The Great Food Crisis of 2011 – As the new year begins, the price of wheat is setting an all-time high in the United Kingdom. Food riots are spreading across Algeria. Russia is importing grain to sustain its cattle herds until spring grazing begins. India is wrestling with an 18-percent annual food inflation rate, sparking protests. China is looking abroad for potentially massive quantities of wheat and corn. The Mexican government is buying corn futures to avoid unmanageable tortilla price rises. And on January 5, the U.N. Food and Agricultural organization announced that its food price index for December hit an all-time high. But whereas in years past, it’s been weather that has caused a spike in commodities prices, now it’s trends on both sides of the food supply/demand equation that are driving up prices. On the demand side, the culprits are population growth, rising affluence, and the use of grain to fuel cars. On the supply side: soil erosion, aquifer depletion, the loss of cropland to nonfarm uses, the diversion of irrigation water to cities, the plateauing of crop yields in agriculturally advanced countries, and — due to climate change — crop-withering heat waves and melting mountain glaciers and ice sheets. These climate-related trends seem destined to take a far greater toll in the future

Real Appreication of Chinese Inflation –The Times’ reports on inflation in China:..consumer prices were 5.1 percent higher in November than a year earlier, according to official government data. And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high.“Four percent, China can bear it — beyond 5 percent, people will complain a lot,” said Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation here.Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter. The central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi’s appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets — while also protecting the jobs of tens of millions of Chinese workers in export factories.

Exchange Rate Modelling at AEA – Or, at least one session’s worth of recent thinking on the topic. This session was notable for bringing together papers that focused on the inability of our empirical models to explain satisfactorily movements in key bilateral exchange rates. One overarching theme was that parameter variability was something to take seriously, and not necessarily as a nuisance. From On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals:

A Fed on hold – Back in November, we previewed the new voting membership of the FOMC and speculated on its possible consequences for monetary policy in 2011: Three of the four new voters are in the Soft Hawk (Kocherlakota) or Hawk camp (Fisher and Plosser). We concluded that overall the voting composition would be slightly more hawkish than the 2010 version, and could make life a bit more difficult for Bernanke if he needed to do anything bold. But since then, the US recovery has accelerated somewhat and outright deflation is less of a threat. In other words, barring a severe negative economic shock (which certainly can’t be ruled out), really bold new measures are unlikely to be on the table anyways.

Stephen’s got standards. So I’m going to steal his graphs from his last post, and write the post he could easily have written. Before you look at Stephen’s graphs, ask yourself this question. How well did the US fare in the Great Recession, in terms of GDP and employment, compared to other G7 countries? Now look at the dark blue lines (that’s the US) in both graphs. Compare them to the other lines. Did you see what you expected to see, on both graphs? I could understand if the US had the worst output and employment during the recession. I could fake up some explanation. I could understand if the US had the best output and employment during the recession. I could fake up some other explanation. What I can’t understand is why the US had the second best output, and yet by far the worst employment. That would require two fake explanations, and it would be hard to make those two explanations consistent.

Eichengreen on the Dollar – At Project Syndicate, Barry Eichengreen sees some interesting similarities between today’s debates over the dollar’s global role and those of the 1960’s, when the Bretton Woods system was nearing its collapse:  In 1964, it was the rapidly growing economies of Europe, still catching up to the US, that were howling about the Federal Reserve. As a result of a recklessly expansionary American policy, they argued, they were being flooded with imported finance. The US was “exporting inflation.” American officials countered that the financial inflows reflected Europe’s underdeveloped capital markets. Europe’s inflation problem was a byproduct of its central banks’ reluctance to tighten policy more aggressively, and European countries’ hesitancy to let their currencies rise, reflecting their long-standing commitment to export-led growth. The effort to replace the dollar with IMF "Special Drawing Rights" (SDRs) ultimately failed, and no agreement was reached on achieving greater flexibility within the context of the Bretton Woods system:

DC Puts Its Bankster-Friendly Solution for Foreclosure Fraud on the Table  – Yves Smith  – We’ll analyze a proposal to fix the foreclosure mess put out by a DC think tank known as Third Way. Third Way is an influential think tank whose board is composed of a special Wall Street-type – the Rubin Democrat. These people sit at the nexus of politics and finance, and are conduits for big bank friendly information flow into the administration and Congress. The President of the think tank, Jonathan Cowan, was the Chief of Staff for Andrew Cuomo at HUD in the 1990s, and the new White House Chief of Staff Bill Daley, who just left the most senior operating committee of JP Morgan, was on their Board of Directors. So by looking at this proposal, we are looking at the state of play among high level policy makers in DC, particularly of the New Dem bent. This is how the administration will probably try to play foreclosure-gate.  Their proposal, not surprisingly, is yet another bailout.  This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.

Matt Stoller: Understanding the Strategy of the Democratic Power Class Since the 1970s, Democratic elites have focused on breaking public sector unions and financializing the economy. Carter, not Reagan, started the defense build-up. Carter, not Reagan, lifted usury caps. Carter, not Reagan, first cut capital gains taxes. Clinton, not Bush, passed NAFTA. It isn’t the base of the Democratic party that did this, but then, voters in America have never had a lot of power because they are too disorganized. And there wasn’t a substantial grassroots movement to challenge this, either. Obama continues this trend. It isn’t that he’s not fighting, he fights like hell for what he wants. He whipped incredibly aggressively for TARP, he has passed emergency war funding (breaking a campaign promise) several times, and nearly broke the arms of feckless liberals in the process. I mean, when Bernie Sanders did the filiBernie, Obama flirted with Bernie’s potential 2012 GOP challenger. Obama just wants policies that cement the status of a aristocratic class, with crumbs for everyone else (Republican elites disagree in that they hate anyone but elites getting crumbs). And he will fight for them.

Richard Alford: Why Has the PPIP Scandal Been Swept Under the Rug? The SIGTARP quarterly report released in October included audits of some aspects of the PPIP. This audit and a prior audit of the PPIP manager selection process reveals that the PPIP has not meet the goals set for it and has allowed the private participants to profit disproportionately to the money that they invested and the risks that they incurred. Only with blood in the street and the financial world on the edge of a precipice after the Lehman, Prime Reserve Fund, and AIG episodes would the Treasury come up with TARP and ask the Congress for enabling legislation and funding.  In short, PPIP has not meaningfully advanced the advertised goals of increasing transparency and liquidity in the markets for real estate assets. In additions, it is clear that the design of the program and the manager selection process and transparency of the PPIP itself are faulty. However, the PPIP has allowed the private investors to reap returns disproportionate to their shares of the risk and monies invested. It ought to be a scandal for numerous reasons.

“The 20 Most Influential Blogs in Financial Media” – 01/12/2011 – Yves Smith – Thanks to Minyanville for publicizing this study by MindfulMoney on the nature and reach of social conversations in the investment arena. But even bigger thanks go to loyal readers and contributors for their frequent comments, leads, and critiques. The success of a blog depends on its community and I am very grateful for all the input so many of you have generously provided. Perhaps the most interesting finding (boldface ours):  The research confirms the existence of a network of investment super-connectors with extraordinary media influence and reach. These super-connected new influentials are, for the most part, not well established voices in the media but individual bloggers who fiercely champion their independence….In the US, the network functions as the unofficial voice of Wall Street & the US federal bank with no mainstream media players at the centre of the network. Given how many of these top blogs are critical of the status quo, this map may be hopeful sign that the blogosphere is beginning to become a important channel of discourse outside the reach of the PR machinery of major corporations and government entities.

Income Distribution Part II,  Here’s another thought relating to this post. Our basic notion of social insurance is that each of us is placed, at birth, in a set of circumstances beyond our control. Before birth, we’re not able to write insurance contracts that will compensate us for being born poor, for being born with a serious disease or birth defect, or for other possible bad events. There is then some role for the government in stepping in to provide the insurance that the private market cannot provide, by redistributing income from the rich to the poor, providing health care, or other interventions. The problem we have to deal with is that, as we teach students in Econ 101, prices help to allocate resources efficiently. To a degree, people are rich by virtue of the fact that society puts a high value on their services, and society puts a high value on their services because these are the services society wants. To provide the services that society wants, people have to be motivated to provide them. Becoming a skilled brain surgeon requires time and effort, and people won’t do it if there is no payoff.

 Euro Looks Set to Win Race to Currency Bottom, Rogoff Says…The euro may “win the race to the bottom” of currency values this year as policy makers struggle to stem the region’s sovereign debt crisis, former International Monetary Fund chief economist Kenneth Rogoff said.  The euro area “has a high chance of a medium-sized meltdown,” Rogoff wrote in an article in the Financial Times published today. In the U.S., there is a “small chance of a large catastrophe.”  Comparing the challenges faced by policy makers globally, Rogoff said his money “is still on the euro” to “hugely” underperform this year.  “I am cautiously optimistic that Europe will find a way to manage its country bankruptcies, but there are no elegant solutions, and the possibility of political paralysis at just the wrong time is significant,” he said.

 The Doctrine of Immaculate Transfer – Paul Krugman –  Dave Altig at the Atlanta Fed weighs in on Martin Feldstein’s much-quoted paper arguing that the United States and China will soon reduce or eliminate their current account imbalances. I think it’s worth saying a bit more about this, because there’s a common fallacy here  The fallacy comes in when you say, “Well, given that it’s all about spending imbalances, exchange rate policy has nothing to do with it.” Anyway, imagine for simplicity that America and China are the only two countries in the world. And imagine that as consumer habits change, American spending falls by $400 billion while Chinese spending rises by $400 billion. Trade imbalance gone, right?No, it’s not that easy. If US residents cut spending by $400 billion, most of that reduction — say 75 percent — will come in reduced spending on US-produced goods and services (even that Chinese pair of pajamas you buy at WalMart has a lot of US value-added in distribution and retailing.) So that’s $300 billion in reduced demand for US output.

Megan McArdle on Foreclosure Fraud Crisis – Megan McArdle has a series of posts on the foreclosure crisis. What’s a ‘Libertarian Solution’ to the Foreclosure Mess?, Reader response, Foreclosure Options. It comes off the question highlighted at Balloon Juice:  Why aren’t libertarian outlets discussing the foreclosure crisis? Given that McArdle and I are likely to disagree on many points, I found it a solid read and hope more libertarians get engaged in this important conversation.  I may have more later, but a few high-level points right now.

Geithner Urges New Start for U.S.-China Relations – Treasury Secretary Timothy F. Geithner on Wednesday suggested a fresh start in relations between the United States and China, aimed at mutually beneficial economic growth.  In a speech at Johns Hopkins University, one week before the state visit of China’s president, Hu Jintao, Mr. Geithner said the two countries would benefit by being more than rivals.  “We have a great deal invested in each other’s success,” Mr. Geithner said.  His main points — that China should reduce the government’s control of the economy, lower barriers to imports from the United States, crack down on the pilfering of American technology and stop holding down the value of its currency — were nothing new.


China’s lending quota? – This year to everyone’s surprise the PBoC failed to announce 2011’s lending quota.  Instead it announced a series of new polices aimed at monitoring the banks.  According to an article in Thursday’s People’s Daily: The People’s Bank of China (PBOC), the country’s central bank, will check credit and capital levels of commercial banks each month to determine the reserve requirements for individual lenders, viewed as a measure to strengthen control over banks’ monthly credit. “The key point of the differentiated reserve requirements lies in how important the individual financial institution is to the overall economy. Apart from systematic importance, its capital adequacy rate, operational stability and other factors will also be taken into account,” the source said. There is a lot of debate about what all this means.  In part, of course, it is aimed at the CBRC, with whom the PBoC has been rumored to be conducting a so-far losing turf battle over control of the banking system.  By putting into place a complex monitoring system, then, the PBoC may be trying to reclaim priority in setting commercial bank policy and to keep the banks from gaming the system.

Floodwater threatens overwhelming damage to Great Barrier Reef – Australia’s great Barrier Reef, one of the ecological wonders of the world, may also be severely affected by the Queensland floods. The pristine waters of the vast 1,400-mile reef system, home to thousands of exotic and often endangered marine species, from whales and dolphins, seabirds and tropical fish to tiny coral polyps, are threatened by huge volumes of polluted floodwater flowing out from the coast.  Already the brown flood "plume" has been detected offshore over a huge expanse of sea, stretching more than 1,000 miles from Cooktown in northern Queensland to Grafton, south of Brisbane in northern New South Wales. But it is in the centre of this area – the Barrier Reef’s southern sector – that the threat is greatest.

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