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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Friday 3 April 2009
Thursday 2 April 2009
****What causes stock prices to move?
What causes stock prices to move?
Published: 2009/03/25
Knowing the answer to this will enable you to buy and sell at the right time.
STOCK investing is perhaps the most talked about form of investing. Stocks create hype because they are volatile and sensitive to various factors. With the current economic landscape and dismal performance of bourses worldwide, we can observe that stock prices are affected on a much larger scale than usual. So, if you are wondering what makes stock prices go up or down, read on to find out.
Knowing the answer to this will enable you to buy and sell at the right time. Unfortunately, there is no one definite answer to this simple question. Various factors influence stock price movements. However, certain primary factors have a major impact on the movement and as an investor, you need to pay attention to these factors as guidance in making the right call to "buy" or "sell".
Demand and Supply
This golden rule of economics holds true even when it comes to the stock market. When demand for stocks is greater than supply, stock prices will go up. This happens when everyone starts to chase after stocks but only very few are willing to sell. This in turn, pushes the prices of stocks up further. On the flip side, when supply is greater than demand, everyone rushes to sell off their stocks, but only a few buyers are interested. This results in stock prices being depressed.
Bearing this in mind, you then need to know what causes the demand or supply to go up or down.
* Economic situation
* Economic situation
Stock market performance is actually a leading indicator of our economic situation. This means that the stock market will reflect the market expectations of our economy a few months down the line. As such, if the market expects the economy to boom, you will start to see stock prices increasing much earlier than the actual boom and the opposite applies when recession hits. Bearing this in mind, as investors, you need to be sensitive to signs that provide any form of indication on the future direction of the economy.
For example, when inflation rate creeps up; there is a possibility that the interest rate will go up as well to help cool the economy. The stock market in turn, will react negatively given such an expectation. On the other hand, when the economy is at the bottom of its cycle and the interest rate is lowered to stimulate economic activity, you will see that stock market will react positively to it. This positive reaction is attributed to the expectation that the economy is on the road to recovery.
* Company performance
* Company performance
Logically, the stock price of a company should go up if its financial performance is good, and vice versa. However, you will notice that most of the time, when the financial results are announced, as long as they reflect analysts' expectations, regardless of whether the reports bear good or bad news, stock prices will usually not show much movement. It is only when the results come as a surprise to the market that you will see a blip in the price. Basically, this is because the existing stock prices already reflect the current market expectation. This tells you that you need to pay attention to the company's business fundamentals, as this is the critical factor that is going to influence the company's stock price in the long run. As an investor, you should be mindful of the company's business direction and projects that it is involved in, that have the potential of bringing growth to the business. You have keep a watchful eye on its financial performance and management's strength, in order to make a good investment decision.
* Market rumours
* Market rumours
This is a major contributor to the stock market's short term volatility. There is a famous saying in the stock market, 'buy on rumours, sell on facts'. Investors tend to over-react or react hastily to the slightest market rumours. Often times, they will panic and rush to sell on negative rumours, resulting in the drop of the stock price. Investors could take the opportunity to buy at that particular time if they know that the company is fundamentally strong and the likelihood of the negative rumours being accurate is low; or the situation is not as bad as it is made out to be. By carefully scrutinising market rumours, you are able to make sound investment decisions instead of just following the crowd, that could lead to dire consequences.
* Political instability
* Political instability
Naturally, if a country is experiencing political unrest, the stock market will inevitably have to deal with some setbacks. In cases of instability, foreign investors react by pulling out their funds which may trigger panic selling from all parties. You will need to assess whether the unrest is just a short-term event or carries with it a longer lasting impact. This is crucial in assessing your risk should you choose to continue holding on to your position, as opposed to taking quick action to leave the market.
The above are only a few major drivers that will cause the stock prices to move. However, most of the time, the investor psychology effect of over reacting makes market movement more prominent than it should be. One of Benjamin Graham's investing principles encourages us to look at market fluctuations as our friend rather than our enemy, as market movements sometime create buying opportunities for true investors. Therefore, as an informed and knowledgeable investor, avoid getting into "panic mode". Always remember, understand and evaluate the situation by using your own judgement to ensure that you make intelligent investment decisions.
This article was written by Securities Industry Development Corporation to educate investors on smart investing. The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.
Securities Industry Development Corporation, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC8/Article/index_html
» RELATED STORIES
Why investors behave the way they do
Shield yourself from scams
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Published: 2009/03/25
Knowing the answer to this will enable you to buy and sell at the right time.
STOCK investing is perhaps the most talked about form of investing. Stocks create hype because they are volatile and sensitive to various factors. With the current economic landscape and dismal performance of bourses worldwide, we can observe that stock prices are affected on a much larger scale than usual. So, if you are wondering what makes stock prices go up or down, read on to find out.
Knowing the answer to this will enable you to buy and sell at the right time. Unfortunately, there is no one definite answer to this simple question. Various factors influence stock price movements. However, certain primary factors have a major impact on the movement and as an investor, you need to pay attention to these factors as guidance in making the right call to "buy" or "sell".
Demand and Supply
This golden rule of economics holds true even when it comes to the stock market. When demand for stocks is greater than supply, stock prices will go up. This happens when everyone starts to chase after stocks but only very few are willing to sell. This in turn, pushes the prices of stocks up further. On the flip side, when supply is greater than demand, everyone rushes to sell off their stocks, but only a few buyers are interested. This results in stock prices being depressed.
Bearing this in mind, you then need to know what causes the demand or supply to go up or down.
* Economic situation
* Economic situation
Stock market performance is actually a leading indicator of our economic situation. This means that the stock market will reflect the market expectations of our economy a few months down the line. As such, if the market expects the economy to boom, you will start to see stock prices increasing much earlier than the actual boom and the opposite applies when recession hits. Bearing this in mind, as investors, you need to be sensitive to signs that provide any form of indication on the future direction of the economy.
For example, when inflation rate creeps up; there is a possibility that the interest rate will go up as well to help cool the economy. The stock market in turn, will react negatively given such an expectation. On the other hand, when the economy is at the bottom of its cycle and the interest rate is lowered to stimulate economic activity, you will see that stock market will react positively to it. This positive reaction is attributed to the expectation that the economy is on the road to recovery.
* Company performance
* Company performance
Logically, the stock price of a company should go up if its financial performance is good, and vice versa. However, you will notice that most of the time, when the financial results are announced, as long as they reflect analysts' expectations, regardless of whether the reports bear good or bad news, stock prices will usually not show much movement. It is only when the results come as a surprise to the market that you will see a blip in the price. Basically, this is because the existing stock prices already reflect the current market expectation. This tells you that you need to pay attention to the company's business fundamentals, as this is the critical factor that is going to influence the company's stock price in the long run. As an investor, you should be mindful of the company's business direction and projects that it is involved in, that have the potential of bringing growth to the business. You have keep a watchful eye on its financial performance and management's strength, in order to make a good investment decision.
* Market rumours
* Market rumours
This is a major contributor to the stock market's short term volatility. There is a famous saying in the stock market, 'buy on rumours, sell on facts'. Investors tend to over-react or react hastily to the slightest market rumours. Often times, they will panic and rush to sell on negative rumours, resulting in the drop of the stock price. Investors could take the opportunity to buy at that particular time if they know that the company is fundamentally strong and the likelihood of the negative rumours being accurate is low; or the situation is not as bad as it is made out to be. By carefully scrutinising market rumours, you are able to make sound investment decisions instead of just following the crowd, that could lead to dire consequences.
* Political instability
* Political instability
Naturally, if a country is experiencing political unrest, the stock market will inevitably have to deal with some setbacks. In cases of instability, foreign investors react by pulling out their funds which may trigger panic selling from all parties. You will need to assess whether the unrest is just a short-term event or carries with it a longer lasting impact. This is crucial in assessing your risk should you choose to continue holding on to your position, as opposed to taking quick action to leave the market.
The above are only a few major drivers that will cause the stock prices to move. However, most of the time, the investor psychology effect of over reacting makes market movement more prominent than it should be. One of Benjamin Graham's investing principles encourages us to look at market fluctuations as our friend rather than our enemy, as market movements sometime create buying opportunities for true investors. Therefore, as an informed and knowledgeable investor, avoid getting into "panic mode". Always remember, understand and evaluate the situation by using your own judgement to ensure that you make intelligent investment decisions.
This article was written by Securities Industry Development Corporation to educate investors on smart investing. The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.
Securities Industry Development Corporation, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC8/Article/index_html
» RELATED STORIES
Why investors behave the way they do
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Understanding effects of economic indicators on stock market
Insight into bonds
Why investors behave the way they do
Why investors behave the way they do
Published: 2009/04/01
Learning from other market players’ mistakes; analysing how and what they think, can help an investor emerge as a winner in the market
In recent years, behavioural finance has been gaining grounds in trying to explain the financial anomalies in the stock market. These anomalies, which cannot be addressed by traditional financial theory such as the market efficiency theory may sound purely theoretical, but you cannot brush aside the need to understand the psychology of investors as it plays a big part in driving the stock market.
What is Behavioural Finance?
Behavioural finance is the study to explain the financial behaviour from the psychological aspect. Over the years, market psychologists have discovered that the two primary emotions that drive investors' risk-taking behaviour are hope and fear. There are a few key behavioural concepts that will help us to understand why some of us behave in certain ways when it comes to making investment decisions. In this article, we talk about four of such concepts:
* Regret theory
Regret, a simple enough concept to understand by any layman, refers to the emotional experience that one goes through when confronted with the wrong decision that he or she has made. It manifests itself in the form of pain when one feels responsible for not doing the right thing. When you look back at your investment history, try to recall the state you were in when you missed the chance to cut losses or missed the opportunity to buy a stock that you knew you should have bought because it was considered a good buy. Try and remember how you felt when the price of that particular stock that you did not buy increased subsequently. This emotion often becomes embedded in someone's mind in such a way that it regulates his or her future actions and decisions.
As a result, most investors make it a habit to avoid selling a loss-making stock and instead hope that the price will rebound eventually - all this, to avoid the feeling of regret. They would much rather make a paper loss than admit that they have made a mistake. In some cases, where the bad decisions happen to be recommended by their financial advisers, investors will put the blame on the advisers to avoid regret.
* Prospect theory
Prospect theory developed by Daniel Kahneman and Amos Tversky (1979), states that "we have an irrational tendency to be less willing to gamble with profits than with losses". Kahneman and Tversky found that when confronted with the choice between accepting a sure loss and taking a chance, most people will choose the latter. This phenomenon is called "loss aversion", which basically means that in general, people hate to lose. So, when faced with a situation involving loss, they become risk takers; they take the chance even if there is only the slightest hope of not having to lose.
On the other hand, when presented with a sure gain, they usually become risk-averse. Investors who behave this way tend to mark their stocks to the price that they originally paid to secure them and not to market. As such, they aim to get even before closing out a position. This type of investors usually ends up holding on to their loss-making stocks for far too long, which may very well prove detrimental to them in the end.
* Overconfidence
It is human nature for us to over-estimate our abilities and shower ourselves with a little too much confidence, i.e, overconfidence. Studies show that investors are often overconfident when it comes to their ability to predict the market's direction. Oddly enough, this is something that is more prominent among novice investors. Compared to experienced investors, those who are new to the market tend to set higher return expectations and end up being overwhelmed by the unfavourable outcome. As a result of overconfidence, some investors tend to trade too frequently only to get unsatisfactory returns or worse yet, losses. With the convenience of online trading, some even quit their full-time jobs to do day trading, thinking that they have the ability to predict the market and earn fast money. These are the people that usually end up getting burned if they do so without proper understanding of what they have been buying and selling, especially when the market is highly volatile.
* Anchoring
This is a behavioural phenomenon in which people tend to extrapolate the past into the future, putting heavier weight on the recent past. At times, when there are new announcements from companies, analysts fail to adjust their earnings forecast for the companies to reflect the latest information due to the anchoring effect. As a result, they land themselves with a few surprises when positive news become more positive and vice versa.
What has been discussed above are a few common behavioural phenomena experienced by investors that are useful to know. By understanding the psychology behind investors' behaviours, you can learn to recognise mistakes and avoid making such mistakes yourself. Learning from other market players' mistakes; analysing how and what they think, can help you emerge as a winner in the market.
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, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC9/Article/
» RELATED STORIES
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Understanding effects of economic indicators on stock market
Insight into bonds
Published: 2009/04/01
Learning from other market players’ mistakes; analysing how and what they think, can help an investor emerge as a winner in the market
In recent years, behavioural finance has been gaining grounds in trying to explain the financial anomalies in the stock market. These anomalies, which cannot be addressed by traditional financial theory such as the market efficiency theory may sound purely theoretical, but you cannot brush aside the need to understand the psychology of investors as it plays a big part in driving the stock market.
What is Behavioural Finance?
Behavioural finance is the study to explain the financial behaviour from the psychological aspect. Over the years, market psychologists have discovered that the two primary emotions that drive investors' risk-taking behaviour are hope and fear. There are a few key behavioural concepts that will help us to understand why some of us behave in certain ways when it comes to making investment decisions. In this article, we talk about four of such concepts:
* Regret theory
Regret, a simple enough concept to understand by any layman, refers to the emotional experience that one goes through when confronted with the wrong decision that he or she has made. It manifests itself in the form of pain when one feels responsible for not doing the right thing. When you look back at your investment history, try to recall the state you were in when you missed the chance to cut losses or missed the opportunity to buy a stock that you knew you should have bought because it was considered a good buy. Try and remember how you felt when the price of that particular stock that you did not buy increased subsequently. This emotion often becomes embedded in someone's mind in such a way that it regulates his or her future actions and decisions.
As a result, most investors make it a habit to avoid selling a loss-making stock and instead hope that the price will rebound eventually - all this, to avoid the feeling of regret. They would much rather make a paper loss than admit that they have made a mistake. In some cases, where the bad decisions happen to be recommended by their financial advisers, investors will put the blame on the advisers to avoid regret.
* Prospect theory
Prospect theory developed by Daniel Kahneman and Amos Tversky (1979), states that "we have an irrational tendency to be less willing to gamble with profits than with losses". Kahneman and Tversky found that when confronted with the choice between accepting a sure loss and taking a chance, most people will choose the latter. This phenomenon is called "loss aversion", which basically means that in general, people hate to lose. So, when faced with a situation involving loss, they become risk takers; they take the chance even if there is only the slightest hope of not having to lose.
On the other hand, when presented with a sure gain, they usually become risk-averse. Investors who behave this way tend to mark their stocks to the price that they originally paid to secure them and not to market. As such, they aim to get even before closing out a position. This type of investors usually ends up holding on to their loss-making stocks for far too long, which may very well prove detrimental to them in the end.
* Overconfidence
It is human nature for us to over-estimate our abilities and shower ourselves with a little too much confidence, i.e, overconfidence. Studies show that investors are often overconfident when it comes to their ability to predict the market's direction. Oddly enough, this is something that is more prominent among novice investors. Compared to experienced investors, those who are new to the market tend to set higher return expectations and end up being overwhelmed by the unfavourable outcome. As a result of overconfidence, some investors tend to trade too frequently only to get unsatisfactory returns or worse yet, losses. With the convenience of online trading, some even quit their full-time jobs to do day trading, thinking that they have the ability to predict the market and earn fast money. These are the people that usually end up getting burned if they do so without proper understanding of what they have been buying and selling, especially when the market is highly volatile.
* Anchoring
This is a behavioural phenomenon in which people tend to extrapolate the past into the future, putting heavier weight on the recent past. At times, when there are new announcements from companies, analysts fail to adjust their earnings forecast for the companies to reflect the latest information due to the anchoring effect. As a result, they land themselves with a few surprises when positive news become more positive and vice versa.
What has been discussed above are a few common behavioural phenomena experienced by investors that are useful to know. By understanding the psychology behind investors' behaviours, you can learn to recognise mistakes and avoid making such mistakes yourself. Learning from other market players' mistakes; analysing how and what they think, can help you emerge as a winner in the market.
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, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC9/Article/
» RELATED STORIES
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Understanding effects of economic indicators on stock market
Insight into bonds
G20 summit: Leaders target bankers
G20 summit: Leaders target bankers
World leaders will agree unprecedented global restrictions on pay and bonuses for bankers at the G20 summit in London.
By Andrew Porter, Robert Winnett and Christopher Hope
Last Updated: 12:07AM BST 02 Apr 2009
In future, bankers will be prevented from receiving multi-million pound cash bonuses for speculating on the stock market.
Their remuneration will instead be based on the risks they take over the long term. Bankers deemed to be making risky investment decisions will only be paid in shares that can be cashed in after several years.
Sarkozy and Merkel demand tough market curbs The multi-million-pound bonuses paid to bankers have been blamed for encouraging them to take the "reckless" decisions that triggered the global financial crisis.
The Daily Telegraph has learnt that the remuneration deal was thrashed out over the past few days following intensive diplomatic efforts by Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor. The measure did not appear in a draft communiqué that was leaked at the weekend.
The European leaders were understood to have pushed for an exact monetary limit on banking pay but were prepared to sign up to the new, strongly-worded agreement.
Regulators in each of the G20 countries will impose the new restrictions, which cover both private banks and those owned both wholly and partially by the state.
The agreement will be the most eye-catching part of the communiqué, which is expected to be released by G20 leaders at the summit in London's Docklands on Thursday.
On Wednesday, violent clashes took place in the capital between police and anti-capitalism protesters ahead of the talks. In the City of London, a branch of Royal Bank of Scotland was attacked and looted as violence flared during a 6,000-strong protest, which resulted in 32 arrests.
A man died after he collapsed at the scene of protests near the Bank of England last night.
A protester called the police after they saw the man collapse and stop breathing in St Michael’s Alley, near Birchin Lane just off Cornhill shortly before 7.30pm.
Two police medics broke through the cordon and carried the man to a clear area in front of the Royal Exchange where they gave him CPR.
The ambulance arrived six minutes later and took him to hospital just before 8pm, where he was pronounced dead.
A Scotland Yard spokesman said: “The officers took the decision to move him as during this time a number of missiles - believed to be bottles - were being thrown at them.”
It is believed that the man died of a heart attack.
The Directorate of Professional Standards at both the MPS and City of London Police have been informed. The IPCC is also being told.
Meanwhile, frantic negotiations between the teams of G20 officials continued and there were more than five draft versions of the final agreement in circulation.
Other measures to rein in offshore tax havens, regulate hedge funds and offer new trade credit to the developing world are also expected to be announced.
The International Monetary Fund will increase its funding by hundreds of billions of dollars. The money will be used to bail out countries whose economies face financial meltdown.
However, critics of the G20 summit were expected to point to the lack of a new co-ordinated fiscal stimulus package, something that Gordon Brown, the Prime Minister, and President Barack Obama had originally hoped would be included.
Mr Brown and Mr Obama said that the new financial system to emerge from the crisis would have to be different from that which led to the economic collapse of last year. However, both leaders expressed optimism that the crisis could be tackled this year. Mr Obama urged the world not to "short change the future" because of fear over the current economic crisis. At a joint press conference with Mr Brown at the Foreign Office, the President said people needed to plan for a recovering economy.
He said: "Despite the current hardships, we are going to get through this. So you should plan sensibly in anticipation that this economy is going to recover.
"Young families are going to want to buy new homes and sooner or later that clunker of a car is going to wear out, so people will buy new cars. I would ask people to have confidence about their futures and that may mean in some cases spending now as investments for the future. Don't short change the future for fear of the present."
In words that echoed Franklin D Roosevelt, the US president at the time of the Great Depression, Mr Obama said: "Basing decisions around fear is not the right way to go."
Mr Brown also called for global action. "It will get worse if we do not act. The option of doing nothing is not available to us," he said. "I believe that the degree of international co-operation that we can get will determine how quickly all our economies can recover.''
Downing Street was confident that a G20 agreement was close following public posturing from the French and German governments.
Earlier this week, Mr Sarkozy, the French president, threatened to walk out of the summit if firm commitments were not made.
On Wednesday, he staged a joint press conference with Angela Merkel at which they insisted there were "red lines" which were not negotiable.
The two European leaders have called for tough global regulation of the financial system, rather than vague pledges.
Mrs Merkel said there was no option to go back for a third summit if decisions proposed in Washington at the end of last year resulted in only a vague statement of intent in London.
The German Chancellor said: "The day after tomorrow will be too late. The decisions need to be taken now, today and tomorrow." She added: "We should not be content with generalisation ... Speculation must be regulated and there must be a framework for pay at the banks."
Mr Sarkozy also said that remuneration paid to traders must be controlled. "It's not a question of morality, all of this is a red line. The problems must be clearly resolved."
British officials believe that the emerging bank pay agreement will help temper European concerns.
The Prime Minister will hail the move as the first time that governments have agreed to regulate the risk-and-reward culture that many leaders blame for the banking collapse.
The G20 leaders will agree to sign up to a new set of principles which can curb, if not cap, bankers salaries. The aim is to ensure that there is no chance that the system of remuneration can ever get out of control again.
It is understood that a report by Lord Turner, the chairman of the Financial Service Authority, which made recommendations on bankers pay, will help to guide the new principles that are also endorsed by the Financial Stability Forum, a global coalition of regulators and watchdogs.
In future, each bank will have to judge the risks taken by individual traders or executives. Only those taking average, or below average risks, will receive cash bonuses.
Those taking more risk, will be paid in shares or other financial instruments which cannot be cashed in for several years. Banks could only circumvent the rules by setting aside large amounts of extra capital to reflect the extra risks being taken.
The French president, threatened to walk out of the summit if firm commitments were not made.
On Wednesday, he staged a joint press conference with Mrs Merkel at which they insisted there were "red lines" which were not negotiable.
The two European leaders have called for tough global regulation of the financial system, rather than vague pledges.
Mrs Merkel said there was no option to go back for a third summit if the measures proposed in Washington at the end of last year resulted in only a vague statement of intent in London.
The German Chancellor said: "The day after tomorrow will be too late. The decisions need to be taken now, today and tomorrow."
She added: "We should not be content with generalisation . . . speculation must be regulated and there must be a framework for pay at the banks."
Mr Sarkozy also said that remuneration paid to traders must be controlled. "It's not a question of morality, all of this is a red line. The problems must be clearly resolved."
British officials believe that the emerging bank pay agreement will help temper European concerns.
The Prime Minister will hail the move as the first time that governments have agreed to regulate the risk-and-reward culture that many leaders blame for the banking collapse.
The G20 leaders will agree to sign up to a new set of principles which can curb, if not cap, bankers' salaries. The aim is to ensure that there is no chance that the system of remuneration can ever get out of control again.
Mr Brown said: "We are within a few hours, I think, of agreeing a global plan for economic recovery and reform.
"Of course it is difficult and of course it is complex – we have a large number of countries – but I am very confident that people not only want to work together but we can agree a common global plan for recovery and reform."
It is understood that a report by Lord Turner, the chairman of the Financial Services Authority, which made recommendations on bankers' pay, will help to guide the new principles that are also endorsed by the Financial Stability Forum, a global coalition of regulators and watchdogs.
In future, each bank will have to judge the risks taken by individual traders or executives. Only those taking average, or below average risks, will receive cash bonuses.
Those taking more risk, will be paid in shares or other financial instruments, which cannot be cashed in for several years.
Banks could only circumvent the rules by setting aside large amounts of extra capital to reflect the extra risks being taken.
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5091306/G20-summit-Leaders-target-bankers.html
World leaders will agree unprecedented global restrictions on pay and bonuses for bankers at the G20 summit in London.
By Andrew Porter, Robert Winnett and Christopher Hope
Last Updated: 12:07AM BST 02 Apr 2009
In future, bankers will be prevented from receiving multi-million pound cash bonuses for speculating on the stock market.
Their remuneration will instead be based on the risks they take over the long term. Bankers deemed to be making risky investment decisions will only be paid in shares that can be cashed in after several years.
Sarkozy and Merkel demand tough market curbs The multi-million-pound bonuses paid to bankers have been blamed for encouraging them to take the "reckless" decisions that triggered the global financial crisis.
The Daily Telegraph has learnt that the remuneration deal was thrashed out over the past few days following intensive diplomatic efforts by Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor. The measure did not appear in a draft communiqué that was leaked at the weekend.
The European leaders were understood to have pushed for an exact monetary limit on banking pay but were prepared to sign up to the new, strongly-worded agreement.
Regulators in each of the G20 countries will impose the new restrictions, which cover both private banks and those owned both wholly and partially by the state.
The agreement will be the most eye-catching part of the communiqué, which is expected to be released by G20 leaders at the summit in London's Docklands on Thursday.
On Wednesday, violent clashes took place in the capital between police and anti-capitalism protesters ahead of the talks. In the City of London, a branch of Royal Bank of Scotland was attacked and looted as violence flared during a 6,000-strong protest, which resulted in 32 arrests.
A man died after he collapsed at the scene of protests near the Bank of England last night.
A protester called the police after they saw the man collapse and stop breathing in St Michael’s Alley, near Birchin Lane just off Cornhill shortly before 7.30pm.
Two police medics broke through the cordon and carried the man to a clear area in front of the Royal Exchange where they gave him CPR.
The ambulance arrived six minutes later and took him to hospital just before 8pm, where he was pronounced dead.
A Scotland Yard spokesman said: “The officers took the decision to move him as during this time a number of missiles - believed to be bottles - were being thrown at them.”
It is believed that the man died of a heart attack.
The Directorate of Professional Standards at both the MPS and City of London Police have been informed. The IPCC is also being told.
Meanwhile, frantic negotiations between the teams of G20 officials continued and there were more than five draft versions of the final agreement in circulation.
Other measures to rein in offshore tax havens, regulate hedge funds and offer new trade credit to the developing world are also expected to be announced.
The International Monetary Fund will increase its funding by hundreds of billions of dollars. The money will be used to bail out countries whose economies face financial meltdown.
However, critics of the G20 summit were expected to point to the lack of a new co-ordinated fiscal stimulus package, something that Gordon Brown, the Prime Minister, and President Barack Obama had originally hoped would be included.
Mr Brown and Mr Obama said that the new financial system to emerge from the crisis would have to be different from that which led to the economic collapse of last year. However, both leaders expressed optimism that the crisis could be tackled this year. Mr Obama urged the world not to "short change the future" because of fear over the current economic crisis. At a joint press conference with Mr Brown at the Foreign Office, the President said people needed to plan for a recovering economy.
He said: "Despite the current hardships, we are going to get through this. So you should plan sensibly in anticipation that this economy is going to recover.
"Young families are going to want to buy new homes and sooner or later that clunker of a car is going to wear out, so people will buy new cars. I would ask people to have confidence about their futures and that may mean in some cases spending now as investments for the future. Don't short change the future for fear of the present."
In words that echoed Franklin D Roosevelt, the US president at the time of the Great Depression, Mr Obama said: "Basing decisions around fear is not the right way to go."
Mr Brown also called for global action. "It will get worse if we do not act. The option of doing nothing is not available to us," he said. "I believe that the degree of international co-operation that we can get will determine how quickly all our economies can recover.''
Downing Street was confident that a G20 agreement was close following public posturing from the French and German governments.
Earlier this week, Mr Sarkozy, the French president, threatened to walk out of the summit if firm commitments were not made.
On Wednesday, he staged a joint press conference with Angela Merkel at which they insisted there were "red lines" which were not negotiable.
The two European leaders have called for tough global regulation of the financial system, rather than vague pledges.
Mrs Merkel said there was no option to go back for a third summit if decisions proposed in Washington at the end of last year resulted in only a vague statement of intent in London.
The German Chancellor said: "The day after tomorrow will be too late. The decisions need to be taken now, today and tomorrow." She added: "We should not be content with generalisation ... Speculation must be regulated and there must be a framework for pay at the banks."
Mr Sarkozy also said that remuneration paid to traders must be controlled. "It's not a question of morality, all of this is a red line. The problems must be clearly resolved."
British officials believe that the emerging bank pay agreement will help temper European concerns.
The Prime Minister will hail the move as the first time that governments have agreed to regulate the risk-and-reward culture that many leaders blame for the banking collapse.
The G20 leaders will agree to sign up to a new set of principles which can curb, if not cap, bankers salaries. The aim is to ensure that there is no chance that the system of remuneration can ever get out of control again.
It is understood that a report by Lord Turner, the chairman of the Financial Service Authority, which made recommendations on bankers pay, will help to guide the new principles that are also endorsed by the Financial Stability Forum, a global coalition of regulators and watchdogs.
In future, each bank will have to judge the risks taken by individual traders or executives. Only those taking average, or below average risks, will receive cash bonuses.
Those taking more risk, will be paid in shares or other financial instruments which cannot be cashed in for several years. Banks could only circumvent the rules by setting aside large amounts of extra capital to reflect the extra risks being taken.
The French president, threatened to walk out of the summit if firm commitments were not made.
On Wednesday, he staged a joint press conference with Mrs Merkel at which they insisted there were "red lines" which were not negotiable.
The two European leaders have called for tough global regulation of the financial system, rather than vague pledges.
Mrs Merkel said there was no option to go back for a third summit if the measures proposed in Washington at the end of last year resulted in only a vague statement of intent in London.
The German Chancellor said: "The day after tomorrow will be too late. The decisions need to be taken now, today and tomorrow."
She added: "We should not be content with generalisation . . . speculation must be regulated and there must be a framework for pay at the banks."
Mr Sarkozy also said that remuneration paid to traders must be controlled. "It's not a question of morality, all of this is a red line. The problems must be clearly resolved."
British officials believe that the emerging bank pay agreement will help temper European concerns.
The Prime Minister will hail the move as the first time that governments have agreed to regulate the risk-and-reward culture that many leaders blame for the banking collapse.
The G20 leaders will agree to sign up to a new set of principles which can curb, if not cap, bankers' salaries. The aim is to ensure that there is no chance that the system of remuneration can ever get out of control again.
Mr Brown said: "We are within a few hours, I think, of agreeing a global plan for economic recovery and reform.
"Of course it is difficult and of course it is complex – we have a large number of countries – but I am very confident that people not only want to work together but we can agree a common global plan for recovery and reform."
It is understood that a report by Lord Turner, the chairman of the Financial Services Authority, which made recommendations on bankers' pay, will help to guide the new principles that are also endorsed by the Financial Stability Forum, a global coalition of regulators and watchdogs.
In future, each bank will have to judge the risks taken by individual traders or executives. Only those taking average, or below average risks, will receive cash bonuses.
Those taking more risk, will be paid in shares or other financial instruments, which cannot be cashed in for several years.
Banks could only circumvent the rules by setting aside large amounts of extra capital to reflect the extra risks being taken.
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5091306/G20-summit-Leaders-target-bankers.html
G20 summit: Barack Obama set for clash with European and Asian export powers
G20 summit: Barack Obama set for clash with European and Asian export powers
• President warns protectionist exporters • Germany defies call to change outlook • America resumes Russia relations
By Ambrose Evans-PritchardLast Updated: 11:27PM BST 01 Apr 2009
Barack Obama does not see eye to eye with Angela Merkel over exports Photo: PA
US President Barack Obama has issued a veiled warning to the export powers of Europe and Asia that they risk setting off a protectionist backlash unless they do more to restore global demand.
"If there is going to be new growth it can't just be the United States as the engine. Everybody is going to have to pick up the pace," he told a joint press conference with Gordon Brown before the G20 summit.
Related Articles
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Protesters give capitalism a dressing down
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Protectionist threat as Obama reads riot act
Live blog and map
G20 protests: scuffles break out as RBS attacked
"Our goal is simply to make certain that each country, taking into account its differences in economic circumstances and political culture, is doing what is necessary to promote economic growth. The US will do its share but in some ways the world has become accustomed to the United States being a voracious consumer market, the engine that drives a lot of economic growth worldwide," he said.
"In the wake of this crisis, we have to take into account our own deficits. To the extent that all countries are participating, that strengthens arguments we make in our respective countries about the importance of world trade, the sense that this isn't a situation where each country is only exporting and never importing, but rather that there's a balance," he said.
While the comments were couched in diplomatic language – and included praise for "significant packages" by the EU, Japan, and China – they reflect irritation in Washington that US fiscal stimulus is leaking out to "free rider" countries. The US budget deficit may reach 13.7pc of GDP this year.
The current US Congress is the most protectionist in half a century. It has already inserted a "Buy American" clause in Mr Obama's fiscal package. It is unclear how far Mr Obama will go – or can go – to restrain the populist mood.
A 530-page report by the US Trade Representative this week reads like an indictment of half the world, with a long chapter on methods used by China to rig its internal market. China had $401bn (£278bn) surplus over the last year.
But it is Germany that has emerged as the villain in this G20 drama because of its attacks on the "crass Keynesianism" of the Anglo-Saxon powers and its willingness to let German GDP contract at a brutal pace despite having ample firepower in reserve.
Chancellor Angela Merkel has blamed the crisis on US "casino capitalism", ignoring the role of massive trade imbalances in generating the deeper economic turmoil. Germany has a surplus of $224bn, or 5.3pc of GDP.
She has given the impression that Germany hopes to carry on running export surpluses for ever as if nothing had happened. "The German economy is very reliant on exports; this is not something you can change in two years. It is not something we even want to change," she said.
Asia has been quicker to join the stimulus coalition. Japan's premier Taro Aso is preparing a third fiscal package, allegedly worth $200bn over three years. China has pushed through stimulus of nearly $600bn.
Mr Aso said Japan had learned during its "lost decade" that pump-priming can prevent a downward spiral at key moments. "There are countries that understand the importance of fiscal mobilisation, and there are some other countries that do not, which is why I believe Germany has come up with their views," he said.
Western Europe may have blundered by failing to offer Mr Obama more support for his agenda. The new president already views the region as an inhospitable place, judging by his book Dreams of My Father. Europeans have not done much to win him over.
Mr Obama has instead hit the "reset button" in US relations with Russia, holding a one-on-one meeting on Wednesday with President Dmitry Medvedev.
The likely outcome of this G20 will be a US strategic tilt away from Brussels and the Nato alliance.
G20 Summit: an easy guide to judge its success or failure
G20 Summit: an easy guide to judge its success or failure
Leaders are likely to declare the G20 summit a triumph today, but what will that mean? Economics Editor Edmund Conway offers some answers.
Last Updated: 6:35AM BST 02 Apr 2009
Let's kick off with a few predictions. At half past three today, Gordon Brown will end the G20 summit with a grand declaration of unity in the face of the worst economic and financial crisis since the 1930s. Despite the threat of temper tantrums, no leader will storm out – not even Nicolas Sarkozy.
This might disappoint protesters and, dare I say it, journalists, some of whom rather wish things would descend into disaster. But whatever their rhetoric, the leaders meeting in London today know that a breakdown in the G20 would be the surest way of consigning the world to a depression far greater in scale and misery than the 1930s. Or at least one hopes they do.
Related Articles
G20: Analysis of finance ministers' summit
G20 leaders facing world trade 'emergency'
Britain will escape with shallower recession than rivals, OECD predicts
G20 London summit 2009: Live blog and map
History shows G20 must stand united
But how will we be able to judge their success or failure? Here are seven ways to decode the most important heads-of-state summit in decades.
1, Don't expect an apology
It wouldn't be such a bad idea, in the face of social unrest that stretches from the doors of the Bank of England to the streets of Eastern Europe, for our leaders to admit they made mistakes and were partly responsible for the crisis. Done under the G20 banner, it wouldn't implicate one government more than another. But it seems unlikely, given the widespread recrimination throughout Europe towards the Anglo-Saxon economies, whom most outsiders blame for causing the crisis.
However, such sentiments are misplaced. The initial seeds for the crisis may have lain in the behaviour of sub-prime mortgage brokers and the financial engineers who sold on the associated debt, but practically no one is innocent when it comes to the crisis that has since ensued.
Britain and America may have been guilty of borrowing too much and building up unsustainable budget deficits, but Germany, Japan and China were guilty of generating massive current account surpluses by pumping out goods around the world. Now, both sides are suffering: the worst plunge in economic output this year will be felt not by the US or UK but by Japan and Germany. The imbalances in their economies were even worse than those in the Anglophone world, but the fact that they were "good" current account surpluses rather than "bad" deficits disguised their lethal nature.
An apology would not bring the crisis to an end; but it might help stem at least some of the unrest that is sure to escalate in the coming months.
2, Ignore Sarkozy; watch Merkel
The French president has hogged most of the headlines in the run-up to the conference, threatening to walk out unless his suggestions for a new international financial regulator are adopted. But his pledge is an empty one: the G20 has already indicated that it wants to strengthen international financial oversight, meaning that Sarkozy is already pretty certain of being able to declare victory on this front.
Better, then, to pay attention to the German Chancellor. Europe's biggest economy is now all but isolated in its view that the solution to the crisis is neither more borrowing nor lower interest rates. Everyone, from the United States and Australia to Japan and China, has pledged to spend more to prevent the recession from deepening. Even those who cannot afford that much extra – the UK, for instance – have agreed that more spending is the way forward. The only nation to stand forcefully in the way of an accord on fiscal stimulus is Germany, supported from the back by Italy and Russia, while France wavers moodily behind them.
This intransigence is dangerous. There is a very real possibility that, just as happened in the 1930s, the world will be torn into two separate economic blocs: those that attempt to reflate their economies and those that choose to liquidate, to sit back and to let destruction take its course. The latter is the path that the United States took in the 1930s, and the direction the Germans seem intent on travelling. So listen carefully to Merkel's press conference: is her rhetorical resistance to the need for a fiscal boost wavering?
3, Don't be fooled by the International Monetary Fund 'triumph'
One of the likely headlines tonight will be the decision to donate something like $500 billion to the IMF. This ought not to be downplayed: without the IMF to support them, certain countries in Eastern Europe and beyond would have defaulted on their loans, and seen their governments collapse. But to claim this as a victory is simply not true: it was effectively agreed at the finance ministers' summit last month, and has merely been held back in case the rest of the summit was a complete disaster. In short, the more noise is made about the IMF, the more likely it will be that the G20 has flopped.
4, Regulation, regulation, regulation
Politicians and commentators may have pitched the summit as a battle between those who believe countries should pump more cash into their ailing economies and those who want instead to remodel the shape of the world's financial system. In reality, the distinction is misleading. All major countries are in favour of eradicating the weaknesses in the system that contributed to this mess.
So, if you are after some tangible sign of progress from the summit, check out what agreement there has been on regulation. Nothing will change overnight – after all, any policies need to be ratified by national governments – but an agreement at the G20 may well signal the beginning of the end for unregulated finance: this could be the meeting that flicks the switch that whirs the wheel that turns the cog that swings the hammer into the hedge fund industry. Also, an agreement on more transparency in tax havens would undermine the argument that any further regulation will only drive the smartest and best minds overseas.
5, For Obama, the real story is not the G20
Don't get me wrong – the President of the United States is as determined as Gordon Brown and most of his G20 counterparts to make a success of the summit. But the trip to London is double-edged: on the one hand, there's the G20; on the other, there's the opportunity for bilateral meetings with his major counterparts around the world.
President Obama is tentatively but most definitely feeling his way towards a new set of global alliances that will shape economic and diplomatic life for decades. Should the G20 really flop, either publicly or privately, the US will embark on Plan B – cementing ties with individual nations. As such, the real story yesterday was not the Brown/Obama press conference, but the US President's meeting with Russian president Dmitry Medvedev, and his agreement to visit China later this year.
On a related point, watch closely to see what the Chinese authorities say about the dollar: the Asian tiger has already questioned the US currency's position as the world's reserve currency. Might it make an unexpected push to instill this into the final statement?
6, Don't expect any big surprises out of the communique
The concluding announcements from big summits are usually drafted weeks, if not months, in advance by the teams of "sherpas", who advise the ministers and heads of state. The most the G20 can hope to achieve in today's four and a half hours of meetings is to elide a few phrases here or add a couple of numbers there. The real giveaway will be the mood of the heads of state in their press conferences: should any of them hint at dissatisfaction with the meeting's conclusions, that's the story.
7, We do need a global agreement on resolving the crisis, but it probably won't arrive today
It is plain wrong to suggest, as some have, that nothing ever comes out of these big international summits – you only have to look back to the G7 meeting in Washington last October, when the world's major leaders agreed on principle to bail out their stricken banks and safeguard depositors. Things didn't change overnight, but the agreement laid down the conditions that helped the financial system avoid outright collapse. This radical agreement was sealed in the face of a crisis, in the weeks following the collapse of Lehman Brothers. If the world is not to slide into a protectionist spiral, we need a similar agreement on how to tackle the economic, as opposed to financial, crisis.
The real question is whether the sense of urgency is as great as it was in those weeks in October. Leading economic institutions predicted this week that 2009 will see the worst global recession since the Second World War, and the biggest collapse in world trade since the 1930s. Whether that will be enough to galvanise any kind of agreement remains to be seen.
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5092470/G20-Summit-an-easy-guide-to-judge-its-success-or-failure.html
Leaders are likely to declare the G20 summit a triumph today, but what will that mean? Economics Editor Edmund Conway offers some answers.
Last Updated: 6:35AM BST 02 Apr 2009
Let's kick off with a few predictions. At half past three today, Gordon Brown will end the G20 summit with a grand declaration of unity in the face of the worst economic and financial crisis since the 1930s. Despite the threat of temper tantrums, no leader will storm out – not even Nicolas Sarkozy.
This might disappoint protesters and, dare I say it, journalists, some of whom rather wish things would descend into disaster. But whatever their rhetoric, the leaders meeting in London today know that a breakdown in the G20 would be the surest way of consigning the world to a depression far greater in scale and misery than the 1930s. Or at least one hopes they do.
Related Articles
G20: Analysis of finance ministers' summit
G20 leaders facing world trade 'emergency'
Britain will escape with shallower recession than rivals, OECD predicts
G20 London summit 2009: Live blog and map
History shows G20 must stand united
But how will we be able to judge their success or failure? Here are seven ways to decode the most important heads-of-state summit in decades.
1, Don't expect an apology
It wouldn't be such a bad idea, in the face of social unrest that stretches from the doors of the Bank of England to the streets of Eastern Europe, for our leaders to admit they made mistakes and were partly responsible for the crisis. Done under the G20 banner, it wouldn't implicate one government more than another. But it seems unlikely, given the widespread recrimination throughout Europe towards the Anglo-Saxon economies, whom most outsiders blame for causing the crisis.
However, such sentiments are misplaced. The initial seeds for the crisis may have lain in the behaviour of sub-prime mortgage brokers and the financial engineers who sold on the associated debt, but practically no one is innocent when it comes to the crisis that has since ensued.
Britain and America may have been guilty of borrowing too much and building up unsustainable budget deficits, but Germany, Japan and China were guilty of generating massive current account surpluses by pumping out goods around the world. Now, both sides are suffering: the worst plunge in economic output this year will be felt not by the US or UK but by Japan and Germany. The imbalances in their economies were even worse than those in the Anglophone world, but the fact that they were "good" current account surpluses rather than "bad" deficits disguised their lethal nature.
An apology would not bring the crisis to an end; but it might help stem at least some of the unrest that is sure to escalate in the coming months.
2, Ignore Sarkozy; watch Merkel
The French president has hogged most of the headlines in the run-up to the conference, threatening to walk out unless his suggestions for a new international financial regulator are adopted. But his pledge is an empty one: the G20 has already indicated that it wants to strengthen international financial oversight, meaning that Sarkozy is already pretty certain of being able to declare victory on this front.
Better, then, to pay attention to the German Chancellor. Europe's biggest economy is now all but isolated in its view that the solution to the crisis is neither more borrowing nor lower interest rates. Everyone, from the United States and Australia to Japan and China, has pledged to spend more to prevent the recession from deepening. Even those who cannot afford that much extra – the UK, for instance – have agreed that more spending is the way forward. The only nation to stand forcefully in the way of an accord on fiscal stimulus is Germany, supported from the back by Italy and Russia, while France wavers moodily behind them.
This intransigence is dangerous. There is a very real possibility that, just as happened in the 1930s, the world will be torn into two separate economic blocs: those that attempt to reflate their economies and those that choose to liquidate, to sit back and to let destruction take its course. The latter is the path that the United States took in the 1930s, and the direction the Germans seem intent on travelling. So listen carefully to Merkel's press conference: is her rhetorical resistance to the need for a fiscal boost wavering?
3, Don't be fooled by the International Monetary Fund 'triumph'
One of the likely headlines tonight will be the decision to donate something like $500 billion to the IMF. This ought not to be downplayed: without the IMF to support them, certain countries in Eastern Europe and beyond would have defaulted on their loans, and seen their governments collapse. But to claim this as a victory is simply not true: it was effectively agreed at the finance ministers' summit last month, and has merely been held back in case the rest of the summit was a complete disaster. In short, the more noise is made about the IMF, the more likely it will be that the G20 has flopped.
4, Regulation, regulation, regulation
Politicians and commentators may have pitched the summit as a battle between those who believe countries should pump more cash into their ailing economies and those who want instead to remodel the shape of the world's financial system. In reality, the distinction is misleading. All major countries are in favour of eradicating the weaknesses in the system that contributed to this mess.
So, if you are after some tangible sign of progress from the summit, check out what agreement there has been on regulation. Nothing will change overnight – after all, any policies need to be ratified by national governments – but an agreement at the G20 may well signal the beginning of the end for unregulated finance: this could be the meeting that flicks the switch that whirs the wheel that turns the cog that swings the hammer into the hedge fund industry. Also, an agreement on more transparency in tax havens would undermine the argument that any further regulation will only drive the smartest and best minds overseas.
5, For Obama, the real story is not the G20
Don't get me wrong – the President of the United States is as determined as Gordon Brown and most of his G20 counterparts to make a success of the summit. But the trip to London is double-edged: on the one hand, there's the G20; on the other, there's the opportunity for bilateral meetings with his major counterparts around the world.
President Obama is tentatively but most definitely feeling his way towards a new set of global alliances that will shape economic and diplomatic life for decades. Should the G20 really flop, either publicly or privately, the US will embark on Plan B – cementing ties with individual nations. As such, the real story yesterday was not the Brown/Obama press conference, but the US President's meeting with Russian president Dmitry Medvedev, and his agreement to visit China later this year.
On a related point, watch closely to see what the Chinese authorities say about the dollar: the Asian tiger has already questioned the US currency's position as the world's reserve currency. Might it make an unexpected push to instill this into the final statement?
6, Don't expect any big surprises out of the communique
The concluding announcements from big summits are usually drafted weeks, if not months, in advance by the teams of "sherpas", who advise the ministers and heads of state. The most the G20 can hope to achieve in today's four and a half hours of meetings is to elide a few phrases here or add a couple of numbers there. The real giveaway will be the mood of the heads of state in their press conferences: should any of them hint at dissatisfaction with the meeting's conclusions, that's the story.
7, We do need a global agreement on resolving the crisis, but it probably won't arrive today
It is plain wrong to suggest, as some have, that nothing ever comes out of these big international summits – you only have to look back to the G7 meeting in Washington last October, when the world's major leaders agreed on principle to bail out their stricken banks and safeguard depositors. Things didn't change overnight, but the agreement laid down the conditions that helped the financial system avoid outright collapse. This radical agreement was sealed in the face of a crisis, in the weeks following the collapse of Lehman Brothers. If the world is not to slide into a protectionist spiral, we need a similar agreement on how to tackle the economic, as opposed to financial, crisis.
The real question is whether the sense of urgency is as great as it was in those weeks in October. Leading economic institutions predicted this week that 2009 will see the worst global recession since the Second World War, and the biggest collapse in world trade since the 1930s. Whether that will be enough to galvanise any kind of agreement remains to be seen.
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5092470/G20-Summit-an-easy-guide-to-judge-its-success-or-failure.html
Tuesday 31 March 2009
Focus on Lifelong Investing
Focus on Lifelong Investing
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Recent Articles
Starting Out
Just Starting Out? Why You Need a Roth
Young Investors: 10 Keys to Unlocking Future Riches
Retirement Guide for 20- and 30-Somethings
Changing Jobs
3 Ways to Deflect a Lowball Salary Offer
7 Costly Mistakes Workers Make When Leaving a Job
Layoffs: Worst-Case Scenario Survival Guide
Building Wealth
Parents: Ease the Tuition Squeeze
4 Ways to Prepare for the Market Rebound
When Your Stock Price Drops, What Happens to the Money?
How to Time Market Exits and Re-Entries
Do You Take Too Many Investing Risks -- or Not Enough?
Getting Ready to Retire
4 Critical Money Questions for Your Aging Parents
Navigating Today's Market as You Near the Home Stretch
10 Tips for Evaluating Early Retirement Offers
The Real Retirement Lesson to Be Drawn From This Market
Living in Retirement
Retirement: The One Thing Couples Shouldn't Do Together
Stimulus: What's in It for Retirees
Managing Wealth
Smaller Though It May Be, It's Time to Look at the Estate
5 Coping Strategies for Top-Bracket Taxpayers
What a Money Manager Does -- and Doesn't -- Owe You
Yes, You Can Still Be Rich
Tuesday, March 31, 2009, 4:55AM ET -
Ramit Sethi: Yes, You Can Still Be Rich
by Kimberly PalmerTuesday, March 31, 2009
Ramit Sethi, 26, author of the just-released I Will Teach You To Be Rich (and blog of the same name), recently spoke with me about how young people are dealing with the recession. He also argued for why 20 and 30-somethings should continue to put money into the stock market, even if most of their so far have shrunk in half. Excerpts:
How do young people think about money?
More from USNews.com: • Smart Money-Saving Tips You Need Now • The Twenty-Something Financial Survival Guide • How to Plan for Your Financial Future
As young people, we don't pay attention to our money. When there's something you're neglecting and you just hear bad news, you again don't pay attention, but you feel guilty about it. It's a combination of apathy and guilt that comes with money, just like eating and working out. 'I know I should go to gym four days a week, I shouldn't eat that pizza.' We know that we should be figuring out something about money and should probably do a Roth IRA, but we don't know where to get started. There's so much conflicting advice out there.
Will the recession make 20 and 30-somethings more pessimistic and risk averse for the rest of their lives?
Yes. There's a lot of research to suggest that. It's a particularly bad situation for young people because we're already not investing as much as we need to. Going forward, there will be people who say, 'I'm not investing in the stock market,' or 'Crooks can still my money.' It's hard to convince people, 'No, you have to look long term.' In any 30-year period, the stock market has always gone up.
How can you encourage people to invest when those who were doing so have lost upwards of 50 percent of their money over the last eight months?
There are two separate things: The intellectual and mathematical part, and the emotional part. If I told you nine months ago that you could pick the same investments on a 50 percent sale, it sounds very attractive. But we think of it as a 50 percent loss. Tremendous wealth has been lost, nobody can deny that. But if you're in your 20s or 30s, you don't need money for 30 or 40 years. So on an intellectual and mathematical side, you think, 'I'm going to continue dollar-cost averaging into the market.'
As for the emotional part, I can understand the emotion of saying, 'I've lost so much, I'm going to pull it all out. People often think they have just two levers to pull, put money in or pull money out. But there are other options. You could pull less in, put more in savings, re-allocate investments to put more in fixed income -- there are so many different levers you can pull. If you pull money out, you're guaranteeing you won't be in the market when it returns.
But what if it doesn't return?
Japan's stock market has been virtually stagnant for decades.
There are functional and structural differences between us and Japan, but without getting too deeply into that, what strongly effects my belief going forward is what happened in the past. The past doesn't predict the future, but it gives us a fairly accurate view of what's likely to happen. Whether it returns 6 percent or 8 percent -- we can split hairs over that -- the question is, do you fundamentally believe the stock market will go up. If you believe that, then invest.
If you don't, where do you put your money?
If you only put it in a savings account, it's not going to give you the returns you need to live on. You have to take risks to get potentially high returns.
People like to complain about the economy, but the economy versus your finances are very different. My question is, 'Have you automated your accounts? Do you use a bank account with overdraft fees? Have you set up a conscious spending plan? How much is dedicated to a savings account versus going out and eating?'
I assume you follow your own advice and have money in the stock market, and it must have lost significant value lately. How do you not get down about that?
I built an infrastructure where I only focus on one thing -- earning more. It gets automatically disbursed -- 20 percent to investments, 5 percent to savings, etc. In terms of dealing with losses, first of all, I don't check into my investments every day, and I don't think anyone should. Second, there's a difference between losing when everyone is gaining and losing when everyone has lost.
I'm resolutely focused on the long-term. I do believe the long-term prospects are great, but I'm not a prognosticator. My focus is on living a rich life, which also means being able to visit a friend or buy what you want. Being rich is just partially about money.
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/106827/Ramit-Sethi-Yes-You-Can-Still-Be-Rich;_ylt=Asoz5hNRUsqy80OnfTXpXR27YWsA?mod=fidelity-startingout
Ramit Sethi: Yes, You Can Still Be Rich
by Kimberly PalmerTuesday, March 31, 2009
Ramit Sethi, 26, author of the just-released I Will Teach You To Be Rich (and blog of the same name), recently spoke with me about how young people are dealing with the recession. He also argued for why 20 and 30-somethings should continue to put money into the stock market, even if most of their so far have shrunk in half. Excerpts:
How do young people think about money?
More from USNews.com: • Smart Money-Saving Tips You Need Now • The Twenty-Something Financial Survival Guide • How to Plan for Your Financial Future
As young people, we don't pay attention to our money. When there's something you're neglecting and you just hear bad news, you again don't pay attention, but you feel guilty about it. It's a combination of apathy and guilt that comes with money, just like eating and working out. 'I know I should go to gym four days a week, I shouldn't eat that pizza.' We know that we should be figuring out something about money and should probably do a Roth IRA, but we don't know where to get started. There's so much conflicting advice out there.
Will the recession make 20 and 30-somethings more pessimistic and risk averse for the rest of their lives?
Yes. There's a lot of research to suggest that. It's a particularly bad situation for young people because we're already not investing as much as we need to. Going forward, there will be people who say, 'I'm not investing in the stock market,' or 'Crooks can still my money.' It's hard to convince people, 'No, you have to look long term.' In any 30-year period, the stock market has always gone up.
How can you encourage people to invest when those who were doing so have lost upwards of 50 percent of their money over the last eight months?
There are two separate things: The intellectual and mathematical part, and the emotional part. If I told you nine months ago that you could pick the same investments on a 50 percent sale, it sounds very attractive. But we think of it as a 50 percent loss. Tremendous wealth has been lost, nobody can deny that. But if you're in your 20s or 30s, you don't need money for 30 or 40 years. So on an intellectual and mathematical side, you think, 'I'm going to continue dollar-cost averaging into the market.'
As for the emotional part, I can understand the emotion of saying, 'I've lost so much, I'm going to pull it all out. People often think they have just two levers to pull, put money in or pull money out. But there are other options. You could pull less in, put more in savings, re-allocate investments to put more in fixed income -- there are so many different levers you can pull. If you pull money out, you're guaranteeing you won't be in the market when it returns.
But what if it doesn't return?
Japan's stock market has been virtually stagnant for decades.
There are functional and structural differences between us and Japan, but without getting too deeply into that, what strongly effects my belief going forward is what happened in the past. The past doesn't predict the future, but it gives us a fairly accurate view of what's likely to happen. Whether it returns 6 percent or 8 percent -- we can split hairs over that -- the question is, do you fundamentally believe the stock market will go up. If you believe that, then invest.
If you don't, where do you put your money?
If you only put it in a savings account, it's not going to give you the returns you need to live on. You have to take risks to get potentially high returns.
People like to complain about the economy, but the economy versus your finances are very different. My question is, 'Have you automated your accounts? Do you use a bank account with overdraft fees? Have you set up a conscious spending plan? How much is dedicated to a savings account versus going out and eating?'
I assume you follow your own advice and have money in the stock market, and it must have lost significant value lately. How do you not get down about that?
I built an infrastructure where I only focus on one thing -- earning more. It gets automatically disbursed -- 20 percent to investments, 5 percent to savings, etc. In terms of dealing with losses, first of all, I don't check into my investments every day, and I don't think anyone should. Second, there's a difference between losing when everyone is gaining and losing when everyone has lost.
I'm resolutely focused on the long-term. I do believe the long-term prospects are great, but I'm not a prognosticator. My focus is on living a rich life, which also means being able to visit a friend or buy what you want. Being rich is just partially about money.
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/106827/Ramit-Sethi-Yes-You-Can-Still-Be-Rich;_ylt=Asoz5hNRUsqy80OnfTXpXR27YWsA?mod=fidelity-startingout
Soros: The Recession Will Last Forever
From The TimesMarch 28, 2009
George Soros, the man who broke the Bank, sees a global meltdown
Alice Thomson and Rachel Sylvester
George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”
Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.
The man who has a phobia about maths has made his name as the philosopher king of economics – his book The Crash of 2008, out in paper-back next week, has been a bestseller on both sides of the Atlantic. Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality.
He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.
When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton. It’s almost as if he has been waiting for the Great Recession for the past ten years. When we ask whether he prefers booms or busts, he replies: “I have to admit that actually I flourish, I’m more stimulated by the bust.”
This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”
The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”
The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”
He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”
He refuses to say whether sterling has yet hit its lowest point. Has he shorted the pound recently? “I had shorted it last year, but I’m not shorting the pound now.” Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.
Mr Soros is critical of the tripartite regulatory system set up when the Bank of England gained independence. “I have a different view on how the market operates than the prevailing view. I believe that the authorities have the responsibility to forestall, to counter the mood of the markets . . . I think that the problem was that the Bank of England didn’t have the supervisory authority.”
He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”
From the day he was born, Mr Soros says, he was attracted to crisis. “It precedes me. I inherited it from my father.” His father had lived through the Russian Revolution and every day after school he would take his son swimming and talk about his experiences. “I sucked it in that way. And then when I was not yet 14, the Germans occupied Hungary, and I would have been deported to Auschwitz if my father hadn’t arranged for false papers. So that was a pretty profound crisis. I had to assume a false identity and live a different life.” He was separated from his parents. “We met occasionally in the swimming pool. But imagine you are 14 years old, you like adventure, and you have a father who seems to understand the situation better than others. It’s very exciting.”
He feels a similar thrill in an economic crisis. “On the one hand there’s tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating.”
He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says. In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”
Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”
The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.” He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.
H e was cast as the villain when Britain was forced out of the exchange-rate mechanism. “I didn’t speculate against sterling to benefit the public. I did it to make money,” he says.
He tells us that he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. “It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache.”
The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”
If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”
Life and times
Born Budapest, 1930. A Jew, he survived the Nazi occupation using a false identity. Fled communist Hungary for Britain in 1947
Education Worked as a railway porter and waiter to pay his way as a student at the London School of Economics, graduating in 1952
Career Took job with Singer and Friedlander in London before moving in 1956 to New York, where he worked as a trader and analyst. In 1970 he set up his own private investment company, the Quantum Fund. Made his fortune, on September 16, 1992, when he short-sold more than $10bn of sterling. Now chairman of Soros Fund Management and the Open Society Institute and said to be worth $11bn
Family Married and divorced twice and has five children
Quick fire
Budapest, London or New York?
Actually I'm very fond of London
English or Esperanto?
It used to be Esperanto, but now it's English. Bad English
Pound or dollar?
I really can't say
Chillies or chocolate?
Both
Boom or bust?
I have to admit that actually I flourish, I'm more stimulated by the bust
http://www.timesonline.co.uk/tol/news/uk/article5989163.ece
George Soros, the man who broke the Bank, sees a global meltdown
Alice Thomson and Rachel Sylvester
George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”
Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.
The man who has a phobia about maths has made his name as the philosopher king of economics – his book The Crash of 2008, out in paper-back next week, has been a bestseller on both sides of the Atlantic. Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality.
He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.
When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton. It’s almost as if he has been waiting for the Great Recession for the past ten years. When we ask whether he prefers booms or busts, he replies: “I have to admit that actually I flourish, I’m more stimulated by the bust.”
This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”
The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”
The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”
He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”
He refuses to say whether sterling has yet hit its lowest point. Has he shorted the pound recently? “I had shorted it last year, but I’m not shorting the pound now.” Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.
Mr Soros is critical of the tripartite regulatory system set up when the Bank of England gained independence. “I have a different view on how the market operates than the prevailing view. I believe that the authorities have the responsibility to forestall, to counter the mood of the markets . . . I think that the problem was that the Bank of England didn’t have the supervisory authority.”
He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”
From the day he was born, Mr Soros says, he was attracted to crisis. “It precedes me. I inherited it from my father.” His father had lived through the Russian Revolution and every day after school he would take his son swimming and talk about his experiences. “I sucked it in that way. And then when I was not yet 14, the Germans occupied Hungary, and I would have been deported to Auschwitz if my father hadn’t arranged for false papers. So that was a pretty profound crisis. I had to assume a false identity and live a different life.” He was separated from his parents. “We met occasionally in the swimming pool. But imagine you are 14 years old, you like adventure, and you have a father who seems to understand the situation better than others. It’s very exciting.”
He feels a similar thrill in an economic crisis. “On the one hand there’s tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating.”
He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says. In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”
Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”
The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.” He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.
H e was cast as the villain when Britain was forced out of the exchange-rate mechanism. “I didn’t speculate against sterling to benefit the public. I did it to make money,” he says.
He tells us that he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. “It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache.”
The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”
If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”
Life and times
Born Budapest, 1930. A Jew, he survived the Nazi occupation using a false identity. Fled communist Hungary for Britain in 1947
Education Worked as a railway porter and waiter to pay his way as a student at the London School of Economics, graduating in 1952
Career Took job with Singer and Friedlander in London before moving in 1956 to New York, where he worked as a trader and analyst. In 1970 he set up his own private investment company, the Quantum Fund. Made his fortune, on September 16, 1992, when he short-sold more than $10bn of sterling. Now chairman of Soros Fund Management and the Open Society Institute and said to be worth $11bn
Family Married and divorced twice and has five children
Quick fire
Budapest, London or New York?
Actually I'm very fond of London
English or Esperanto?
It used to be Esperanto, but now it's English. Bad English
Pound or dollar?
I really can't say
Chillies or chocolate?
Both
Boom or bust?
I have to admit that actually I flourish, I'm more stimulated by the bust
http://www.timesonline.co.uk/tol/news/uk/article5989163.ece
China sees opportunity in failure
China Business
Mar 19, 2009
China sees opportunity in failure
By Antoaneta Bezlova
BEIJING - Differences between the United States and Europe over how to restore global economic growth have given rise to speculation here on whether a failure to agree on a grand strategy at the upcoming Group of 20 (G-20) summit might create room for China to assert its national agenda.
"It is well remembered that the collapse of international talks at the 1933 London summit laid the foundation for the US's consequent emergence as a dominant financial power," said an editorial in the China Business News at the weekend.
"With the US-based financial system facing unprecedented challenges, could a failure at the upcoming London meeting serve
to advance China's aspirations for the creation of a new financial order?" the editorial asked.
Officially at least, China has declared low expectations regarding the outcome of the April 2 summit of the leaders of the G-20 countries. Wu Xiaoling, former vice governor of the People's Bank of China, told a financial conference in Shanghai at the weekend that the summit was unlikely to bear much fruit.
"It is impossible for any concrete agreements to be reached at the G-20. We should not put much hope on it," Wu said. "That's why we should have our voice heard."
Low expectations aside, Beijing has invested substantial effort in preparing for the global summit. Officials from the ministries of Commerce and Finance, the Central Bank and the banking regulatory commission have been dispatched to London since early March to forge and present a united strategy at the meeting.
Divided into working groups, they have been laying the ground for China's participation in sweeping talks, including reform of the International Monetary Fund (IMF) and other multilateral bodies, the size and timing of coordinated stimulus measures and the inception of a global regulatory system.
Indications of China's stance came during the weekend's meeting of the G-20 finance ministers' preparatory to the April 2 summit. Finance Minister Xie Xueren called on the global community to accelerate the reforms of international financial institutions and to build a new financial system, which is "fair and square, compatible and orderly".
Speaking from Shanghai, Wu Xiaoling echoed Xie's statement, saying developed nations should shoulder greater responsibility in protecting the interests of developing countries and give emerging economies more power in international bodies like the IMF.
"The IMF should increase the share from emerging economies, and treat all members equally," Wu said. "A new set of rules should be set up to regulate the world economy, with a focus on global superpowers."
The meeting of the G-20 finance ministers revealed also the scope of existing disagreements between the US and Europe. US officials, backed by Britain and Japan, are seeking to line up global support for more government-backed stimulus measures.
European nations, though, are wary of such debt-fueled stimulus measures and have pushed for more regulation and oversight to prevent further deterioration of the global economy.
The split between the US and Europe and the deepening economic downturn have provided a distraction from the debate about China's role in creating global economic imbalances that had dominated economic circles in late 2008.
But to China's chagrin, the divergence of opinions has also pushed the summit agenda towards discussing an increase in financing to the IMF, instead of debating the much-anticipated reform of the financing body.
"What should have been the core issue of the summit - how to reform the IMF - has now been left by developed nations to fall by the wayside," Xu Mingqi, economist with the Shanghai Academy of Social Sciences, told the financial conference.
Xu argued that instead of debating how to redistribute voting rights inside the body, world leaders should decide on the creation of a monetary mechanism to be applied to countries issuing hard currencies that would work to protect the interests of global investors.
A similar concern was voiced by Chinese Premier Wen Jiabao during his once-a-year meeting with the press last week. Wen said he was "worried" about the safety of China's assets in the US, and asked Washington to provide guarantees that it would protect their value.
China is the largest holder of US Treasury bonds. As of December 31, the volume of the country's investments had reached US$696 billion.
While China also grapples with the implications of slumping global demand for its export-driven economy, Beijing sees the crisis as an opportunity to advance its own priorities of raising the country's global profile and acquiring more say in international financial institutions.
Over the past few months, Beijing has taken the first steps towards transforming its controlled, partially convertible currency into a regional currency by pushing loans and some trade settlements in yuan across Asia.
At the same time, China has said that it would use its huge foreign exchange reserves to contribute to the bailout fund of the IMF on the condition that its share of voting rights in the international body is increased.
Currently, the voting rights of the BRIC countries, namely Brazil, Russia, India and China, in the IMF are 9.62% of the total, together accounting for about half of the voting rights that the US holds.
Some Chinese economists have cautioned against committing any funds to the IMF before the removal of the US's right to veto in the IMF.
"Even if China decides to inject a large sum of money, it is pointless to increase its weight in the international financial organization," Yu Yongding, president of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told the China Daily. This is because the US holds veto rights in the decision-making process of the IMF.
But other experts see more room for advancing China's priorities by cooperating directly with the US. "In solving the crisis I would place more hope in the G-2, or the US and China, rather than in the G-20," said Liu Yuhui, economist at the Institute for Financial Studies of the Chinese Academy of Social Sciences.
"I expect few concrete results to emerge from this G-20 meeting," Liu said. "Currently, the IMF is an institution of rigidly allocated financial power and it would take a long time to change the status quo."
(Inter Press Service)
http://www.atimes.com/atimes/China_Business/KC19Cb01.html
Mar 19, 2009
China sees opportunity in failure
By Antoaneta Bezlova
BEIJING - Differences between the United States and Europe over how to restore global economic growth have given rise to speculation here on whether a failure to agree on a grand strategy at the upcoming Group of 20 (G-20) summit might create room for China to assert its national agenda.
"It is well remembered that the collapse of international talks at the 1933 London summit laid the foundation for the US's consequent emergence as a dominant financial power," said an editorial in the China Business News at the weekend.
"With the US-based financial system facing unprecedented challenges, could a failure at the upcoming London meeting serve
to advance China's aspirations for the creation of a new financial order?" the editorial asked.
Officially at least, China has declared low expectations regarding the outcome of the April 2 summit of the leaders of the G-20 countries. Wu Xiaoling, former vice governor of the People's Bank of China, told a financial conference in Shanghai at the weekend that the summit was unlikely to bear much fruit.
"It is impossible for any concrete agreements to be reached at the G-20. We should not put much hope on it," Wu said. "That's why we should have our voice heard."
Low expectations aside, Beijing has invested substantial effort in preparing for the global summit. Officials from the ministries of Commerce and Finance, the Central Bank and the banking regulatory commission have been dispatched to London since early March to forge and present a united strategy at the meeting.
Divided into working groups, they have been laying the ground for China's participation in sweeping talks, including reform of the International Monetary Fund (IMF) and other multilateral bodies, the size and timing of coordinated stimulus measures and the inception of a global regulatory system.
Indications of China's stance came during the weekend's meeting of the G-20 finance ministers' preparatory to the April 2 summit. Finance Minister Xie Xueren called on the global community to accelerate the reforms of international financial institutions and to build a new financial system, which is "fair and square, compatible and orderly".
Speaking from Shanghai, Wu Xiaoling echoed Xie's statement, saying developed nations should shoulder greater responsibility in protecting the interests of developing countries and give emerging economies more power in international bodies like the IMF.
"The IMF should increase the share from emerging economies, and treat all members equally," Wu said. "A new set of rules should be set up to regulate the world economy, with a focus on global superpowers."
The meeting of the G-20 finance ministers revealed also the scope of existing disagreements between the US and Europe. US officials, backed by Britain and Japan, are seeking to line up global support for more government-backed stimulus measures.
European nations, though, are wary of such debt-fueled stimulus measures and have pushed for more regulation and oversight to prevent further deterioration of the global economy.
The split between the US and Europe and the deepening economic downturn have provided a distraction from the debate about China's role in creating global economic imbalances that had dominated economic circles in late 2008.
But to China's chagrin, the divergence of opinions has also pushed the summit agenda towards discussing an increase in financing to the IMF, instead of debating the much-anticipated reform of the financing body.
"What should have been the core issue of the summit - how to reform the IMF - has now been left by developed nations to fall by the wayside," Xu Mingqi, economist with the Shanghai Academy of Social Sciences, told the financial conference.
Xu argued that instead of debating how to redistribute voting rights inside the body, world leaders should decide on the creation of a monetary mechanism to be applied to countries issuing hard currencies that would work to protect the interests of global investors.
A similar concern was voiced by Chinese Premier Wen Jiabao during his once-a-year meeting with the press last week. Wen said he was "worried" about the safety of China's assets in the US, and asked Washington to provide guarantees that it would protect their value.
China is the largest holder of US Treasury bonds. As of December 31, the volume of the country's investments had reached US$696 billion.
While China also grapples with the implications of slumping global demand for its export-driven economy, Beijing sees the crisis as an opportunity to advance its own priorities of raising the country's global profile and acquiring more say in international financial institutions.
Over the past few months, Beijing has taken the first steps towards transforming its controlled, partially convertible currency into a regional currency by pushing loans and some trade settlements in yuan across Asia.
At the same time, China has said that it would use its huge foreign exchange reserves to contribute to the bailout fund of the IMF on the condition that its share of voting rights in the international body is increased.
Currently, the voting rights of the BRIC countries, namely Brazil, Russia, India and China, in the IMF are 9.62% of the total, together accounting for about half of the voting rights that the US holds.
Some Chinese economists have cautioned against committing any funds to the IMF before the removal of the US's right to veto in the IMF.
"Even if China decides to inject a large sum of money, it is pointless to increase its weight in the international financial organization," Yu Yongding, president of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told the China Daily. This is because the US holds veto rights in the decision-making process of the IMF.
But other experts see more room for advancing China's priorities by cooperating directly with the US. "In solving the crisis I would place more hope in the G-2, or the US and China, rather than in the G-20," said Liu Yuhui, economist at the Institute for Financial Studies of the Chinese Academy of Social Sciences.
"I expect few concrete results to emerge from this G-20 meeting," Liu said. "Currently, the IMF is an institution of rigidly allocated financial power and it would take a long time to change the status quo."
(Inter Press Service)
http://www.atimes.com/atimes/China_Business/KC19Cb01.html
Russia backs return to Gold Standard to solve financial crisis
Russia backs return to Gold Standard to solve financial crisis
Russia has become the first major country to call for a partial restoration of the Gold Standard to uphold discipline in the world financial system.
By Ambrose Evans-Pritchard
Last Updated: 8:23AM BST 30 Mar 2009
Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.
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Mr Dvorkevich said it was "logical" that the new currency should include the rouble and the yuan, adding that "we could also think about more effective use of gold in this system".
The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities.
It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and "Great Society" social spending forced President Richard Nixon to close the gold window in 1971.
The world's fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold.
Russia is a major gold producer with large untapped reserves of ore so it has a clear interest in promoting the idea. The Kremlin has already instructed the central bank of gradually raise the gold share of foreign reserves to 10pc.
China's government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the "Bancor" proposed by John Maynard Keynes in 1944.
Obama tells carmakers to shape up or face bankruptcy
March 31, 2009
Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy
Christine Seib in New York
President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.
GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.
Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.
Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.
The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.
Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”
Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.
It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.
After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”
If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.
This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.
Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.
Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.
Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.
A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.
"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.
http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6005600.ece
Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy
Christine Seib in New York
President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.
GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.
Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.
Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.
The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.
Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”
Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.
It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.
After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”
If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.
This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.
Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.
Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.
Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.
A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.
"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.
http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6005600.ece
In absolute terms, the G20 summit already looks unpromising
G20: a damp squib won't be the end of the world
Posted By: Edmund Conway at Mar 30, 2009 at 12:50:26 [General]
Posted in: Politics , Business , Economic Pulse
Tags:View More G20, global recession, Gordon Brown, london, Obama, summit
I've written enough times - before the finance ministers' summit for instance - that we can expect little in the way of tangible economic agreements out of the G20. This would be expecting too much (knowing what today's bunch of politicians are and aren't capable of). The world's financial system has collapsed; the very foundations of both it and the precepts that underpin global capitalism have come under question. These kind of disturbances cannot be undone or repaired overnight.
And so it is hardly a surprise that it is now dawning on politicians around the world that, in terms of actual output, the summit in London this week will be something of a damp squib. The draft communique has been leaked and looks dismally familiar: refutations of protectionism, calls for more free trade, rather blithe commitments to rescue packages for both their economies and their financial infrastructure. In fact, the phrases that have wafted out sound remarkably similar to the mantras Gordon Brown has been emanating around the world on his recent tour (for instance, a "global crisis requires a global solution"; or "we are determined to restore growth now, resist protectionism, and reform our markets and institutions for the future" or "we are determined to ensure that this crisis is not repeated.")
I can confidently predict that on the day the politicians and officials - keen to avoid the accusation of inaction or incapacity - will pepper the press with news of breakthroughs: a new $500bn plus donated to the International Monetary Fund, for instance, and further clampdowns on tax havens, to take two. But this will be done (perhaps successfully) in order to divert attention away from the lack of concrete results.
However, before one declares this a failure before it has even begun, it is worth bearing a couple of things in mind - however cynical one is. First, the real story of a big summit like this is rarely predictable. Most big financial or political meetings are preceded by plenty of debate and speculation over their likely outcome. The eventual story is often quite different. And by eventual story, I mean not the headlines that come out the day afterwards but the extent to which it shapes policy in the following weeks and months, the reaction in markets as time goes on, the impact on currencies and the effect on economic data - in short the historical significance of the summit.
Second is the fact that in the case of a major summit like this success or otherwise should be defined not in terms of concrete policies but in terms of the mood music surrounding the event. The 1933 London conference was a disaster because too many politicians either didn't turn up or showed a disappointing apathy about actually getting round the intractable problems of the day (which largely revolved around the gold standard). So as sceptical as I am (and as I am sure you are) about the bon mots from Brown, President Obama et al about unity being essential, I believe this is one of those rare moments when a show of unity is extremely important - in both economic and political terms.
Having resigned myself to the fact that it is too late to come up with a decent, comprehensive plan either to bail out struggling nations or to repair and reshape the financial system, I personally will judge the relative success of the summit on whether the leaders seem to be singing from the same hymnsheet. If they aren't, it is truly time to get worried, for it harks back to the 1930s when different blocs of nations took radically opposing economic strategies for escaping depression, with the result that for some countries the downturn was far nastier than it should have been.
However, in absolute terms, the summit already looks unpromising. The fact is that there are some important concrete agreements the G20 should be trying to achieve that seem simply to have been forgotten. For a more detailed guide of the kind of things they could or should be doing, and why, check out Willem Buiter's blog and Simon Johnson's here and here (as the former IMF chief economist his analysis over the next week or so will be particularly invaluable and important).
My plan over the next week, along with the Telegraph's other writers, is to try to look beyond the excitement surrounding both the visit of President Obama and the glitz surrounding the summit - not to mention the small news stories that flow out of it - and to try to determine precisely what this means for the world economy in the long-run.
http://blogs.telegraph.co.uk/edmund_conway/blog/2009/03/30/g20_a_damp_squib_wont_be_the_end_of_the_world
Posted By: Edmund Conway at Mar 30, 2009 at 12:50:26 [General]
Posted in: Politics , Business , Economic Pulse
Tags:View More G20, global recession, Gordon Brown, london, Obama, summit
I've written enough times - before the finance ministers' summit for instance - that we can expect little in the way of tangible economic agreements out of the G20. This would be expecting too much (knowing what today's bunch of politicians are and aren't capable of). The world's financial system has collapsed; the very foundations of both it and the precepts that underpin global capitalism have come under question. These kind of disturbances cannot be undone or repaired overnight.
And so it is hardly a surprise that it is now dawning on politicians around the world that, in terms of actual output, the summit in London this week will be something of a damp squib. The draft communique has been leaked and looks dismally familiar: refutations of protectionism, calls for more free trade, rather blithe commitments to rescue packages for both their economies and their financial infrastructure. In fact, the phrases that have wafted out sound remarkably similar to the mantras Gordon Brown has been emanating around the world on his recent tour (for instance, a "global crisis requires a global solution"; or "we are determined to restore growth now, resist protectionism, and reform our markets and institutions for the future" or "we are determined to ensure that this crisis is not repeated.")
I can confidently predict that on the day the politicians and officials - keen to avoid the accusation of inaction or incapacity - will pepper the press with news of breakthroughs: a new $500bn plus donated to the International Monetary Fund, for instance, and further clampdowns on tax havens, to take two. But this will be done (perhaps successfully) in order to divert attention away from the lack of concrete results.
However, before one declares this a failure before it has even begun, it is worth bearing a couple of things in mind - however cynical one is. First, the real story of a big summit like this is rarely predictable. Most big financial or political meetings are preceded by plenty of debate and speculation over their likely outcome. The eventual story is often quite different. And by eventual story, I mean not the headlines that come out the day afterwards but the extent to which it shapes policy in the following weeks and months, the reaction in markets as time goes on, the impact on currencies and the effect on economic data - in short the historical significance of the summit.
Second is the fact that in the case of a major summit like this success or otherwise should be defined not in terms of concrete policies but in terms of the mood music surrounding the event. The 1933 London conference was a disaster because too many politicians either didn't turn up or showed a disappointing apathy about actually getting round the intractable problems of the day (which largely revolved around the gold standard). So as sceptical as I am (and as I am sure you are) about the bon mots from Brown, President Obama et al about unity being essential, I believe this is one of those rare moments when a show of unity is extremely important - in both economic and political terms.
Having resigned myself to the fact that it is too late to come up with a decent, comprehensive plan either to bail out struggling nations or to repair and reshape the financial system, I personally will judge the relative success of the summit on whether the leaders seem to be singing from the same hymnsheet. If they aren't, it is truly time to get worried, for it harks back to the 1930s when different blocs of nations took radically opposing economic strategies for escaping depression, with the result that for some countries the downturn was far nastier than it should have been.
However, in absolute terms, the summit already looks unpromising. The fact is that there are some important concrete agreements the G20 should be trying to achieve that seem simply to have been forgotten. For a more detailed guide of the kind of things they could or should be doing, and why, check out Willem Buiter's blog and Simon Johnson's here and here (as the former IMF chief economist his analysis over the next week or so will be particularly invaluable and important).
My plan over the next week, along with the Telegraph's other writers, is to try to look beyond the excitement surrounding both the visit of President Obama and the glitz surrounding the summit - not to mention the small news stories that flow out of it - and to try to determine precisely what this means for the world economy in the long-run.
http://blogs.telegraph.co.uk/edmund_conway/blog/2009/03/30/g20_a_damp_squib_wont_be_the_end_of_the_world
Only a united front at the London G20 can save the world from ruin
Only a united front at the London G20 can save the world from ruin
Industrial production is collapsing faster than during the Great Depression. Social and political devastation will not be far behind, unless the G20 can heal global divisions, writes Ambrose Evans-Pritchard.
Ambrose Evans-PritchardLast Updated: 7:02PM GMT 28 Mar 2009
Comments 89 Comment on this article
By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed.
Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).
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It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident.
The London Conference was a fiasco. President Roosevelt refused to attend. He took a sailing holiday to flag his contempt for Old World posturing. FDR feared a trap to draw America back onto the Gold Standard – the source of the misery – and to lock the White House into Europe's deflation orthodoxies. As delegates waited, he cabled a message mocking the "old fetishes of so-called international bankers". Keynes defended him as "magnificently right".
The London G20 comes earlier in the depression cycle. A good thing too. The fundamental circumstances are worse today than in the early 1930s. The debt burden is higher. The global economy is more tightly intertwined. The virus spreads more swiftly.
Do not be misled by apparent normality. Unemployment lags, and social devastation lags further – although it has already hit the Baltics and Ukraine. Do not compress the historical time sequence either. Life seemed normal in early 1931 when the press reported "green shoots" everywhere. Part Two of the Depression was the killer. Part Two is what we risk now if we botch it.
Yes, we have done better this time. We saved the credit system. Central banks have slashed rates to near zero in half the world economy. The heroic Bank of England has pioneered monetary stimulus a l'outrance, even if the ungrateful wretches of this island mock their own salvation. But we must move faster because world manufacturing is collapsing at three times the speed. The damage that occurred from late 1929 to early 1931 has been packed into six months. Japan's exports fell 49 per cent in January. Holland's CPB Institute says global trade shrank 41 per cent (annualised) from November to January. Industrial output has fallen heavily over the last year: by 31 per cent in Japan, 24 per cent in Spain, 19 per cent in Germany, 17 per cent in Brazil, 13 per cent in Russia and by 11 per cent in the UK and US. Almost all has occurred since September.
In any case, the European Central Bank (ECB) is still standing pat. It is partial to medieval leech-cures – and hamstrung by the lack of EU debt union. Now, if the G20 were to convey the world's wrath at Europe's monetary paralysis, we might get somewhere. But Gordon Brown has been sidetracked by fiscal flammery. We are past that stage. Only the printing presses can rescue us, and the ECB refuses to print. Tactically, Mr Brown erred gravely by promising "the biggest fiscal stimulus the world has ever seen". It is not his gift, and comes ill from a deadbeat state that cannot sell its own bonds.
There again, was it wise for the Czech premier and titular EU president to rubbish Barack Obama's fiscal blitz as the "road to hell"? That too comes ill from a leader who has just lost a no-confidence vote over his handling of the Czech economy. But the hapless Bohemian speaks for Europe, where Hooverism is written into EU Treaty law. Indeed, last week Brussels fired anathemae at Greece, Spain, France, Britain and Ireland, for breach of the 3 per cent deficit rule. We must retrench under Regulation 1466/97. Laugh not.
Germany's finance minister, Peer Steinbruck, is still digging in his heels against "crass Keynesianism". No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll.
You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The most protectionist Congress since Bretton Woods is not going to acquiesce as precious US stimulus leaks abroad to the benefit of "free-riders". Patience will snap. "Buy American" is already US law.
The risk is that this G20 becomes the defining moment when a disgusted American political class – sorely provoked – turns its back on the open trading system. The US alone has the strategic depth to clear its own path, and might find eager partners in a "pro-growth bloc" – much as Britain led a reflation bloc behind Imperial Preference in the early 1930s. As the world's top exporters, Germany and China should take great care to restrain their body language this week.
Well done, Mr Brown, for trying to hold the world together. But if the summit degenerates into a shouting match between mercantilist creditors and prostrate debtors, it may serve only to frighten markets and tip us into the next – more violent – downward leg of this slump.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5067491/Only-a-united-front-at-the-London-G20-can-save-the-world-from-ruin.html
Industrial production is collapsing faster than during the Great Depression. Social and political devastation will not be far behind, unless the G20 can heal global divisions, writes Ambrose Evans-Pritchard.
Ambrose Evans-PritchardLast Updated: 7:02PM GMT 28 Mar 2009
Comments 89 Comment on this article
By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed.
Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).
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Financial crisis: Does the US face a full-scale run on its currency?
New 'Iron Curtain' threatens to split Europe over economic crisis
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It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident.
The London Conference was a fiasco. President Roosevelt refused to attend. He took a sailing holiday to flag his contempt for Old World posturing. FDR feared a trap to draw America back onto the Gold Standard – the source of the misery – and to lock the White House into Europe's deflation orthodoxies. As delegates waited, he cabled a message mocking the "old fetishes of so-called international bankers". Keynes defended him as "magnificently right".
The London G20 comes earlier in the depression cycle. A good thing too. The fundamental circumstances are worse today than in the early 1930s. The debt burden is higher. The global economy is more tightly intertwined. The virus spreads more swiftly.
Do not be misled by apparent normality. Unemployment lags, and social devastation lags further – although it has already hit the Baltics and Ukraine. Do not compress the historical time sequence either. Life seemed normal in early 1931 when the press reported "green shoots" everywhere. Part Two of the Depression was the killer. Part Two is what we risk now if we botch it.
Yes, we have done better this time. We saved the credit system. Central banks have slashed rates to near zero in half the world economy. The heroic Bank of England has pioneered monetary stimulus a l'outrance, even if the ungrateful wretches of this island mock their own salvation. But we must move faster because world manufacturing is collapsing at three times the speed. The damage that occurred from late 1929 to early 1931 has been packed into six months. Japan's exports fell 49 per cent in January. Holland's CPB Institute says global trade shrank 41 per cent (annualised) from November to January. Industrial output has fallen heavily over the last year: by 31 per cent in Japan, 24 per cent in Spain, 19 per cent in Germany, 17 per cent in Brazil, 13 per cent in Russia and by 11 per cent in the UK and US. Almost all has occurred since September.
In any case, the European Central Bank (ECB) is still standing pat. It is partial to medieval leech-cures – and hamstrung by the lack of EU debt union. Now, if the G20 were to convey the world's wrath at Europe's monetary paralysis, we might get somewhere. But Gordon Brown has been sidetracked by fiscal flammery. We are past that stage. Only the printing presses can rescue us, and the ECB refuses to print. Tactically, Mr Brown erred gravely by promising "the biggest fiscal stimulus the world has ever seen". It is not his gift, and comes ill from a deadbeat state that cannot sell its own bonds.
There again, was it wise for the Czech premier and titular EU president to rubbish Barack Obama's fiscal blitz as the "road to hell"? That too comes ill from a leader who has just lost a no-confidence vote over his handling of the Czech economy. But the hapless Bohemian speaks for Europe, where Hooverism is written into EU Treaty law. Indeed, last week Brussels fired anathemae at Greece, Spain, France, Britain and Ireland, for breach of the 3 per cent deficit rule. We must retrench under Regulation 1466/97. Laugh not.
Germany's finance minister, Peer Steinbruck, is still digging in his heels against "crass Keynesianism". No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll.
You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The most protectionist Congress since Bretton Woods is not going to acquiesce as precious US stimulus leaks abroad to the benefit of "free-riders". Patience will snap. "Buy American" is already US law.
The risk is that this G20 becomes the defining moment when a disgusted American political class – sorely provoked – turns its back on the open trading system. The US alone has the strategic depth to clear its own path, and might find eager partners in a "pro-growth bloc" – much as Britain led a reflation bloc behind Imperial Preference in the early 1930s. As the world's top exporters, Germany and China should take great care to restrain their body language this week.
Well done, Mr Brown, for trying to hold the world together. But if the summit degenerates into a shouting match between mercantilist creditors and prostrate debtors, it may serve only to frighten markets and tip us into the next – more violent – downward leg of this slump.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5067491/Only-a-united-front-at-the-London-G20-can-save-the-world-from-ruin.html
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