Ringgit, government bond yields up on rates hike

KUALA LUMPUR: The hike in interest rates, which the market now expects to be the last for the year, drove the ringgit up and saw a rise in yields of short-term government bonds.

The ringgit appreciated against the dollar yesterday following the 25-basis-point rise in Bank Negara’s overnight policy rate (OPR) to 2.75%, with traders now expecting the local currency to continue to strengthen in the short term.

CIMB Investment Bank regional rates and foreign exchange strategist Suresh Kumar Ramanathan said the ringgit, which rose to 3.19 against the dollar yesterday, was pointing towards further strengthening.

He said the hike in interest rates made the ringgit an interesting carry-trade proposition for traders.
“Interest rates are pretty high to attract more capital flows into the market,’’ he said.

The monetary policy statement on Thursday was dissected by the market and the general consensus is that Bank Negara would most likely stand still now after raising domestic interest rates by 75 basis points this year.

Analysts said the previous statement, which alluded to further normalisation of interest rates, was omitted this time around.

They said this was replaced by a fresh stance whereby the Monetary Policy Committee (MPC) now considered the new level of the OPR to be appropriate and consistent with the current assessment of growth and inflation prospects.

“Taken together, these signals suggest that rate hikes are unlikely to come through in the future,’’ said Barclays Capital in a note yesterday.

“It appears that Bank Negara has created enough monetary policy buffer to respond to any downside risks.”
While the MPC’s assessment is for the global recovery to continue, it noted that there was increased risk that the global growth momentum could moderate.

But it pointed out that for the domestic economy, recent trends in key economic indicators such as industrial production, financing activity, labour market and external trade showed that economic activity had remained robust in the second quarter.

“While external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvement in private consumption and investment, and augmented by public investment spending,’’ MPC said.

Barclays Capital said the statement noted that recent economic indicators and trends would remain strong despite the recent gains in the ringgit. “This suggests that they are comfortable with the recent normalisation in the currency and would not stand in the way of further appreciation, provided this is fundamentally dictated,’’ it said.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng believes the strong domestic economic indicators might have pipped Bank Negara’s decision to let interest rates go up for the third time.

The market was divided over the prospects for such a hike, given the economic situation globally.

“The central bank is confident that domestic growth momentum can be sustained despite the slowdown in the second half-year in the European Union economies,” Yeah said.

Although the current level was still below the historical average, Yeah called it the “new normal” considering the benign inflationary concerns and the weak economic condition globally.

He felt that the hike was important to nip asset price inflation, especially in the property sector which was driven by super-low interest rates, before it got out of hand.

“The double-digit increase in some property segments is of some concern,’’ he said.

While households have seen a debt build-up in recent years to levels considered high for Malaysia, Yeah said the current level of interest rates was seen as a balance between what households could shoulder and what the business sector found it could live with.

“It’s a fine line. We believe this level will stay for the rest of the year,” he said.

Should interest rates plateau at this level, Maybank Investment Bank head of debt capital markets Michael Oh-Lau said the rally in the bond market, which had seen yields dropping as a result of foreign buying of Malaysian Government Securities, should continue.

The impact on the bond market is expected to be positive but Oh-Lau said one risk that could emerge from interest rates remaining stagnant was a rotation of money out of the Malaysian capital markets to other countries that had not raised their rates. “There might be some risk of the exit of foreign investors if this is the last hike,’’ he said.

With interest rates now projected to remain firm for the rest of the year, analysts said all eyes would now be on the yuan and its movement against major currencies.

“The ringgit is seen as a close proxy to the yuan and further strengthening of the ringgit will come from the pace of strengthening of the yuan,” said Yeah. “This will fit in nicely for Malaysia getting a slower pace of strengthening.’’

By JAGDEV SINGH SIDHU

jagdev@thestar.com.my

Is Malaysia in danger of going bankrupt?

If Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we will have fewer worries

IN a recent speech, Datuk Seri Idris Jala warned that Malaysia could in 2019 end up bankrupt like Greece if the RM74bil annual subsidies are not slashed. That speech attracted a lot of flak, and has been dismissed as more of a “scare tactic” to jolt “us to not live beyond our means”. More of that later.

What are the causes of national bankruptcy? A country can go bankrupt if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.

Greece has been in the spotlight with its debt problems. Though it didn’t actually default on its public debt, it is as good as bankrupt, as far as a lot of people are concerned. The European Union and the IMF kept the embattled Greek economy afloat by agreeing to a US$1 trillion loan package.

The crisis began when investors started getting nervous about Greece’s ability to refinance almost 17 billion euro of bonds (about US$23bil) maturing in April and May this year.

Greece certainly did not endear itself to investors when it was revealed in early 2010 that since 2001, it had help from Wall Street firms to quietly borrow so that it could continue to spend beyond its means while meeting the euro-zone’s deficit rules.

The Greek government hasn’t balanced a budget in nearly 40 years. Its profligate and irresponsible spending had resulted in its public debt ballooning to a forecast 125% of GDP in 2010. Measures to tackle its public finances problems are expected to cut its 2010 deficit to 9.3% of GDP, an improvement from 2009’s 12.7%.

Years of socialism have also resulted in an oversized government that has systematically crowded out the private sector and driven them underground. In fact, one third of Greeks work for the government where their jobs are guaranteed for life.

But the key cause of Greece’s debt crisis is corruption and impunity, which the Greek Prime Minister himself readily admits. Tax evasion, a way of life in Greece, could be costing the Greek government as much as US$30bil a year. According to Transparency International’s (TI) Corruption Perceptions Index 2009, which measures the perceived levels of public sector corruption in 180 countries and territories, Greece scored 3.8 points out of a possible 10 (with 10 being perceived as having low levels of corruption) and was ranked number 71.

While Japan hasn’t yet run into the kind of solvency problems faced by Greece, some commentators have already started predicting that it could end up being the world’s largest national bankruptcy. That’s because Japan’s public debt mountain is bigger than that of any other industrialised nation.

Japan’s public debt is a legacy of massive half-baked economic stimulus packages during the “lost decade” of the 1990s, as well as during the recession that began in 2008. It is expected to hit 200% of GDP within 2010 as the government tries to spend its way out of the economic doldrums against a backdrop of plummeting tax revenues and soaring welfare costs.

The Japanese government expects its fiscal deficit in 2010 to hit 9.3% of GDP, and public debt to rise to 17 times its annual tax revenues by the end of the year. Japan’s public debt situation seems irrecoverable, and its newly installed prime minister has warned that Japan could face a financial crisis of Greek proportions if it does not tackle its colossal debt.

Prospects of a downgrade

Despite all that, Japan isn’t in the kind of pickle Greece is in right now. In fact, credit rating agency Standard & Poor’s rating on Japan’s sovereign debt remains at AA, one step below its best possible rating, though it did in January raise the prospect of a downgrade on concerns about large fiscal deficits and a sluggish growth outlook.

Why isn’t Japan in the same kind of mess as Greece? And why hasn’t its sovereign credit rating been downgraded to junk status, like that of Greece’s?

It is possible that Japan is perceived as being too big to fail. Japan is the world’s second largest economy after the United States, and even though it may have lost some of its shine, it remains a technological powerhouse with a diligent and highly trained workforce. Its default risk is low, as it has a huge current account surplus as well as the backing of massive domestic private sector savings to continue investing in government bonds.

And unlike Greece, Japan’s credibility remains good, there being no fiddling with statistics to make Japan’s public finances look good. Its institutions are strong, and there is no crowding out of the private sector by the public sector. And corruption is hardly an issue in Japan; according to TI’s Corruption Perceptions Index 2009, Japan scored 7.7 points and was ranked number 17.

Malaysia’s public finances are clearly better off than either Japan’s or Greece’s, and its current debt-to-GDP ratio is nowhere near that of either’s. The CIA’s list (The World Factbook) ranking countries based on public debt as a percentage of GDP (2009 estimates) puts Malaysia at number 50 (at 47.8%); that’s far behind Japan at number 2 (192.1%), Singapore at number 6 (117.6%), and Greece at number 8 (113.4%).

However, according to Datuk Seri Idris Jala, Malaysia could in 2019 end up bankrupt like Greece if it does not cut its subsidies because its debt-to-GDP ratio would by then soar to 100% from the current 54%. Could Malaysia actually end up bankrupt like Greece?

As can be seen from the Greek and Japanese examples, the million-dollar question is actually not whether Malaysia could in 2019 end up bankrupt if its debt-to-GDP ratio soars to 100% but whether investors still find Malaysian government bonds attractive.

But this is an impossible question to answer because besides debt-to-GDP ratio, many other factors like economic strategies and policies, transparency and quality of governance, government efficiency, strength of institutions, etc also figure significantly in investing decisions.

According to the National Economic Advisory Council’s New Economic Model (Part 1) report, aggregate investment levels (in products and services) as a percentage of GDP have been declining ever since the Asian Financial Crisis of 1997-1998. The same report also mentioned that the contraction was driven mostly by a decline in private investment.

Is this an indication that investor interest in Malaysian government bonds could likely go the same way south as investor interest in the real sector in Malaysia?

Suffice to say that if Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we’ll have fewer worries.

COMMENT
By QUAH BOON HUAT

● The author is a research fellow at the Malaysian Institute of Economic Research (Mier). The views expressed in this article are the author’s and do not represent those of Mier.

Immigration Can Fuel U.S. Innovation—and Job Growth

Lost amid the heated debate over U.S. policy is a key point: Immigrant entrepreneurs and skilled workers are a boon to the economy

By Chris Farrell

 Arizona may be ground zero for the conflict over U.S. immigration policy, but it takes only a few minutes of watching cable television news and scanning local op-ed pages to see how raw and divisive the matter has become in the nation's political sphere.

Yet with all the heated rhetoric about illegals, border security, amnesty, racial profiling, and other incendiary topics, one aspect of immigration isn't emphasized enough: the job-creating potential of immigrant entrepreneurs. They're the vanguard in America's global competition for entrepreneurial talent and innovative ideas. The nation needs to encourage more entrepreneurs from other nations to call America home. Their energy is the elixir of future economic growth.

Take a recent study by the McKinsey Global Institute on U.S. multinational corporations. In Growth and competitiveness in the United States: The role of its multinational companies, the consulting firm notes that big business comprises less than 1 percent all U.S. companies, yet the 2,270 multinational corporations in its database accounted for 31 percent of the growth in inflation-adjusted gross domestic product from 1990 to 2007. Even more important, U.S. multinational corporations have contributed 41 percent of gains in labor productivity since 1990—and 53 percent of the productivity increases during expansions.

The consultants highlight the role immigrants play in bolstering the competitiveness of American multinationals, especially helping the U.S. "lead the world in the number of engineers, scientists, and business professionals who are ready to work in a multinational company."

High-Tech Startups

Specifically, some of the world's brightest brains and cutting-edge innovators come to learn and create in the U.S.—and they stay. In 2007, for instance, 62 percent of foreign-born nationals who received a science or engineering doctorate remained in the U.S. for at least five years following graduation. That figure is up from 41 percent in 1992. More than 80 percent of graduates of Indian origin and 90 percent of Chinese graduates still lived in America five years after graduation, according to McKinsey. (The McKinsey study on multinationals makes for good companion reading to Intel founder Andy Grove's cover story in the July 5-11 issue of Bloomberg BusinessWeek. The Silicon Valley legend is himself an immigrant from Hungary.)

It's well-known that America's high-tech economy has prospered thanks largely to highly educated foreigners. But the degree that the nation's cutting-edge industries, from semiconductors to biotechnology, depend on immigrant scientists, engineers, and entrepreneurs to remain competitive is stunning. For example, a quarter of the engineering and technology companies started in the U.S. from 1995 to 2005 had at least one founder who was foreign-born, according to research by scholars Vivek Wadhwa, Annalee Saxenian, Ben Rissing, and Gary Gereffi. In Silicon Valley, America's epicenter of technological innovation, the percentage of immigrant-founded startups reached 52 percent of total new companies over the same period.

The scholars also calculate that foreign nationals living in the U.S. were named as inventors or co-inventors in 24 percent of all international patent applications filed in the U.S. in 2006. That's up from 7 percent in 1998. The influx of highly-skilled workers from India, Asia, Latin America, and other corners of the world is also a boon to U.S. exports.

Lake Street Revival

It isn't just highly educated foreigners who are entrepreneurs, either. Immigrants have created businesses, from the corner grocery to the local builder, that create jobs and revitalize neighborhoods throughout the country. Take Lake Street in Minneapolis. A good portion of the major urban artery had become was one of the city's most poverty-stricken, crime-ridden neighborhoods by the late 1980s and early 1990s

Storefronts were boarded up, while drug dealing, prostitution, and other crimes were all too common.

The area started to attract Latino immigrants, legal and illegal. The first Latino-owned business opened on Lake Street in 1994. Cheap rents and a growing market attracted many more Hispanic entrepreneurs. "We saw the need and the opportunity," says Ramon Leon, founder and chief executive of the Latino Economic Development Center on Lake Street. "Everybody wanted to open a business on Lake Street."

Business is doing well on Lake Street today, despite the economic downturn. The street is lined with restaurants, small grocery stores, and other classic neighborhood shops. East African entrepreneurs from Somalia and Eritrea have also opened businesses. Little wonder that cities with lots of immigrants have seen their per capita tax base go up, according to David Card, economist at the University of California, Berkeley. The competition on Lake Street is fierce enough that immigrant entrepreneurs are increasingly aware they need to expand their market beyond their ethnic communities. "If you want to be successful you need to sell stuff to others," says Ramon.

Put Out the Welcome Mat

The Obama Administration wants to start a national debate on comprehensive immigration reform. It's a sensible but daunting, politically perilous undertaking. The Bush Administration took a similar tack, and it ended badly. All the political signs point toward legislative intransigence rather than compromise. The danger is that during a period of anger and vilification of immigrants, fortified by post-9/11 fears of immigrants, 
America will lose out in the global war for innovative brain power and entrepreneurial hustle. It's all too easy for overseas innovators and entrepreneurs to stay home and pursue their dream there, particularly in fast-growing emerging markets with modern universities and high-tech clusters.

Yet America's historic record, blue-chip economic research, and well-established business experience all suggest the payoff from making it vastly easier for immigrants—especially educated immigrants—to stay permanently in the U.S. will be enormous. Tear down the walls that place obstacles to immigrants attending American universities and set up procedures for rapidly granting educated workers permanent resident visas.

Create a mechanism for a permanent "entrepreneurial" visa for those immigrants with a hunger to create a business and a plan for a job-generating startup. Instead of piling on more obstacles to prevent abuses of the current temporary H-1B visa system, why not streamline the whole process and eliminate many of the restrictions that make it difficult for workers to travel, change jobs, or earn a promotion?

Let's turn down the rhetoric and put out the welcome mat again.

Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on Businessweek.com. 

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Russia - US spy swap under way

Russia, U.S. swap 14 in Cold War-style spy exchange

A Vision Airlines Boeing 767 plane carrying candidates for the spy swap lands at Washington Dulles International airport July 9, 2010.

Credit: Reuters/Yuri Gripas

A Vision Airlines Boeing 767 plane carrying candidates for the spy swap lands at Washington Dulles International airport July 9, 2010.

Play Video

The largest Russia-US spy swap since the Cold War appears to be in motion. A Russian convicted of spying for the US has been reportedly plucked from a Moscow prison and flown to Vienna.

Igor Sutyagin, a Russian arms control analyst serving a 14-year sentence for spying for the US, told relatives he was going to be on the swap list.

Russian and US officials refused to comment on a possible swap.

A swap would have significant consequences for efforts between Washington and Moscow to repair ties chilled by a deepening atmosphere of suspicion.

A political analyst believes a swap is likely.

Ninolai Petrov, Political Analyst at carnegie Endowment, said, "I am afraid that we will never learn totally about how exactly it happens, and I am afraid it can be a mixture of both secret services from both sides, to be interested somehow in doing something which is not necessarily in favour of their political leadership. The fact that a solution to the case was found in such a fast way means that there is a political desire to fix the problem and not to develop the scandal, so there is understandable political will from both sides."

In New York, the ten suspects recently accused of being undercover Russian spies pleaded guilty. The ten and an 11th person, who was released on bail by a court in Cyprus and is now a fugitive, were formally charged in a federal indictment.

The defendants are accused of living seemingly ordinary lives in America while acting as unregistered agents for the Russian government, sending secret messages and carrying out orders they received from their Russian contacts.

Editor:Zhang Jingya |Source: CCTV.com

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Tips for Job-Seeking in This Economy

Newswise — Thanks to the recession, today’s job market is crowded. If an open position at a company would once attract 100 resumes, today it could attract 500. The search can be long and grueling.

Butler University Executive-in-Residence Marv Recht offers some tips to help in the job search.

1) Be prepared for your salary to get a “haircut.”
With more job seekers than available jobs, companies appear to be using the imbalance to adjust their salary bands downward. Rutgers University researchers first surveyed a representative sample of unemployed Americans in August and recently checked back with them to monitor their luck in going back to work. Since August, only one in five of the group who had been out of work for six months or longer had found a job. Of that group, only 10 percent had landed a new position with a salary on par with their previous job. The rest had accepted lower pay and fewer benefits.

2) Handle the question of salary expectations strategically.
In a job listing, employers often ask for your salary expectations or history. You do not want to rule yourself out of a chance at an interview by listing a salary that is too high; conversely, you do not want to short-change yourself if you should land the job by listing a salary that is too low.

Handle the question with a variation of this response: “My most recent base salary was $XX. However, as I
understand, there is significant growth potential in this position. As my primary interest at this stage of my career is working for a growing company, the matter of salary is negotiable.”

What if you are offered the job and the HR person asks, “What kind of salary are you looking for?” Again, you don’t want to rule yourself out by being too high or shortchange yourself by being too low. Prepare for that moment by researching on www.salary.com what the midpoint of the salary range is for that kind of job in the area where the company is located.

3) Play good offense if your age might be an issue in a job interview.
If you are 50 or over, you want to disabuse the potential employer quickly of the idea that you might work a few years in the new job and then retire. Research the company thoroughly so you can speak knowledgably about the company’s success. Emphasize the future in answers, such as “I see the company is on a growth pattern of X percent a year and I want to work for a growing firm and grow in my skills and contributions to that success.”

4) Be prepared to move.
You like where you currently live because it’s a good place to raise children, say, or your elderly parents live nearby. That’s fine — but your best shot at a job might lie elsewhere.

5) Investigate getting into a new job via a staffing organization.
With companies reduced to lean employee rolls, they are filling some of the gaps with temp employees from companies such as Kelly Services, Inc., and Adecco. As the economy picks up steam, companies will make some of those jobs full-time again. If you are already doing great work as a temp in a position, you will be first in line for consideration.

Marv Recht has over 35 years of career counseling and human resources experience, working for General Motors Corporation and human resources consulting firm DBM. Now retired from corporate life, he works at Butler University as an executive-in-residence for the College of Business where he teaches courses on career planning and development, and serves as an academic advisor.

To find other Butler University experts, visit http://www.butler.edu/experts/.
Source: Butler University
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Joblessness and housing add risks to U.S. recovery: IMF

A view of a home for sale in Los Angeles February 24, 2010.

Credit: Reuters/Mario Anzuoni

By David Lawder

WASHINGTON | Thu Jul 8, 2010 6:53pm EDT
 

WASHINGTON (Reuters) - High unemployment and a moribund housing market have increased risks to the U.S. economic recovery, while the public debt looms large and needs to be cut, the International Monetary Fund said on Thursday.

In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.

The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.

"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.

The IMF also said commercial real estate continued to deteriorate, posing risks for smaller banks. Further tipping the balance of risks to the downside, it said Europe's sovereign debt crisis could worsen financial market conditions and hurt trade.

David Robinson, the IMF's Western Hemisphere deputy director, conceded in a news briefing that recent data had come in on the weak side since the report was completed on June 21. If the weakness continued, the Fund may have to revise its forecasts downward, he said.

In a separate report on the world economy, the IMF raised its 2010 global growth forecast to 4.6 percent from the 4.2 percent it had projected in April.

DEBT BURDEN

Apart from dealing with economic risks, the IMF said the key challenge for the United States was to develop a credible strategy to put its budget on a sustainable path without jeopardizing the recovery.

The fund said U.S. federal debt as a percentage of gross domestic product would rise from 64 percent in 2010 to 80.4 percent by 2015, 96.3 percent by 2020 and 135 percent by 2030. These debt forecasts are higher than those of the Obama administration and the Congressional Budget Office, which projects debt-to-GDP at 77.4 percent in fiscal 2015, and 90 percent by 2020.

A U.S. Treasury official said the IMF's forecasts for future growth and interest rates were "overly pessimistic". The Fund, for example, predicted U.S. growth at 2.8 percent in 2012, compared to the Blue Chip consensus of private forecasters at 3.4 percent growth for that year.

But the IMF welcomed commitments by the Obama administration to stabilize this at just over 70 percent of GDP by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues.

The IMF said the biggest contribution the United States could make to global growth and stability would be to increase its domestic savings -- particularly by reducing deficits.

"The U.S. is no longer going to be the global consumer of last resort and therefore other countries, especially those with current account surpluses, will need to take up the slack," Robinson said.

"With our assessment that the dollar is now somewhat overvalued from a medium-term perspective, I emphasize medium-term, this will also need to be accompanied by greater exchange rate flexibility and appreciation elsewhere," he added.

Robinson said he believed the dollar's value would decline moderately over the next five years based on economic fundamentals. The dollar's rise in recent months was "not helpful" in sustaining global recovery but was not a "deal breaker" either, he said.

The Fund said the Federal Reserve's pledge to keep interest rates exceptionally low was appropriate to fight deflation and the drag on the economy from reduced government spending, but said the U.S. central bank must clearly communicate its plans for exiting its supportive policies.

The IMF also said that while the United States has made considerable progress in restoring financial stability, more capital will be needed in the banking system to support additional lending -- particularly if securitization markets remain impaired.

It said U.S. financial reform legislation would reduce systemic risks in the financial system, but noted that Congress missed an opportunity to consolidate bank regulators, maintaining a burden on agencies to cooperate and avoid gaps in supervision.

(Additional reporting by Emily Kaiser, Tim Ahmann and Lesley Wroughton; Editing by Andrea Ricci)

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Krugman Says U.S. Economy Is Facing a ‘Long Siege’

Washington -- Nobel Prize-winning economist Paul Krugman said the U.S. should have a “kitchen-sink strategy” that uses all fiscal and monetary policies possible to prevent the economy from sliding back into a recession.

“We are looking at what could be a very long siege here,” Krugman said in an interview today in Princeton, New Jersey, with Carol Massar of Bloomberg Television’s “Street Smart.” “We really are at a stage where we should have a kitchen-sink strategy. We should be throwing everything we can get at this.”


At a time when European countries such as Germany are calling for austerity measures to rein in budget deficits, Krugman is calling for more stimulus to prevent a repeat in the U.S. of Japan’s decade of economic malaise in the 1990s.

“The most effective things you can do, in terms of actual bang for the buck, is actually having the federal government go out and hire people,” he said. “We are deep in the hole here, and you need to be unconventional to get out of it.”

He said too many policy makers and commentators are overly concerned that the ballooning U.S. deficit would set off a crisis of confidence similar to Europe’s sovereign debt crisis. Krugman said he’s concerned U.S. policy makers would be unable to agree to short-term stimulus for the economy along with long- term measures to curtail the deficit.

“I worry about the politics,” he said. “I worry about our ability to get a consensus to do the pretty straight-forward things we need to do to balance our budget in the long run.”

Long-Term Deficits

The projected U.S. budget gap in 10 years can be brought under control with a “combination of modest tax increases and reasonable spending cuts,” particularly on health care, Krugman said, adding it’s “extremely unlikely” the U.S. would ever default on its debt.

“I’m not aware of any example of a country that got into fiscal difficulty because it began a stimulus program and couldn’t take away the stimulus program,” he said. “If you’re serious about fiscal responsibility, you should not be saying, ‘let’s skimp on aid to the economy in the middle of a financial crisis.’”

Krugman forecast the economy will grow at about a 1 percent pace or slightly faster within six months, and that job growth would be less than the rate of growth of the population. He said in six months, the U.S. would be facing a “labor market that’s getting worse not better.”

Job Gains

The U.S. Labor Department reported last week that employment fell by 125,000 workers in June, the first jobs decline this year, because of layoffs of temporary census workers. Private companies added 83,000 people, a smaller-than- forecast gain that capped a month of data indicating weakness in industries from housing to manufacturing.

Other reports last month showed a plunge in home sales, a slump in consumer confidence, cooler manufacturing and less growth in the first quarter.

The lack of jobs will curtail consumer spending, which accounts for about 70 percent of the world’s largest economy, and restrain sales at retailers including Barnes & Noble Inc. The rebound from the worst recession since the 1930s faces risks from the European debt crisis and slower growth in China at the same time that fiscal stimulus measures fade.

“We are, I think, sliding into a situation where we’re likely to see several bad years ahead,” Krugman said. “Given what I see in the political process, the odds are against us avoiding a really prolonged bad period.”

By Bob Willis and Carol Massar
Bloomberg

Americans Adopt Chinese Web Habits

Paul DenlingerBio |

Paul Denlinger is an internet consultant specializing in the China market who is based in Hong Kong and Beijing.  

When it comes to revenue on the U.S. Internet, it has traditionally come from three sources:

• Display (banner) advertising;
• Search advertising, made popular through Google Adwords;
• E-commerce, with Amazon.com being the most outstanding success story;

The collapse of display advertising revenue for leading companies such as Yahoo!, which at their peak relied on large banner buys and campaigns from new Internet startups accounting for 1/3 - 1/2 of total income, was the single greatest cause of the popping of the Internet bubble in early 2000.
Lately though, something different has happened. These are:

• The rise of social game publishers, led by Zynga;
• The rise of group-buying, lead by Groupon;

In contrast to the U.S., online games have been popular in China since 2002 when Shanda Online Entertainment popularized the South Korean fantasy game title "Legend" in China. Almost single-handedly, that title made Shanda the single most successful IPO in 2004. Later, Shanda used its IPO cash to buy other studios and titles, becoming the single largest gaming network in the world.

A large reason for the success of online games in China was because consoles such as Nintendo's Wii, Sony's Playstation and Microsoft's xBox were never popular in China. A combination of high console prices, fear of game piracy on the part of publishers and government policy opened up an opportunity for online gaming.

In the U.S., Zynga has grown just as fast as Shanda, seemingly coming out of nowhere. Like Shanda, it is becoming a network too, leveraging the popularity of Farmville among many social game players. One could argue that Zynga is like Shanda, except it is starting from the U.S. market.


Groupon has leveraged the popularity of group buying, an activity which has long been popular in China since at least 2004. In China, group buying is called tuangou, and was an early popular use of the Internet for organizing. In China, the authorities have been wary of uses of the Internet which allow people to organize, but organizing for commercial purposes, such as group buying, are considered harmless, and thus are not obstructed. So effective was the tuangou movement that some retailers first sought to reject volume tuangou purchases of white goods and autos, but all eventually caved in, with some eventually setting up group purchasing departments to specially serve tuangou buyers. Now, they are a natural part of the Chinese retail landscape.

So, it is doubly ironic that Groupon's success in the U.S. has set off a flurry of Chinese startups who copy the Groupon model in China. It makes one wonder...

As gaming and group buying become more popular in the U.S., some trends to watch are:

• Will social gaming eat into the popularity of console game titles and their publishers' revenue?
• Will more game publishers move into social game publishing, seeking to duplicate Zynga's success?
• How popular will social gaming become on the Android and Apple iPhone mobile platforms?
• As social games take off, will display advertising revenues fall, maybe even to China levels? (In China, online game revenues have always been higher than display advertising revenue.)
• If social gaming becomes popular, will in-game advertising ever take off? (In-game advertising has been a promise for years, but has never taken off.)
• Will U.S. retailers embrace group buying groups the way Chinese retailers have embraced tuangou?
• Will e-commerce in China overtake U.S. e-commerce in five years, as PwC has predicted, and will China become the largest IPO market this year?

Tags: America, android, Apple, China, Gaming, Google, Groupon, Internet, Microsoft, Nintendo, PlayStation, shanda, Sony, U.S., Web, Wii, xBox, Zynga

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