China hints at revaluation

 

In its quarterly report on monetary policy, the People’s Bank of China said it would orient its exchange rate policy towards “capital inflows and major currency movements”, a not too subtle hint that the country is currently subject to massive dollar inflows as the US currency weakens. The dollar yesterday continued its decline against major currencies, and the price of gold reached a new nominal record of $1117 per troy ounce. Pressure has been building up on China to do something about the exchange rate, most recently from the IMF, according to the FT, which said the renminbi was extremely undervalued.

The FT has an article on the forthcoming visit by the euro area policy trio to China.

 

Up, up, up

Everything goes up, except the dollar. The S&P briefly breached through 1100, stocks were up all over the world, commodities are up. The best summary of what is happening came from Charles Diebel at Nomura, who was quoted by the FT as saying: “The current obsession in markets is that with low policy rates ‘locked in’, risky assets can continue to perform, while the weaker US dollar pushes the commodity basket firmer, particularly gold,”

 

ED Harrison on Inflation

A good discussion about the likelihood of an inflationary exit comes from Ed Harrison in Naked Capitalism, who discusses an article by Andy Xie about a stagflation light scenario at the Federal Reserve, and the implications this has for Asia. Xie is calling on China and Japan to gang up together against the US.

 

Crisis accelerated European disintegration

In an interview with Les Echos Tommaso Padoa-Schioppa warns that so far the crisis only accelerated disintegration in Europe. Sectors have been saved by nationalistic politics and markets that were about to integrate were defragmented again. To avoid further disintegration Padoa-Schioppa called for a stronger role of the European Parliament and an avant garde of integration minded countries to move ahead.

 

A new chapter in the Franco German relationship?

The French press is full of coverage about the first Franco-German celebration of the armistice day (see review by Le Monde). Sarkozy always wanted this day to become a symbol of the Franco-German relationship (Jean Quatremer).  In their speeches both Sarkozy and Merkel comfirmed their determination  to form a stronger alliance between the two countries.  The event hardly featured in the German press. Spiegel  Online notes that all these gestures are only marketing for Sarkozy will not cover up the rising alienation between the two countries. Two months earlier Sarkozy did not get through with his suggestion of a common minister that would participate in both cabinet meetings.

 

 

EU Council president – no deal in sight

FT Deutschland reports that Fredrik Reinfeldt, Sweden’s prime minister, is expecting a vote on the EU council president, as EU leaders are not edging towards a consensus about the candidates. After a first round of consultation, Reinfeldt said he had more names than jobs. The paper writes that Germany wants the job of general secretary of the council, and mentions Uwe Corsepius, Merkel’s European adviser, as a possible candidate.

 

EU Commission clashes with France over budget

The European Commission has yesterday officially demand that France must get its budget deficit to below 3% by 2013 – a deadline that has already been rejected by Nicolas Sarkozy. FT Deutschland writes that a major confrontation with France is on the cards now, and it quotes Joaquin Almunia as saying that it is essential that France and Germany pull in the same direction, for otherwise the euro area would lose all credibility in questions of global co-ordination. The article also said that Schauble promised to adhere to the Commission’s recommendations of a deficit reduction, but quotes experts as saying that this will in practice be difficult to achieve, if Germany presses ahead with tax cuts in 2011.

 

The Commission also made some tough demands on Spain, as El Pais reports. Between 2011 and 2013 Spain will have to step up its consolidation efforts, result in a 1.75% annual structural deficit reduction effort by 2013.

As for Italy, the Commission said the biggest problem is low economic growth, as La Repubblica reports.

 

 

A repeat of the Great Depression – of sorts

Harold James has an alarmist column in Project Syndicate, reprinted by FT Deutschland, in which he warns of a breakdown in the global monetary system – similar to the events that led to the global spread of the Great Depression. He said Fed and Bank of England will both run a policy of zero interest rates for an extended period, and try risk inflation and another asset price bubble, and hope to boost their exports through devalued currencies, while continental Europe will drive a very different policy.

 

Liquidity, default, and market regulation

Charles Goodhart and Dimitri Tsomocos write in Vox about liquidity and default. They are inseparable. Liquidity problems fuel defaults and vice versa. This column discusses the shortcomings of current regulatory proposals to address liquidity and default. It says that regulators must address “systemic markets”, not just systemic institutions, and need informative measures of financial stability.

 

 

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