Measuring and Monitoring Overheating economy and Slowing economy

Interest rates and Money supply

Interest rates and money supply are the major tools the Fed and other central banks have traditionally used to control economic growth; the key is in how the tools are applied.

A country's economy is regulated by its money supply, which determines interest rates.  And each country's money supply is controlled by its central bank.  These quasi-public institutions are set up by governments but are then given the independence to keep an economy under control without undue interference from dabbling politicians.

How to measure and monitor growth and inflation in an economy?

Despite the tendency of the media to concentrate on the latest major economic statistic, such as GDP growth or unemployment, there is no one single indicator that tells us 

• how fast an economy is growing or 
• if that growth will lead to inflation down the road.

In addition, there is no way to know how quickly an economy will respond to changes in monetary policy.  

• If a country's central bank allows the economy to expand too rapidly - by keeping too much money in circulation, for example - it may cause bubbles and rampant inflation.  
• But if it slows down the economy too much, an economic recession can result, bringing financial turmoil and severe unemployment.  
• When economic stagnation coincides with high inflation, sometimes referred to as stagflation, a worst-case scenario is created.

Central bankers, therefore, need to be prescient and extremely careful - keeping 

• one eye on inflation, which is usually a product of an overheating economy, and 
• one eye on unemployment, which is almost always the product of a slowing economy.

In the twenty first century, with the amount of capital flowing around the world dwarfing many countries' money supplies, it is almost impossible to know with certainty what the effect of any one monetary decision will have on a local economy, let alone on the world.

Fiscal policy or Massive deficit spending

Given the extremely low inflation rates in the 2010s, some have called for alternative methods for controlling economic growth.  Instead of using the central banks' authority to raise tor lower interest rates, referred to as "monetary policy," another solution would be to use "fiscal policy" to alter the money supply - essentially allowing governments to circumvent central banks by printing massive amounts of money to increase the money supply, for example.  

The use of a government's ability to issue new currency to influence economic growth, commonly referred to as Modern Monetary Theory (MMT), is not unproblematic in that inflation can come roaring back at a moment's notice.  

Many governments may misuse the power of MMT to pay for massive deficit spending in ways that lack the prudent guidance provided by the world's central banks.

Unforeseen and unpredictable events

Sometimes financial crises are caused by - and sometimes solved by forces -  entirely unconnected to the original problem.  

Most of the recent financial meltdowns, 

• from the stock market crash of 1987, 
• to the bursting of the dot-com bubble in 2000, 
• to the market collapse following the terrorist attacks of September 11, 2001, 

were exacerbated by economic and sociopolitical forces well outside the control of any one country and greatly affected markets around the world.

Jobs: human, automation and robots

Workplaces evolve to incorporate machines, and people find a way to fit in.

Over the past quarter century, about a third of the new jobs created in the United States were types that did not exist, or barely existed, twenty-five years ago.

In the next transformation, humans are likely to replace jobs lost to automation with new jobs we cannot yet imagine.  

And economists may start counting growth in the robot population as a positive sign for economic growth, the same way that today they analyze growth in the human population.

To assess whether population trends are pushing a nation to rise or to fall, look 

• first at growth in the working-age population, which sets a baseline for how fast the economy can grow.  
• Then track what countries are doing to bring more workers into the talent pool, quickly.  Are they opening doors to the elderly, to women, to foreigners, even to robots?   

In a world facing the challenge of growing labour shortages, it is all hands - human or automated - on deck

First look at US pay data, it’s awful

OCT 19, 2011 

EMPLOYMENT | WAGES

Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday.

The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.

These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008.

This means 3.3 percent of people who had a job in 2007, or one in every 33 30, went all of 2010 without earning a dollar. (Update: the original version of this column used the wrong ratio.)

In addition to the 5.2 million people who no longer have any work add roughly 4.5 million people who, due to population growth, would normally join the workforce in three years and you have close to 10 million workers who did not find even an hour of paid work in 2010.

SIX TRILLION DOLLARS
These figures come from the Medicare tax database at the Social Security Administration, which processes every W-2 wage form. All wages, salaries, bonuses, independent contractor net income and other compensation for services subject to the Medicare tax are added up to the penny.

In 2010 total wages and salaries came to $6,009,831,055,912.11.

That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.

While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.

The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each.
At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.

What these figures tell us is that there was a reason voters responded in the fall of 2010 to the Republican promise that if given control of Congress they would focus on one thing: jobs.

But while Republicans were swept into the majority in the House of Representatives, that promise has been ignored.
Not only has no jobs bill been enacted since January, but the House will not even bring up for a vote the jobs bill sponsored by President Obama. His bill is far from perfect, but where is the promised Republican legislation to get people back to work?

Instead of jobs, the focus on Capitol Hill is on tax cuts for corporations with untaxed profits held offshore, on continuing the temporary Bush administration tax cuts — especially for those making $1 million or more – and on cutting federal spending, which mean destroying more jobs in the short run.

At the same time, nonfinancial companies are sitting on more than $2 trillion of cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation.
All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, which will not and cannot happen until more people have jobs and wages rise, creating increased demand for goods and services.

More of the same approach we have had for most of the last three decades and all of the last ten years is not going to increase demand, create more jobs or enable overall prosperity. In the long run, continuing current policies will make even the richest among us less well off than they would be in a robust economy with government policies that foster job creation and the capital investment that grows from increased demand.

On top of this are the societal problems caused by something the United States has never experienced before, except during the Depression — chronic, long-term unemployment.

Having millions who want work go years without a single day on a payroll is more than just a waste of talent and time. It also can change social attitudes about work and not for the better.

The data show why protests like Occupy Wall Street have so quickly gained momentum around the country, as people who cannot find work try to focus the federal government on creating jobs and dealing with the banking sector that many demonstrators blame for the lack of jobs.

Will official Washington look at the numbers and change course? Or do voters need to change their elected representatives if they want to put America back on a path to widespread prosperity?
(Editing by Kevin Drawbaugh)

http://blogs.reuters.com/david-cay-johnston/2011/10/19/first-look-at-us-pay-data-its-awful/

Stories from the Great Depression

The Recovery: Why Deflation Remains a Threat

GLOBAL ECONOMICS May 27, 2010, 5:00PM EST
The Recovery: Why Deflation Remains a Threat
Economic growth isn't strong enough yet to keep deflation at bay—and turmoil in Europe and market jitters amplify the risk

By Peter Coy

Bargains are everywhere in America these days. Men's shirts and sweaters were 3.4 percent cheaper this April than a year earlier. Prices also fell for eggs, peanut butter, bananas, potatoes, hotel and motel rooms, cosmetics, curtains, rugs, tools, and lawn care. Excluding gasoline and other energy items, the consumer price index rose just 0.9 percent for the year. That's the smallest increase since January 1962, when John F. Kennedy was President.

Everybody likes to save money, but flat to falling prices are not entirely good. They're a symptom of continued weakness nearly a year after the U.S. economy supposedly hit bottom. The same softness of demand that keeps goods cheap is pressuring workers. Annual growth of average hourly earnings fell from 3.5 percent in April 2007 to 1.6 percent this April.

The economic recovery, while welcome, isn't yet strong enough to ensure against the risk of deflation, in which prices fall across the board for an extended period. Deflation caused by a shortfall in demand can be dangerous. People delay purchases, waiting for lower prices, which exacerbates the slowdown. Bankruptcies rise because even though pay falls, debt levels don't. To keep deflation at bay, the Federal Reserve's Open Market Committee voted in April to keep the federal funds rate at near zero. Even with an overhang of more than $1 trillion of excess reserves in the banking system, ready to be lent, committee members cut their inflation forecasts by 0.2 percentage point between the January and April meetings, to a range of 1.2 percent to 1.5 percent for this year.

Turmoil in Europe is amplifying the risk of deflation in the U.S. It's driving up the dollar's value, making American goods less competitive in world markets and retarding growth. Europe's problems also are pushing down the U.S. stock market, which makes consumers fearful and less likely to spend. The Standard & Poor's 500-stock index has fallen 12 percent from its April high. A sharp decline in oil prices since the end of April shows that growth worries are worldwide, since it's global demand that determines the price of oil. Crude hit $71 a barrel in late May, down from $86 at the end of April. Gold is moving the other way, rising to more than $1,200 an ounce by late May from a recent low of less than $900 in April 2009, as investors seek a refuge from chancy markets and banks. All the grim indicators have made their mark. "Call it a nightmare," says one of the most prominent bears, David A. Rosenberg, chief economist and strategist at the Toronto-based investment firm of Gluskin Sheff + Associates.

The decline of output during the 2007-09 recession was so steep that there's still a huge amount of excess productive capacity. According to Federal Reserve data, only 69percent of total industry capacity was used in April, vs. an average of 81percent in the previous 38 years. As for labor, the unemployment rate remains stubbornly high because every uptick in hiring encourages more people to start looking for work again—and thus boost the official jobless rate.

The optimistic take on the economy is that the threat of deflation is temporary and will diminish as excess capacity gets eaten up. Kurt Karl, chief U.S. economist of Swiss Re, says employment gains are producing income that will be spent, generating more jobs and more spending in a virtuous upward spiral. "I'm still bullish," says Karl, adding, "employment growth has turned a major corner." Deflation, he adds, "would be a permanent kind of problem only if you didn't have any employment momentum." He predicts a decrease in the unemployment rate from 9.9percent in April to about 9.5percent at the end of 2010 and about 8percent at the end of 2011.

Certainly there are some signs of progress. On May 25 the Conference Board announced that its May index of consumer confidence rose to the highest level since March 2008. MasterCard Advisors' SpendingPulse measure of consumer purchases has ticked up sharply since early 2009. Luxury retail chains including Barneys and Saks (SKS) are scaling back discounts and promotions they offered to attract shoppers during the recession. In February, Tiffany (TIF) raised prices across the store. Consultants Bain & Co. say U.S. sales of luxury goods may rise 4percent in 2010 after declining 17percent in 2009.

There are worrisome signs, though, that the recovery could stall. Employment has been boosted by the Census Bureau's temporary hiring for the decennial census, but as summer approaches that source of employment will fade. Job creation will slow as the year goes on and be "anemic" in 2011, predicts Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's J. Mack Robinson College of Business. Says Sumit Chandra, a supply chain expert who is a partner at A.T. Kearney consultants: "The recovery is real. It's happening. But I think the magnitude of the recovery, the level of confidence we have in it, is fragile."

Kelly Services (KELYA), the temporary help firm, sees the tentativeness of the expansion at ground level. Demand for its services is strong because companies "want to maintain maximum flexibility" in case the recovery fades, says George S. Corona, Kelly's executive vice-president. Meanwhile, upward pressure on wages is nil in most segments, says Corona. "We have a lot of résumés coming in the door," he says. "We're not having to work hard to find people." Exactly. Cheap shirts and sweaters are cold comfort for unemployed people who are sitting at home in their pajamas.

With Cotten Timberlake

The bottom line: The recession created so much extra capacity that the economy is struggling to absorb it, even as the recovery takes hold.

Coy is Bloomberg Businessweek's Economics editor.

http://www.businessweek.com/print/magazine/content/10_23/b4181009637404.htm

The Economic Climate (7): The economy has gone from hot to cold in a matter of months.

A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.

Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models.  The automakers are giving rebates, and car prices begin to fall a bit.  Thousands of auto workers are laid off, and the unemployment lines get longer.  People out of work can't afford to buy things, so they cut back on their spending.

Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV.  This puts a damper on the motel business in Orlando.  Instead of  buying a new fall wardrobe, they make do with last year's wardrobe.  This puts a damper on the clothes business.  Stores are losing customers and the unsold merchandise is piling up on the shelves.

Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers.  There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending.  The economy has gone from hot to cold in a matter of months.  In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.

Economic Indicators: Jobless Claims

Economic Indicators: Jobless Claims Report


By Ryan Barnes

Release Date: Weekly; Thursdays, prior to market open
Release Time: 8:30am Eastern Standard Time
Coverage Previous week (cutoff date is previous Saturday)
Released By: U.S. Department of Labor
Latest Release: http://www.dol.gov/opa/media/press/eta/main.htm



Background
The Jobless Claims Report is a weekly release that shows the number of first-time (initial) filings for state jobless claims nationwide. The data is seasonally adjusted, as certain times of the year are known for above-average hiring for temporary work (harvesting, holidays).

Due to the short sample period, week-to-week results can be volatile, so reported results are most often headlined as a four-week moving average, so that each week's release is the average of the four prior jobless claims reports. The release will show which states have had the biggest changes in claims from the previous week; the revised edition shows up about a week later, at which time a full breakdown by state and U.S. territory is available.

Also released with this report are the relatively minor data points of the insured unemployment rate and the total unemployed persons. These are not seen as valuable indicators because the total unemployed figure tends to stay relatively constant week to week. (To learn more, read Surveying The Employment Report.)

What it Means for Investors
New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the "run rate" of the economy's health with little lag time. The Jobless Claims Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP).

The fact that jobless claims are released weekly is both a blessing and a curse for investors; sometimes the markets will take a mid-month jobless claims report and react strongly to it, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators are showing a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks, even if only because there isn't any other more recent data to chew on.

A favorable Jobless Claims Report can also get lost in the shuffle of a busy news day, and hardly be noticed by Wall Street at all. The biggest factor week to week is how unsure investors are about the future direction of the economy.




Most economists agree that a sustained change (as shown in the moving averages) of 30,000 claims or more is the benchmark for real job growth or job loss in the economy. Anything less is deemed statistically insignificant by most market analysts.

Strengths:

•Weekly reporting provides for timely, almost real-time snapshots.
•As a tightly-presented release, investors can easily pick up the raw release and quickly apply the information to market decisions.
•Initial claims are provided gross and net of seasonal adjustments, and give a breakdown for every state's individual results.
•Some states' figures are shown along with a comment from that state's reporting agency regarding specific industries in which noteworthy activity is happening, such as "fewer layoffs in the industrial machinery industry".

Weaknesses:

•Summer and other seasonal employment tends to skew the results.
•Highly volatile - revisions to advance report can be very big on a percentage basis
•Jobless claims in isolation tell little about the overall state of the economy.
•No industry breakdowns are provided, just the national figure.

http://www.investopedia.com/university/releases/joblessclaims.asp

Recession: the penny finally drops...

April 7, 2009

Recession: the penny finally drops...

David Wighton: Business Editor's commentary

One of the great mysteries of the recession has been why consumer confidence has held up so well. To judge from the Asda survey we report today, the grim reality finally appears to have dawned. Half of those polled fear losing their jobs in the next six months while two thirds would take a pay cut or a reduction in the working week to protect theirs.

That represents a big shift from December, when only one third of those questioned said they expected their job security to get worse in the next three months.

One surprising result of the survey is that 21 per cent of those questioned said that they expected to receive a pay rise at least as good as last year's. Then again, maybe not so odd. This happens to be almost precisely the proportion of the workforce employed in the public sector.

http://business.timesonline.co.uk/tol/business/columnists/article6047897.ece

Understanding effects of economic indicators on stock market

Understanding effects of economic indicators on stock market
Published: 2009/02/25

When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain

IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.


With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.


As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.


Why do you need to understand and monitor the economic situation?


A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.


Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.


Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.


What is an economic indicator

An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.


There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.


* Inflation


Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.


Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.


The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.


The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.


The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.


On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.


* Gross Domestic Product


Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.


When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.


* Labour market


The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.


Bottom line


By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.


Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.


Malaysia's economic indicator data can be obtained from the Department of Statistics website at www.statistics.gov.my



Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.


http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC4/Article/index_html

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Fed downgrades economic forecast for this year

Fed downgrades economic forecast for this year

WASHINGTON – The Federal Reserve on Wednesday sharply downgraded its projections for the country's economic performance this year, predicting the economy will actually shrink and unemployment will rise higher. Under the new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.

The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.

The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.

"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.

Against that backdrop, unemployment — now at 7.6 percent, the highest in more than 16 years — will keep climbing and stay elevated for quite some time, the Fed predicted.

Fed officials anticipated that unemployment would remain "substantially" higher than normal at the end of 2011 "even absent further economic shocks."

The Fed forecast calls for the jobless rate to dip to between 8 and 8.3 percent next year, and to between 7.5 and 6.7 percent in 2011. All those projections are worse than the Fed's previous estimates and would put unemployment higher than the normal range around 5 percent.

Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.

Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year. Fed officials "generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped," according to the Fed documents.

Fed officials, however, predicted the economy would pick up speed in 2011, growing by as much as 5 percent, which would be considered robust.

Still, given all the economy's problems, there are risks that the Fed's forecasts could turn out to be too optimistic.

And a few Fed officials — none are identified — feared that it could take five or six years for the economy and employment to get back into a sustainable mode of health.

On the inflation front, the weak economy should mean that companies will keep a lid on price increases this year as they try to lure skittish consumers.

The Fed expects prices to rise between 0.3 and 1 percent this year, down from a projection of between 1.3 and 2 percent in the fall. Prices will pick up slightly in 2010 and 2011 as the economy strengthens.

For now, Fed officials are more worried about falling prices, than rising ones.

The Fed didn't use the word "deflation," which is a dangerous bout of falling prices, but officials noted "some risk of a protracted period of excessively low inflation."

Falling prices sound like a gift at first — at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.

http://news.yahoo.com/s/ap/20090218/ap_on_bi_ge/fed_economy

Foreign exchange risks

The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.

The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.

The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.

What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.

My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.

How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?