China central bank adviser sees Q1 interest rate rise
Another Chinese interest rate increase in the first quarter is likely, a central bank adviser said on Wednesday, but a vice governor cautioned against raising rates too steeply for fear of luring in hot money.
Reuters, Jan 12
China’s exchange reserves at issue
China’s central bank said Tuesday that Beijing’s holdings of foreign cash and securities amount to $2.85 trillion – a jump of 20 percent over the year before – despite Chinese promises to try to balance its trade and investment relations with the United States and other countries…The reserves are so large and the recent run-up so rapid that it’s casting new doubts over whether Beijing is reforming the handling of its currency and curbing its heavy reliance on exports as a source of jobs and growth.
Washington Post, Jan 12

The Dollar: Dominant no more?
If the euro’s crisis has a silver lining, it is that it has diverted attention away from risks to the dollar… Now it is Europe that has deep economic and financial problems. Now it is the European Central Bank that seems certain to have to ramp up its bond-buying program. Now it is the Eurozone where political gridlock prevents policymakers from resolving the problem.
In the US meanwhile, we have the extension of the Bush tax cuts together with payroll tax reductions, which amount to a further extension of the expiring fiscal stimulus. This tax “compromise”, as it is known, has led economists to up their forecasts of US growth in 2011 from 3% to 4%. In Europe, meanwhile, where fiscal austerity is all the rage, these kind of upward revisions are exceedingly unlikely. All this means that the dollar will be stronger than expected, the euro weaker. China may haves made political noises about purchasing Irish and Spanish bonds, but which currency – the euro or the dollar – do you think prudent central banks will it find more attractive to hold?
Barry Eichengreen (VOX), Jan 10
Consumers and the Economy, Part I: Household Credit and Personal Saving
In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.
R. Glick and K. Lansing (San Francisco Fed), Jan 10
NFIB Small Business Optimism Index Remains Weak
The National Federation of Independent Business Index of Small Business Optimism lost 0.6 points in December, dropping to 92.6, and disappointing those who were anticipating a rebound that might signify more growth in the small business sector. Weak sales remains the top problem, stagnating hiring and spending on capital projects. All of which are sidelining the small business sector from a recovery. This marks the 36th month of Index readings in the recession level.
National Federation of Independent Business, Jan 11
Issing repents, says euro may fall apart
Otmar Issing, the former chief economist of the European Central Bank and the German Bundesbank, is a genial number-cruncher who believes in the overall benefits of European integration but is genuinely is open to others’ views. He is a key bellwether for Germany’s stance on the euro… And he unashamedly says — in an essay in the January Bulletin of the Official Monetary and Financial Institutions Forum due to be published this week — the days of the single currency may be numbered. “The present seemingly unstoppable process toward further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterized by unsound conduct of individual member countries, the more these tensions will endanger the existence of EMU.”
MarketWatch, Jan 10
The Shattered American Dream: Unemployed Workers Lose Ground, Hope, and Faith in their Futures
The November 2010 survey finds that only one-third of those originally looking for work in August 2009 had become employed by November 2010, either as full-time workers (26%) or part-timers who do not want a fulltime job (8%). This figure is up slightly from the March 2010 survey when 13% were found to have gotten full-time jobs and another 8% had gotten part-time jobs… Almost a majority of reemployed workers (48%) were forced to take a cut in pay, and for most, a significant one. Nearly 60% are earning at least 20% lower at their new position compared to their last full-time job. For panelists who are employed full time, 53% are making less now than they did in their most previous job before becoming unemployed, with many (56%) reporting that they earn at least one-fifth less in their current position than in their last job.
John J. Heldrich Center for Workforce Development (Rutgers University), Dec 2010
Government, the Anti-Stimulus
The job machine has remained relatively weak for the past year. We do expect acceleration to 220,000 new jobs per month in 2011, but even this would be less than historical recoveries have produced. Some argue this is a new and weaker “normal,” and that it signals a fragile underlying recovery that will be permanently at risk of a double dip. Some say debt, housing and shattered consumer confidence are the cause. But, in reality, this is what we should expect when government has become so large.
B. Wesbury and R. Stein (First Trust), Jan 10
The Debt-Inflation Cycle and the Global Financial Crisis
Writing over 230 years ago, Adam Smith noted the ‘juggling trick’ whereby governments hide the extent of their public debt through ‘pretend payments.’ As the fiscal crises around the world illustrate, this juggling trick has run its course. This paper explores the relevance of Smith’s juggling trick in the context of dominant fiscal and monetary policies. It is argued that government spending intended to maintain stability, avoid deflation, and stimulate the economy leads to significant increases in the public debt. This public debt is sustainable for a period of time and can be serviced through ‘pretend payments’ such as subsequent borrowing or the printing of money. However, at some point borrowing is no longer a feasible option as the state’s creditworthiness erodes. The only recourse is the monetarization of the debt which is also unsustainable due to the threat of hyperinflation.
P. Boettke and C. Coyne (George Mason University) via SSRN.org, Dec 21, 2010