Is China's property market a bubble?

After the global downturn and the lessons learnt from property bubbles there are suspicions of a property bubble occurring in China. A property meltdown in China would damage the global economic recovery as China becomes more and more important in the global economy with China accounting for almost a fifth of world growth this year, according to the IMF; at purchasing-power parity.

China’s economy rely’s on its property market is reaching a level close to the housing peaks in the U.S. and Japan, according to Citigroup Inc Shen Minggao. Micheal Pettis said, " Over the next few years if China can re balance its economy, and reduce its trade surplus, it will contribute real growth and employment to the rest of the world.” While China's GDP will likely rise 9% or more it is dependent on real estate investment. “Last year, fixed-asset investment accounted for more than 90% of China's overall growth, and residential and commercial real estate investment made up nearly a quarter of that.” According to Bill Powell continuing on to say that more investors are becoming speculators. This event has been seen before in the U.S that has and has had severe consequences on the economy in the global economy leading to a global downturn.

Chinese authorities are dealing with the bubble and are hoping to deflate it before the bubble burst like in the U.S and Ireland. Shen Minggao said that the country “may only avoid the bubble burst if current property tightening is effective.”

Blanket bank guarantee was to avoid ECB and market scrutiny

In yesterday’s Sunday Tribune Jon Ihle give an account why the blanket guarantee was “solved before it entered the public domain” according to recent documents realised by the Department of finance. He explains that “a "comprehensive guarantee would be necessary" for the Central Bank to step in with emergency liquidity assistance (ELA) to help Ireland's ailing banks”. The paper in question when on to specify that “It is in the interests of the public that the situation is solved before it enters the public domain in order to prevent contagion”.

The government has come in for some just criticism in the recent past but I believe that in this case it may have saved the economy not telling the public. Since this time there has been a complete lack of consumer confidence, which is restricting our economic recovery on a domestic front. As a nation we are leading an export led recovery at a stage when Irish savings are at record highs. I also believe the government did not know the extent of our debt in 2008 and as a result I would be hard fought to blame our government for their action on this particular issue.
This argument is put forward in the article as it is explained that the government's preparations were to "help support public confidence" in the banks, but feared openness could jeopardise financial stability. However the papers indicate that Central Bank officials wanted recourse to the public purse before providing help, as the European Central Bank could have prohibited emergency funding if it was deemed to interfere with monetary policy.

Inally it outlines that European finance ministers in October 2007 and referenced in the Department of Finance documents, which said creditors and uninsured depositors "should expect to face losses" in a bank failure. I believe that if the savings of the country were burned and the Irish people had lost life savings we as a country would have failed our patriotic duty to protect the innocent hard working people of the island of Ireland. I don’t think our government have showered themselves in glory in the past but I think they acted competently in this case.

http://www.tribune.ie/business/article/2011/jan/30/blanket-bank-guarantee-was-to-avoid-ecb-and-market/

Is the world too dependent on the Chinese economy?

This is a question that be discussed on the Economist web, the whole question is

"Is the world too dependent on the Chinese economy?

China's economy may account for up to a fourth of global growth in 2010. What are the risks to dependency on a single country's economic performance, and what, if anything, should the world do to reduce this dependence?"

"The problem with China and its relationship to the global economy is largely tied to its traded goods sector. Excess capacity there imparts a deflationary bias on the global economy. China's policy of intervening to prevent currency appreciation that would adversely impact its traded goods sector enhances that deflationary bias and risks igniting a US-initiated trade war." John Makin gave his opinion of this question, he said the Chinese trade sector is too big.

However, there are some people do not think the world too dependent on the Chinese economy, like Yang Yao said, "China is not the most trade-dependent country in the world; among the large countries, Germany is more dependent on trade than China is." Micheal Pettis said, " Over the next few years if China can rebalance its economy, and reduce its trade surplus, it will contribute real growth and employment to the rest of the world. For now, however, it is hard to argue that the global economy depends too much on China’s economic growth."

in my opinion, China is becoming one of the world largest economy, however, there are many problem into its development. Chinese fast economic growth rely to its cheaper labour cost not the development of the productivity. The structural of the Chinese economy is bigger and still development but the level of productivity is still low. So the fast growth of Chinese economy can't keep long-time. There are also problem between the market economy system and the high government power. High government power is one factor that slow down the development of Chinese the market economic. The huge number of the population, Wen Jiabao has been said, a small question multiply 1.3 billion is a big question, a big problem divided by 1.3 billion is a small problem. China has the 1/5 of the world population. From this side, it is the biggest country in the world, however, the big amount of the population is also a big problem in the development. From all of these, China is one of the most important economy system in the world but the world economy is not dependent on the Chinese economy.

Cowen to quit politics

Brian Cowen announced today that he will not run in the forthcoming general election. Many Irish people expected him to make this move after he stepped down as leader of the Fianna Fail party more than a week ago.

Mr Cowen said "I have to take things into consideration now in the context of the fact of having been Taoiseach and leader of the party and former leader and giving a break to the new leader"

The outgoing Taoiseach said new Fianna Fail Micheal Martin did not ask him to stand down.

Mr. Cowen will dissolve the Dail tomorrow and will announce a date for the general election.

Although Mr. Cowen political career has finally come to an end he stressed that his commitment to the party will always be strong.

He ended stating "It's a momentous decision for me but also I think it's the right decision because the party now is in the process of rebuilding, rejuvenations and renewing. A general shift should take place of which I'm a part certainly in terms of the tenure I've had as a prominent member of the organisation throughout the country for many years"

Decrease in bank deposits

According to an article that appeared in the Irish Examiner yesterday, deposits in irish banks have decreased in December by 3% from the previous month.

Article available at: http://www.irishexaminer.com/business/deposits-in-irish-banks-fall-by-3-143568.html

The article states that "Irish banks saw deposits fall to €201.1 billion from €207.9bn in the previous month and from €213.8bn in October." (Irish Examiner) This is a large decrease. The article goes on to say that "such sharp consecutive drops in countries with stable banking systems are unusual." (Irish Examiner)

The question that needs to be addressed is 'why is this the case?' There are a number of assumptions which could explain this decrease in deposits.

1. With high unemployment rates are people being forced to withdraw their savings to make ends meet.
2. Is it a seasonal factor? Christmas is a costly time of year. Are people spending higher amounts of their income than they would at other times of the year? This could result in an increased demand for cash which would lead to people saving less and depositing lower amounts.
3. Have the public decided to hold their reserves in cash rather than deposit them in a bank?

These are only a few factors which could explain the decrease in bank deposits, there could be many more. The reason for this decrease will need to uncovered quickly, in order to find a solution to the decreasing deposits.

Fergie's rhetorical approach

Rhetoric is the art of using language to communicate effectively and persuasively, and when put to good affect by a maestro such as Sir Alex Ferguson, the ball often tends to reach its target. Two years ago Manchester United sold their most prized asset Cristiano Ronaldo to Real Madrid. Prior to one of the longest drawn out transfer sagas in the history of football, Sir Alex Fergusson continually denied that a deal between the two clubs would be agreed, even going so far as to say he 'wouldn't sell that mob a virus'!! Low and behold a few short months later and the gifted young Portuguese star had donned the famous white strip of Real Madrid.

Ferguson is now famous for his use of phrases which imply a statement of fact but often are mere opinions led to sway the public opinion. It is rare that an Alex Ferguson press conference does not contain the phrase ‘there’s no doubt about that’, in an effort to command a state of fact for an opinion that is often far from factually based. Fergusson might suggest that officials are biased against United and end the statement declaring ‘there’s no doubt that’, and almost instantaneously
dispel any chance of retort from the regularly terrified interviewer.

Ferguson’s press conferences of late have often involved the phrase, ‘there’s no value in the market’, alluding to the fact that the football transfer market is over inflated. It is by no means an unfair argument and in light of a recent transfer where Aston Villa have signed Darren Bent, a fairly standard striker, for over £20 million then it does indicate an over inflated market. However when Ferguson pedals the line that there is no value without a hint of irony, then one has to wonder if he is simply fooling the public, or fooling himself also. This is of course a man who has broken the British transfer fee on no less than 5 occasions. Also it can be argued that the high price demanded by Manchester United for the sale of Ronaldo was perhaps the watershed moment in inflating the market. £80 million which Ferguson will swear is simply resting in United’s bank and waiting for the value to reappear in the market.

Here in lies perhaps the most damaging of Fergusons apparent use of rhetoric. For the past 6 years he has been full of praise for the clubs owners and admonished any supporter uprising against the Glazer regime. Ferguson repeated the oft heard “no value” mantra after a recent victory, which many supporters have taken as a euphemism for Glazer-inspired austerity. That United has broken the £20 million barrier just once under Glazer ownership is symptomatic of a transfer policy that now focuses on the cheaper end of the market. Earlier this month Ferguson admitted that he wanted to “get one player” during the window, qualifying the statement – as always – with a warning about inflated transfer fees. But true to form in recent seasons, Ferguson has now ruled out any new signings in the January transfer window. He continues to spin the propaganda whilst insisting that the Ronaldo money is simply resting in the bank.... Aye Fergie, ‘there’s no doubt about that’!!

Can having children really increase ones utility?

This topic came to mind after a particularly difficult customer visited the store in which I work last weekend. This was a little boy who proceeded to throw jewellery and shoes around the store, pull clothes from hangers and somehow find and press our silent alarm. The mother, it seemed, had just given up on trying to control the situation.

After this distressed woman finally left the store, having left us a nice comment complimenting our patience, I began to think of a topic I studied in my first year of undergraduate economics. This was behavioural economics, more specifically the economics of happiness. The basic premise of this is that a rational person will try to maximise their utility. However, when looking at the utility children generate, results show that over a parents lifetime their child generates more stress than happiness. I certainly would never want to be in the position of the lady who it seemed had just accepted the actions of her child no matter how much stress it caused.

As Stevenson discusses the economics of happiness, she addresses the topic of the utility of becoming a parent. She discusses how the data does suggest that people without children are happier than those with them. However, she puts forward an explanation as to why this might be the case. As people experience events that increase their utility, their utility level is increased. Therefore the reason that parents seem less happy, is because their utility level is higher overall and therefore more difficult to achieve.

If we look at the world from the perspective of 'economic man', then we would be perfectly rational and so having children would be the irrational choice. According to studies, for example Blanchflowers(2008), children generate more stress than utility as well as holding a significant financial cost. Therefore it seems irrational to have a child. However, economic man or 'homo economicus' is not a realistic perception of human beings. We are irrational beings that often put the well-being of others before ourselves and are not always aiming to maximise our own utility.

There are many opinions on this topic and I'm still not sure which opinion I agree with, even though I'm currently leaning a bit more towards the 'rational' choice, after witnessing just how much stress, that which supposedly shifts utility outwards, can cause.

The economy appears to be moving in the right direction
Its been three months since since the IMF came to Ireland and the gloomy mood still persists. However when the ESRI set out their new quarterly economic forecasts on Wednesday there was more positivity. Despite the imposition of a much larger budgetary adjustment for 2011 than feared in October – of €6 billion, rather than a mere €4 billion, there is no grave talk. The first forecasts for 2012 include an acceleration in economic growth and the first increase in the number of people at work in five years. The prospect of price stability should also give cause for relief. The ESRI expects Irish inflation to remain very low in 2011-12, with prices rising in a range of 1 – 2 per cent annually. This follows an unprecedented two consecutive years of falling consumer prices. On of the reason for this is the expected fall in wages. This should improve Irish competitiveness. Exports could be even stronger than predicted, sucking more foreign cash into the country. Although the Irish economy is far from recovered there are signs we are moving in the right direction

Saving the Euro

There is an excellent long article by Paul Krugman in the New York Times about the origins and the future of the Euro. He outlines the reasons for the formation of the Euro: to make doing business in Europe easier as you wouldn't need to change currencies as you travel to other European countries and a removal of uncertainty for importers about the cost of a contract due to currency movements.

Krugman also outlines the case against the Euro. Lack of monetary authority. No fiscal union to accompany the monetary one. Although labour mobility is legally uninhibited in the Euro area, cultural and language differences make labour mobility restricted.

Krugman also outlines how the lack of flexibility that being part of the Euro means for the peripheral countries, like Ireland, where deflation and wage reductions are present. This means our wages are falling but our debts are not, which means debtor must meet their obligations with less income, which means they must consume less, thus worsening the economic slump. In this case, allowing your currency to depreciate is a viable way to keep away this deflationary cycle.

He outlines four possible paths for Europe to take:

1. Tough it out: This is the current situation where the peripheral countries will push out with their current paths of fiscal consolidation, repaying their debts in full, with the aid of EU/IMF emergency loans.
2. Debt restructuring: Peripheral countries would undergo a structured default on their debts.
3. Default and Devalue: Same as path 2 but with a currency default. This would mean some countries dropping out from the Euro and devaluing their new currencies.
4. A more Fiscal Union: This is where the Euro becomes a fiscal union to go with the monetary union. Krugman acknowledges that this is practically politically impossible as the Germans, in particular, don't want the Euro to become and transfer union. This would make the Euro work and is Krugman's preferred option, but he allows that it is, at the moment, unattainable.

My preference is for path 2, which is outlined in the leader in this weeks Economist. It outlines that the best option for the Euro is for a debt restructuring of the clearly insolvent peripheral countries, namely Ireland, Greece and Portugal. The Economist argues that the only long-term alternative to debt restructuring is path 4 outlined above but recognises that it is political non-starter. It also argues that now is the opportune time as the dangers from debt restructuring have diminished as the European economy is in better shape now than it was when the EU/IMF deal was sorted out for Greece and that buying more time with emergency loans is imposing a greater burden on the countries that have been rescued.

Therefore, the case is for an orderly debt restructuring of the insolvent peripheral countries, with some of Ireland's restructuring coming from a write down of its bank debt.

The costs of car scrappage.

In the most recent budget the government has extended the car scrappage scheme until June 2011. Its effects have been highlighted again today with the announcement by the CSO that despite the economic downturn car sales jumped 56% last year on 2009 figures. These figures may well be positive news for the car sales industry in this country but is this announcement all good news?

The scrappage scheme "provides for VRT relief when a new passenger car with CO₂ emissions of not more than 140g/km is purchased and registered and another passenger car, over ten years old is scrapped. The VRT relief now available has been reduced from €1,500 down to €1,250 for qualifying vehicles registered during the period 1 January 2011 to 30 June 2011." This has added heavily to the increase of almost 30,000 more new cars being purchased in the state than last year. According to industry figures this has lead to an the increase in an estimated €109m extra in Government revenue and a rise of 3,500 in the number of people employed in the industry.

There are however some questions about the schemes real benefit.The scheme subsidises a car manufacturing industry which is not indigenous and firms who's profits are exported. This means that the benefit of the scheme will be felt as much by foreign firms operating in Ireland and exporting profits as by the Irish individuals employed and operating franchises on their behalf. The scheme also includes write offs, cars that have ceased to be road worthy and only cars that are ten years old. This asks the question - surely these cars would have been purchased anyway?

Assuming that the average person changes car every six or seven years this scheme simply means that for an owner of a five year old car an incentive is created to bring forward their purchase instead of deferring it until their usual time of purchase.

The Budget 2010 described the scheme as budget neutral however the long run effects are yet to be seen. Is this just consumption brought forward rather than new consumption? Are the target beneficiaries(ie the Irish taxpayer and employees) of the scheme really the ones who will profit? Should we be relying on even more consumption based tax?

A serious cost benefit analysis from the dept of finance needs to ask these questions before the scheme is extended further.

Cowen..to be or not to be???

Tonight's meeting between Fianna Fáil TDs will be to decide upon the continuing leadership of Brian Cowen. This meeting will be the 5th time in 83 years that a leader of the party has faced a challenge to his position. Tonight's vote differs from previous years for two main reasons. Firstly, it is the first time a motion of confidence has been put down by its leader has been put down by the party leader, as opposed to a motion of no confidence. Secondly, although not the first time, it will be a secret ballet.

"We are in a fight and we need a fighter to lead Fianna Fáil into the general election. The question is: who is best equipped to lead that fight?" (Cowen)

Cowen's decision to table a motion of confidence in his own leadership and to make it a secret ballet shows his confidence that he is "best equipped to lead that fight" and the majority of party's 71 TDs are behind his leadership. Many TDs have disclosed that they will be voting in his favour in tonight's election. As of last night, only 12 TDs said they will be voting against the motion and still 22 TDs that have not spoken on their intentions.

Micháel Martin is the only senior Minister that said he is voting against the motion. He believes the election will "go to the wire." As the vote will be taken in a secret ballet, the intentions of many TDs can not be fully relied upon.

Till tonight....

World oil price in 2011

(Reuters) – “The global economy can withstand an oil price of $100 a barrel, Kuwait's oil minister said on Saturday, as other exporters indicated OPEC may decide against increasing output through 2011 as the market was well supplied” (http://in.reuters.com/article/idUSTRE6BN16A20101225).

The international oil price is a result of consulting, compromise and game that between oil producing countries and big consumers, as well as keeps a relatively reasonable price in a short term. Too high oil price would harm global economy and too low would not stimulate positivity of oil producing countries or organizations, so this situation decides a reasonable interval of world oil price. As we know $70-$80 per barrel is a relatively reasonable price in 2010, this price could be received by supply and demand parties. So OPEC did not change the crude oil output by a wide margin and this price level did not hinder the global economy growth.

In the beginning of this year, almost every expert and organization forecast that 2011 oil price will keep increasing, as well as like Kuwait said that “global economy can withstand an oil price of $100 a barrel”. Higher price is not what consumers want to see. “The current high price of oil will threaten economic recovery in 2011”, “oil import costs for countries in the Organization for Economic Co-operation and Development had risen 30% in the past year to $790bn (£508bn)” and “this is equal to a loss of income of 0.5% of OECD gross domestic product (GDP)”, said International Energy Agency (http://www.bbc.co.uk/news/business-12117902).

Additionally, the increasing oil price would add China’s inflationary pressure. From the China’s increasing demand of oil import in the past years, the oil imports will continue increase in 2011. But the increasing oil price would drive the other staple commodities prices increase, and then cause global inflation (China is the largest commodity exporter in the world, so the higher producing cost must lead to the exports price rise).

However, on the other hand, the increasing oil price is a signal of global economic recovery. The economic recovery is one reason that causes world demand of oil remained elevated since the 2nd quarter 2009. Since the 4th quarter last year, the Europe’s unusual cold weather and oil stock fell lead to a raise on oil price, but I think the global economic recovery is the main reason that rose demand and price of oil.