The inflation moderation (in charts)

I got a little obsessed today with the prospects of inflation – I guess it’s all the deficit talk out there. But good central banking has brought the number of countries with 20%+ inflation rates from 27 in 1982 down to just 18 in 2008.

I guess my question is: is the global inflation moderation to continue? According to the IMF, the answer is yes (at least through 2011).



Rebecca Wilder

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I have to side with China on this one

Yes, the renminbi (RMB) is closer to fair value. Chinese Foreign Ministry spokesman Ma Zhaoxu states:

"Our currency, the RMB, has appreciated more than 20 percent against the U.S. dollar since July 2005, when China moved to a floating exchange rate regime," Ma said. Before 2005, the RMB was pegged to the U.S. dollar at a fixed rate.

"The RMB exchange rate has drawn close to a reasonable and balanced level, given the international balance of payments and the market supply and demand for foreign exchange," Ma said.

The New York Times asserts that China's currency is undervalued by 25%-40%. The NY Times, like many politicians and media channels, is entirely too obsessed with China's exchange rate; they fail to understand that economic fundamentals are changing.

Contrary to popular belief, the level of the renminbi has become rather inconsequential to Chinese trade flows. Why? Because despite the fact that the renminbi has been pegged against the dollar since July of 2008, imports are surging.

The chart above illustrates the 3-month annualized growth rate in exports and imports and the renminbi valued against the US dollar. I use the 3-month annualized rate, rather than the year/year rate, to remove the strong base effects from the drop-off in trade last year.

The first thing to notice is that while export growth is indeed strong, "business as usual" in China, import growth is surely breaking trend. The 3-month annualized growth rate of imports - a good proxy for domestic demand - averaged 117% annualized growth per month from April (when it turned positive) to December 2009. Compared to this period in 2006, annualized import growth is up almost 80 percentage-points, while that for exports is up just 5 percentage-points (76.2% average 3-month annualized growth in exports May-December 2009 vs. 71.7% in 2006).

It's hard to argue that the Chinese currency is so "undervalued" if the import response is this strong.

Another myth is that China is running large current account surpluses. Given the chart above, it won't surprise you to know that China's current account has dropped markedly since late 2008.

The thing is: since prices in developed economies have dropped relative to those in key emerging markets (i.e., China), real exchange rates are coming back in-line with a s0-called equilibrium. Therefore, the renminbi, by definition, is closer to whatever an equilibrium would be, despite the fact that it is fixed. Thus, like Ma Zhaoxu says, it's at a "reasonable" value.

Rebecca Wilder

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Japan to increase holding of US assets

Here's one that was tucked away in the Financial Times, Japan Post Bank urged to diversify holdings. With all of the talk about China, its currency, and the question of the Chinese "financing the U.S. deficit", the media always forgets about Japan!

From the FT:

One of the largest buyers of Japanese government bonds is under pressure to diversify its holdings in a move that will reverberate throughout the huge JGB market.

Shizuka Kamei, Japanese financial services minister, said on Monday that Japan Post Bank should diversify its investments into US Treasuries and corporate bonds in an effort to reduce the risks of over-concentration in JGBs.

and later..

A big shift by the postal bank away from JGBs could have unsettling implications for the market. Japan Post helped digest 45 per cent of the increase in outstanding JGBs between 2001 and 2007 and already holds about 24 per cent of outstanding JGBs, according to Ruixue Xu, rates strategist at Royal Bank of Scotland in Tokyo.

However, analysts do not expect Japan Post to shift away from JGBs immediately.

Although it has attempted to expand lending since it was privatised in 2007, Japan Post has largely failed to make inroads in new businesses and remains dependent on buying JGBs.

Japan Post Bank - one of four government companies that was scheduled for an IPO offer, but to my knowledge that has been stalled - holds ¥176,990.8bn in deposits, or $US1.96tn, and the equivalent of $US2.2tn in total assets. That rivals Bank of America, the US' largest bank holding company by assets.

Who's going to purchase Treasury bonds? That's right, Japan (at least the very large Japan Post Bank, in this case): the largest foreign holder of US assets at 12.11% of the total (see above chart).

The disclaimer at the end of the FT article (in bold) is important - banks are sitting on quite a bit of reserves, and purchasing JGB's creates a very safe and clean balance sheet on which to sit. However, it is very interesting that the government is pushing US bonds. Why not German?

And the chart of the day: Japan's 5-yr CDS is 113% higher than in Q4 2009. In fact, the G3, Japan, the US, and Germany, are all seeing heightened CDS spreads.

Debt is on the mind. Rebecca Wilder

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Global consumer confidence is currently less than stellar

Today I wrote an article on Angry Bear, Consumers around the world are generally more upbeat, but not uniformly so, highlighting the still melancholy consumers around much of the world, especially in the U.S. Here is an excerpt from the article:

Confidence, consumer, investor, and business, is key - let's focus on the consumer. The one that accounts for roughly 17% of global GDP - i.e., the U.S. consumer - remains afflicted by excessive debt burden and record unemployment. In contrast, consumer confidence is rebounding smartly in other parts of the world, developed and developing.

Advanced consumers showing some confidence, but the U.S. consumer confidence index remains 39% below that during the onset of the recession.

The chart illustrates various measures of consumer confidence across a selection of advanced economies (you can see the exact sources here). Consumer confidence in the U.S., U.K., Germany, and Ireland remain well short of their Jan. 2008 levels. Notably, confidence in the U.S. has moved laterally since May 2009 despite recent gains in the fourth quarter of 2009.

I wanted to add just a few comments to this post regarding the "not uniform" part of the Angry Bear title. Ostensibly (in the chart), consumers in some advanced economies - Australia, Spain, Italy, and Tokyo - are "feeling" better off than those in the U.K., U.S., and Germany...in levels, that is. But with the exception of Australia, the recent trend is admittedly less sanguine. Let's see why.

From the Conference Board (U.S.):

"Consumer Confidence rose for the third consecutive month, primarily the result of an improvement in present-day conditions. Consumers' short-term outlook, while moderately more positive, does not suggest any significant pickup in activity in the coming months.

From the GfK Group (Germany):

German consumers are assuming that the German economy is slowly recovering from the recession, a view that is shared by many experts. However, small set-backs cannot be ruled out, and economic expectations have consequently stagnated in January.

From Nationwide (U.K.):

Although it is still early days, these lower expectations may foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn.”

From the Westpac Group (Australia):

Four of the five components of the Index increased in January. All components are seasonally adjusted. Assessments of “Family finances compared to a year ago” increased by 5.2%; expectations about family finances “over the next 12 months” increased by 10.5%. Expectations for “Economic conditions over the next 12 months” rose by 6.8% although expectations for “economic conditions over the next 5 years” fell by 2.1%”. Opinions on whether it is a “good time to buy a major household item” rose by 7.7%.

Cheery Australia is certainly the odd-man-out. At least in the latest reports, it is the expectations index that is dragging confidence in the U.S., Germany, and the U.K. Ick, not good for spending nor growth.

Rebecca Wilder

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