Prieur’s readings (October 24, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Gillian Tett (Financial Times): Rally fuelled by cheap money brings a sense of foreboding, October 22, 2009.
It is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.

• Doug Kass (TheStreet.com): The earnings season racket, October 21, 2009.
If end demand doesn’t pick up (and pick up quickly), the 2010 earnings outlook for many industries (such as semiconductors and other beneficiaries of restocking) will be in jeopardy, as will be the now ambitious consensus for S&P 500 earnings of over $70 a share next year.

• Gordon Chang (Forbes): China’s 8.9% growth? No way, October 23, 2009.
Beijing will continue to boast about its economic management . As a National Bureau of Statistics spokesman said on Thursday, “We can say we have made obvious and remarkable achievements in our economic growth.” Unfortunately, for the Chinese people and the rest of us, that is not true.

• Paul Krugman (The New York Times): The Chinese disconnect, October 22, 2009.
The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

• Economist.com: Dollar depreciation – denial or acceptance? October 22, 2009.
The dollar’s slide is complicating life for countries with floating exchange rates.

• Ambrose Evans-Pritchard (Telegraph): Dollar hegemony for another century, October 21, 2009.
Let me stick my neck out. The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.

• Katie Benner (Fortune): Three signs of the next real estate collapse, October 22, 2009.
The latest bubble is about to burst, but this time it’s in the commercial market.

• Martin Wolf (Martin Wolf): Why curbing finance is hard to do, October 22, 2009.
There is a way of making finance safe. But it would be radical: deposits would be 100% reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.

• Mohamed El-Erian (Financial Times): The two-stage de-risking of banks, October 22, 2009.
With the market-induced contraction of the banking sector over-shooting, the highly disruptive implications for employment and economic activity forced policymakers into a “WIT” mindset – doing “whatever it takes” to stabilise the sector. The massive policy reaction succeeded in stabilising the banking system. And while the banks are still not lending in any meaningful manner to the real economy – an issue that will become politically even more problematic as unemployment continues to rise in the industrial countries (particularly, in the US and UK) – most have used the extraordinary policy support to strengthen their balance sheets and, also, take on risk.

• William Barnett (The New York Times): Who’s looking at the Fed’s books? October 21, 2009
But while the Fed needs to be audited substantially, creating an independent data institute to monitor the Fed’s monetary and financial data would be better than expanding a Government Accountability Office audit. An independent institute would have the highest specialized expertise to produce economic data for the Fed. Neither an independent monitoring institute, nor – a reasonable second best – an expanded Congressional audit would constrain the Fed’s ability to act in the country’s best interests. It would simply ensure that the country knew what the Fed was doing, and why.

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