The IMF on overinvestment @ China Financial Markets in his latest post Michael Pettis comments a recent report on China, by the IMF, in which it is argued that China’s economy, whose present investment levels stand at 50% of GDP, is and has overinvested significantly. This has been Mr. Pettis’ thesis for quite a few years, and only recently it is starting to gain wider acceptance. One of the consequences of this overinvestment is that the household sector (citizens) and Small & Medium Enterprises (SME) have been “forced” to subsidize growth at a rate of 5 to 8% per year, for many years. Mr. Pettis concludes that “the extent of Chinese overinvestment – even if we assume that it has not already caused significant fragility in the banking system and enormous hidden losses yet to be amortized – requires a very sharp contraction just to get back to a “normal” which, in the past, was anyway associated with difficult economic adjustments. It is hard to imagine how such a sharp contraction in investment will itself not lead to a sharp drop in GDP growth”. Something to keep in mind when so many in the West rely on a continuation of strong chinese growth as a support to their own economies.
Inside the Risky Bets of Central Banks @ The Wall Street Journal In this article the unofficial spokesman of the Federal Reserve explains how unelected central bankers, in secret meetings at the offices of the Bank of International Settlements (BIS) in Basel, Switzerland, control and play with the world’s economy, wield more power than any elected official, including the president of the USA, and under the cover of “keynesian economics” are taking the world closer and closer to an inflationary crisis: “Since 2007, central banks have flooded the world financial system with more than $11 trillion.”…and they are not finished.
Mark Carney hints at need for radical action to boost ailing economies @ The Telegraph The present governor of the Bank of Canada and next governor, from mid 2013, of the Bank of England has stated that “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.” The seemingly technical and neutral expression “NGDP targeting” hides a radical change in monetary policy. In plain language it means that monetary policy will aim at a precise number of NOMINAL GDPgrowth in the economy. Nominal GDP has a real component and an inflation component, that is NGDP = real GDP + inflation. In practice this change in monetary policy would aim at increasing inflation until the NGDP target was reached, regardless whether that number was achieved simply by increasing the inflation rate, devaluing the currency, impoverishing savers, citizen.
Nicola Porpora (17 August 1686 – 3 March 1768) was an Italian composer of Baroque operas and teacher of singing, whose most famous singing student was the castrato Farinelli. This aria is from his opera Polifemo and belongs to the soundtrack of the movie Farinelli.
Still Not Spreading the Wealth Around @ Azizonomics This article compares the evolution of the percentages of GDP that both wages and corporate profits have had in the USA from the 1940s until 2012. Data shows that corporate profits have never been higher, around 11% of GDP, and wages have never been lower, around 43.5% of GDP. This trend has accelerated since 2008, because of the extreme and biased policies of the FED and the Federal Government, bailing out banks and corporations and, at the same time, forcing inflation and lower wages to the population. The article ends: “And the growing gap between the rich and the poor is steadily beginning to resemble neofeudalism.”
Lighthouse Investment On The ‘N’-Word In Monetary Policy @ Zerohedge Zerohedge publishes and comments a report from Lighthouse Investment on the likely next inflationary tool from the FED: Nominal GDP Targeting (NGDPT). The report, titled “Monetary Policy: the N-Word”, clearly explains how potential GDP (PGDP) is calculated and how the FED will use this concept to “sell” to the public the “reasonableness” of NGDPT. The trick lies in assuming that PGDP is invariant thru time (false assumption) and that, if real GDP (RGDP) is lower than PGDP, then it is reasonable, warranted, to “stimulate” the economy until NGDP = PGDP, conveniently forgetting that NGDP includes an inflation component (NGDP = RGDP + Inflation). How is that achieved? Through printing money, of course. The endgame of such a policy is hyperinflation and the replacement of the currency. This replacement, Lighthouse Investment assumes, would be Gold.