The French election: An inconvenient truth | The Economist

What do you expect when you have not balanced you budget since 1978...

The underlying problem is that, over the past ten years, France has lost competitiveness. In 2000 hourly labour costs in France were 8% lower than those in Germany, its main trading partner; today, they are 10% higher (see chart 2). French exports have stagnated while Germany’s have boomed. An employer today pays twice as much in social charges in France as he does in Germany. France’s unemployment rate is 10% next to 5.8% in Germany—and has not dipped below 7% for nearly 30 years.

This erosion of French competitiveness raises hard questions about the underlying social compact. Frenchmen cherish the notion that everyone has an equal right to decent services in good times and a generous safety net in bad. But what sort of level of support, in sickness, joblessness, infancy or old age, can France really afford to offer its citizens? How can the country justify its massive public administration—a millefeuille of communes, departments, regions and the central state—which employs 90 civil servants per 1,000 population, compared with 50 in Germany? How can France lighten the tax burden, including payroll social charges, so as to encourage entrepreneurship and job creation?

Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway - Bloomberg

Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway

By John Hathaway - Oct 28, 2010

Bloomberg Opinion

The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

Risky Targets

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.

This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

No Freak Occurrence

The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.

Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.

In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.

Slender Thread

But whatever the playbook promises, the capacity of financial markets to overshoot can’t be overestimated. The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.

The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.

Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.

Naysayers’ Bubble

Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The Fed is organizing an attack on the dollar’s value, believing that this is the most expedient way to defuse deflationary market forces. The man in the street is unaware, a perfect setup. Inflation can only be successful when the public doesn’t see it coming.

The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: They facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles.

(John Hathaway is a managing director of Tocqueville Asset Management LP in New York. The opinions expressed are his own.)

To contact the writer of this column: John Hathaway at JHathaway@Tocqueville.com

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

®2010 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway - Bloomberg

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VW warns on risk of decline in car market 

FT.com / Companies / Automobiles -

By Daniel Schäfer in Berlin

Published: August 13 2010 18:54 | Last updated: August 13 2010 18:55

Volkswagen on Friday sounded a warning bell over the recovery prospects for the motor industry, as Europe’s largest carmaker warned that the global car market could shrink in the second half of this year.

Christian Klingler, VW’s executive board member and head of sales, cautioned of a bumpy road ahead after the carmaker’s July sales growth considerably slowed down.

“Now that incentive programmes have come to an end, the global automotive market is expected to decline in the second half of the year,” Mr Klingler said, in a warning shot that took even close market observers by surprise.

While it is common sense among analysts and car executives that growth will slow in the second half of the year, most do not forecast vehicle sales to fall.

“We expect global sales to remain just above the level seen in the second half of 2009,” said Christoph Stürmer, analyst at IHS Global Insight.

But he added that production levels would drop significantly, as many mass market carmakers had ramped up their plant output too fast in the first six months.

“It was about time that someone came out with a warning, as the car industry has become overly euphoric,” Mr Stürmer said. “This [high level of production] will lead to a pricing battle in the remainder of the year.”

Global carmakers have been basking in a rapid sales recovery in the first half of the year, which helped many to return to profits and revenue growth after last year’s economic crisis. But as state-sponsored scrappage incentives run out and austerity measures kick in all over the continent, IHS Global Insight forecasts western European car sales to fall by 1.1m units to 5.5m vehicles year-on-year in the second half.

Car sales in the US and China, the main demand drivers in the first six months, are still growing but have been losing steam rapidly in the past few months.

VW’s July sales highlighted how the car market recovery is rapidly losing traction.

In the past month, the multi-branded carmaker’s deliveries grew by 2.9 per cent to 572,200 cars.

This marked a steady decline from the growth rates of 5.7 per cent in June and 8.6 per cent in May. Due to a much faster upswing in the first quarter of the year, VW’s sales are still up by 13.7 per cent in the first seven months.

VW, which is set to add sports car maker Porsche to its stable of nine brands next year, sold a record 4.16m cars between January and July.

But Mr Klingler warned that this pace would be difficult to maintain. “There will not be a return to the high pre-crisis levels this year,” he said, referring to the global car markets.

“Over the coming months we will continue on our growth path . . . However, this will be a challenge, given an operating environment that is again becoming difficult,” he added.

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FT.com / Companies / Automobiles - VW warns on risk of decline in car market

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Currencies The Race to the bottom

Currencies

Race to the bottom

A weak economy and an active Federal Reserve have driven the dollar down since June. Will that last?

Aug 12th 2010

THREE months ago, when Europe’s debt crisis had markets panicking about sovereign risk, it seemed that all roads led to the dollar. The greenback was rising against the other big global currencies, the yen, pound and euro. Its role as the world’s reserve currency seemed an inestimable advantage when investors were unsure where they could safely park their cash. Within the rich world, America’s economy looked the best of a bad bunch. The stage seemed set for a dollar rally.

How quickly things have changed. On August 11th the dollar fell to a 15-year low against the yen of ¥84.7. It perked up against the euro to $1.29, though that was still much weaker than the $1.19 it reached in early June when euro-revulsion was at its worst (see chart 1). The ground the greenback has lost in recent weeks owes to a run of weaker data about the economy, not least on jobs (see box on the next page). On August 10th the Federal Reserve conceded that the recovery would probably be slower than it had hoped. The Fed kept its main interest rate in a target range of 0-0.25% and stuck to its creed that rates would need to stay low for “an extended period”. In addition the central bank said that it would reinvest the proceeds from the maturing mortgage bonds it owns into government bonds to prevent its balance-sheet (and thus the stock of ready cash) from gradually shrinking.

This modest change in Fed policy was widely expected. It signalled concern about the economy while stopping short of panic measures. That did not stop stockmarkets from slumping the day after the Fed’s statement—perhaps because investors had hoped the central bank would go further and commit itself to a fresh round of asset purchases, or perhaps because they were unnerved by the Fed’s more cautious tone on the economy. But the Fed’s shift still seemed to confirm that it is more minded than other central banks to keep its monetary policy loose, a perception that has contributed to the dollar’s slide and helped America’s exporters. The day before the Fed’s decision, the Bank of Japan kept its monetary policy unchanged. The European Central Bank (ECB) has allowed short-term market interest rates to rise as it withdraws emergency liquidity support from the banking system.

Events in America do not determine the dollar’s fate: exchange rates have two sides. The euro has bounced back since June in part because markets are more confident that Europe has got to grips with its sovereign-debt problems. The currency’s strength also reflects a stronger economy. Figures due out after The Economist went to press were expected to show that the euro area’s GDP grew a bit faster than America’s in the second quarter, thanks largely to booming Germany. But the problem of sluggish growth in the euro zone’s periphery has not gone away. A strong euro amplifies the lack of export competitiveness in Italy, Spain, Greece and Portugal. That is one reason why many analysts think the euro is likely to weaken again.

The yen’s rally, in contrast, may have further to run. It is trading against the dollar at levels last seen in the aftermath of the peso crisis in the mid-1990s, when the yen had greater claim to being a haven from troubles elsewhere. But the yen’s renewed strength may not be quite as painful for Japan’s exporters as that implies. Years of falling prices in Japan combined with modest inflation elsewhere mean the real effective exchange rate is below its average since 1990 (see chart 2). Because Japan’s wages and prices have fallen relative to those in America and Europe, its exporters can live with a stronger nominal exchange rate.

What needs explaining, then, is not why the yen has strengthened recently but why it was so weak before. Kit Juckes of Société Générale reckons that the low yields on offer in Japan provide most of the answer. “The yen is under-owned because Japan had by far the lowest interest rates in the world,” he says. But now falling bond yields in America, as well as in most of Europe, have made Japan a less unattractive place for investors to put their money. The more that the rest of the rich world resembles Japan, the less reason there is to shun the yen. There are even stories that China has been buying Japanese bonds as part of its effort to diversify its currency reserves away from the dollar.

Such interest may not be entirely welcome in Japan. A cheap currency is especially prized now, when aggregate demand in the rich world is so scarce and exports to emerging markets seem the best hope of economic salvation. Japan’s finance minister has complained that the yen’s recent moves are “somewhat one-sided”. That kind of talk has spurred speculation that Japan’s authorities may soon intervene to contain the yen’s rise. But such action would spoil the rich world’s efforts to persuade China to let its currency appreciate. It is perhaps more likely that the Bank of Japan and the ECB will follow the Fed’s lead in extending (albeit modestly) its quantitative easing—or risk a rising exchange rate.

The battle for a cheap currency may eventually cause transatlantic (and transpacific) tension: not everyone can push down their exchange rates at once. For now, though, the dollar holds the cheap-money prize.

http://www.economist.com/node/16792926