Alarming rise in US and German inflation – and oil at $130
The oil price has been rising with clockwork regularity in the last few week, now close to $130 for WTI. German and US producers prices indices have also shot up (core producer price are now rising at annual level of 3% in the US, and wholesale inflation in Germany was up 5% yoy). These data yesterday clearly spooked the financial market, where there is a slow recognition that inflation may be a problem after all.
The question among experts is to which extent is this price a result of speculation or structural supply shortages. A good analysis on this issue is from James Hamilton at Econbrowser, who takes a detailed look at global demand and supply conditions, and concludes that some of the supply estimates are exaggerated, for example for China, so that there is a genuine problem of supply shortages. While there has been no doubt some speculation, the oil price is trending upwards in the long run.
The upshot of a high oil price
Another interesting analysis about the oil price came from Francesco Lippi in Lavoce who writes that a high oil price, driven up by Asian demand, has some upshots. For example, in the US there is a positive correlation between the cost of oil and industrial production. As the arrival of new actors renders available resources more scarce and increase their cost, it offers new commercial opportunities. The capacity to innovate and the ability to switch towards new sophisticated production will be the name of the game in the futures – and some countries a potential nightmare.
Willem Buiter on inflation (part II)
Willem Buiter has another post on inflation, in which he argues that the world’s three most important central banks, the Fed, the ECB and the BoE are now all in danger of losing their credibility, the biggest asset they have in fighting inflation, as they have persistently failed to hit their targets. The situation is admittedly much worse for the Fed than the other two, as a recent survey of inflationary expectations threw up a number of over 5% in the US. But the ECB too has never seriously targeting its “below but close to” 2% target, which would have required a rise in interest rates.
John Kay on inflation
John Kay argues in his FT column that inflationary expectation are formed by the salient prices – those that are most visible. The British newspapers calculated their own inflation index, and found that “true” inflation is in the range of 10-15%, while official inflation is only 3%. Kay says the true figure includes some of the important durables from Asia, whose prices had fallen. But what matters for future inflationary expectations may be current inflation sentiment, which usually runs ahead of the official statistics.
The danger of credit default swaps
Are credit default swaps – financial instruments that insure against non-payment of interest – the next subprime? The Naked Capitalism blog has dug up a Bloombery story, quoting a BNP Paribas analyst, as well as Eurointelligence contributor Satyajit Das, saying that there is ticking time bomb. Andrea Ciccione from BNP Paribas has done the maths, and concluded conservatively default of over $150bn. Altoghether about $1.3 trillion is at risk. Das makes the point that CDS are going to complicated the financial crisis, saying that this may well freeze up the financial system. Ciccione in particular fears counterparty risks from hedge funds, who have written many CDS. The crisis could be triggered by a rise in bankruptcies from their previously low levels, as global growth slows down. (The point is you don’t a long and deep recession to produce a scary scenario. A mere return to normal is all it takes.)
Italy’s first reform – reduction of windfall taxes
It is a genuine reform, or is it another Berlusconi-style ploy? The new centre-right Italian government is preparing sharp falls in taxes on the variable components of salaries, such as profit-related pay, which apparently also has the support of the social partners. Tito Boeri and Pietro Garibaldi argue in Lavoce that this is in principle a good idea, as it could help the process to decentralise wage negotiations, and brings wage closer to productivity. But there are big risks. It makes the tax system more complication, and could possibly lead to a huge fiscal loss. It would have been better, they conclude, to cut taxes overall, and to reform the labour contracts separately.
Germany’s Grand Coalition loses popularity
Even though the German economy is still relatively robust, the Grand Coalition has lost popularity. The Christian Democrats are now at just over 35%, the disappointingly low level they reached at the last elections, and the SPD is at 28%, according to the Allensbach research institute. The post communists are strong at 12%. The CDU’s and SPD’s results are certainly sufficient to form another Grand Coalition, but this would be a very unpopular option. As the CDU is now falling as well, the likelihood of a two-party coalition dwindles.
Financial Times Deutschland has an article in its political section according to which the Greens are very determined not to entered into a coalition with the CDU at national level (they did so in Hamburg recently). Green chief Reinhard Butigkofer told the paper that the CDU is too much dominated by short-term oriented commercial lobbyists. Without the Greens, however, there is no possibility for Angela Merkel to form a government after the next election. Her best chance is for a repeat of the election result last time, which saw no overall winner, and which forces the two large parties into a Grand Coalition.
Is Japan like Germany?
FT Deutschland has an interesting analysis about the Japanese economy. Reporting on a visit by John Lipsky of the IMF to Japan, the paper said the Japanese economy has proved surprisingly robust to the recent global financial crisis – like Germany in a way. Japan’s exposure to the subprime is much lower than in other regions, and the country’s export performance is remarkable. The article quotes analysts as saying that Japan’s innate strength should not be underestimated. (Funny that Japan and Germany are now the growth engines of the world economy. Oh, and by the way, Germany has once again been the world’s largest exporter in 2007.)
A German lesson for China
In his column in FT Deutschland, Wolfgang Munchau argues that the German election of 1969 holds some lessons for China’s dictators. 1969 was the year when Germany’s ruling CDU first lost power (to Willy Brandt’s SPD). It was democratic change that brought overdue change in economic policy, such as the revaluation of the D-Mark against the dollar within the Bretton Wood system. Without democratic change, that would either not have happened, or it would have happened much later. With democracy, Germany would have degenerated even more into a state dominated by producer lobbies. He concludes that China’s economic development is going to hit a wall at some point without the adoption of democracy. Furthermore, German foreign minister Steinmeier is wrong in his “policy realism” towards China. His decision not to receive the Dalai Lama, for fear of offending the Chinese, is a case in point.
Let’s annex Flanders!
The Dutch populist Geert Wilders (yes, the guy with the film) has proposed that the Netherland should simply annex Flanders, the Dutch-speaking bit of Belgium. Now Wilders is not proposing an invasions, but has asked Jan Peter Balkenende, the Dutch premier, to hold talks with his Belgian counterpart, Yves Leterme, Le Monde reports. The article itself is downbeat on the prospects of a Great Netherlands, as there is too much animosity between the Flemish and the Dutch, mostly historical and religious.
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