Gross external debt – How scary is it?

According to IMF’s guide to External Debt, “Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy. Generally external debt is classified into four heads i.e. (1) public and publicly guaranteed debt, (2) private non-guaranteed credits, (3) central bank deposits, and (4) loans due to the IMF. However the exact treatment varies from country to country.”

The US and UK come in top 2 in the competition of biggest gross external debt among selected countries. The US has been for the l2 years constantly hovering around US$14 trillion, while the the UK external debt position has decreased over the last 2 years, staying roughly at US$9 trillion since mid Q209. Further down the line are Germany and France, moving almost in tandem with each other, and since Q109 have been on the slow increased upwards, and around US$5.3 trillion as of Q309.

The next close cluster of countries in this data set is made up of Italy, Spain and Japan, which have been up and down since Q407 but staying mostly within the range of US$2-3 trillion. In the lowest rung, countries with less than US$1 trillion of debt as of Q309, in descending order are are Australia, Canada, Hong Kong, Greece, Russia, Korea, Brazil, India, Indonesia, Argentina, South Africa, Thailand.

Suddenly it appears that the most developed countries (US, UK, EU nations and Japan) have relatively alot more gross external debt than the less developed nations, which also form the emerging markets. This is an interesting observation as I had originally expected that the poorer nations would be the ones sinking in debt, and not the other way round.

Yet looking at the absolute values of gross external debt may be a biased argument. A country may have alot of gross external debt, but if measured as a proportion of GDP, it may tell us a different story. As a measure of sustainablity of external debt, this might provide some insight on the ability of a country to finance its debt and how unhealthy its external debt position really is.

Using this measure instead, we see that the UK is now right at the top (421% at end 2009), followed by, but not closely, Hong Kong at 316%. Trailing further behind is France at 200%, then Spain, Italy and Germany at 176%, 165% and 130%. So far, the results tally with the gross observations.

However, it is now surprising to see that the US, whose absolute gross external debt at Q309 was a towering US$14 trillion, has a gross external debt to GDP ratio of only 96% (compared to the UK, which was just 2nd behind the US in gross terms but as a proportion stands at 421%.) Canada is also not too far behind at 68%. The other countries in the data set (Argentina, Brazil, Chile, Greece, India, Indonesia, Japan, Korea, Malaysia, Russia, South Africa, Thailand) fall in the seemingly healthy range of 25-50% range.

The sheer magnitude of the US economy, first in the world and unrivalled even by its closest competitors, is perhaps the reason why proportionally, US external debt looks less scary than the absolute figures. However, that means the external debt from just the US alone is almost as huge as the entire American economy – Now maybe that’s something to worry about.

Exports, exports everywhere!

Absolute current account balance and the that as a percentage of GDP show two very interesting perspectives.
Looking at absolute current account balances, we see China scaling its own mountain (around US$400 bn) when the rest of developing Asia’s C/A balances are mostly staying within the +/- US$50 billion range. One glance at the absolute C/A balance graphs throws the attention solely on the Dragon of the East; the other developong Asian nations seem to have less newsworhthy stories. Since the early 2000s, China has set its own pace; following none other in its race to growth. Rich in natural resources, and cheap labour, its manufacturing industry blows out exports like bubbles, with their unprecendented increase propped up by heavy FX intervention to keep the RMB competitive. Surely, the Chinese do things with a aim in mind – to be fulfilled despite protests from its any trade partner or supranational.

Turn the page with me and let’s now look at the C/A balance, but as a percentage of GDP. Suddenly China drops out of the limelight and other Asian stories emerge. It’s easy to get carried away with the China growth story. Certainly, one nation cannot have the rest of the world at its mercy, simply because it has duly earned the title “Factory of the World” – or can it? But the sheer size of the 1.34 billion population nation should not be forgotten. When looking at C/A accounts in proportion to GDP, we see China (roughly 10% in 2008) coming in third behind Brunei (51%) and Malaysia (18%). The rest of the developing Asian countries don’t go much more than +3% for surpluses but do hit -16.5% for decifits, with Laos setting the record, followed by Vietnam with a deficit of 12% of GDP.

For the last 5-7 years at least, there seems to be a consistent list of obvious C/A surplus nations (Brunei, Malaysia, China, Myanmar, Thailand), and the corresponding list of C/A deficit nations (Laos, Vietnam, Cambodia, Pakistan, Sri Lanka). The former list is also generally made up of countries richer in the region; the latter list the opposite. Well, obviously we know from Y = C + I + G + (X-M), that net exports (X-M) are positively correlated to GDP. And as factories and companies shift operations towards the countries with the cheapest labour, exports tend to follow a natural upward curve, and so does the C/A balance, unless imports increase much faster (such as in the case of Vietnam, in which case exports have been sky-rocketing but imports have also been rapidly rising, particularly for machinery and spare parts, reflecting strong investment growth).

Now, trade surplus, and a huge one at that, is usually a highly sensitive topic, particularly so because before the Global Financial Crisis of 2007-2009, the main export markets for developing Asian economies were the US and Europe. China has been the main targetboard for dart calls of letting its currency revalue, and more recently, these have intensified, as economists around the globe (well, maybe excluding the Middle Kingdom), have been pushing for rebalancing of economies. Many asian countries, pegged to some extent to the Yuan, will only allow currency appreciation if China does so first. And well, what does China say in response to calls for currency appreciation?

NO! Chinese Premier Wen Jiabao said in a conference over the weekend of 12-14th of March that he does not believe the RMB is undervalued, despite protests from Washington and prominent US economists like Paul Krugman that if China were to allow the RMB to depreciate, global growth would increase by around 1.5 percentage points. Yet it seems that there will be no one-off revaluation (like that in July 2005) as Wen stressed the importance of keeping the Yuan “basically stable” and that timing for any monetary policy changes must be appropriate. In this response, his tone was serious, and unyielding, making US President Obama look weak against China.

Relations between the huge chinese nation and the world’s number one economy have been deteriorating, since a long time ago. Right now, the US recent meetign with the Dalai Lama and the American arms sales to Taiwan, is what has main a strained relationship even more fragile. Wen’s deliberate comments about the declining value of dollar assets as a result of the growing US fiscal deficit rubbed a sore wound. China’s proactive policy to engage in bliateral agreements and currency swaps allowing it’s main export buyers to pay it in RMB instead of the USD and it’s slow but definite shift in weightage of foreign reserves away from the USD, is all fueling speculations of how much longer it will be before the RMB because one of the world’s reserve currencies, and when will the USD lose that power.

Much is unfolding in this current climate – all very exciting developments that will take a while to fully bloom, but still nonetheless, exciting.

Inscribing the history of today.

2010 marks the last year of the first decade of the third millennium. Indeed, it was also the decade that has been most marked in my memory, partially because I was growing up and made more aware of the events which though outside my circle of comfort, still managed to shake those, including me, inside our zone. But not only was I becoming more worldly-wise, it was also the degree of shock which emanated throughout the world as some events shook it, both psychologically and literally.

2000: My family had booked a room at the 52nd storey of Westin Stamford Hotel, in a bid to celebrate the New Year and watch from above should predictions come true that technology would be severely disrupted, as machines were not programmed to run past 1999. I remember us staying our prayers and thanking God for the new year and the years past, and then opening my eyes the moment it struck 12 midnight, looking down at the rest of the city below. Surprise and relief, as we saw the cars still lighting the streets with their pretty headlights, and the blueprint of our city still visible, lit by electrical cables which kept all technical appliances running like clockwork. All was alright again. I breathed a huge sigh of relief. Suddenly the rest of the year flew by, and arrived astonishingly quickly at December, the month that Bush Jr won the elections, taking over Bill Clinton as president of the USA. Still young and not particularly keen on politics, I only remember seeing the debates on TV and that the world seemed eager to assess to the new of state as he took on the toughest job in the world.

2001: September 11 – I was studying for my ‘O’levels examinations, buried in a mound of ten-year-series and past examination papers, biting on my pen as I tried to solve the biggest Math and Physics problems in my world. Suddenly, at 10pm that night, I heard the phone ring. Apparently, my aunty had called, urgency in her voice as she told my parents to switch on the TV. Switching to the news channel, we watched as the terrorist-controlled flights crashed into the twin towers of New York City’s World Trade Center. Our eyes stayed glued to the screen as we saw three New Yorkers catapulting out from the towers, pummeling to their horrific deaths. Not long later, another plane rammed into the Pentagon, symbol of power of the USA. We watched with gaping mouths, too shocked to believe an event so unfortunate had happened. As news anchors busied themselves reporting from the disaster scenes, I remembered thinking what a huge mess they were in. As the story and intentions of the hijackers became clear over the next few weeks, the world jumped as fear’s stranglehold tightened its grip. Facing the largest and most massive adversity of his career yet, President Bush declared the war on terror, changing the way airports, international routes and immigration functioned. Flying became such a hassle afterwards; bodies were searched for terrorist clues, tensions heightened at check-in counters as darker skin color facial hair growth made many the target of searches, resulting in mounting resentment. Yet the fact that the Taliban, led by Osama Bin Laden, had outright declared its goal to destroy and wreck the United States rendered the States with no choice, and security simply became stricter with the months.

2003: Terrorist attacks continued in different parts of the world; unwanted presents that shattered lives and made travelers paranoid. The beautiful resort island of Bali, where tourists flocked to in order to bask on the sun-washed beaches and crystal waters, was bombed. An attempt to strike at the Caucasians, it left over a thousand Australian dead on their last holiday ever. Yet for that year, my greatest memory was that of the Severe Acute Respiratory Syndrom (SARs) epidemic. For the first time, I saw people all around wrapped in face masks, wary of any person who even sneezed or so much as rubbed their noses. Queues formed all around Asia as governments battled against this new strain of highly contagious flu. Entrances to public buildings were thronged with people, in ling to get their temperatures taken and to be given approval to pass through. Singapore, being such an open and small country, saw its GDP drop to an another low since the 1998 Asian financial crisis. Its reliance on tourism and trade exposed its vulnerability to such an epidemic which hindered tourism. Thankfully, we managed to combat the disease and eventually to quell the fears of the nation, but it made us always on the alert, and at times, too paranoid for our good.

2004: This was the year I enrolled into university, and to enjoy before I started school, I took a vacation in Bali, certain that the previous year’s unfortunate events would not repeat. It was a resplendent holiday, forever etched in our memories. Nothing terrorist in nature occurred, and after the beautiful break, I started my first semester as a sophomore. 26th December was a project group mate’s birthday, and to celebrate she had planned a summer getaway in Phuket, Thailand, where she was to stay at Patong Beach. That morning at 7am, her flight got cancelled, as news came of the disastrous Tsunami – whose effects on East Asia are still present today. The thousands of lives its unannounced arrival claimed, the scent of destruction heavy in the air; again it was hard to believe that it had struck so near home. The wreckage was nauseating to take in. That Boxing Day, my group mate gave thanks to God for being alive, yet it was with sorrow that we all said a silent prayer for those who had died and were dying.

2005: Another natural disaster came not long after. On August 29, at least 1836 people were killed by an act of god named Hurricane Katrina. The US Gulf Coast was severely damaged; its people left devastated in the trail of its fury. A month before, 4 explosions rocked the transport network in London, injuring over 700 and killing 56. Another strike of terrorism, it struck new fear in the hearts of the city. Fanatically religious people who felt it was there duty to die in “Jihad”, or holy war, and in so becoming matyrs of their faith – what were on their minds as they prepared these bombs? What was their ultimate goal? Where were they strike next? When will they stop? Would they even stop?

2008/2009: It was a period of crisis, where defaults were the main theme. Panic, fear shook the world as people watched the collapse of the likes of Lehman Brothers; as they saw their life savings disappear with the crash of the stock markets; as suicide rates increased with the amount of defaulted debt. America cried, and its wails were heard all over the globe. America was too sunken in debt; all the secrets of large, previously highly acclaimed firms starting spilling out, dirtying the financial markets in every corner of the world. The world had never before been as inter-linked as it is now. Bubbles burst, left right and center – property, equity, and many other types of assets fell, losing all their capital gains. Credit default spreads, a measure of default risk, swelled, and yield curves dropped to all time lows, and countries came one after another to announce their booming stimulus plans, blowing billions of dollars into their economies to keep them afloat. North America and Europe were in a frenzy unheard of before, and the financial crisis was continually compared to the Great Depression of the 1930s. A monumental period documented in the pages of history, yet it seems some have already started to forget. Another epidemic struck in 2009, even more severe and rampant than SARS. The latest strain of the flu virus, the H1N1 disease, also known initially as pork flu, gripped the hearts of many with fear. From Mexico, where it was originally identified, this virus made use of international immigration and spread through cars, ships and aircraft. Tourism was severely affected, and this simply added salt to the fresh wound of the financial crisis.

2010: Most recently, even before the month of January is over, Haiti, a Caribbean fourth world country was hit by a 7.0 magnitude earthquake, on 12th January. One of the poorest nations in the world, Haiti is currently suffering from the after-effects of the quake, and its people are fraught with frustration and fury at the government, the slowness of international aid, and the anguish that has enveloped and crushed their hearts as close to 200,000 are confirmed dead. Looting is everywhere, with citizens emptying coffins and stealing them to sell; leaving the bodies to rot in the streets. The stench of death clogs the air, emotions are teetering on the edge and some have even lost their reason. There are reports of identified looters being torched alive, with passers-by watching the flames engulf him till they grew numb. Oppressed by hunger and anger in a molten mix of potent rage, Haiti suffers as we watch. Only a few are courageous enough to go there and provide aid. In the heightened tensions, its citizens are now furious with the US for using its control over the international airport to prioritize the safe return of its citizens.

So much sorrow, so much terror. Was that meant to be the recurring theme of the last decade? What will the next year bring? And those following after? We can only know with time as history is currently in the making.

Oh oh, we’re in trouble; Is someone going to burst our bubble?

In 1997, I was in Primary 6, didn’t give a hoot about the world, nor the fact that the Asian Financial Crisis was hitting all the Asian countries in full force, wrecking havoc whose effects on certain countries like Indonesian have left them still recovering from the shock.

This year its 2007, I’m in University, and through my readings and courses as well as of course, my new interest in the world whose effect on all of us I can no longer deny, I read over and over again, about the 1997 crisis. It’s weird to read a Caucasian’s reports on the effects of the Asian Crisis, and weirder to find that it seems in the field of Asian Monetary Policy, there are more good writers from the Western part of the world than from Asian. Even my Asian Monetary Professor is American.

Apart from that brief digression, I really want to talk about the possibility of another crisis, another crash, but this time, perhaps not just involving Asia, but perhaps America (very likely) and maybe also Europe. I’m not advocating that such a scenario is good; but looking at the news everyday that mark yet another all time high on the stock exchange, in Singapore, China, and many other places, where the prices of goods are going atrociously high. In a time and age where the economy is booming, everyone is busy swiping out their plastics to make use of more and more credit, it seems the stage is set for a market correction. Maybe Crash is a word too harsh; corrrection may be more correct (pun intended).

As I mentioned a few posts ago, hedge funds are taking on dangerous amounts of debt, and together with the package, risks that they may be unable to handle.  Everywhere, it seems the press is screaming with news about inflation curbing, in the USA, Thailand, China; all the Central Banks are scratching their heads over whether to maintain or increase interest rates. If you were to keep up with the news everyday, you’d realize that every country seems troubled by any news that may hint at increasing inflation, yet at the same time, investors with money to act on these news are moving capital in and out of countries, hedging their bets that these interest rates increases or decreases will move currencies and bond prices in the direction of their favour.

Everything happens so fast, many are pumping in much money and taking on leverage to accelerate the growth of their wealth. Suddenly it feels like we’re trapped in an air tight bubble that keeps getting larger and thinner. Will it be another bubble that bursts? How can we identify it? Someone wise one said that you can never identify a bubble until it bursts, but by then it would have been too late.

Alas, writing the history of the future is harder than writing the history of the past (in Eichengreen’s beautiful words). Only time will be able to unravel the mystery that has left so many worrying about.

Hedge funds leaning too much on leverage

Not since the time of Long Term Capital Management in 1998 where it lost $4.6 billion in less than 4 months has leverage been at the all time high that it is at now.

Hedge funds are riding high on the abled use of leverage (also known as debt) and the arising concern regarding their debt financing is due to their lack of controls over risks that they take.  As of present, the hedge funds manage US$1.3 trillion (that’s approx the current total amount of China’s foreign reserves), and after including all the borrowings, the hedge funds total up to about US$2.6 trillion.

With the leverage further increased by placement of funds in derivatives, hedge funds has made it to the top issues that requires discussion in the Group-of-Eight nations (G8) together with fellow issue of the explosion in global derivatives trading.

The Business Times states that Deloitte’s survey found that only 60% of its hedge fund respondents monitor balance sheet leverage, and only 50% of them monitor off balance sheet leverage (the extent of derivatives position). That highlights many a red flag that risk management policies are inadequate or insufficient enough for the dealing with a possibility of a possible risk crisis (i.e counterparty risk and credit defaults).

Those who remembered the Long Term Capital Management (LTCM) debacle in 1998 will shiver at the thught that such a major crisis may repeat. The then fear that LTCM’s forced liquidation of its company would lead to drastic fall in prices and hence creating a vicious cycle where other companies would have to liquidate as well was so huge that even the Federal Reserve had to step in to mediate the potential losses.

This entire debacle was the result of the credit risks and default risks undertaken by LTCM; the Russian defaulting of their government bonds made what was supposed to be a huge gain in LTCM’s positions (had the spreads of the bonds actually converged) turn out to be the biggest loss by a hedge fund in the market.

It’s slightly worrying, all this debt that is carrying the financial markets around. Leverage is good, but where it starts to hit highs never before seen, it is justifiable for us to get more than just a little tingle of worry.

Inequality in America The rich, the poor and the growing gap between them

I was talking with Youyi yesterday about the increasing Gini Coefficient around the world, and especially in Asia, but then realised that the increase in income inequality can first of all be observed in the world’s largest debtor, America. So I dug out an article from the Economist, albeit a year old as of now, and decided to whet your appetite on my latest topic of discussion. 

 Jun 15th 2006 | WASHINGTON, DC From The Economist print edition

The rich are the big gainers in America’s new prosperity Getty Images AMERICANS do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.

The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy’s adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America’s economy has outpaced other rich countries’ for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers’ wages far outpaced inflation.

But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the most skilled workers have seen their pay packets swell much in the current economic expansion. The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.

Even in a country that tolerates inequality, political consequences follow when the rising tide raises too few boats. The impact of stagnant wages has been dulled by rising house prices, but still most Americans are unhappy about the economy. According to the latest Gallup survey, fewer than four out of ten think it is in “excellent” or “good” shape, compared with almost seven out of ten when George Bush took office.

The White House professes to be untroubled. Average after-tax income per person, Mr Bush often points out, has risen by more than 8% on his watch, once inflation is taken into account. He is right, but his claim is misleading, since the median worker—the one in the middle of the income range—has done less well than the average, whose gains are pulled up by the big increases of those at the top. Privately, some policymakers admit that the recent trends have them worried, and not just because of the congressional elections in November. The statistics suggest that the economic boom may fade. Americans still head to the shops with gusto, but it is falling savings rates and rising debts (made possible by high house prices), not real income growth, that keep their wallets open. A bust of some kind could lead to widespread political disaffection. Eventually, the country’s social fabric could stretch. “If things carry on like this for long enough,” muses one insider, “we are going to end up like Brazil”—a country notorious for the concentration of its income and wealth.

America is nowhere near Brazil yet (see chart 1). Despite a quarter century during which incomes have drifted ever farther apart, the distribution of wealth has remained remarkably stable. The richest Americans now earn as big a share of overall income as they did a century ago (see chart 2), but their share of overall wealth is much lower. Indeed, it has barely budged in the few past decades. The elites in the early years of the 20th century were living off the income generated by their accumulated fortunes. Today’s rich, by and large, are earning their money. In 1916 the richest 1% got only a fifth of their income from paid work, whereas the figure in 2004 was over 60%.

The not-so-idle rich
The rise of the working rich reinforces America’s self-image as the land of opportunity. But, by some measures, that image is an illusion. Several new studies* show parental income to be a better predictor of whether someone will be rich or poor in America than in Canada or much of Europe. In America about half of the income disparities in one generation are reflected in the next. In Canada and the Nordic countries that proportion is about a fifth. It is not clear whether this sclerosis is increasing: the evidence is mixed. Many studies suggest that mobility between generations has stayed roughly the same in recent decades, and some suggest it is decreasing. Even so, ordinary Americans seem to believe that theirs is still a land of opportunity. The proportion who think you can start poor and end up rich has risen 20 percentage points since 1980. That helps explain why voters who grumble about the economy have nonetheless failed to respond to class politics. John Edwards, the Democrats’ vice-presidential candidate in 2004, made little headway with his tale of “Two Americas”, one for the rich and one for the rest. Over 70% of Americans support the abolition of the estate tax (inheritance tax), even though only one household in 100 pays it. Americans tend to blame their woes not on rich compatriots but on poor foreigners. More than six out of ten are sceptical of free trade. A new poll in Foreign Affairs suggests that almost nine out of ten worry about their jobs going offshore. Congressmen reflect their concerns. Though the economy grows, many have become vociferous protectionists. Other rich countries are watching America’s experience closely. For many Europeans, America’s brand of capitalism is already far too unequal. Such sceptics will be sure to make much of any sign that the broad middle-class reaps scant benefit from the current productivity boom, setting back the course of European reform even further. The conventional tale is that the changes of the past few years are simply more steps along paths that began to diverge for rich and poor in the Reagan era. During the 1950s and 1960s, the halcyon days for America’s middle class, productivity boomed and its benefits were broadly shared. The gap between the lowest and highest earners narrowed. After the 1973 oil shocks, productivity growth suddenly slowed. A few years later, at the start of the 1980s, the gap between rich and poor began to widen. The exact size of that gap depends on how you measure it. Look at wages, the main source of income for most people, and you understate the importance of health care and other benefits. Look at household income and you need to take into account that the typical household has fallen in size in recent decades, thanks to the growth in single-parent families. Look at statistics on spending and you find that the gaps between top and bottom have widened less than for income. But every measure shows that, over the past quarter century, those at the top have done better than those in the middle, who in turn have outpaced those at the bottom. The gains of productivity growth have become increasingly skewed. If all Americans were set on a ladder with ten rungs, the gap between the wages of those on the ninth rung and those on the first has risen by a third since 1980. Put another way, the typical worker earns only 10% more in real terms than his counterpart 25 years ago, even though overall productivity has risen much faster. Economists have long debated why America’s income disparities suddenly widened after 1980. The consensus is that the main cause was technology, which increased the demand for skilled workers relative to their supply, with freer trade reinforcing the effect. Some evidence suggests that institutional changes, particularly the weakening of unions, made the going harder for people at the bottom. Whether these shifts were good or bad depends on your political persuasion. Those on the left lament the gaps, often forgetting that the greater income disparities have created bigger incentives to get an education, which has led to a better trained, more productive workforce. The share of American workers with a college degree, 20% in 1980, is over 30% today.

The excluded middle
In their haste to applaud or lament this tale, both sides of the debate tend to overlook some nuances. First, America’s rising inequality has not, in fact, been continuous. The gap between the bottom and the middle—whether in terms of skills, age, job experience or income—did widen sharply in the 1980s.

High-school dropouts earned 12% less in an average week in 1990 than in 1980; those with only a high-school education earned 6% less. But during the 1990s, particularly towards the end of the decade, that gap stabilised and, by some measures, even narrowed. Real wages rose faster for the bottom quarter of workers than for those in the middle. After 2000 most people lost ground, but, by many measures, those in the middle of the skills and education ladder have been hit relatively harder than those at the bottom. People who had some college experience, but no degree, fared worse than high-school dropouts. Some statistics suggest that the annual income of Americans with a college degree has fallen relative to that of high-school graduates for the first time in decades.

So, whereas the 1980s were hardest on the lowest skilled, the 1990s and this decade have squeezed people in the middle. Getty Images First, pick your parents The one truly continuous trend over the past 25 years has been towards greater concentration of income at the very top. The scale of this shift is not visible from most popular measures of income or wages, as they do not break the distribution down finely enough. But several recent studies have dissected tax records to investigate what goes on at the very top. The figures are startling. According to Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Ecole Normale Supérieure in Paris, the share of aggregate income going to the highest-earning 1% of Americans has doubled from 8% in 1980 to over 16% in 2004. That going to the top tenth of 1% has tripled from 2% in 1980 to 7% today. And that going to the top one-hundredth of 1%—the 14,000 taxpayers at the very top of the income ladder—has quadrupled from 0.65% in 1980 to 2.87% in 2004. Put these pieces together and you do not have a picture of ever-widening inequality but of what Lawrence Katz of Harvard University, David Autor of the Massachusetts Institute of Technology and Melissa Kearney of the Brookings Institution call a polarisation of the labour market. The bottom is no longer falling behind, the top is soaring ahead and the middle is under pressure.

Superstars and super-squeezed
Can changes in technology explain this revised picture? Up to a point. Computers and the internet have reduced the demand for routine jobs that demand only moderate skills, such as the work of bank clerks, while increasing the productivity of the highest-skilled.

Studies in Britain and Germany as well as America show that the pace of job growth since the early 1990s has been slower in occupations that are easy to computerise. For the most talented and skilled, technology has increased the potential market and thus their productivity. Top entertainers or sportsmen, for instance, now perform for a global audience. Some economists believe that technology also explains the soaring pay of chief executives. One argument is that information technology has made top managers more mobile, since it no longer takes years to master the intricacies of any one industry. As a result, the market for chief executives is bigger and their pay is bid up. Global firms plainly do compete globally for talent: Alcoa’s boss is a Brazilian, Sony’s chief executive is American (and Welsh). But the scale of America’s income concentration at the top, and the fact that no other country has seen such extreme shifts, has sent people searching for other causes.

The typical American chief executive now earns 300 times the average wage, up tenfold from the 1970s. Continental Europe’s bosses have seen nothing similar. This discrepancy has fostered the “fat cat” theory of inequality: greedy businessmen sanction huge salaries for each other at the expense of shareholders. Whichever explanation you choose for the signs of growing inequality, none of the changes seems transitory. The middle rungs of America’s labour market are likely to become ever more squeezed. And that squeeze feels worse thanks to another change that has hit the middle class most: greater fluctuations in people’s incomes. The overall economy has become more stable over the past quarter century. America has had only two recessions in the past 20 years, in 1990-91 and 2001, both of which were mild by historical standards. But life has become more turbulent for firms and people’s income now fluctuates much more from one year to the next than it did a generation ago. Some evidence suggests that the trends in short-term income volatility mirror the underlying wage shifts and may now be hitting the middle class most. What of the future? It is possible that the benign pattern of the late 1990s will return.

The disappointing performance of the Bush era may simply reflect a job market that is weaker than it appears. Although unemployment is low, at 4.6%, other signals, such as the proportion of people working, seem inconsistent with a booming economy. More likely, the structural changes in America’s job market that began in the 1990s are now being reinforced by big changes in the global economy. The integration of China’s low-skilled millions and the increased offshoring of services to India and other countries has expanded the global supply of workers. This has reduced the relative price of labour and raised the returns to capital. That reinforces the income concentration at the top, since most stocks and shares are held by richer people. More important, globalisation may further fracture the traditional link between skills and wages. As Frank Levy of MIT points out, offshoring and technology work in tandem, since both dampen the demand for jobs that can be reduced to a set of rules or scripts, whether those jobs are for book-keepers or call-centre workers. Alan Blinder of Princeton, by contrast, says that the demand for skills depends on whether they must be used in person: X-rays taken in Boston may be read by Indians in Bangalore, but offices cannot be cleaned at long distance. So who will be squeezed and who will not is hard to predict. The number of American service jobs that have shifted offshore is small, some 1m at the most. And most of those demand few skills, such as operating telephones. Mr Levy points out that only 15 radiologists in India are now reading American X-rays. But nine out of ten Americans worry about offshoring. That fear may be enough to hold down the wages of college graduates in service industries. All in all, America’s income distribution is likely to continue the trends of the recent past. While those at the top will go on drawing huge salaries, those in the broad middle of the middle class will see their incomes churned. The political consequences will depend on the pace of change and the economy’s general health. With luck, the offshoring of services will happen gradually, allowing time for workers to adapt their skills while strong growth will keep employment high. But if the economy slows, Americans’ scepticism of globalisation is sure to rise. And even their famous tolerance of inequality may reach a limit.

re-sparked love

The more in depth i get with Economics, the greater my love for Economics deepens, opening my eyes to a world that is so intricately webbed in a maze of decisions whose consequences befall not just one but many.

Economics has natural rules much like that of the Universe, which, no matter how man tries, will not allow themselves to be broken. The impossible trinity for one, where free capital flows, independent monetary policy and a fixed exchange rate regime cannot and positively will not co-exist together. Only two out of the three options can be put side by side, and even though there may be arguments that the impossible trinity theorem may be violated in fractions (such as having a fixed exchange rate regime with a semi-controlled capital flows regime and a semi-independent monetary policy), it only goes to prove that Economics has a mind of its own, and though markets are man-made, the natural rules that govern are as their name suggests– Natural.

This term Asian Monetary Policy is on my list of modules, and the readings that come with the package, though more than I would prefer, are actually enjoyable to a great degree. This year sees me more interested in financial and economic news than in gossip columns, and the past 7 days have been a terrific start, with the exception of the damned flu and phelgm that Im finally getting rid of.

Courtesy of Wall Street Journal online

ECONOMIC FORECASTING SURVEY

DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. • See a sample reprint in PDF format. • Order a reprint of this article now. Economy Poised For ’07 Rebound, Forecasters Say Weakness in Housing, Manufacturing Is Likely To Take a Lighter Toll By MARK WHITEHOUSE January 2, 2007; Page A1 The U.S. economy is poised to shake off the housing slump and regain momentum by the end of this year, and the credit goes to techies, bankers, chefs and shoppers, according to a Wall Street Journal survey of economists. The panel of 60 economists who participated in the Journal’s latest semiannual economic forecasting survey offered an optimistic outlook for 2007: The service sector should keep humming along as the recent weakness in housing and manufacturing abates and the Federal Reserve begins to reduce interest rates. That would allow the economy to expand at a rate fast enough to keep investors happy, but slow enough to keep inflation at bay. (See related article1.) CHARTS AND FULL RESULTS 2 See and download forecasts3 for growth, housing, inflation and employment. Plus, views on the “Christmas Effect,” the biggest risks to growth and predictions for the DJIA. Survey conducted Dec. 8-18. HITTING THE MARK U.S. Trust’s Robert McGee4 was the most accurate forecaster in the 2006 second half. How did he climb to the top? WSJ reporter Mark Whitehouse discusses the survey results with Mr. McGee. See the video5. MORE Find More Online:6 Here is a sampling of other Web resources for tracking economists’ predictions. Even so, economists haven’t stopped worrying about what could happen if the current slowdowns in housing and manufacturing spread further — a pattern that has characterized previous recessions. In another potentially ominous sign, they increasingly differ about the economy’s trajectory. On average, the economists predict that inflation-adjusted gross domestic product, a broad measure of economic activity, will grow at an annualized rate of 2.3% in the first half of 2007 and 2.8% in the second half. That’s up from a sluggish 2% in the third quarter of 2006, but still far below the robust annual growth rates of 3.2% for 2005 and 4.1% for early 2006. “As long as you don’t think the labor market is going to collapse or financial conditions are going to change, then you’re starting to have the conditions for better growth down the road,” says Bruce Kasman, head of economic research at J.P. Morgan Chase & Co. in New York. The rapid expansion of technology companies such as Google Inc. and the huge bonuses lavished on New York investment bankers are just a couple of signs of the service sector’s strength. Across the country, restaurants, hospitals, software makers and consulting firms are growing and hiring. All told, service businesses, which make up about 80% of the nation’s economy, added 1.1 million jobs from May through November. ABOUT THE SURVEY The Wall Street Journal surveys a group of 60 private-sector economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the semiannual survey that evaluates how economists fared in the second half of 2006 and looks ahead to 2007. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists7. “We’ve been extremely busy,” says Anthony Kolton, president and chief executive of Logical Information Machines, a Chicago company that provides research software to hedge funds, trading firms and investment banks. “There’s a lot of money out there, and people have to put it to work.” The upbeat attitude in services contrasts sharply with the recent pain in the housing and manufacturing sectors. Builders have been slashing prices and production as they attempt to get rid of a large backlog of unsold homes. Despite a rise in November, new-home construction was down 30% from its January peak. Housing-related industries shed 145,000 jobs from May though November, according to Zoltan Pozsar, an economist at Moody’s Economy.com. Falling home values have also left people with less power to extract cash from their homes through home-equity loans and refinancings, a factor that many economists expect to take a bite out of consumer spending. Along with slumping auto sales, the drop in housing activity has affected all kinds of manufacturers, from drywall factories to furniture makers. The Institute for Supply Management, a purchasing managers’ trade group, said that its index of manufacturing activity for November fell to 49.5, the lowest point since April 2003. (Any number below 50 indicates contraction.) By contrast, the ISM’s index of service-sector activity for the same month rose. “It’s really two very different economies, depending on whether you’re looking at the goods or service industries,” says J.P. Morgan’s Mr. Kasman. The bottom line is that the strength in services will help to keep the job market relatively healthy. In the consensus scenario, nonfarm businesses will add about 100,000 jobs a month in 2007. That should be strong enough to slowly lift wages, but not to keep the unemployment rate from creeping up to 4.9% from 4.5% in November. The economists surveyed expect year-to-year inflation to decline to 1.7% in May from 2.0% in November. As a result, they expect the Fed to shift its focus from fighting inflation to helping the economy grow, lowering short-term interest rates to 4.75% by the end of 2007 from the current 5.25%. That’s a big change from six months ago, when forecasters saw the Fed’s battle with inflation as the greatest challenge facing the economy. “The Fed was hoping to slow the economy down enough to take the wind out of inflation without triggering a recession,” says Nariman Behravesh, chief economist at consulting firm Global Insight in Waltham, Mass. “So far it looks like it has succeeded.” Most forecasters expect 2007 to be a good — not great — year for the economy. While six in 10 said they think the worst of the housing downturn’s impact on the broader economy had passed, they still see a deeper housing slump as the biggest risk looming over the economy. That concern was reflected in the odds they placed on a recession in the next 12 months, which rose to 27% from 20% in June. More so than in recent surveys, forecasters differ on the economic outlook. One measure of their disagreement — the standard deviation of their forecasts for inflation-adjusted GDP for the coming half year — widened to about 0.7 percentage point in December, up from a 20-year low of 0.5 percentage point in June. Each of the past two recessions have been preceded by sharp increases in the deviation measure — to levels greater than one. Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics and one of the survey’s most pessimistic forecasters, places the odds of a recession at one in two. He believes that home construction still has a long way to fall before it levels off with demand, and that the Fed’s rate increases, which helped push corporate borrowing costs upward by about a full percentage point between fall 2005 and spring 2006, have yet to take their full toll on business activity. Mr. Shepherdson expects real GDP to grow at an annual rate of 0.5% in the first half of 2007 and 2.25% in the second half. “It’s going to be worse than the consensus expects,” he says. “My guess is that we’ll probably avoid a recession, but by the skin of our teeth.” Most other forecasters believe the economy will prove more resilient. For one, stronger growth abroad should help boost U.S. exports: More than three out of four forecasters pointed to Asia as the biggest contributor to global growth in 2007. Beyond that, money remains easy to borrow despite the Fed’s efforts to raise interest rates. Global investors’ appetite for U.S. bonds has helped fuel a boom in mergers and acquisitions, and low long-term interest rates have kept mortgages accessible for potential home buyers. Even people with shaky credit, whose tendency to default has proved greater than many investors expected, still have access to money. “We’ve had a remarkably benign credit environment,” says Richard Berner, chief U.S. economist at Morgan Stanley in New York. “That’s partly a tribute to our flexible and resilient capital markets, but I think it’s also just plain good luck.” To some extent, the hit U.S. manufacturing has taken in recent years has made the sector’s outlook less consequential today because there just aren’t as many American manufacturing jobs left to lose, says Ed Leamer, head of the forecasting center at the University of California’s Anderson School of Management. Manufacturing has been shedding jobs since the recession of 2001. “There’s no fat to trim,” says Mr. Leamer. “And without the trimming of fat in manufacturing, you just can’t get the job loss that can add up to a recession.”

A time to remember.

There was an earthquake in Taiwan, 7.1 on the Richter scale on tuesday. So bad was it that it affected Internet communications in the rest of Asia, and it set off a Tsunami warning that left Vietnam shivering in fear.

I was in Taiwan just 2 weeks ago, and I remember the tourguide telling us that Taiwan was formed because of the plates rubbing against each other. That initially, Taiwan didnt exist, except for the friction that eventually led to Taiwan being squeezed out from under the Ocean.  And how Taiwan could keep producing rocks that kept growing taller and taller because of the constant gnashing of the plates on which its foundation is built.  Because of this fact, earthquakes are common and mostly on the higher end of the Richter scale. Especially for those in Taizhong, who would usually feel the brunt of such vibrations of the earth.

This time the earthquake took place near the coastal areas of Taiwan, and its tremors affected not just the 42 wounded and 2 dead, but also the many buildings and infrastructure that will have to be rebuilt for life to get back on the normal track. Asia’s communications temporal breakdown, Bloomberg’s several hours of lost data and the anxiety felt in bond markets served only to show that no matter how advanced we are as a generation, as a nation, as a financial hub, we are still at the mercy of acts of God, things that cannot be controlled by man’s so called knowledge and quest to conquer all and rule all.

Floods have hit Malaysia so badly that Johor’s tourism for this festive period has dipped to below the monthly average, with wary singaporeans cancelling their holiday plans, and my sister adding to one of this statistic. Some roads are still 1.5 m deep in water, and in Aceh, people rush for food packets dropped by helicoptors sent to bring necessary supplies to stranded victims. Villagers rush to the beach to collect the millions of cockles that have been washed ashore so as to get something to eat. Two years ago, the Tsunami came and wiped so many people and things from the face of the earth, devastating the hundreds of thousands that lost their loved ones and were left homeless. Even till today, houses are still being built for the Tsunami victims, and the same goes for the Hurricane Katrina Victims.

Even in the midst of all the celebrations and ushering in of the New Year, let’s say a prayer for those who were lost and those who have lost, in remembrance of them, and also, to remind ourselves not to take things for granted.

Good news a-calling for Singaporeans

SINGAPORE: Singapore’s robust economy created a record 124,500 jobs in the first nine months of the year, surpassing even the employment gains of 113,300 in 2005, the government said on Friday.

“This employment creation is the highest ever recorded,” the Ministry of Manpower said in a statement.

During the third quarter ended September, 43,000 jobs were created with the seasonally adjusted unemployment rate at 2.7 percent, down slightly from 2.8 percent in the previous quarter and 3.2 percent for the same period in 2005, the ministry said.

“In summary, the sustained economic expansion has created record number of jobs. Unemployment has also eased substantially from the high in 2003,” it said.

Singapore’s seasonally unemployment rate at the end of December 2003 was 3.9 percent, the year that the trade-led economy suffered from the fallout of the US-led invasion of Iraq and the outbreak of the Severe Acute Respiratory Syndrome disease that affected mainly East Asia.

The city-state’s gross domestic product is targeted to grow 7.5-8.0 percent in 2006, making it the second fastest growing economy in Southeast Asia after Vietnam where the government has estimated growth of 8.2 percent this year. – AFP/so