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[nasional_list] [ppiindia] Global Agenda: Beware - world slowing

From: "Ambon" <sea@xxxxxxxxxx>
To: <"Undisclosed-Recipient:;"@freelists.org>
Date: Fri, 10 Mar 2006 08:43:54 +0100

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Mar. 10, 2006 2:46 | Updated Mar. 10, 2006 8:41

Global Agenda: Beware - world slowing
By PINCHAS LANDAU

The one clear trend at work throughout the developed economies is the rise in
interest rates. Whilst not new - the US Federal Reserve has been raising rates
virtually non-stop since mid-2004 - the important features of this trend are
that it is both deepening and widening.

Deepening, in that the length and extent of the upswing in interest rates is
proving greater than had been generally thought. As recently as last fall, the
consensus expectation was that the Fed would stop raising rates at 4.5%, in
January or, in the worst case, at 4.75% later this year. Now, however, no one
expects the Fed to stop at the current rate of 4.5%. The discussion has moved
on to whether 5% or 5.25% will be the top of the upswing.

But there is no guarantee that this debate will also prove optimistic. On
Wednesday, the President of the St Louis Fed., one of the regional banks that
comprise the US Federal Reserve System, said it was better to raise rates too
much than too little. This is typical central bank thinking, and it confirms
the probability that the Fed won't stop until the economy is definitely slowing
- on its way to at least a minor recession.

Meanwhile, the European Central Bank (ECB) has joined the rate-raising set,
with just two moves to date but at least one or two more on the way. Of course,
there are big differences between the states of the European and American
economies, but the fact is that the ECB is now pushing rates upward, and the
only question is how far and at what pace. Most of the independent European
central banks, notably the Swiss, are also oriented towards higher rates. The
only exception is the UK, where rates peaked last year and are expected to fall
- but this expectation is also proving optimistic, so that the overall trend
holds true there, as well.

Most recently - yesterday, to be exact - the Japanese central bank finally
joined the global trend. Interest rates in Japan have been zero for several
years, as the central bank has fought the long-running deflation in Japan via a
policy known as "quantitative easing." In practice, this has meant printing
incredible amounts of money in an effort to flood the economy with 'free' money
and thereby spur demand. Eventually, consumer prices have stopped falling and
may even rise marginally this year, so that the bank - after talking about it
for many months - has now announced that it is taking the plunge and beginning
to turn the money tap off. Even so, this will be a slow and cautious process,
so that interest rates will only move above zero later this year. But, once
again, the direction is what matters and it is up.

The fact that all the major economies are engaged in tightening monetary policy
is of great significance to the entire world. The fact that the Americans are
well-advanced in this process but apparently intend to continue it, is even
more important because it is the US - in particular, the American consumer -
which has been the most important player in the global economy in recent years.

The steady increase in the cost of short-term money has fed through into
longer-dated interest rates.

The yield curve, measuring the cost of money for different durations, is now
flat from two years through 30 years. Normally, interest rates rise as the
duration of the loan rises, to take account of the greater risk involved. The
fact that the yield curve is flat and may soon invert (so that short-term money
is more expensive than long-term funds) is seen as a sign of impending trouble
for the economy. Indeed, in the all-important housing market, indications that
the boom is fading have been building up for months. The key question now is
whether the excess supply and slowing demand will cause a sharp drop in prices,
or whether a 'soft landing' is possible.

The fate of the housing market will determine in large extent how the US
economy fares in 2006-2007. Meanwhile, however, the rising cost of money will
impact the rest of the world, too - and possibly very soon. The massive boom in
emerging market equity markets, including that of Israel, has been fuelled by
the availability of endless quantities of cheap money.

As this money becomes less cheap and there is less of it (reduced supply causes
price to rise - see Introduction to Economics), these markets will be exposed
to potentially sharp falls, of precisely the sort that have occurred in several
overpriced markets in recent weeks.

In short, if money makes the world go round, when there is less of it, the
world and its economy will go round slower.

landaup@xxxxxxxxxxxxxxxx

[Non-text portions of this message have been removed]

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[nasional_list] [ppiindia] Global Agenda: Beware - world slowing

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