Paul Krugman got a lively discussion started with his blog post asking why interest rates on Japanese and Italy bonds were so different. At around 4.5% for ten-year bonds, the spread is huge.

Personally, I am at a loss to comprehend why people would compare Japan and Italy and why this question even arises. As should be known by now the Japanese economy is fundamentally structured differently. As in most of East Asia, the relationship between government, big business and bureaucrats is tight-knit. Whereas banks in Italy are supposed to help in price-discovery, that is not exactly true for Japan. Traditionally the role of the interest rate has been neglected in East Asian bank lending; companies had access to cheap funds in order to finance their operations much more competitively.

Other notable examples are Korean chaebols (big conglomerates) or Chinese SOEs. Many investors and hedge funds have been burned

The folks at HSBC recently released some intriguing research regarding how a core-euro and a periphery-euro might have fared. They came up wih this.

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Even if those numbers are just close approximations, they give us a clue as to what countries would have to expect were they to leave the euro zone and re-introduce their own national currencies. Irrespective of the most recent deal, there is a real risk of a break-up of the euro zone. This is fascinating stuff as devalued currencies would have repercussions beyond merely affecting bondholders through currency loss. Companies with a heavy revenue stream in Germany and other core countries would see their value rise in line with their earnings. One of the many reasons behind the resurgence of Spanish football teams in Europe is that thanks to the euro, their purchasing power is strengthened vis-à-vis the past. If a nation

With Chinese President Hu Jintao coming to the United States for a state visit, the RMB (renminbi) is sure to once again occupy a space in the spotlight. So far trade and financial issues are at the center of the debate about its value but monetary concerns may trump these in importance. Unbeknownst to many the Chinese embarked on a liquidity of their own.

It has become common wisdom to speak of the Chinese Yuan as a deliberately undervalued currency. And there are many facts pointing into this direction, ranging from the trade surplus to more sophisticated analysis such as purchasing-power comparisons.

If the RMB were to be floated soon one could expect that many investors would try and get on that trade in anticipation of a substantial appreciation in value. But, alas, there is more to this story. Faced with a negative external-shock after the Lehman crisis the

The question of how large the American economy is may seem trivial at first. A simple glance at the most recent GDP statistics should suffice, one would think. However, there are many things that go unreported in this figure, their failure to appear causes many policy errors, and in the unlikely event of a currency dislocation, companies’ exposure to specific markets may have big repercussions on their share of the global market.

There are three different factors influencing GDP and the global market share which go quite unnoticed. One of them, debt in all its form (household, corporate, state), will be left out in this article as the focus here is on exchange-rates and wealth-generating activities.

For years the U.S. government has been trying to lure the value of dollar down in order to increase exports. But that recommendation is missing the rationale of what an undervalued currency is supposed

Around the peak of a bubble there’s always not just one but many signs that asset prices have seriously decoupled from reality. The astronomical increase in the price of jade should make even the most bullish investor pause for a second and reflect on the fundamentals.

In the old days rising house prices were associated with a growing economy. In those days rising asset prices reflected a sound and solid economic foundation. Higher income supported higher mortgage payments or rents. This still holds true in some economies but over the last couple of decades an increase in housing prices has often been a sign of economic weakness and imbalance.

The typical response of central banks after a downturn is to open the monetary spigot and lower rates. The US housing bubble was in no small part down to actions of the Fed. Similarly the Japanese central bank opened the way

Whenever tensions over the value of the RMB rise the old chestnut of China dumping its Treasury holdings comes up. That concept has to be one of the most-widely misunderstood ones in today’s world. The value of the Chinese holdings rests on the promise of the US government to meet its obligation and pay both principle and interest. Some argue that the US could handle a sudden influx of Treasuries in a manner which would not cripple it too much economically, say via the Fed monetizing but at the same time sterilizing the purchase.

The point is that even if this co-called ‘nuclear option’ were to have an adverse effect on the US economy there is a simple measure the US could take: declare those bonds null and void.

The question of whether or not the US could get away with it rests on the legitimacy of any such action.

As has been evident throughout the financial crisis, the framework provided by mainstream economics is out-dated and rests on many false assumptions. Hence, in order to understand how today’s economies work, we first need to establish a solid foundation.

Along the way to modern monetary policy we have witnessed the introduction of central banks. Initially created to act as lender-of-last-resort, their policies have increasingly shaped the business cycle. Economists regard asset markets much in the same way as markets for goods and apply the same principles to them.

It wasn’t much of a stretch hence to come up with the concept of the efficient market-hypothesis (EMH) which has driven much of research on financial markets and monetary policy. Under EMH, the assumption is that asset prices are always and everywhere at the correct price. Following this logic asset-price bubbles can’t possibly exist; there is substantial research whether the Nasdaq

Everyone and his dog is now engaged in debate which aims to find ways to boost job creation in the US. More than a fair few are proposing further stimulus programmes. They wrongly tend to call it "second stimulus" - it is far from being the second one.

It’s not like the Bush tax cuts and Fed-inspired interest rate cuts could or should be excluded. In fact, one could argue that America has been on a debt-fuelled stimulus since the 1980s when total debt in relation to GDP went from 160% to more than 360%. Steve Keen argues that the contribution to demand from rising private debt was far greater during the recent boom than during the Roaring Twenties — accounting for over 22% of aggregate demand versus a mere 8.7% in 1928.

People argue against increased government spending based on the fact that the private sector does

Americans tend to view global trade issues through a prism which is characterized by private actors and free markets; hence, describing the global trade arena as one where gains are won by the state by employing cunning strategies seems unnatural to them. In fact, trade wars are not a new phenomenon. Wars were not seldom justified by the argument of opening up new markets for domestic business.

The American belief is further intensified by the experience of the past half century in which most trade was done with nations that were partners and allies. China and the U.S. cannot be natural allies; they might be partners, but due to size and differences over many issues ranging from ideology to resources, the nature of their relationship inherently is one of conflict. I’ve been working on a new framework for describing Sino-U.S. foreign relations, and typical descriptions such as (neo-)realism or liberalism

The topic of Chinese real estate is still occupying many people’s minds and considerations. However most analysis is inconclusive and fails to incorporate the variety of factors which affect pricing. Journalists tend to dodge deeper analysis in favour of proclaiming a bubble based on opinions of other people or the rather crude price-to-income ratio.

That static ratio is useful in developed economies but what’s left forgotten is that ordinary incomes keep rising at a rapid speed in China while a certain group of people already enjoy tremendous wealth. If incomes rise by 10% a year that means they double over a mere seven years. Hence this dynamic has to be incorporated. Wages are bound to increase even higher than in the past because China is finally about to move past the Lewis turning point. In contrast to many other commentators I regard this development as positive as this boosts domestic

It’s a lovely, sunny day and I finally get to spend some time at home so I’ll keep this piece short. Nonetheless the point I’ll be making is an important one which so far to my knowledge hasn’t been mentioned .

Typically devaluing one’s currency is associated with gaining a competitive advantage, however there are certain peculiarities in the eurozone which make this a bit more complicated. In order for internal/external devaluation to work it is important that the nation in question actually has either a decent industrial policy, an already existing export base or increasing investment into this area.

South Korea benefited from external devaluation after the Asian Crisis because it had companies like Samsung, Germany benefited from internal devaluation in the 2000's because it has a large manufacturing base.

Now that the euro is getting cheaper some sections of the public are in a way euphoric as

Just a quick note to clarify a misconception one often hears regarding China’s infrastructure investments and the health of its banks.

One of the most common mistakes people make in analyzing infrastructure investments in China is that they fail to note how the income stream is actually supposed to work. Typically one would assume that banks lend only to projects that generate a decent return by themselves. Emphasis being that at the core of the banks’ decision lies the revenue stream of that single project and that even to outsiders the revenue stream is predictable as they assume some sort of linear progression.

In China, however, banks are for all practices and purposes agents of the state. That is why infrastructure investments are rated by their contribution to national growth as opposed to direct attributable yield. Banks are backstopped by the government which in turn finances its needs through a

So we have a deal now. The exact details will become clear throughout the day and as the package will be put into use. What's become evident is how Europeans still haven't come to grips with the market mechanism. To be fair, sentiment in some Asian countries during the Asian Financial Crisis of 1997 mirror the contemporary European one. Media coverage then and now was full of people blaming everything on speculators who 'attacked' a country's currency. Mahathir Mohamad, then Malaysian Prime Minister, stood out amongst the politicians in his criticism of bond vigilantes.

What we see today is the reaction of people who believe that markets did not perform rationally during the last few weeks. In their opinion, yields are high because sentiment among traders is negative. ‘Wolfpacks’ are supposedly attacking the euro. It has been evident to anyone who had a mere glance at sovereign balance sheets that

Frustrated by a China still insistent on its dollar peg, some sections within the US have now come up with the proposition that instead of trying to persuade China to rise the value of the RMB via unilateral talks the time has come to pay them a visit with some friends. It is argued that through multilateral talks leverage can be enhanced and China pressured to finally make a move on its currency. International fora are increasingly used to solve global problems so ample opportunities exist to have a chat with Mr. Hu Jintao.

Unfortunately for the US administration it may find itself with little company.

China has been closely pegging the RMB to the dollar since July 2008. It is thus common to see the argument that this has been done in order to boost exports.

The problem however is that by pegging the RMB to the dollar China

There is a tremendous amount of talk about China with real estate, the yuan and now Google (GOOG) topping the list.

Let's start of with income distribution. One quirk about China is that aggregate numbers themselves are pretty meaningless since the divergence within the whole country is too large to be reflected properly by a single figure.

Even then there is a large inequality in income distribution within a province. The 19^th biggest province by population (Shanxi) boasts a population as large as Canada. In contrast to residents of a nation such as Canada the residents of a province are almost certainly going to try and live in the regional capital. The reason for this includes a much higher lifestyle, Chinese people prefer to live in cities as this is

Given that the American Fed, British BoE and Japanese BoJ have all been engaging in various sorts of quantitative easing (QE), the reluctance of the ECB to conduct such operations itself has been one of its distinguishing policy features.

The ECB remains one of the most independent central banks in the world however budget constraints are appearing all over Europe and even traditional deficit hawkish members such as Germany face a worrying pile of debt which will has to be issued in the forthcoming years. Unless the macro-situation improves and organic economic growth (i.e. growth absent of government stimulus spending) appears, the gap between revenue and expenditure is going to remain unsustainably high in the whole Eurozone. What has been neglected so far in the discussion about QE in the EZ is that Germany may very well alter its position. Borrowing at the federal level in 2010 will likely surpass

Sino-US relations are becoming ever more important and for investors, it is critical to understand the political factors that drive China as well as basic economic fundamentals.

While I will provide a review of Chinese foreign exchange holdings and past trade patterns, I have to emphasize that for as long as the Taiwan issue remains unresolved, both countries could find themselves in a conflict situation within days. Next to providing a stable environment for economic growth future, reunification with Taiwan is one of the two main pillars of regime legitimacy.

"Now many countries are saying that China is good and hope that China will emerge, but honestly we are still a developing country. Don't over estimate the fact that we have almost 2 trillion dollar in our foreign exchange reserve. If you take that amount and divide it by 1.3 billion people, how much per head is that? Therefore, we