By Central Bank News
By Central Bank News
The central bank of Australia kept its benchmark cash rate unchanged at 3.50 percent, as widely expected, as inflation was on track to remain within the bank’s target range and economic growth remained close to its trend rate.
But the international outlook had become more subdued in recent months, the Reserve Bank of Australia (RBA) added in a statement from Governor Glenn Stevens.
“Having picked up in the early months of 2012, growth in the world economy has since softened. Current assessments are that global GDP will grow at no more than average pace in 2012, with risks to the outlook still on the downside,” Stevens said.
While economic activity in Europe is contracting, growth in the U.S. is only modest, he said, adding that growth in China has remained reasonably robust but recent indicators have been weaker and this has given rise to uncertainly about near-term growth and dampened growth around Asia.
Australia’s economy expanded by 1.3 percent in the first quarter from the fourth for an annual growth rate of 4.3 percent, helped by large increases in capital spending in the resources sector.
The RBA recently raised its 2012 growth forecast to 3.5 percent from a previous forecast of 3 percent on the back of the boom in the mining sector.
Australia’s inflation rate was 1.2 percent in the second quarter, down from 1.6 percent in the first. The RBA targets inflation of 1-3 percent.
“The Bank’s assessment is that inflation will be consistent with the target over the next one to two years,” Stevens said, adding that maintaining low inflation will require growth in domestic costs to remain contained as the effects of the rise in the Australian dollar wane.
The RBA cut its cash rate in June, bringing this year’s reduction to 75 basis points, and Stevens said interest rates for borrowers were a little below their medium-term averages and the impact of the rate cuts were still working their way through the economy.
“At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate,” Stevens said.
Economists had widely expected the RBA to keep rates unchanged at the meeting but are starting to look ahead to a rate cut later this year as the slowdown in Asia, along with Europe’s slump, hits the country’s growth.
www.CentralBankNews.info
The Chinese haven’t figured out the answer to the chicken and the egg problem yet. But they sure have answered the economics version of the same question: What comes first, production or consumption?
You can’t consume without producing, but why produce if you’re not consuming?
The Chinese have decided that production is more important. They run the entire Chinese economy on the premise of keeping people employed, not buying stuff. The Americans are the opposite. They think the desire and ability to consume comes first.
Their answer to the chicken and egg problem is to eat both. That’s why, when the financial crisis hit, the Americans stimulated ‘demand’. While China’s economy built stuff, putting things into production.
The demand for Australian resources that resulted from China’s production is what kept us out of trouble during the financial crisis. Finding out who is right about production and consumption, China or America, could determine the source of the world’s future economic growth. And the demand for our resources.
Unfortunately, both sides are wrong. It’s all about producing and consuming at the same time. It’s pretty difficult to produce if you’re not consuming anything. And it’s pretty difficult to consume if you’re not producing anything. Unless you’re a lawyer.
The key is the proportion of the two. And to make sure you produce the right stuff.
Here’s the catch. To enhance your production and consumption, you have to consume less at first. That’s because enhanced production first requires you to work on how efficiently you produce. You need to take the time to build a new tool, or machine. In other words, you need to invest. You can’t consume what you spend on investment. So you have to save it first.
Here’s a quick example to prove the point. You’re stuck on a desert island with a bunch of palm trees. To survive, you need to consume 20 coconuts each day. Any more than that and you’re living a life of luxury. You can pick 4 coconuts an hour (production), or you can produce wood (save) to build yourself a ladder (investment), which will take 5 hours.
With a ladder, you can double your production to 8 coconuts an hour. How do you apportion your time between coconut picking and ladder building without starving or dying of exhaustion?
The Chinese answer is to produce more ladders. The American answer is to consume more coconuts. Obviously, you want to do both. But just wanting more of one or the other isn’t going to achieve anything.
The real question you face is how to apportion your time between coconut production and ladder building.
What’s interesting is that every individual would answer the question differently. We have different preferences for how many coconuts we want and how hard we want to work. Not only that, but the amount of coconuts we need and are able to pick differs. So does our ladder building ability.
But when the government makes the decision on whether the economy needs more production or consumption, everyone is along for the ride.
That’s why hundreds of millions of Chinese are suffering in terms of not being able to consume very much. And millions of Americans are suffering in terms of not having a job.
Over in America, they’ve been so busy consuming coconuts, they haven’t even maintained their ladders, let alone increased them.
That’s why ‘American incomes declined more in the three-year expansion that started in June 2009 than during the longest recession since the Great Depression, according to an analysis of U.S. Census Bureau data by Sentier Research LLC.’ Oops.
Over in China, they’ve got multiple ladders up any given coconut palm. That’s another way of saying the Chinese have been building bridges to nowhere. In fact, reality is even more absurd than the metaphors.
German newspaper Der Spiegel has a great article (in English) on what is really going on in China. Here are some highlights, or lowlights if you own shares in Australian mining companies:
‘Duan, the official in the west, is … in a hurry. Duan builds things, and he does so because he can. The sheep walk across Duan’s wonderful, multi-lane, freshly asphalted street, and they’re disruptive.’
The sheep probably don’t appreciate their new highway any more than the occasional drivers do. Der Spiegel visited one of China’s empty cities, built to create jobs:
‘It’s a gloomy day, and the wind is howling through the shells of buildings. According to the plans, there will be 300,000 people living here in 2015, 600,000 by the year 2020 and eventually as many as a million… Everything is already there: airports, railways and highways. Second, there is “unlimited electricity”. And third, the province has rich mineral resources, including coal, oil and nickel. Of course, he adds, it also has plenty of workers.’
The beautiful irony of China’s ghost cities is that America is facing a similar problem in its former industrial hubs. Just look at Detroit, the world’s former industrial miracle. You can now play golf from one side of the city to the next. Much of it is abandoned and crumbling.
The problem with overconsumption is obvious. You become unproductive because you didn’t invest in production. The problem with China’s overinvestment is less obvious.
In fact, most economists wouldn’t spot the problem if it was woolly and walked across the highway in front of their car. The term for this is malinvestment. And China is a textbook case. The Age reports on some examples:
‘China’s banks are coming after the country’s steel traders, hauling executives into court to chase down loans that some traders say they didn’t initially need and can’t now repay…
‘”After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn’t need,” Li Huanhan, the owner of Shanghai Shunze Steel Trading, told a judge at a recent hearing. “We had nothing to do with the money, so we turned to other investments, like real estate.”‘
Debt is one problem even a mainstream economist can spot. It is difficult to repay debt if you don’t earn an income from your investment. And one characteristic of a malinvestment is that it doesn’t earn enough of an income to justify it.
But economists don’t recognise many of the other problems, which are obvious to the rest of us. Producing things that nobody wants, like empty cities, is incredibly wasteful.
Eventually, China will experience an economic crisis. The debts they ran up to malinvest can’t be repaid. When the economy tries to shift towards a more stable balance of consumption, investment and production, it will be extremely disruptive.
Jobs and all the industries catering to construction will take a major hit. You can’t turn an investment and production focused economy into a balanced one overnight.
Unfortunately, all this means a collapse in demand for Australian resources. The mining boom will be over. The iron ore price will plunge. Treasurer Wayne Swan’s budget will be in tatters. As will the speedy half of Australia’s two speed economy.
Worst of all, many of those predictions have already come true. As for what to do about it, you can watch Greg Canavan’s presentation on the matter here.
Nick Hubble
Editor, Money Morning
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China bulls used to deny that any sort of economic slowdown was possible for the country.
Once it became clear that the Chinese economy was indeed slowing down, the bulls said it would be a “soft”, well-managed landing.
But now that the landing is looking a lot harder than they’d expected, the bullish argument is that there will be a rebound in the second half of 2012.
However, the latest data suggests there’s little hope of that either.
So just how hard will China fall? And what does it mean for your money?
China’s manufacturing sector shrunk in August, according to official figures. That was the worst showing in nine months, and worse than analysts had expected.
The unofficial figures were even worse. The HSBC Purchasing Manufacturing Index reported its worst figures since March 2009. HSBC’s index has now been falling for ten months in a row.
Optimists had been hoping that China’s economy would start to rally this quarter. Now that seems unlikely.
Never mind, say the China bulls. China has plenty of room to “loosen monetary policy”. Indeed, shares in Asia were boosted by the bad data, because of hopes that China will go on a spending spree now.
However, looser monetary policy was what the bulls pinned their hopes on when it became clear the Chinese economy was slowing at the start of the year. Yet it hasn’t had a big impact so far.
For example, the deterioration in the official manufacturing figures was ‘driven by a worsening of conditions for large firms’, notes Qinwei Wang of Capital Economics.
What’s significant about that? Well, China has been loosening monetary policy recently, which had encouraged the bulls. However, ‘large firms tend to be the first beneficiaries of policy loosening. The fact that they are still struggling does not bode well for hopes of a rapid rebound.’
There are other factors beyond monetary policy affecting the Chinese economy. There’s the political handover this year, for one thing. Bulls have been arguing that China would try to ensure the Chinese economy was looking healthy for when the new leaders take over this year.
Yet Paul Glasson of Satori Investments tells The Australian newspaper that the handover process is part of the problem. The change in government is holding up the development of new projects.
The trouble is that ‘many projects are developed at provincial level’. With changes sweeping through the ranks at all levels, it is ‘impossible to progress with meaningful investment’.
Of course, the worse the data gets, the more chance there is that the Chinese will embark on a big push. But that would be bad news too. Given the political confusion, capital will be misallocated even more badly than in the past.
Caixin Online: ‘overcapacity is still severe in most industries’. To get rid of the overcapacity, companies need to cut production. But that won’t happen if they’re being pushed to maintain production to sustain GDP figures.
In turn, this ‘will prolong the vicious cycle’, with over-production leading to falling commodity prices and making the eventual reckoning all the harder.
China’s woes are one of the main reasons why we would keep avoiding the industrial mining sector, as I noted last week. But wouldn’t more quantitative easing (QE) in the US also boost risky, cyclical sectors like the miners?
It probably would – in the short term at least. But I wouldn’t be betting on more QE from Ben Bernanke either.
At his Jackson Hole speech on Friday, the Fed chief reiterated that the Fed would act ‘as needed’. But that doesn’t mean much. That’s just part of the Fed’s basic job description. Looking at the figures, there’s no clear reason for the US to print money yet.
The US economy is looking fragile, no doubt about it. But as Jim Paulsen of Wells Capital Management points out in the FT, the best thing that could happen is for the US to get over this particular “soft patch” without any more money-printing from the Fed.
This ‘would boost confidence by creating a sense of a much more sustainable, less monetarily addicted economy’.
Even if Bernanke doesn’t agree with this view, it would be hard for him to justify any heroic action from the Fed, not of the sort that would send stock markets soaring. As we’ve noted already, the first and second batches of QE took place against a backdrop of panic. That’s not present right now.
QE3 may well materialise – eventually. And the Chinese might panic and print a ton more money, although that would be the worst thing to do for the Chinese economy in the long run.
But investors will have to endure a lot more pain before either event happens. That’s why we’d favour European over US stock markets right now – Europe is priced for hard times, whereas the US is priced rather more optimistically.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek
From the Archives…
Why There’s No Such Thing as a Floor Price Just the Market Price
31-08-2012 – Kris Sayce
Take Advantage of the High Australian Dollar While You Can
30-08-2012 – Greg Canavan
Smartphone, Dumb Patents
29-08-2012 – Jeffrey Tucker
Find Out if You’re a Speculator, Value Investor or Stock Trader
28-08-2012 – Nick Hubble
Why Green Energy Will Struggle Against a 790,000 Year Habit
27-08-2012 – Kris Sayce
EURUSD stays above a upward trend line on 4-hour chart, and remains in uptrend from 1.2241. Initial support is at the trend line, as long as the trend line support holds, uptrend could be expected to continue, and further rise to 1.2700 is possible. Key support is at 1.2465, only break below this level will indicate that lengthier consolidation of the longer term uptrend from 1.2042 is underway, then deeper decline to 1.2400 area to complete the consolidation could be seen.
By Central Bank News
By OilPrice.com
The biggest geostrategic change of the past decade overlooked by Washington policy wonks in their fixation on their self-proclaimed “war on terror” is that Latin America has been throwing off the shackles of the Monroe Doctrine.
These ignored developments may well soon refocus Washington’s attention on the Southern Hemisphere, as Venezuela’s President Hugo Chavez reorients his country’s to China.
It is not an inconsiderable element of concern for the Obama administration. According to the U.S. Energy Administration, the United States total crude oil imports now average 9.033 million barrels per day, with the top five exporting countries being Canada (2.666 mbpd), Mexico (1.319 mbpd), Saudi Arabia (1.107 mbpd), with Venezuela in fourth place at 930 thousand barrels per day. Note that two of America’s top four energy importers are south of the Rio Grande.
Furthermore, Venezuela’s reserves according to OPEC now top those of Saudi Arabia, with Venezuela now estimated to have the largest conventional oil reserves and the second-largest natural gas reserves in the Western Hemisphere. Two years ago OPEC reported that of the organization’s 81.33 percent of the globe’s known oil reserves Venezuela had 24.8 percent, exceeding Saudi Arabia with 22.2
So, why is Chavez in Washington’s bad books? Well, among other reasons, for the company he keeps, as the Russian Federation, Iran and Cuba are all allies. Note that the first two are also major oil exporters.
Worse however are the social programs that Chavez has implemented to benefit his people, which not only smack of socialism but offer an alternative to Washington’s proscriptions. Case in point – Venezuela’s health care system. A joint Cuban-Venezuelan medical program, “Barrio Adentro,” has made health care free and accessible to all Venezuelans. Founded in 2003, Barrio Adentro expanded Venezuela’s national health care system by employing more than 30,000 Cuban medical professionals as the government equipped clinics and hospitals with advanced high technology diagnostic and surgical equipment.
Something that Americans might consider as the presidential race heats up, with Medicare on the table. Such alternatives hardly please the powers that be in Washington, but are increasingly considered in Latin America.
But, back to energy. Despite the primacy of Venezuelan oil sales to the U.S. Caracas is shifting gears, and China will soon to become Venezuela’s main trade partner, with oil sales surging 60 percent in 2012.
During a recent interview Oil Minister Rafael Ramirez said, “We are selling 640.000 barrels of petrol per day to China.” This is now equivalent to 2/3 of Venezuela’s oil exports to the U.S., up from 400,000 barrels per day in February. For those with a sense of history, before President Chavez took office in 1999, Venezuela did not ship oil to China, but Chavez has stated that by 2015 he intends to ramp up Venezuelan oil exports to China to one million barrels of crude per day. According to Ramirez, the rise in exports will come from increased production in the natural resource-rich Orinoco Oil Belt in the east of the country.
It is hard to see this emphasis shift as anything but a short-sighted diplomatic disaster for the U.S. Compounding the degradation of Washington, which insists that China in Africa in particular exploits poor nations by buying resources at rock bottom prices, Ramirez said simply, “We are selling oil to China at a better price than what is sold in the U.S. market.” And, given Washington’s foreign aid stinginess, last week President Chavez announced that China Development Bank will bankroll $4 billion dollars in development projects, to include housing, energy and industrial growth.
Again, those with a sense of history might note that the year Chavez took office, Venezuela exported to the U.S. market 1.5 million bpd.
So, where does Washington go from here? If it wants to preserve its increasingly tenuous foothold in a nation with the world’s largest oil reserves, it might begin by engaging in some honest diplomacy.
And match Chinese rates of pay.
Source: http://oilprice.com/Energy/
By. John C.K. Daly of Oilprice.com
On the day when the Fed Chairman Ben Bernanke delivers his much-anticipated speech in Jackson Hole, we want to tell you about an emerging forex opportunity which…
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By Central Bank News
The Bank of Zambia held its policy rate steady at 9.00 percent as inflation remains in line with the central bank’s target of 7 percent.
The central bank of Zambia said in a statement from Aug. 31 that its Monetary Policy Committee had taken note of upside price pressures from a proposed change in electricity tariffs and higher mealie meal and meat prices. However, these inflationary pressures are likely to be moderated by the stable exchange rate and stable prices for fuel, fish and vegetables.
“The Committee has weighed the inflation risks going forward and it has noted that during the policy relevant period, inflation will be broadly in line with the end-year target of 7.0%. Therefore, the Committee decided to maintain the policy rate at 9%,” the bank said.
Zambia’s inflation rate rose to 6.4 percent in August from 6.2 percent in July due to higher food prices. The International Monetary Fund expects the country’s economy to expand by 7.7 percent this year, up from an estimated 6.5 percent in 2011 due to high copper production.
www.CentralBankNews.info
By Central Bank News
