“I asked the Zebra,
are you black with white stripes?
Or white with black stripes?
And the zebra asked me,
Are you good with bad habits?
Or are you bad with good habits?
Are you noisy with quiet times?
Or are you quiet with noisy times?
Are you happy with some sad days?
Or are you sad with some happy days?
Are you neat with some sloppy ways?
Or are you sloppy with some neat ways?
And on and on and on and on and on and on he went.
I’ll never ask a zebra about stripes…again.”
― Shel Silverstein
The Crisis Has Hit the Entire Core of the Euro Zone
Jose Manuel Barroso and Angela Merkel are in disagreement over so-called “euro bonds.”
Those who believe the economic situation in the euro zone can only improve are, it seems, sadly mistaken. On the same day that conflict between Berlin and the European Commission over so-called euro bonds flared up, an auction of German ten-year bonds failed, with investors purchasing barely half of the €6 billion offering. Could Germany, supposedly the only safe haven in the euro zone, be the next country to slide into financial trouble?
The failure of the bond auction, dubbed a “complete disaster” by Marc Ostwald, an analyst at Monument Strategies, has shaken confidence in German debt. Bond investors are effectively on strike, lending to euro-zone banks is freezing up, ever more financial institutions are dependent on the ECB for funding, and depositors are withdrawing increasing amounts of money from southern European banks.
Though there has been much consternation over Germany’s government bond auction failure, few officials are starting to panic just yet. German Finance Minister Wolfgang Schäuble’s spokesman said the auction did not mean the government had refinancing problems, and the financial markets seemed to agree. Some analysts said Berlin just needed to offer a more attractive yield. But it was a sign that, as the paymaster of the euro zone, Germany may face creeping pressure as the crisis continues to deepen.
In one of the most widely quoted remarks of the day, Andrew Roberts, an analyst at the Royal Bank of Scotland, even went so far as to ask if Germany now realized that it was just “a first-class passenger on the Titanic.”
France Pushing for ECB Intervention
France is now hoping the unfavorable outcome of the auction will increase pressure on Germany to allow the European Central Bank (ECB) to have a greater role in tackling the crisis. French President Nicolas Sarkozy is set to press German Chancellor Angela Merkel at a meeting in Strasbourg on Thursday which will also include Italian Prime Minister Mario Monti. “There is urgency (for ECB intervention),” French Foreign Minister Alain Juppe said on France Inter radio. “I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence.”
The president of the European Commission, meanwhile, has continued promoting the introduction of jointly issued euro bonds, which would essentially pool euro-zone debt. Coupled with stricter budgetary discipline, the bonds “could bring tremendous benefits,” Jose Manuel Barroso said. But Merkel, a staunch opponent of such euro bonds, told lawmakers during an impassioned speech in Berlin on Wednesday that it was wrong to suggest that a “collectivization of the debt would allow us to overcome the currency union’s structural flaws.”
Instead, Berlin wants individual euro-zone countries to clean up their own finances so they can eventually borrow at lower rates again. Euro-bond proponents, on the other hand, argue that they would immediately ease refinancing costs for struggling countries. But for Germany, they would most likely lead to higher borrowing costs.
Merkel has thus repeated her call for changes to the EU treaty to guarantee strict enforcement of fiscal discipline. On that point, at least, Merkel and Barroso seem to agree. “It is quite clear, as things stand at present, if we want to keep a common currency, we need more integrated governance,” Barroso said.
German commentators Thursday criticized both Barroso and Merkel:
The center-left Süddeutsche Zeitung writes:
“It is the duty of the European Commission to spur on the European Union with ideas. It needs courage occasionally, but wisdom always. Commission President Jose Manuel Borroso, however, is lacking the latter with his push for euro bonds.”
“Instead of opening up the debate about the correct solution to the crisis, he has merely forced the government in Berlin to stiffen its tough stance even further. Barroso has not built a bridge, but slammed the door.”
“Never in the history of the EU has a German head of government so publicly rebuked a president of the Commission like Angela Merkel has now done with Barroso. As the German chancellor is hardly known for hot-blooded spontaneity, the provocation must have been perceived as very great.”
“And in fact, with his efforts, Barroso wanted to put Berlin under pressure to move away from its ‘no’ to euro bonds. One can argue whether the German position is correct. European Commissioner for Economic and Financial Affairs Olli Rehn admits nevertheless that there is no ‘magic bullet’ for solving the crisis. It is thus frivolous that the German concerns, which by the way are shared by others in the EU, to be swept aside just like that.”
The left-leaning daily Die Tageszeitung writes:
“Carrots and sticks: That’s how the proposals from the European Commission on how to resolve the debt crisis can be summed up. The carrots are common bonds with the same interest rates for all euro-zone countries — so-called euro bonds. A responsibility community, therefore. The sticks are tighter controls and tougher punishments for those who exceed debt limits. This program, you would think, would enable Commission head Barroso to also score points in Berlin. Far from it.”
“For Merkel, only discipline and obedience counts. The chancellor seems to be ignoring the fact that more and more economists are convinced that the crisis can only be overcome with both common bonds and support purchases through the ECB.”
“With that, she is risking not only new conflict with Barroso, who has long been annoyed by the faltering German course, but she also risks isolating Germany even further. Already, Merkel can only rely on a handful of supporters in Paris, The Hague or Helsinki. French President Sarkozy has already distanced himself in the clash over the ECB. And now even Germany itself has become vulnerable: The federal budget for 2012 does not equate to the hard austerity course which Merkel preaches. On Wednesday, the markets also showed their first doubts about German creditworthiness and spurned formerly sought-after German bonds.”
The left-leaning Berliner Zeitung writes:
“It is true: The highly-indebted euro-zone countries — including Germany — must reduce their debts. Therefore, the proposed legislation to tighten economic and budgetary control that the European Commission presented yesterday is right.”
“It will also meet with the approval of the German government, whose strategy for tackling the crisis has for a long time primarily consisted of saving and controls. Even a cursory look at the economic and socio-political situation in the crisis countries (over 40 percent youth unemployment in Spain!) shows, however, that they need help. Alongside the demands there must be assistance. The EU Commission in Brussels is clear on that, unlike the German government.”
“It therefore contrasts the strict budgetary control with the idea of common euro-zone bonds, which it calls ‘stability bonds.’ This would ease the burden on the crisis countries and give them some breathing space for urgently needed economic growth. In other words: It would prevent the countries from having to rescue themselves to death.”
“Sooner or later Berlin will realize this too, because as an export nation the economic development of its neighbors is not insignificant to Germany.”
The center-right Frankfurter Allgemeine Zeitung writes:
“The European Commission is undeniably acting in its own best interests as it presents new proposals for national budget policy. Its leaders are not only concerned about more fiscal discipline, but securing more authority. This becomes even more apparent as Commission President Jose Manuel Barroso links his proposals for budgetary control to a push for euro bonds. But even Barroso himself hasn’t dared claim that the common bonds would definitely lead to more fiscal discipline. More than anything, they will secure the European authorities more clout, just as a deepened control of the budget would.”
“More control by the Commission — even at the cost of partial interference with national sovereignty — is the natural alternative. Anyone who is suspicious, with good reason, of the noble motives of the Commission must suggest another way as to how budget discipline can be achieved without their participation.”
Commentators also agreed that the failure of the German bond auction, whilst not a reason to panic, is proof that even Germany is not immune to the debt crisis:
The financial daily Handelsblatt writes:
“In a Germany that is has been accustomed to success in the era of the euro, there has never before been a showing so weak. That may not be any reason to view Germany’s efforts to refinance its debt as being jeopardized. But the flop does show that the sex appeal of German government bonds as an extremely secure investment is waning. It is no longer the case that risk-averse investors are withdrawing their money from other euro-zone states and parking it, en masse, in German bonds as they were once inclined to do, even though they offered particularly low yields.”
“The government provided an historically low interest rate of only 2 percent on Wednesday. Germany is thus financing itself extremely cheaply. If the government had offered a slightly higher interest coupon, it also would have had greater demand. Still, the absolute trust in German securities is no longer there. … This also shows that the crisis has now hit the entire core of the euro zone.”
“In the short term, the ECB remains the only investor that can hold down the yields by purchasing bonds from euro-zone states. In the longer term, this will lead to a fiscal union that, at least in part, will be unable to avoid some form of euro bonds.”
The conservative Die Welt writes:
“In at least one respect, the failed auction of German debt delivered a signal: Germany is not a safe harbor in the euro zone at any price. Major investors are not willing to put in their money for an interest rate of less than 2 percent over 10 years. The risks over such a long period of time are too big for them — be it the fear of inflation, the danger of sinking credit ratings or the fear of default. Even Germany is not untouchable.”
“Conversely, a botched sale of bonds does not automatically mean that the fundamental creditworthiness of the country must be questioned. Demand is still brisk for securities with shorter maturity periods, for example.”
“Only events over the coming days will show how much more time the markets will give politicians to finally provide some answers. The clandestine hope of some politicians in Berlin to be able to inject some pre-Christmas calm into the bond market and perhaps have the opportunity by January to implement already-agreed strengthening of rescue measures must surely have at least been dented.”
The Financial Times Deutschland writes:
“Despite assertions to the contrary, the crisis is often still seen as a Greek, Spanish and Italian problem instead of a collective challenge. But yesterday this asynchrony decreased a bit. The investors on the German sovereign bond market took care of this.”
“Whatever the reason behind yesterday’s warning signal was, it can only help the euro zone. It shows that Germany too could very quickly be pulled into a maelstrom of panic, and that Germany isn’t invincible. This realization can end the ideological trench battle over euro bonds, or more intervention from the European Central bank, much more quickly than any bailout summit.
Banks brace for big squeeze
Eric Johnston, Gareth Hutchens November 24, 2011
Renewed funding pressures for the big banks are likely to make it tougher for business and some consumers.
AUSTRALIAN banks are preparing for a potential freeze in global funding markets heading into the new year, as Europe’s worsening stresses threaten to send the world’s financial markets into a tailspin.
Renewed funding pressures for the big banks, which need to raise $16.3 billion over the next two months, are likely to make it tougher for business and some consumers to get credit, but the upside is that economists are now tipping that the Reserve Bank could slash the official cash rate early into next year.
The investment bank JPMorgan is now forecasting official cash rates could fall to a two-year low of 3.75 per cent by March. Just this month the Reserve Bank cut the official cash rate 25 basis points to 4.5 per cent to spur on growth.
Renewed concerns over escalating European bond yields and potential problems in a bailout of Belgium’s Dexia bank flowed through to equities markets yesterday, Australian shares slumping 1.98 per cent.
Resources and banks were hardest hit as weak manufacturing figures in China also weighed on sentiment.
The Australian dollar last night fell further, trading at US97.60¢, down almost US1¢ over the day, its lowest level in a month. It has now fallen 9¢ in just over three weeks, as investors flock back to the US dollar, a traditional ”safe haven” in times of trouble.
Australia’s 10-year bond yield hit a low of 3.88 per cent, which is close to its last record low of 3.84 per cent in January 2009.
Commodity prices, which have endured massive falls in recent weeks, rebounded yesterday. Copper prices soared 30 per cent and iron ore prices followed, gaining 28 per cent.
Finance executives from at least two of Australia’s big banks have reviewed their forward funding plans. This has involved shelving scheduled raisings, with the focus to remain ”opportunistic” fund raisings in US and Australian capital markets.
Australia’s four major banks need to refinance a total of $48 billion in bonds by June next year, according to figures prepared for BusinessDay by Deutsche Bank. Of this, $16 billion needs to be refinanced by the end of January, the figures show.
One bank treasury executive yesterday told BusinessDay that his firm view was that funding markets would be ”effectively closed” over the next month, given that the cost of wholesale money was too high.
Commonwealth Bank this week pulled its inaugural covered bond issue, as volatile pricing made the cost of the raising too high.
Australian banks this year are expected to borrow as much as $100 billion from global markets, to make up for a shortfall in their deposit base. Currently, deposits cover around 70 per cent of their lending book, although at times of fast lending growth this figure has fallen below 50 per cent.
Unlike the funding freeze after the collapse of Lehman Brothers in late 2008, Australian banks are cashed-up after being able to rapidly grow their deposit base over the past 18 months. At the same time, slowing demand for credit has reduced their need to raise funds from offshore markets.
Macquarie Equities analyst Michael Wiblin said the recent ”significant” increase in the cost of raising funds on global money markets could wipe as much as 1 per cent from bank profits this coming year.
Mr Wiblin said there was likely to be some scope for banks to reprice loans, although they would first have to accept some crunching to their profit margins.
The Spanish government was forced to sell three-month bonds at a price to yield 5.11 per cent, more than double the 2.29 per cent interest rate investors demanded at a sale of similar Spanish securities in late October.
Spain also sold six-month debt at 5.23 per cent, up from 3.30 per cent in October.
Italy’s 10-year bond yield, meanwhile, edged up once again, to nearly 6.8 per cent.
Meanwhile, Australian bank regulators yesterday declared they were more determined than ever to push ahead with the tough new bank rules known as Basel III.
Given market volatility, Australian bankers, including ANZ boss Mike Smith have called for slower introduction of the rules that are scheduled to begin from 2013.
PM Lee draws lessons from Qantas fiasco
Prime Minister Lee Hsien Loong said that Singapore can learn two key lessons from the face-off between Qantas Airlines and its employees – the importance of business competitiveness as well as the close relationship between companies, unions and the government.
“It shows how important it is for all companies to be competitive and for employers, unions and government to work closely together to manage the problem,” the prime minister told local media at the end of the Commonwealth Heads of Government Meeting on Sunday.
Lee noted that Qantas is losing S$266 million a year, has 20 per cent higher operating costs than other airlines and had to ground flights after a row with unions.
He also added that the Australian government could not do much about the situation, and could only give the unions and Qantas more time to talk as flights were grounded worldwide.
“It is a very painful adjustment and they have not been able to reach an agreement,” Lee observed.
The airline took the drastic step of grounding all its flights worldwide on Saturday, prompting an unhappy Australian government to call for an emergency arbitration hearing by an independent tribunal to resolve the matter. A settlement has been achieved and the airline’s planes have started flying again.
Lee warned, “We have to make sure we stay competitive because if we allow ourselves to become non-competitive, we will be in as unhappy a position.”
However, when the prime minister was quizzed upon the government’s decision to tighten the entry of foreign workers into Singapore, he admitted that there was no easy choice as many small and medium enterprises and local companies depended heavily on foreign workers.
“Because it’s not as if you send away all the foreign workers or keep out all the foreign workers, then we live in paradise. There is a price, and it’s a quite a high price to pay. As we try to manage the population in Singapore, we are going to also accept a lower growth rate,” he said.
Pointing out that keeping out foreign workers will lead to slower growth, Lee said that it would be an achievement if Singapore managed a 3 per cent or 4 per cent growth in a year.
“We’ve been used to 5, 6, 7 per cent, or even more, in the past, but it’s a different phase. When you’re an adolescent, you grow and shoot up inches every year; but when you’re mature, you hope to grow, not necessarily taller, but wiser and better. We have to make that change of gear,” he added.
The Monetary Authority of Singapore (MAS) last week projected that Singapore’s growth next year could be slightly below its potential rate of 3 per cent and 5 per cent.
It added that economic growth over the next few quarters would likely stagnate before picking up again late next year.
However, Lee warned that things might not necessarily be smooth sailing after next year.
“MAS is being optimistic. They say hopefully by the end of next year, things will pick up. But even if things pick up by the end of next year, the longer-term problems in Europe are not going to disappear,” Lee said. “I expect a period of several years of difficulty in the global economy and we have to be prepared for that.”
Adapt
15 things I learned from Adapt.
1. Adapting is necessary for improvement (the first car did not turn or reverse)
2. Adapting cannot be centralized (mao’s great leap backwards), it is not that market based adaptation do not fail, it is that they do not fail catastrophically
3. Learning from failure is hard (poker player wrongly feels money is still his after a big loss through bad luck or bad strategy - go on tilt, make bets he would otherwise not have made) (deal or no deal - increasingly generous offers)
4. First step - variation. ROI is not a good way to get new ideas and innovation. Most original ideas fail, or are not original, but the original and useful ones offer returns too high to be sensibly measured
5. Offering a prize is the best way to create innovation
6. Google, Intel, Pfizer - huge companies, large edifices, but products are small or no physical form at all, they sell ideas.
7. Small Microsoft humbled mightly IBM, now failing to adapt, Microsoft eclipsed by facebook and Google. Failed to see potential of internet
8. Not all adaptations are possible - Boeing 747 been around for 50 years, Cars are much the same although now they have aircon, airbags, electric windows
9. Patents - Bayer’s Cipro and Roche’s Tamiflu, govt pressure to sell patent. Vaccine for HIV?
10. Innovation means certain failure
11. Key is to make failures small and survivable
12. 1700 - Greenwich, Royal Observatory, British Navy offered prize to anyone who can provide a solution to the Longitude problem. Village carpenter Harison created a clock capable of keeping time accurate despite rolling, pitching, extreme climate, temperature and himidity. Knowing the time in London, sailors can calculate their position using the sun. But Royal Observatory’s experts went to great lengths to deny the prize, tested the clock for 10 years, sent Harison to war with the clock. He survived the war and the clock passed with flying colors. The clock was then impounded for further testing. Harison did receive his prize and his method did become the standard way to navigate longitude. But only after his death.
13. Insider info -Google’s R&D hiring policy is you cannot have a degree someone already has. They want people from diferent walks of life to contribute
14. Coupled - compounding, one leading to another. Safety systems prevents one but causes another
15. Experiments. Survivable. Variance. Selection.
The U.S. Economic Outlook I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy. The Outlook for Growth As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth—largely reflecting gains in equity values—and lower debt burdens have also increased consumers’ willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence. Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers—a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed—fell, remarkably, by nearly 10 percent from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6-1/2 percent below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6 percent. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment—nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed. Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday’s jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully. The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well. In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like. Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane. The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence. The Outlook for Inflation Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product—gasoline—account for the bulk of the recent increase in consumer price inflation.1 Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily. Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong. The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households’ longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable.2 As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled. Commodity Prices The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40 percent from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist’s first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply. From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4-1/2 percent per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7 percent per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10 percent in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.3 Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14 percent from 2000 to 2010; underlying this overall trend, however, was a 40 percent increase in oil use in emerging market economies and an outright decline of 4-1/2 percent in the advanced economies. In particular, U.S. oil consumption was about 2-1/2 percent lower in 2010 than in 2000, with net imports of oil down nearly 10 percent, even though U.S. real GDP rose by nearly 20 percent over that period. This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies.4 Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years. Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1 percent per year since 2004, compared with nearly 2 percent per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC’s production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle. Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer’s drought in Russia severely reduced that country’s wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices. Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques.5 Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions. In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments. As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term. While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar’s decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that. Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks. Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment. Monetary Policy Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer. Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate. 1. Through April, personal consumption expenditures (PCE) inflation over the previous six months was 3.6 percent at an annual rate; excluding gasoline, inflation over that period was 2 percent. Over a 12-month span, inflation through April was 2.2 percent; excluding gasoline, it was 1.2 percent. Return to text 2. In the Thomson Reuters/University of Michigan Surveys of Consumers, the median reading on expected inflation over the next 5 to 10 years was 2.9 percent in May after having averaged 2.8 percent in 2010. In the Survey of Professional Forecasters (SPF) compiled by the Federal Reserve Bank of Philadelphia, the median projection for PCE inflation over the next 10 years was 2.3 percent in May, up from the 2.1 percent average reading last year. The equivalent SPF projection for CPI inflation was 2.4 percent, versus 2.3 percent in 2010. The 5-year forward measure of inflation compensation derived from TIPS stood at about 2-3/4 percent in May, down noticeably from the levels observed toward the end of 2010. Return to text 3. The GDP data cited here are from the International Monetary Fund’s World Economic Outlook database. The difference between the advanced and emerging market economies is also evident in the statistics on industrial production, which is perhaps more directly relevant to the demand for commodities. According to the CPB Netherlands Bureau for Economic Policy Analysis, from March 2009 to March 2010, industrial production rose 26 percent in the emerging market economies and 11 percent in the advanced economies. Return to text 4. A portion of commodity use in the emerging market economies serves as inputs to the production of exports, some of which are ultimately consumed in advanced economies. Return to text 5. As natural gas is difficult to transport overseas, the increased supplies of natural gas in North America have not translated into significantly lower prices abroad. In the first quarter of 2011, natural gas prices in the United States were less than half of those in Germany. Return to textChairman Ben S. Bernanke
At the International Monetary Conference, Atlanta, Georgia
June 7, 2011
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.
Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3-1/2 percent, compared with an average of less than 1 percent over the preceding two years.
As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let’s look at these price increases in closer detail.
Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and—notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum—the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.
RULES OF PRUDENCE 1. Our Party has won 81 out of 87 seats in the just concluded General Election. The opposition contested 82 seats, of which the PAP won 76, with 60.1% of the votes. SERVING IN A NEW ERA 2. The people have given us a clear mandate to carry out our programmes. We must fulfil what we have promised to do in our manifesto. We must never break faith with the people, but always carry out our duties to them responsibly, address their worries and advance their interests. 3. The elections have shown that voters have concerns which need to be addressed. The Government will have to significantly improve our outreach to voters, our approach to formulating policies, and our policies themselves. As MPs, you play key roles in all these areas. You have to listen hard to voter concerns, help them to tackle pressing needs, reflect their worries and aspirations to the Government and persuade them to support policies which are in their own long term benefit. 4. Singapore is in a new phase of its political development. The PAP government has to operate and govern in a different way than before. But two things should not change. First, we must always hold fast to the spirit of service to the people, and work hard on their behalf. Second, we must never compromise the high standards of honesty and integrity, which have enabled the PAP to keep trust with the people all these decades. UPHOLDING OUR REPUTATION AND INTEGRITY 5. The PAP’s reputation for clean, incorruptible government is one of our most precious assets. As PAP MPs, your standing in society reflects this high standing of the Party as a whole. I cannot stress strongly enough that every MP must uphold the rigorous standards that we have set for ourselves, and do nothing to compromise them. Never give cause for accusations that you are misusing your position, especially your access to Ministers. This would discredit both you and the Party. 6. As MPs, you will come across many different sorts of people. Some will be altruistic, public spirited people who will help you without wanting anything in return, spending their time and money to get community projects going and to serve your residents. But a few will cultivate you in order to obtain benefits for themselves or their companies, to gain respectability by association with you, or to get you to influence ministries and statutory boards to make decisions in their favour. Gift hampers on festive occasions, entertainment, and personal favours big and small are just a few of countless social lubricants which such people use to ingratiate themselves to MPs and make you obligated to them. 7. You must be able to distinguish between these two groups of people, and be shrewd in assessing the motives of those who seek to get close to you. At all times you must be seen to be beyond the influence of gifts or favours. 8. You should be scrupulously proper in your contacts with government departments or public officers. Do not lobby any ministry or statutory board on behalf of anyone who is not your constituent or grassroots activist. Do not raise matters with public officers on behalf of friends, clients, contractors, employers, or financiers to advance their business interests. To be above board, conduct business with public officers in writing and avoid making telephone requests. If you have to speak, follow up in writing to put your requests on record. 9. MPs are often approached by friends, grassroots leaders or proprietors of shops and businessmen to officiate at the openings of their new shops or other business events. They usually offer a gesture, such as a donation to a charity or constituency welfare fund. Though you may find it awkward to refuse such requests, once you accept one, you will be hard-pressed to draw a line. As a rule, you should decline invitations to such business events unless you have obtained prior approval from the Whip. The Whip will grant approval only if the business is one that will add much value to the economy. SEPARATING BUSINESS AND POLITICS 10. You must separate your public political position from your private business or professional interests. MPs who are in business, who occupy senior management positions in companies, or who sit on company boards should be especially vigilant. You must not exploit your public position as Government MPs, your close contacts with the Ministers, or your access to government departments and civil servants, for your personal business interest or the benefit of your employers. Your conduct must always be above board. 11. MPs who are employed by companies or industry associations may at times have to make public statements on behalf of their company or industry association. If you have to do so, make it clear that you are not speaking as an MP, but in your private, professional or business capacity. 12. When you raise questions in Parliament related to your own businesses, you should first declare your pecuniary interest in the issue. Do not use Parliamentary questions as a means to lobby the Government on behalf of your businesses. 13. You may, however, speak freely to Cabinet Ministers, who are your Parliamentary colleagues. Ministers will listen carefully to arguments on principles, especially when they relate to the general policy of their Ministries. But Ministers will not change individual acts of discretion, unless they have very good reasons which they can justify publicly. Parliamentary Secretaries and Ministers of State who intervene in their Ministries to reverse or alter decisions should promptly report the matter to their Ministers to protect themselves against possible accusations of misconduct. The Government must always base decisions on the merits of the issues, and cannot yield to pressure from interested parties. DIRECTORSHIPS 14. MPs are often invited to serve on the Boards of private and publicly listed companies. This is a sign that private sector values PAP MPs’ integrity and service, and reflects the high standing of the Party and of PAP MPs in general. The Party permits MPs to serve as directors, provided you keep your private and public responsibilities rigorously separate. 15. The public will closely scrutinise your involvement in companies, because you are a PAP MP. You should conduct your business activities so as to bring credit to yourself and to the Party. Adverse publicity on your performance as a director, or lapses in the companies you are associated with, will tarnish your reputation as an MP and lower the public’s regard for the Party. 16. You should not solicit for Directorships in any companies, lest you appear to be exploiting your political position to benefit yourself. 17. You should not accept directorships where the company just wants to dress up the board with a PAP MP or two, in order to look more respectable. 18. Some grassroots leaders are businessmen who own or manage companies. You should not sit on any boards of companies owned or chaired by grassroots leaders appointed by you, so as to avoid the perception that you are obligated to them or advancing their business interests. 19. If you are offered a Directorship, you have to decide for yourself whether to accept. The Party is not in a position to vet or approve such decisions. 20. Before accepting, consider the possible impact of the Directorship on your political life. Ensure that the company understands that you are doing so strictly in your private capacity, and will not use your public position to champion the interests of the company, or lobby the government on its behalf. 21. Make every effort to familiarise yourself with the business, track record and background of the key promoters of the company. Satisfy yourself that the company is reputable, and that you are able to make a meaningful contribution. Specifically, just like anyone else contemplating a Directorship, you should ask yourself: a. How well do you know the company, its business strategy, financial status, shareholding structure and the underlying industry? b. Do you know your fellow directors, the way the Board and its committees fulfil their responsibilities, the reporting structure between Board and Management and the relationship between shareholders and the company? c. Do you have sufficient industry, financial or professional expertise to fulfil your expected role and responsibilities as a Director? Do you understand your obligations under the law and the Code of Corporate Governance? Will you be able to discharge your fiduciary duties properly and without fear or favour? d. Will you face any conflicts of interest, and if so can you manage them? If you are in any doubt, you should decline. 22. Once you have decided to accept an offer of a Directorship, please inform the Whip. Detailed reporting requirements can be found in the Annex. PARLIAMENT 23. MPs are expected to attend all sittings of Parliament. If you have to be absent from any sitting, seek the prior permission of the Government Whip. Please inform the Whip if you have to leave the Parliament premises while a sitting is on. 24. If you travel abroad, or need to be absent from Parliament for any reason, you must apply to the Speaker for leave, with copies to the Leader of the House and the Government Whip. You should also inform the Whip where you can be reached while away from Singapore. 25. I will ask the Speaker to give all MPs, particularly new MPs, ample opportunity and latitude to speak in Parliament. Your first opportunity will be during the debate following the President’s Address at the opening of Parliament. At the Budget Debate, all MPs should speak up. Script your speeches or put your key points in note form to organise your ideas, and help the media. 26. The public expects PAP MPs to express their views frankly, whether for or against Government policies. In debates, speak freely and with conviction.Press your points vigorously, and do not shy away from robust debate. However, please exercise judgement when putting your points across. 27. Bring out grapevine talk for the Government to rebut, but do not unwittingly lend credence to baseless gossip. By doing so, you help ministers to put across the facts, explain the reasons for policies and decisions, and hence maintain public confidence in the openness and integrity of our actions. 28. Your honest, informed views are an important political input which Ministers will consider in formulating and calibrating policies. Ministers will accept valid, constructive suggestions, but they have to correct inaccurate or mistaken impressions. Over time, the public will see that PAP backbenchers are as effective as opposition MPs, if not better, at holding ministers to account, debating issues fully, and influencing policies for the better. IMPORTANT PUBLIC OCCASIONS 29. On certain occasions, like the National Day Parade and the Investiture Ceremony for National Day Awards, the whole Establishment, i.e. the Executive, the Legislature and the Judiciary, will be there. Those who cannot attend must have very good reasons. Those who have accepted the invitation must attend, otherwise they leave empty seats, which does no credit to them or to the Party. 30. At all public functions and constituency events, punctuality is of paramount importance. GIFTS 31. You should not accept gifts which might place you under an obligation which conflicts with your public duties. If you receive any gifts other than from close personal friends or relatives, you must declare them to the Clerk of Parliament who will have the gifts valued. If you wish to keep the gifts, you must pay the Government for them at the valuation price. FUND-RAISING 32. Party Branches should not raise funds on their own without permission, for example by soliciting advertisements for a souvenir magazine or a carnival. If you intend to raise funds, please clear it beforehand with the Organising Secretary. When your branch embarks on a collective fund-raising activity, e.g. a Family Day or Walk-A-Jog, you must follow the rules strictly. FINANCIAL PRUDENCE 33. As MPs, you should manage your personal financial affairs prudently. Do not over-extend yourself, or become financially embarrassed. This would be not only a potential source of personal embarrassment, but also a weakness which may expose you to pressure or blackmail. 34. In particular, you should not make major financial commitments assuming that you will continue to receive your MP’s allowance. While MPs typically serve several terms, you cannot assume that you will automatically be fielded in future General Elections, or that if fielded you will definitely be re-elected. There is no tenure or job security in politics. DECLARATION OF INCOME 35. For your own protection, every MP should disclose to me, in confidence, your business and professional interests, your present employment and monthly pay, all retainers and fees that you are receiving, and whether your job requires you to get in touch with officers of Government Ministries or statutory boards on behalf of employers or clients. Office holders need not do so because you will be subject to the reporting requirements of the Code of Conduct for ministers. This should be done by 30 June 2011. GENERAL BEHAVIOUR 36. We have held our position in successive elections because our integrity has never been in doubt, and because we are sensitive to the views and attitudes of the people we represent. MPs must always uphold the high standards of the Party and not have lifestyles or personal conduct which will embarrass themselves and the Party. Any slackening of standards, or show of arrogance or indifference by any MP will erode confidence in him, and ultimately in the Party and Government. New MPs can pick up the dos and don’ts from older MPs, so that they conduct themselves always with modesty, decorum and dignity. You must win respect, not popularity, to stay the course. MEDIA PUBLICITY 37. I am releasing a copy of this letter to the media so that the public knows the high standards we demand of our MPs. DIRECTORSHIP DISCLOSURE REQUIREMENTS TO THE WHIP 1. Please inform the Whip of all the Directorships that you hold, and of the director’s fees or benefits in kind e.g. stock options, which you receive. Include the name of the company, the position(s) held, the date of first appointment and the current Chairman of the Board (if he is someone other than yourself) by end January for the preceding calendar year, using the Schedule attached 2. There is no need to report Directorships of subsidiary companies that you hold by virtue of your employment in the main or holding company. 3. Please update the Whip whenever you have relinquished a Directorship or accepted a new appointment, within two weeks.
Yuan Revaluation Is Win-Win for China-U.S.
By Lee Hsien Loong
The world has recovered remarkably quickly from the financial crisis. But growth is now on two tracks: developed economies still struggling with fiscal, financial and structural problems, while emerging economies, especially in Asia, are growing robustly. The resulting global imbalances have created international tensions.
The Group of 20 has emerged as a forum to tackle these issues. It was especially effective during the crisis, and remains valuable as it is more inclusive than the G-8.
The most consequential relationship in the world today is between the U.S. and China. There has been significant friction, notably over exchange rates. The yuan issue is politically hard — the U.S. sees an undervalued Chinese currency as unfair competition, while China fears that sharp revaluation will disrupt its economy, causing unemployment and unrest.
But from an economic point of view, this needn’t be a win- lose battle. A gradually appreciating yuan will encourage Chinese export industries to restructure and upgrade, help distribute the gains from growth more broadly beyond exports to the rest of the economy, and mitigate inflation, which is a growing problem in China. At the same time, it will help ease political pressures in the U.S. and tensions in the relationship.
The U.S. and China need to build mutual trust, in order to cooperate on a range of tough international issues, including Iran’s nuclear program and North Korea. Otherwise each side will doubt the other’s motives, especially when problems arise, such as over competing claims in the South China Sea.
Pre-Eminent Superpower
The world is witnessing a gradual shift in the relative balance of influence and economic power. The U.S. will remain the pre-eminent superpower for decades. But Asian countries see and sense China’s growing influence and are adjusting their stances to benefit from that nation’s growth and to consolidate their relationships with China. Yet almost all of them wish the U.S. to stay engaged in Asia. They want to be friends with both the U.S. and China, and not be forced to choose sides.
The Chinese are aware of foreign perceptions that with growing strength it has become more assertive. China’s leaders have emphasized that the country is committed to peaceful development and has no aggressive intentions. China’s domestic challenges are numerous and daunting. Its government must uplift hundreds of millions who remain in poverty, create social safety nets for its people, moderate major disparities in wealth and development, and maintain social and political stability so that progress can continue.
Chinese Leadership
No less than the U.S. or other democracies, China has its own domestic politics that it can’t ignore. China’s leaders need to explain this reality, and their basic thinking, convincingly to international audiences, who see Beijing and Shanghai and think that is China. But countries will also watch China’s actions — how it conducts itself on international issues such as climate change, and what the leaders say to their own people on China’s role in the world.
As world economies recover, governments must continue promoting global trade, to deepen the international division of labor and foster long-term prosperity for all. More immediately, the win-win results of freer trade will give a badly needed boost to demand and growth. During the crisis, protectionist pressures were a real worry. Fortunately, governments took fewer protectionist and retaliatory actions than many feared, but they also made very few positive trade moves.
Trade Tensions
In the U.S., there is little political appetite for free trade; hence the slow progress of its bilateral Free Trade Agreements and the World Trade Organization’s Doha Round. But there are some recent positive developments. The renegotiated free-trade agreement between South Korea and the U.S. was settled recently, though not yet ratified. The U.S. is also one of nine Asia-Pacific countries negotiating a Trans-Pacific partnership, which will be a pathway toward the Asia-Pacific Economic Cooperation’s vision of a free-trade area of the Asia- Pacific region.
Countries shouldn’t rest there. Leaders need to persuade electorates worried about unemployment and apprehensive about the future that free trade will benefit them in the long term. Globalization poses significant challenges to countries. Competition is intense, change is continuous, and the fruits of prosperity are unevenly distributed. But trying to shut out competition or freeze the status quo will fail, nor will currency realignments create real, sustainable prosperity.
Investment in Skills
The only reliable strategy for improving the lives of citizens is for countries to upgrade the skills of their people and the capabilities of their economies. This means educating the population to enhance their earning power, investing in technology and infrastructure to raise overall productivity, developing new industries to replace declining ones, and constantly adapting to stay relevant in a changing world.
Beyond promoting growth, governments must build political support for free markets and economic integration. Growth has to benefit the many, not just a few. The state needs to tilt the playing field in favor of the less successful, and those having difficulties keeping up. But it must do so in a sustainable way, without undermining the human drive to do well and get ahead. This is what Singapore is striving to do, to improve its people’s lives and advance as a nation.
(Lee Hsien Loong is the prime minister of Singapore. The opinions expressed are his own.)
To contact the writer of this column: Lee Hsien Loong at pmo_hq@pmo.go
