown to persist through 2007 and to prompt the Fed to ease policy in the first half of next year.
So Bernanke's warning last week on the need for vigilance against inflation fell on deaf ears. The dollar fell because the markets do not believe the Fed will make good on its threat. Bernanke is wary of cutting rates for fear of looking soft on inflation; he is wary about raising rates for fear of weakening the economy. So, for now, he'll do nothing and hope that something comes up to get him out of the bind he's in. That doesn't always work: ask Major or Lamont.
Rebalancing
One lesson from the ERM experience is that a weaker dollar is not necessarily a bad thing. In the context of the US trade deficit, it is to be welcomed that the dollar is likely to get a lot cheaper. Sterling's devaluation in 1992 and four points off interest rates coupled with a tighter fiscal policy helped rebalance the UK economy, boosting production at the expense of consumption. A similar rebalancing is long overdue in the US.
Indeed, it is unclear why a $2 pound is being greeted with such enthusiasm on this side of the Atlantic. It makes a Christmas shopping spree in New York far cheaper but the British economy's problem is not that we shop too little but too much. Sterling's trade-weighted index hit a six and a half year high on Friday and the UK trade deficit is at about 5% of GDP. Economic fundamentals suggest the pound must go lower, just as it is obvious the dollar had to fall.
Bernanke's problem, however, is that there is the world of difference between a gentle but steady decline in the dollar and a pell-mell crash. A controlled depreciation would ease strains caused by global imbalances - US trade deficits, Asian trade surpluses - and insulate the US economy a little from the impact of a severe housing market downturn. A crash in the dollar would lead to turmoil on the world's markets, an increase in long-term US interest rates and a vastly increased risk of a hard landing.
One difficulty in analysing how the markets will react is that nobody is sure why the dollar has suddenly fallen out of favour. Some commentators say the trigger was the hint from China that it favoured diversifying reserves so they were less weighted towards dollars. But Beijing has said this regularly over the past three years but carried on buying US assets and thus propping up the dollar. There seems no logical reason why Asian central banks should start dumping greenbacks; not only would they be selling their US assets at a loss, it would make their exports more costly.
Carry trades
A greater risk is that private investors change their behaviour. Hedge funds could determine what happens next. One issue is the growth in carry trades, which is when money is borrowed in a country with low interest rates (such as Japan) and invested in a country with high rates (the US, say). This is lucrative for investors and supports the dollar but risky and attractive to speculators only if the currency in the country with high rates remains strong. If it doesn't, gains from the differential in rates are wiped out by the depreciating currency.
All in all, the prognosis is not good for the dollar. The economy is weak, policymakers seem paralysed and speculators look ready to stampede for the exit. Doing nothing is sometimes the least bad option; it is hard to see that it will be this time. There is a risk that the Fed will get badly behind the curve, and that every bit of gloomy economic news triggers more selling of dollars. Bernanke needs to start preparing the markets for rate cuts or he could be facing a real panic.
Guardian Unlimited © Guardian News and Media Limited 2006
Wednesday, December 06, 2006
The really rich and how much they own
World's richest 1% own 40% of all wealth, UN report discovers
· First ever study of global household assets
· 50% of world's adults own just 1% of the wealth
James Randerson, science correspondent
Wednesday December 6, 2006
Guardian
The richest 1% of adults in the world own 40% of the planet's wealth, according to the largest study yet of wealth distribution. The report also finds that those in financial services and the internet sectors predominate among the super rich.
Europe, the US and some Asia Pacific nations account for most of the extremely wealthy. More than a third live in the US. Japan accounts for 27% of the total, the UK for 6% and France for 5%.
The UK is also third in terms of per capita wealth. UK residents are found to have on average $127,000 (£64,000) each in assets, with Japanese and American citizens having, respectively, $181,000 and $144,000. All data relate to the year 2000.
The global study - from the World Institute for Development Economics Research of the United Nations - is the first to chart wealth distribution in every country as opposed to just income, for which more comprehensive date is available. It included all the most significant components of household wealth, including financial assets and debts, land, buildings and other tangible property. Together these total $125 trillion globally.
Anthony Shorrocks, director of the research institute at the United Nations University, in New York, led the study. He affirmed that the existence of a nest egg provided an insurance policy that helped people cope with unforeseen events such as ill health or a lost job. Capital allowed people to drag themselves out of poverty, he added. "In some ways, wealth is more important to people in poorer countries than in richer countries." It was more difficult in developing countries to set up a business because it was harder to borrow start-up funds, he said.
His team used detailed data from 38 countries, but had to rely on incomplete information from the rest.
The report found the richest 10% of adults accounted for 85% of the world total of global assets. Half the world's adult population, however, owned barely 1% of global wealth. Near the bottom of the list were India, with per capita wealth of $1,100, and Indonesia with assets per head of $1,400.
Many African nations as well as North Korea and the poorer Asia Pacific nations were places where the worst off lived.
"These levels of inequality are grotesque," said Duncan Green, head of research at Oxfam. "It is impossible to justify such vast wealth when 800 million people go to bed hungry every night. The good news is that redistribution would only have to be relatively small. Such are the vast assets of the rich that giving up a small part of their wealth could transform the lives of millions."
Madsen Pirie, director of the Adam Smith Institute, a free-market thinktank, disagreed that distribution of global wealth was unfair. He said: "The implicit assumption behind this is that there is a supply of wealth in the world and some people have too much of that supply. In fact wealth is a dynamic, it is constantly created. We should not be asking who in the past has created wealth and how can we get it off them." He said that instead the question should be how more and more people could create wealth.
Ruth Lea, director of the Centre for Policy Studies, a thinkthank set up by Margaret Thatcher, said that although she supported the goal of making poverty history she did not think increasing aid to poorer countries was the answer. "It's no use throwing lots of aid at countries that are basically dysfunctional," she said.
The UN report was issued as the Swiss magazine Bilan released a list of the richest Swiss residents. Ingvar Kamprad, the founder of Ikea, topped the list with an estimated fortune of $21bn.
Guardian Unlimited © Guardian News and Media Limited 2006
· First ever study of global household assets
· 50% of world's adults own just 1% of the wealth
James Randerson, science correspondent
Wednesday December 6, 2006
Guardian
The richest 1% of adults in the world own 40% of the planet's wealth, according to the largest study yet of wealth distribution. The report also finds that those in financial services and the internet sectors predominate among the super rich.
Europe, the US and some Asia Pacific nations account for most of the extremely wealthy. More than a third live in the US. Japan accounts for 27% of the total, the UK for 6% and France for 5%.
The UK is also third in terms of per capita wealth. UK residents are found to have on average $127,000 (£64,000) each in assets, with Japanese and American citizens having, respectively, $181,000 and $144,000. All data relate to the year 2000.
The global study - from the World Institute for Development Economics Research of the United Nations - is the first to chart wealth distribution in every country as opposed to just income, for which more comprehensive date is available. It included all the most significant components of household wealth, including financial assets and debts, land, buildings and other tangible property. Together these total $125 trillion globally.
Anthony Shorrocks, director of the research institute at the United Nations University, in New York, led the study. He affirmed that the existence of a nest egg provided an insurance policy that helped people cope with unforeseen events such as ill health or a lost job. Capital allowed people to drag themselves out of poverty, he added. "In some ways, wealth is more important to people in poorer countries than in richer countries." It was more difficult in developing countries to set up a business because it was harder to borrow start-up funds, he said.
His team used detailed data from 38 countries, but had to rely on incomplete information from the rest.
The report found the richest 10% of adults accounted for 85% of the world total of global assets. Half the world's adult population, however, owned barely 1% of global wealth. Near the bottom of the list were India, with per capita wealth of $1,100, and Indonesia with assets per head of $1,400.
Many African nations as well as North Korea and the poorer Asia Pacific nations were places where the worst off lived.
"These levels of inequality are grotesque," said Duncan Green, head of research at Oxfam. "It is impossible to justify such vast wealth when 800 million people go to bed hungry every night. The good news is that redistribution would only have to be relatively small. Such are the vast assets of the rich that giving up a small part of their wealth could transform the lives of millions."
Madsen Pirie, director of the Adam Smith Institute, a free-market thinktank, disagreed that distribution of global wealth was unfair. He said: "The implicit assumption behind this is that there is a supply of wealth in the world and some people have too much of that supply. In fact wealth is a dynamic, it is constantly created. We should not be asking who in the past has created wealth and how can we get it off them." He said that instead the question should be how more and more people could create wealth.
Ruth Lea, director of the Centre for Policy Studies, a thinkthank set up by Margaret Thatcher, said that although she supported the goal of making poverty history she did not think increasing aid to poorer countries was the answer. "It's no use throwing lots of aid at countries that are basically dysfunctional," she said.
The UN report was issued as the Swiss magazine Bilan released a list of the richest Swiss residents. Ingvar Kamprad, the founder of Ikea, topped the list with an estimated fortune of $21bn.
Guardian Unlimited © Guardian News and Media Limited 2006
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