Tuesday, July 6, 2010

U.S. Congresswoman Sue Myrick Warns About Hizbullah-Drug Cartel Link on Border with Mexico

Hizbullah may be conspiring with drug cartels along the U.S.-Mexico border, a Republican congresswoman warned, calling on the Homeland Security Secretary to establish a special task force to figure out how to “clamp down” on this “national security” threat, Fox News reported.

In her letter to Secretary Janet Napolitano (read it below) North Carolina Congresswomen Sue Myrick called on finding out and reporting more on the extent of the problem.

She cited several developments that would point to Hizbullah creeping closer to and inside the U.S., with the help of Mexican drug gangs, according to Fox News.

“It is vital we know what is happening on our border, especially as crime and violence continue to rise there and as terrorist plots and threats are increasing inside the U.S.,” she wrote.

She said gang members in prisons in the American southwest are starting to show up with tattoos in Farsi, implying a “Persian influence that can likely be traced back to Iran and its proxy army, Hizbullah.”

Myrick cited the opinions and findings of former intelligence officials and others in her detailed letter. One of them was a “high-ranking Mexican Army officer” whom she said believes Hizbullah could be training Mexican drug cartels to make bombs.

“This might lead to Israel-like car bombings of Mexican/USA border personnel or National Guard units,” she wrote.

US: The Clothes Have No Emperor

US: The Clothes Have No Emperor – by Greg Walcher

The Deepwater Horizon accident and the resulting oil leak is a tragedy on many levels, costing the lives of 11 workers, displacing hundreds of others, costing an entire region jobs and tax revenue, and beginning an environmental catastrophe that will take years to heal. Watching the reaction of politicians, business leaders and the media has made the whole spectacle worse, if that’s possible, and prompting many to wonder, “Who is in charge?”

  • Is it Secretary of the Interior Ken Salazar, who inelegantly announced that with his boot on the neck of BP, if they couldn’t stop the leak soon he would push them aside and do so himself (but after 2 months has still not done so)?
  • Is it White House Environment Czar Carol Browner, who told a press conference that while BP was doing the actual work, “we are in charge” (but who cannot make a decision between contradictory environmental laws)?
  • Is it the President, who criticized Salazar for using harsh words, and then said he was meeting with experts to find out “whose ass to kick” (but who thus far has been content with reorganizing a minor agency, changing its name from MMS to BOE)?
  • Is it the congressional committee members who spent an entire day yelling at BP Chief Executive Tony Hayward, while continuing to ban drilling at easier locations throughout the United States?
  • Is it the news media, where in-depth investigative reporting has focused mainly on oily pelicans, the President playing golf, and the BP chief executive watching yacht races?
  • Is it BP, whose experts after 2 months cannot find a way to stop the leak, but refuse outside assistance (even from noted Hollywood oil spill experts like James Cameron and Kevin Costner)?

Sadly, the honest answer is: no one is in charge. Lots of politicians are wearing the clothes of power, but where is the emperor? Who is making decisions on what technology to try next, whose expertise to ask for, or how to streamline the bureaucracy and get decisions made? Alas, no one.

Consider that environmental laws have stopped the use of chemicals that disperse the oil slick because such “dispersants” are harmful in other ways. At the same time, burning the oil while it’s still floating at sea has been used only very sparingly because of the impact on air quality standards. Similarly, the sand berms that might stop the oil from reaching wetlands and beaches (requested by state governors) were stopped for weeks because that requires an extended permitting process. Morning news shows have featured dozens of products (from specialized foam to sawdust) touted for their ability to soak up oil, all of which have been referred to a BP committee that has received over 65,000 suggestions, but apparently can’t decide whether to use any of them.

Here is the problem: spilling oil is illegal; allowing oil to wash up on shores is illegal; burning oil at sea is illegal; dumping sawdust or foam into the ocean is illegal; dumping piles of sand into the ocean without permits is illegal; and the use of large quantities of chemical dispersants is illegal. Believe it or not, this is a common problem with our nation’s environmental laws. You can’t have a pile of old tires or batteries on your property – and you are not allowed to dispose of them. This contradictory mess of well-meaning regulations results in a damned-if-you-do-damned-if-you-don’t quandary. In many instances it actually hurts the environment. But in a catastrophe of this magnitude, it is inexcusable.

Someone, somewhere, needs to take charge and make it clear that the nation will do whatever it takes to stop this leak, stop the oil from reaching the shore, and clean up the mess that’s already out there. Someone needs to make a clear decision on how and where America will get the energy upon which its economy absolutely depends. Someone needs to decide to allow drilling where it is easier, cheaper, and fixable when something goes wrong.

We hear strong words about this every day. But instead of making such vitally important decisions and taking whatever heat comes with it, our political leaders are rearranging the desks of minor bureaucrats and posturing to see who can appear toughest on TV. The “never waste a crisis” mentality has provided the impetus to stop all drilling (as if that is any answer), perhaps hoping Americans will stop driving cars if the price of gasoline goes high enough.

Just to make sure that happens, Congressional leaders have slipped a massive oil tax increase into the current tax “extenders bill.” Hidden on page 138, the proposed language would raise taxes on oil from 8 cents a barrel to 49 – an increase of 612 percent! If nobody notices the tax increase, Americans will simply blame BP when the price of gas at the pump goes up. And that is politics, not leadership.

Plenty of people in politics wear the clothes of power and surround themselves with the trappings of government authority. Is there an emperor in there somewhere? A good friend once compared Washington, D.C. to a log floating down the river with a thousand tiny ants – every one of whom thinks he’s steering. Who really is?

US: Kagan’s Top Ten

US: Kagan’s Top Ten – by Jillian Bandes

Here are the top ten quotes from Solicitor General Elana Kagan as she goes into her fourth day of Senate hearings.

1. “Like all Jews, I was probably at a Chinese restaurant.” — Responding to Sen. Lindsey Graham, R-S.C., who asked Kagan was she was doing on Christmas Day of last year, when a an terrorist was caught trying to blow up a plane.

2. “Lets just throw that piece of work in the trash, why don’t we?” she said. “That’s before I went to law school, and didn’t understand much about the way judges should work.” — Speaking about her thesis to the Judiciary Committee, which defended both judicial activism and bemoaned the demise of the Communist Party in the United States.

3. “The ‘disaster’ would be if the statement did not accurately reflect all of what ACOG thought.” — Trying to wiggle out of her previous reflection that the it would be a “disaster” if the American College of Obstetricians and Gynecologists could not identify any circumstances under which that partial-birth abortion “would be the only option to save the life or preserve the health of the woman.”

4. “Senator, the military at all times during my deanship had full and good access.”— Speaking on her decision to exclude military recruiters from availing themselves of Harvard’s career services office, and instead force them to work through a student group with limited access to the student body.

5. A “loosey-goosey style of interpretation in which anything goes.” — Describing her opinion of a “living” Constitution.

6. “A vapid and hollow charade,” serving “little educative function, except perhaps to reinforce lessons of cynicism that citizens often glean from government.” — From 1995 Law Review article, expressing her opinions of Supreme Court hearings. Ironically, she ensured her very own hearings embodied that sentiment perfectly.

7. “Sounds like a dumb law. But I think that the question of whether it’s a dumb law is different from whether the question of whether it’s constitutional and I think that courts would be wrong to strike down laws that they think are senseless just because they’re senseless.” — Responding to a question from Sen. Tom Coburn (R-Okla.), who asked Kagan if she thought a bill that required Americans to eat three vegetables and three fruits every day would violate the Commerce Clause.

8. “My political views are generally progressive.” — Responding to a question from Sen. Lindsey Graham (R-S.C.), who brought up the fact that a former chief counsel to President Obama characterized Kagan as “largely a progressive in the mold of Obama himself.”

9. “I’m not quite sure how I would characterize my politics.” Responding to Sen. Jeff Sessions (R-Ala.)

10. “I wish you wouldn’t [ask].” Responding to Sen. Amy Klobuchar, (D-Minn.), who jokingly asked Kagan to give her opinion on the “the vampire versus the werewolf” in the television series Twilight. Klobuchar’s teenage daughter had seen the midnight showing on the morning before the hearings.

US: Obama Fires McChrystal – We Can Fire Obama

US: Obama Fires McChrystal – We Can Fire Obama – by Doug Giles

Unless you live on the oil-saturated bottom of the Gulf of Mexico, you’re probably well aware that our President, who happens to have skin thinner than that of an Iberian Ribbed Newt, fired General Stanley McChrystal for committing the unpardonable sin: He told the ugly truth about Obama.

Now, before I get flooded with emails about the impropriety of a general criticizing the commander-in-chief, let me remind you that most of you crying “foul” said squat when active duty General Eric Shinseki and other retired generals did that to W and Rummy when they were in office. Yes, I believe instead of howling “off with their heads!” you reveled in the generals going rogue on George. I believe you hypocritical dorks called the Bush dissenters “patriotic truth tellers.”

So, why did McChrystal publicly say that Obama is dealing with things that are, how shall I say, above his pay grade, to a liberal magazine like Rolling Stone? Hell if I know. I’m not bulimic. I can’t read minds.

One possibility is that this is Stanley’s way of repenting to the nation for voting for this nabob. Or perhaps he was simply upholding his oath to protect us from enemies both foreign and domestic. Who knows?

One thing that’s for certain in the utilization of the Stones mag is that a lot of Michael Jackson and Lady Gaga fans heard from the horse’s mouth that a four-star general, one whom Obama cherry-picked for the war in Afghanistan, one who actually voted for him, now thinks the community organizer has been elevated to a level of incompetence.

Yep, if that intel didn’t go out on a wire like Rolling Stone then the real story of Barack’s ghastly mishandling of Afghanistan would go untold to the non-Fox watchers as McChrystal tumbled under the oncoming Obama bus. Providence made certain that negative info went out to Lefties, uncut … to which I say, sa-weet! That’ll have reverbs at the polls this November.

Y’know, in the grand scheme of things, the Rolling Stone interview might prove to be more strategic than tragic for McChrystal and the war in Afghanistan. McChrystal jumping on the grenade is making BHO and his paramours in the MSM sit up and take notice that they’re not taking notice in regard to this heel-draggin’ conflict in Afghanistan. In addition, I smell a Tea Party tour, a regular spot on Hannity and Bud Lime commercials for Stanley.

I’m sure Louisiana Governor Bobby Jindal can empathize with McChrystal as his state’s beaches morph into a Jiffy Lube drip pan while Hussein golfs and does duos with the cute Beatle. Similarly, I’ll go out on a limb and guess that Arizona’s Governor Jan Brewer can equally empathize with the general; she’s not only been blown off by Barack, but Obama’s suing her state for upholding federal laws on immigration.

So, what’re the walk away lessons for me from McChrystal’s McHiccup? Well, it goes something like this:

1. Speaking the truth can be costly.
2. We should grow a pair and speak out against Obama’s fecklessness.
3. Obama may have been able to fire the General for speaking the truth, but he can’t fire America. No, on the contrary, we can “can” his backside and those of his stripe come their respective election days, and we should for the way they have mismanaged all the major issues touching our nation.

US: Where Best To Be Poor

US: Where Best To Be Poor – by Walter Williams

Imagine you are an unborn spirit whom God has condemned to a life of poverty but has permitted to choose the nation in which to live. I’m betting that most any such condemned unborn spirit would choose the United States. Why? What has historically been defined as poverty, nationally or internationally, no longer exists in the U.S. Let’s look at it.

According to the U.S. Department of Health and Human Services, the 2009 poverty guideline was $22,000 for an urban four-person family. In 2009, having income less than that, 15 percent or 40 million Americans were classified as poor, but there’s something unique about those “poor” people not seen anywhere else in the world. Robert Rector, researcher at the Heritage Foundation, presents data collected from several government sources in a report titled “How Poor Are America’s Poor? Examining the ‘Plague’ of Poverty in America” (8/27/2007):

– Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage and a porch or patio.

– Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.

– Only 6 percent of poor households are overcrowded; two-thirds have more than two rooms per person.

– The typical poor American has more living space than the average individual living in Paris, London, Vienna, Athens and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)

– Nearly three-quarters of poor households own a car; 31 percent own two or more cars.

– Ninety-seven percent of poor households have a color television; over half own two or more color televisions.

– Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.

– Eighty-nine percent own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

What’s defined as poverty is misleading in another way. Official poverty measures count just family’s cash income. It ignores additional sources of support such as the earned-income tax credit, which is a cash rebate to low-income workers; it ignores Medicaid, housing allowances, food stamps and other federal and local government subsidies to the poor. According to a report by American Enterprise Institute scholar Nicholas Eberstadt, titled “Poor Statistics,” “In 2006, according to the annual Bureau of Labor Statistics Consumer Expenditure Survey, reported purchases by the poorest fifth of American households were more than twice as high as reported incomes.” That additional money might represent earnings from unreported employment, illegal activities and unreported financial assistance. A proper measure of well-being is what a person consumes rather than his income. A huge gap has emerged between income and consumption at lower income levels.

Material poverty can be measured relatively or absolutely. An absolute measure would consist of some minimum quantity of goods and services deemed adequate for a baseline level of survival. Achieving that level means that poverty has been eliminated. However, if poverty is defined as, say, the lowest one-fifth of the income distribution, it is impossible to eliminate poverty. Everyone’s income could double, triple and quadruple, but there will always be the lowest one-fifth.

Yesterday’s material poverty is all but gone. In all too many cases, it has been replaced by a more debilitating kind of poverty — behavioral poverty or poverty of the spirit. This kind of poverty refers to conduct and values that prevent the development of healthy families, work ethic and self-sufficiency. The absence of these values virtually guarantees pathological lifestyles that include: drug and alcohol addiction, crime, violence, incarceration, illegitimacy, single-parent households, dependency and erosion of work ethic. Poverty of the spirit is a direct result of the perverse incentives created by some of our efforts to address material poverty.

* Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.

Gathering Data while Washington Burns

Gathering Data while Washington Burns

Mises Daily: by

[An MP3 audio file of this article, read by Steven Ng, is available for download.]

When future generations of scholars look back on the economic and political disaster enveloping the United States today, three questions should be at the forefront of their minds.

First, they should wonder whether the many generations of politicians that collectively engineered this economic and political disaster were either (1) too outrageously stupid to know that what they were doing would produce such a dreadful catastrophe, or (2) whether they were so evil and underhanded that they did know what they were doing would result in disaster — and yet they did it anyway.

Second, they should wonder how the American people could possibly have been so stupid and gullible as to believe that government spending, borrowing, warring, jailing, regulating, and above all, taxing, could produce anything but an economic and political catastrophe for themselves and their fellow countrymen.

Finally, they should wonder what the heck their predecessors in the academic world were doing before and during the American empire's descent into poverty, tyranny, and war.

Searching for Answers

I hope that the answer to the first question, while important for reconstructing a complete historical narrative for the period, will not be of particular interest to most future scholars. Ascertaining whether generation after generation of Americans managed to elect mostly scoundrels or mostly idiots is not particularly edifying in itself (except in those cases where idiocy and villainy overlap in a spectacular way). It will be far more interesting for them to simply observe that democracy managed to produce a situation in America where only scoundrels and idiots were in charge of telling everyone else what to do.

The answer to the second question will interest them more, I hope, because they will be able to ask people who were alive at the time to explain their former gullibility and naïveté. Their own parents, for example, will be able to regale them with tales about how they simply took it on faith that democracy was the best possible form of government, and this blinded them from even considering the possibility that Washington was full of idiots and crooks.

It is the third question, however, that I hope will most interest future scholars of this dark period in American — nay, world — history. They will be confronted with the glaring fact that virtually all of the economists and political scientists of the period leading up to and during this great disaster were running around collecting data on less-than-useless projects while the world economy collapsed, the American political system devolved into full-blown despotism, and most Americans sank into desperate poverty. And virtually none of them saw it coming.

"The necessary result of the adoption of this empiricist epistemological and methodological model was that social scientists would always be behind the curve of any emerging social phenomenon."

The last question will hopefully interest future social scientists first and foremost, because men involved in this particular field pride themselves on being members of a select group of people in human history who have "scientific" answers to the most important and consequential social questions confronting man. It should come as a monumental embarrassment to future social scientists to observe that their mainstream predecessors were worse than useless for both predicting and remedying the disaster that began in 2007.

It should disgust them to learn that virtually all mainstream economists, including the most decorated among them, were so clueless about the impending economic disaster. It should disgust them even further to learn that the only remedy these supposed academic luminaries had to offer the American government and public was to print up more green paper and to borrow more money from the Chinese. It should shock them to learn that the most prestigious political science journals were publishing articles about attitudes toward immigration and race relations at the very moment that the European monetary union was on the verge of collapsing. It should shock them still further to learn that, at least as late as 2010, many in the discipline of political science still believed in the "democratic peace theory" — at the very moment that Israel, the United States, and the rest of democratic Europe continued their multidecade crusade to raze and depopulate the Middle East.

It should be hard for future social scientists to believe that these men of science, these supposed beacons of erudition, were so completely clueless and useless for the world exactly when the world needed them most.

The Root of the Problem

If they dig into the matter more deeply, future social scientists will ultimately arrive at the fundamental cause of the appalling failure of today's social scientists' to predict or offer solutions to the disaster: they decided to adopt empiricism as their method for studying man. In the first third of the 20th century, the social sciences adopted the methods of the natural sciences as their model for studying social phenomena. This led them to assume that nothing about the social world could be known until one went out and collected data to test one's hypotheses, just like physicists and geneticists do.

The necessary result of the adoption of this empiricist epistemological and methodological model was that social scientists would always be behind the curve of any emerging social phenomenon. If one has to wait for the data to test hypotheses, one can say virtually nothing concrete about emerging conditions until well after important and revolutionary events have already occurred. They became, in effect, not prescient predictors of future social conditions, but rather mere boring, backward-looking chroniclers of past events.

In contrast to this reality, mainstream political scientists and economists of today are inclined to think that the government is capable of anticipating and avoiding crises. They are especially disinclined to think that serious and revolutionary change can occur on their watch. This is most obviously true with regard to economists, many of whom will be employed by Federal Reserve at some point in their careers, who seem to think that an economy planned and controlled by economists couldn't go off track. After all, with the economy managed and directed by men from exactly the same profession as themselves, how could anything go awry?

"They became, in effect, not prescient predictors of future social conditions, but rather mere boring, backward-looking chroniclers of past events."

The same is true for political science, but for less-obvious reasons. Political scientists tend to have an inferiority complex when it comes to economics. While they like to think of their field as being just as "scientific" as economics, they are also constantly looking over their shoulders wondering whether they are merely playing at scientific work. Their reverence for economists discourages political scientists from even imagining that economic crises could occur on the watch of their heroes. Thus, they are usually just as blindsided by economic crises, since their heroes failed to predict them.

Nor are they predisposed to think that their political heroes — that is, their close associates in government, themselves advised by political scientists — are capable of ramming the economy into a brick wall. For these reasons, mainstream political scientists and economists of this generation were completely useless for predicting the disaster we now confront, and continue to pour forth nothing but the most worthless empirical studies of yesterday's least consequential issues.

Tomorrow's Experts

Unfortunately, it is exceedingly likely that future political scientists and economists will be just as useless and beholden to government as the current batch. I think this likely for one overriding reason: the American economy will be in a disastrous state for a very long time. There are two very important effects that this will have on economists and political scientists.

First, the institutions of higher education in America will soon begin to crumble into dust, because poor people (i.e., most Americans going forward) cannot afford to go to college and study under these failed social scientists without any promise of future employment. This is true even though the federal government has commandeered the student loan system away from bankers, because a cheap loan for an expensive education is a complete waste if one cannot find employment afterward. This means that a large proportion of current political scientists and economists will soon be forced to find employment elsewhere, and the ones who do retain their jobs will be completely beholden to the political class that will be supporting and subsidizing their jobs.

"Mainstream political scientists and economists of this generation were completely useless for predicting the disaster we now confront, and continue to pour forth nothing but the most worthless empirical studies of yesterday's least consequential issues."

Second, the very nature of empirical social science means that the researchers who do manage to keep their jobs will be obsessed with this crisis for a very long time. In fact, they will be so obsessed with this crisis that they will undoubtedly miss the emergence of recovery, if it ever does show up. They will be testing hypotheses with past data, and they will thus be looking backward precisely when the recovery hits — or when yet another crisis hits. So, we can count on the crisis-reared economists and political scientists to fail to predict recovery or future crises just as completely as the last batch failed to predict the gigantic conflagration of 2007 that persists to this day.

At some point in the future, however, after failure upon failure, social scientists will get around to looking at why they keep failing to predict these important social events. At that point, we can only hope that nothing will interest them more about this dark period of history than the failure of their predecessors, and that they may finally seek out an alternative to empiricism that can transform them from backward-looking failures into true social scientists.

China policy

China policy


China’s adjustment of its currency is too small and slow for many

Schumer is not going to shut up

CHINA might have hoped for better. The decision at last to suspend its exchange-rate peg to the dollar bought the Chinese government little more than a moment’s peace with its largest trading partner. Ominously, Charles Schumer, a Democratic senator from New York, is still busily pressing ahead with legislation designed to force China into a significant revaluation.

Mr Schumer has sought congressional action against Chinese trade policies since 2004. But with unemployment still near 10% and little change in the dollar-yuan rate since 2008, his strategy has attracted growing support. The senator introduced a new measure, with bipartisan sponsorship, in March this year. If passed, the bill would force the Treasury to issue a ruling on whether China is manipulating its currency (a determination Tim Geithner, the treasury secretary, postponed making in April). Chinese goods might then be subject to import tariffs.

China’s new exchange-rate policy has not deterred the senator, who says it will not “placate” his colleagues. He may soon offer his measure as a floor amendment to a bill with lots of support, and some reckon the chances of approval are good.

That possibility seems to make the White House nervous. Barack Obama has emphasised that the yuan must eventually appreciate. But in comments at the recent G20 summit he explained that he did not expect a rapid rise in the currency. Instead, the administration would be “paying attention over the next several months”.

The White House is pressing Mr Schumer to give China more time to revalue. A blow-up over trade and the currency could pose serious diplomatic difficulties for the administration: Mr Obama needs Chinese help to deal with Iran and North Korea. And with the global recovery in a fragile state, the world cannot afford a serious trade row.

Critics respond that with America’s economy stuck in the doldrums, China’s undervalued currency means that America is importing unemployment. They argue that the “flexibility” is mostly bluster. Since the policy was announced, the yuan has appreciated by just 0.7% against the dollar, and markets are expecting only a 2-3% rise over the whole of the next year. However, that is only a little slower than the pace at which the yuan rose at the beginning of the 2005-2008 period, over which time the currency appreciated by 20% in total. According to some analyses, a further revaluation of that size would bring the yuan close to fair value against the dollar. But with America’s trade deficit swelling towards pre-recession levels, legislators are anxious to see faster results.

Their expectations may be unrealistic. China faces its own internal battles over its currency, pitting its diplomats against its powerful export lobby, so it may have little choice but to pursue only a slow revaluation. A sudden appreciation could damage its manufacturers, doing more harm than good to the global economy. Both American and Chinese leaders are nervous about the impact of European economic troubles on their own economies.

Mr Obama may again prevail on Congress to give China more time. But American voters are frustrated and legislators are fearful. What little patience China has won may soon run out.

Immelt blasts China

Immelt blasts China

by Schumpeter

THIS week's plain-speaking prize goes to Jeff Immelt, the boss of General Electric.

He argued that China is increasingly hostile to foreign multinationals; he also gave warning that his company, the world's biggest manufacturer, is actively looking for better prospects in other emerging markets. "They don't all want to be colonised by the Chinese", he said, going rather further than was prudent. "They want to develop themselves".

Mr Immelt's broadside was undoubtedly significant. It reflects a growing mood of disillusionment with China among big Western companies. It came from the mouth of one of China's biggest boosters, a man who praised the Chinese leadership, only last December, for doing exactly what they say they will.

Is Mr Immelt right about the changing mood in China? The Chinese are certainly unusually self-confident at the moment, thanks to the financial meltdown. They have flexed their muscles against a succession of companies, including Rio Tinto and Google.

But the Chinese have always driven a hard bargain, and they have always made it clear that they will give only to get. The American Chamber of Commerce reported in 2008 that three-quarters of the foreign companies that they surveyed were finally making money in China, a big increase on the historical average. Many Western companies, notably Yum! Brands, have finally cracked the China code, and are becoming ubiquitous across the country.

It will be interesting to see how Immelt's comments play out in China, a country which puts a great store on "face", and which does not take kindly to even gentle criticism, let alone talk of "colonisation".

Google seems to be retreating, with its long tail between its legs, from its bold challenge to Chinese authoritarianism. It will therefore also be interesting to see if, sometime in the near future, Mr Immelt finds himself delivering a speech with a rather different message.

Ask George W. Bush How to Avert ......

Ask George W. Bush How to Avert a Double Dip: Kevin Hassett

Commentary by Kevin Hassett

July 6 (Bloomberg) -- As the jobless recovery continues, President Barack Obama and his liberal supporters argue that the U.S. needs another stimulus or risks a double-dip recession. A look behind the numbers suggests that liberal policies will hand us a double dip whether we get a stimulus or not.

A major reason for the revival of sour economic news is the looming expiration of George W. Bush’s tax cuts. The top marginal income-tax rate is set to increase on the first day of 2011 to 39.6 percent from 35 percent. The phase-out of itemized deductions will lift that, effectively, to 40.8 percent. In 2013, the 3.8 percent Obama health-care tax on investment income will kick in, making the top rate 44.6 percent.

This tax hike will push us into double-dip territory for two reasons.

First, it will hurt small businesses. In fact, it’s already having that effect. While some of the income in the top bracket is wage and salary income of high earners, a big chunk of the money is the profit of small businesses. If you lift the top rate, you depress small-business activity, which in good times is often the engine of job growth.

According to the latest ADP National Employment Report, goods-producing small businesses -- those with fewer than 50 employees -- have reduced their total payroll employment by about 20,000 jobs each month this year, including in June. (A corresponding rise in jobs at small service businesses is less revealing, since people get haircuts in good times and bad.)

Shrinking Companies

So companies affected most by Obama’s planned tax hike are shrinking, while big businesses -- primarily subject to the corporate tax code -- have been adding jobs.

Why are small businesses battening down the hatches? In May, the National Federation of Independent Business asked small business owners about the most important problem they face. Twenty-two percent named taxes, up from 19 percent a year earlier. Sales performance was the top worry, cited by 30 percent, unchanged from the prior year.

The other way the tax hike will rekindle the recession is through its treatment of dividends. Absent action by the Democratic majority in Congress, which seems increasingly unlikely, the current 15 percent top tax on dividends will rise to the top income tax rate --39.6 percent in 2011, which, again, will grow to 44.6 percent.

This massive increase will reduce the desirability of equities, significantly harming the stock market, while giving firms a powerful incentive to pay dividends this year, while the rate is lower. Businesses may well focus on paying out cash in the second half of this year -- not a terrible thing, but not as helpful to the recovery as spending the money to expand their operations.

No Binging

If history is a guide, shareholders are unlikely to go on a consumption binge with their dividends -- certainly not one big enough to compensate for the drop in business investment, which could well be enough to push growth in gross domestic product into negative territory in the second half of this year.

It is no surprise, given the dramatic changes in taxation and the winding down of stimulus spending just over the horizon, that the U.S. economy is getting weaker. The correct policy response is to extend the Bush tax cuts for all income levels, giving small businesses and shareholders cause for renewed optimism, while enacting spending cuts to preserve budget discipline.

The alternative idea, to tax the economy into oblivion and then try to revive it with more Keynesian spending, is tragically wrong-headed. As we’ve seen, the small businesses that are necessary to create a lasting recovery will be contracting while government reacts to any new stimulus.

Blown Chance

There are two ways to stimulate an economy that is in trouble: with tax cuts or with increased government spending. Declaring early and resolutely that he would extend the Bush tax cuts would have given Obama a chance to try both. Instead, Democrats hoped that higher government spending would offset the suffocating prospect of tax increases. It hasn’t worked.

That fact may be too painful for some to admit. But we all better hope that some semblance of rationality creeps into the discussion before it is too late. The left’s ideological opposition to the Bush tax cuts is poised to push the U.S. into a depression, regardless of whether we get another Keynesian stimulus.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)

China Bashing Over Yuan

China Bashing Over Yuan Needs a Long Rest: Ronald I. McKinnon

Commentary by Ronald I. McKinnon

July 6 (Bloomberg) -- I’ll say it at the outset: Focusing on the yuan-dollar rate is a serious distraction, and it’s time for the U.S. to back off from bashing China over problems that are born mostly at home.

Let’s start with the source of all the misdirected attention. On June 20, the People’s Bank of China bowed to American pressure and said it was abandoning the peg of 6.83 yuan to the dollar. Now the bank will vary the exchange rate at the beginning of each trading day, as well as widening the range of variation to plus or minus 0.5 percent.

But the PBC is concerned about re-introducing the one-way bet that prevailed between July 2005 and July 2008: that the currency steadily rises as it did at about a 6 percent annual rate. This led to massive inflows of hot money that threatened a loss of monetary control while impeding the forward market in foreign exchange.

China’s central bank is again in a difficult situation. The U.S. Congress, led by New York Senator Charles Schumer, again is threatening to impose punitive tariffs on imports from China unless the yuan appreciates. Thus China’s ritualistic de-pegging exercise to defuse American pressure.

Yet any gradual appreciation, or even the threat of it, will restart the hot-money inflows. Moreover, any sharp appreciation won’t defuse the situation because it will be unlikely to reduce China’s trade surplus, mainly the result of that country’s high savings rate.

False Belief

Unfortunately, what lies behind this unnecessary political crisis is a widely held but false economic belief: the idea that the exchange rate can be used to control any country’s trade balance, which is the difference between its saving and investment rate. Instead, the problem is a saving deficiency in the U.S. -- with very large fiscal deficits and low personal saving -- coupled with surplus saving in China.

To correct the trade imbalance between the two countries, these fundamentals must be jointly altered by changes in public policies.

Nobody disputes that almost three decades of U.S. trade and net saving deficits have made the global system of finance and trade more unstable. Dollar debts outstanding have become huge, and threaten America’s own financial future.

Because the U.S.’s main creditors in Asia -- Japan in the 1980s and 1990s, China since 2000 -- rely heavily on exports, the transfer of their surplus savings to the U.S. entails that they run large trade surpluses in manufactured goods.

The result has been that U.S. trade deficits have worsened the decline in the American manufacturing sector.

Industrial Decline

One unfortunate consequence of this industrial decline has been an outbreak of protectionism in the U.S., which is exacerbated by the conviction that foreigners have somehow been cheating with their exchange rate.

However, the prevailing idea that a country’s exchange rate could, and indeed should, be used to bring its external trade into better balance is often wrong.

This conventional wisdom is based on faulty economic theorizing. It need not apply in a globalized financial system where capital flows freely.

There are several forces at play tied to a simple economic formula with exports and imports on one side and saving and investment on the other.

Most economists and commentators focus on exports and imports. Looking at this alone suggests that a depreciation of the home currency will make its exports cheaper in world markets and make the home country’s imports more expensive, leading to an improved trade balance.

Whole Picture

But that’s not the whole picture. For the trade balance to improve with currency depreciation, overall domestic expenditures must fall relative to aggregate output. This is the same as saying that domestic saving must rise relative to domestic investment. Looked at this way, one can’t presume that U.S. net saving will rise when the dollar is devalued.

Indeed, the presumption may go the other way when domestic investment (fueled in part by multinational firms) is sensitive to the exchange rate.

Suppose the yuan were to appreciate a lot against the dollar. Potential investors -- either foreign or domestic -- would now see China to be a more expensive place in which to invest and the U.S. less expensive. This might set off a minor investment boom in the U.S., where investment expenditures rise from a relatively small base, and a major slump in China’s huge investment sector, which now is about 45 percent of the country’s annual output. Overall, investment-led expenditures in China would fall, the economy would contract, and Chinese imports might fall.

Japan Lesson

So why wouldn’t the trade imbalance between China and the U.S. be reduced? Let’s look to Japan to see what happened when it allowed its currency to appreciate in the 1980s into the mid- 1990s, when the yen went ever-higher.

Japan became a higher-cost place in which to invest, so that large Japanese firms decamped to invest in lower cost Asian countries and in the U.S. Yet, even though yen appreciation slowed Japan’s export growth, because its economy slowed and imports declined, the trade surplus with the U.S. still increased.

No wonder China is reluctant to appreciate. Like Japan, its trade and saving surplus would likely not diminish because domestic saving is relatively insensitive to the exchange rate.

Critics in the U.S. and Europe might well come back and say “you just didn’t appreciate enough.” But continual yuan appreciation is an invitation to further hot money inflows. The People’s Bank of China would be, as it has been, forced to intervene to buy dollars on a grand scale to prevent an indefinite upward spiral in the yuan.

So we need a permanent moratorium on bashing China to appreciate its exchange rate, allowing China’s central bank to stop its obscure fiddling with the yuan-dollar rate. The U.S. should work toward a credible program for closing its enormous fiscal deficits and encouraging personal saving, while China works on reducing incentives for corporate over-saving by allowing a freer labor market and more rapid wage growth. But these are stories for another time.

Obama Meets Netanyahu

Obama Meets Netanyahu as Settlement Freeze Nears End (Update1)

By Nicole Gaouette and Jonathan Ferziger

July 6 (Bloomberg) -- President Barack Obama meets Prime Minister Benjamin Netanyahu today at a moment when U.S.-Israeli ties are improving. Further warming may depend on whether Israel extends a settlement-building freeze due to expire in September.

The U.S. sided with Israel in the face of international criticism following its raid on a Gaza aid flotilla in May and persuaded the United Nations to impose additional sanctions on Iran over its nuclear program last month.

Those actions helped reverse a downturn in relations that developed over Israel’s plan to build 1,600 new homes in east Jerusalem. Dan Shapiro, senior director at the White House for the Middle East and North Africa, told reporters last week that the freeze on building new homes in West Bank settlements, announced by Netanyahu on Nov. 25, has helped advance efforts toward the goal of direct peace talks between Israel and the Palestinians.

“There has been a distinct improvement in the White House relationship with Israel since the last meeting” between Obama and Netanyahu on March 23, said Jonathan Spyer, a political scientist at Israel’s Interdisciplinary Center Herzliya. “Obama will be looking for a payback,” perhaps in the form of an extension to the settlement freeze, Spyer said.

The stakes are potentially high for both leaders. Obama has expended political capital on reviving the peace negotiations, beginning with indirect talks intended to lead toward direct ones -- something that aides to Palestinian Authority President Mahmoud Abbas say won’t happen unless Israel halts all settlement building. Netanyahu could lose his parliamentary majority if he extends the settlement freeze beyond the Sept. 26 expiration.

Moratorium Issue

The Obama administration is “very keen to see the moratorium extended,” said Roger Danin, a senior fellow for Middle East and Africa studies at the Council on Foreign Relations in Washington. “That’s a very difficult issue they will probably not be able to resolve during this visit.”

Shapiro said the focus of the discussion between the leaders would be “on making that transition into direct talks” and on what has been covered through the indirect talks.

U.S. officials say that relations between the two countries have improved considerably since March, when Israel’s announcement of the east Jerusalem housing plan in the midst of a visit by Vice President Joe Biden drew criticism from Secretary of State Hillary Clinton.

“There’s absolutely no rift between the United States and Israel,” said Ben Rhodes, a U.S. deputy national security adviser. “This is a relationship that is very strong and very important to the United States.”

Israel Shielded

Obama shielded Israel from international censure at the UN, after Israeli forces killed nine pro-Palestinian Turkish activists aboard a ship trying to breach a naval blockade on the Gaza Strip.

In May, the president requested $205 million from Congress to fund a medium-range missile-defense system for Israel. The system, called Iron Dome, is intended to protect Israel from rockets and mortars from Gaza and Lebanon.

In their meeting, the two men will also discuss Iran’s nuclear program, which Israeli officials call an existential threat. Israel, along with the U.S. and its allies, suspect the nuclear program is aimed at building a bomb. Iran says its work is for civilian purposes. Israeli leaders have refused to rule out a military strike on Iran’s nuclear installations should sanctions fail.

Settlement Building

U.S. relations could sour again if Netanyahu sticks to his pledge to renew settlement building. The Israeli leader is under pressure to lift the West Bank construction ban from allies in his coalition and members of his Likud party.

“There is no doubt that construction in Judea and Samaria will resume when the freeze runs out,” Culture and Sport Minister Limor Livnat, a Likud member, said on Army Radio, using the Biblical terms for the West Bank.

The departure of the Yisrael Beitenu party, which supports West Bank settlement and has 15 seats, would rob Netanyahu’s 74- seat ruling coalition of its majority in the 120-member parliament.

Netanyahu’s coalition collapsed during his first term as prime minister, precipitating elections in 1999 which he lost, because of compromises he made in negotiations with the Palestinians.

In Washington, Netanyahu is “going to be asked for more than he’s going to get,” said Mark Heller, a senior research fellow at the Institute for National Security Studies in Tel Aviv. “He’s certainly going to be asked to extend the West Bank construction freeze. That would cause a lot of problems in his coalition.”

Settlement Freeze

The four-month period allotted for indirect talks also expires in September. Netanyahu said July 4 that one of the goals in his meeting with Obama is to bring about direct talks with Abbas. The Palestinian leader won’t engage Israel directly until all settlement building ceases, Ghassan Khatib, a spokesman for the Palestinian Authority, said June 22.

The 10-month freeze imposed by Netanyahu doesn’t include some 3,000 housing units approved before the moratorium, the construction of public buildings or construction in east Jerusalem, which Israel captured from Jordan during the 1967 Middle East war and the Palestinians want as the capital of a future state.

“I would be very dubious that the Israeli government would be willing or able to extend the temporary freeze, as this would only encourage the Palestinians to put up additional conditions,” said Zalman Shoval, a former Israeli ambassador to the U.S. and head of an advisory forum on Israel-U.S. relations for Netanyahu.

Deficits Shrinking Most in Decades

Deficits Shrinking Most in Decades as Growth Lets S&P 500 Rally

By Rich Miller and Simon Kennedy

July 6 (Bloomberg) -- Industrial countries are embarking on the most aggressive tightening of fiscal policy in more than four decades, led by the U.S. and Britain, as governments gamble they can pare debt without strangling an economic recovery.

Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.

Even as President Barack Obama warns his counterparts to be wary of derailing demand, U.S. gross domestic product will be reduced by 1.3 percentage points next year when his $787 billion stimulus program expires. That compares with a drag of 0.7 percentage point in the euro-area and 2.4 points in the U.K., JPMorgan calculates.

“There’s going to be a meaningful deceleration in growth, but it will still be solid,” said Bruce Kasman, the New York company’s chief economist. He forecasts the global economy will expand at a 2.8 percent annual pace in the first half of next year, down from 3.8 percent in the quarter that just ended.

While retrenchment may fortify countries by reducing government debt and lowering long-term interest rates, investors are selling stocks partly on concern that policy makers may repeat the mistakes of the 1930s and cut back too far, too fast. The MSCI World Index has fallen 16.5 percent to 1,036.62 on July 2, and the Standard & Poor’s 500 Index was down 16 percent to 1,022.58 from their year-to-date highs in April.

Bounce Back

The S&P index will bounce back to 1,350 by the middle of next year as investors realize the recovery is on track and profits are rising, said David Bianco, head of U.S. equity strategy at BofA Merrill Lynch Global Research in New York.

“Right now, we’re in the worry season,” he told reporters June 28. “I look forward to moving into the earnings season.”

Investors should favor companies that export to faster- growing emerging markets instead of businesses exposed to local demand that may be pinched, said Ian Richards, an equity strategist in London at Royal Bank of Scotland Group Plc. That means corporations like London-based British American Tobacco Plc, Europe’s second-largest cigarette maker, and Leuven, Belgium-based Anheuser-Busch InBev NV, the world’s largest brewer, will probably outperform businesses such as U.K. car insurer Admiral Group Plc and Italian utility A2A SpA, he said.

Declining Demand

Some companies already are coping with declining government demand. International Business Machines Corp. in Armonk, New York, the world’s largest computer-services provider, said on April 19 its public revenue was flat in the first quarter after rising 6 percent in the same period a year earlier. At the same time, the decline in industrial revenue was 2 percent compared with 15 percent.

Munich-based Siemens AG, Europe’s largest engineering company, last week predicted “continued strong profitability” in its third quarter as demand rebounds for its factory- automation gear, health-care products and light bulbs. Orders and sales for the quarter ended June 30 rose simultaneously for the first time in almost two years as customers restocked goods.

The last time developed economies saw primary deficits tumble was in 2006, when they fell by 1.5 percentage points, according to data from the Paris-based OECD. Industrial nations grew 3.1 percent that year, while the MSCI World Index rose 18 percent.

Need for Austerity

Obama and his fellow Group of 20 leaders agreed on June 27 to keep existing stimulus plans in place while pledging to halve their budget deficits by 2013. Their statement, issued after a summit in Toronto, bridged a gap between Obama, who wanted to focus on growth, and German Chancellor Angela Merkel, who stressed the need for austerity.

Obama’s push for more government spending in the U.S. this year has run into problems in Congress, where Senate Republicans oppose it, saying it will increase the deficit.

Much of the fiscal tightening in the U.S. next year will be what Kasman described as “passive” -- the result of ending the stimulus package Congress passed in February 2009, shortly after Obama took office. The government says it already has distributed $415 billion, or 53 percent, of the program, which includes tax cuts and expenditures on roads and other infrastructure projects.

The U.S. will probably reduce its budget deficit -- the difference between what it spends and what it takes in as taxes and revenue -- to $1.1 trillion in the fiscal year beginning Oct. 1 from $1.4 trillion this year, said Mark Zandi, chief economist at New York-based Moody’s Analytics. He predicts the total will fall to $900 billion in 2012 and $800 billion in 2013.

Debt Crisis

European governments, spooked by Greece’s debt crisis, are also implementing cuts. The U.K.’s new coalition government last month announced higher taxes and the deepest spending reductions since World War II to trim its deficit. Finance Minister Wolfgang Schaeuble proposed spending cuts on July 4 that will reduce Germany’s federal budget deficit by about 40 percent during the next five years.

Tighter fiscal policies will shrink the German deficit a percentage point of GDP in each of the next two years from 4.3 percent in 2010 and reduce the U.K.’s gap to 7.4 percent next year from 9.7 percent this year, economists at Barclays Capital predict.

Expansion in the euro area will slow by 1 percentage point next year, estimates Lars Tranberg Rasmussen, an analyst at Danske Bank A/S in Copenhagen. At the same time, the euro’s decline may add 0.8 percentage point to growth, and a decline in long-term interest rates could add another 0.2 point, he said. The euro zone contracted 4.1 percent in 2009.

‘Negative Effects’

“Fiscal policy cannot be neglected and there are some negative effects, but we don’t think tightening will mean another recession,” Rasmussen said.

One irony is, for all Merkel’s declarations that “it’s time to reduce deficits,” Germany is on track to get a boost from continued infrastructure spending and income-tax cuts. Europe’s largest economy will receive a 1.1 percentage-point fillip from the government during the next two years, estimates Gilles Moec, an economist at Deutsche Bank AG in London and former Bank of France official.

That will help cushion the blow of austerity programs in Europe’s so-called peripheral countries such as Greece, which Moec estimates will suffer a 4.3 percentage-point hit from its government’s efforts to avert a debt restructuring or default.

Stock-Market Gains

Smaller budgets may generate stock-market gains by limiting the amount governments need to borrow, freeing up access to funds for private companies, according to Ian Scott, a London- based strategist at Nomura Holdings Inc. Periods of high borrowing during the past 35 years in the U.K. were associated with relatively low stock valuations, he said.

The simultaneous tightening of fiscal policy by rich nations is nevertheless a “risky strategy,” according to Kasman. With short-term interest rates in the U.S., Europe and Japan already at or near zero, there’s little scope for the Federal Reserve and other central banks to respond with easier money if the budget squeeze undercuts the economy, he said.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California, likens the situation to driving a car without a spare tire over a bumpy road where further mishaps are possible. Fifty-nine percent of 440 executives in an RBC Capital Markets survey published last week believe governments in developed nations lack the firepower to spur credit if another financial crisis hits.

Falling Home Sales

The U.S. housing market is already suffering from the expiration of an $8,000 tax credit at the end of April, which pushed May purchases of new U.S. homes down 33 percent to the lowest level in records going back to 1963, the Commerce Department said. Sales for Lennar Corp., the third-largest U.S. homebuilder by revenue, were down 20 percent to 25 percent in June compared with a year earlier, the Miami-based company said June 24.

The chance of a relapse into recession in the U.S. will rise to one in three from one in four if Congress fails to extend unemployment benefits and provide federal aid to states as Obama has requested, Zandi said. Obama might also opt to phase in tax increases for the wealthy that are due to kick in next year to cushion their impact on the economy, he added.

There is a 30 percent chance of renewed recession in the U.K. and 35 percent risk in the euro-area, said Howard Archer, chief European economist at IHS Global Insight in London.

“A double-dip can’t be ruled out,” he said.

Euro Worst to Come

Euro Worst to Come for Top Analysts as TD Sees Parity (Update3)

By Matthew Brown

July 6 (Bloomberg) -- The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy.

Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters in anticipating a lower euro in the next two quarters.

The euro weakened 15 percent against the dollar in the first half on speculation record budget deficits from Ireland to Portugal and Greece will force governments to cut spending and reduce economic growth. Bond yields among the euro-area’s so- called peripheral nations surged relative to German bunds even as European Union leaders crafted an almost $1 trillion aid package to avoid sovereign defaults.

“It’s going to be an immensely challenging environment for these economies to try and regain competitiveness internally within the euro zone,” said Osborne, 47, who has been head of currency strategy at TD Securities since he joined in 2006 from Scotia Capital. His colleague Jacqui Douglas in Toronto assists in formulating forecasts. “The ECB is moving towards its version of quantitative easing. It suggests they’re going to be very late now to the tightening cycle.”

The currency, shared by 16 European nations, rose 0.8 percent to $1.2644 as of 10:49 a.m. in New York. It has gained 6.5 percent since hitting a more than four-year low of $1.1877 on June 7, after falling from 2009’s high of $1.5144 on Nov. 25.

Diversifying Reserves

The ECB began buying government bonds from some member nations on May 10, part of the EU rescue package, to cap yields and underpin the euro. The decline threatens to break up the region, former Federal Reserve Chairman Paul Volcker said in May, while central banks are putting more of their reserves into currencies other than the euro, data from the International Monetary Fund show.

“Reserve diversification, one of the drivers behind euro strength ever since the introduction of the single currency, is therefore unlikely to be euro-dollar supportive over the next few years,” said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader and one of the five best predictors of the currency’s decline against the yen and the pound this year.

Most Accurate

TD Securities, a unit of Canada’s second-biggest lender, Toronto-Dominion Bank, was also the most accurate forecaster for the dollar against the yen, second best for the euro versus the yen and the dollar-Swiss franc exchange rate. The firm’s predictions had the lowest margin of error in a survey of 48 forecasters of eight currency pairs in the past 18 months.

The firm surpassed second-ranked Standard Chartered Plc, whose margin of error was 4.37 percent, third-place Wells Fargo & Co., Credit Suisse Group AG in fourth place and Canadian Imperial Bank of Commerce in fifth.

Recent euro strength is a sign traders are trimming bearish bets after wagering correctly that the currency would weaken, rather than a change in sentiment, according to Callum Henderson, head of foreign-exchange strategy at Standard Chartered in Singapore.

Fiscal Tightening

“We do not think euro-dollar weakness is over,” Henderson wrote in an e-mail. “Growth in the euro area will remain subdued for some time due to fiscal tightening. To be sure, euro weakness will benefit the exporters in north Europe.”

Henderson predicts a drop to $1.10 to $1.12 this quarter, before the euro recovers to $1.30 by 2012.

CIBC, based in Toronto, predicts the euro will depreciate to $1.18 in the third quarter, before climbing to $1.20 by the end of the year and $1.24 by mid-2011. The next six months will be a “turning point” as traders focus on economic frailty in the U.S., said Avery Shenfeld, the chief economist at CIBC. The Toronto-based firm’s average margin of error was 5.19 percent.

Futures show a majority of traders don’t expect an interest-rate increase by the Fed until the second quarter of 2011 after the central bank said June 23 that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”

“There will be an absence of enough growth to prompt Fed tightening anytime soon, and a recognition that if domestic demand cannot sustain the U.S. expansion that a weaker dollar will be needed to allow trade to fill in for some of that,” said Shenfeld, who joined CIBC 16 years ago and has been chief economist for a little more than a year.

Rate Differentials

The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008, while the ECB’s main rate has been at a record low of 1 percent since May 2009.

The most accurate analysts were identified using data gathered for Bloomberg’s Foreign Exchange Forecasts function.

Firms were compared based on seven predictions: six forecasts as of the end of each quarter for the close of the subsequent quarter, starting Dec. 31, 2008, plus estimates as of a year ago for this year’s second quarter. Only firms with at least four forecasts were ranked in each currency pair, and only those that qualified for ranking in at least five of eight pairs were included in the overall best list.

The majority of analysts say the euro has further to fall against the dollar, dropping to $1.19 in the first quarter and ending 2011 at $1.21, according to the median of at least 26 forecasts compiled by Bloomberg.

Weakness ‘To Persist’

“Over the next six months, the market’s concern over the growth outlook is likely to persist,” said Derek Halpenny, European head of global currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., which ranked seventh overall, with a 5.55 percent margin of error. “The scenario for the global economy is deteriorating, and in those circumstances you’ve got to prefer the dollar over countries where they are implementing austerity programs.”

The euro is most likely to weaken in the second half of this year against the Australian, New Zealand and Canadian dollars, said Nick Bennenbroek, 39, global head of currency strategy in New York at Wells Fargo, the biggest U.S. home lender. The bank had a margin of error of 4.76 percent across all currency pairs and was the top forecaster for the dollar against the yuan.

‘Continue to Weaken’

“Our overall view is that the euro will continue to weaken and Australia, New Zealand and Canada will rebound over the next year,” said Bennenbroek, who joined the bank in 2007, beginning his career in finance at the New Zealand Treasury in Wellington. “These are medium-term trades we believe people should be putting on now.” The euro will end this year at $1.20 and conclude 2011 at $1.08, he said.

Currency forecasting became easier the past 12 months after the worst of the global financial crisis, sparked by Lehman Brothers Holdings Inc.’s collapse in September 2008, passed, said Niels Christensen, 49, chief currency analyst at Nordea Bank AB in Copenhagen. Nordea was the most-accurate forecaster for the euro-dollar exchange rate.

“In March 2009, everybody was wondering whether we would get another Lehman, that the economy was extremely fragile,” he said. “In December 2009, the wave of risk appetite was abating and currencies started to trade on fundamentals and rate differentials again.”

The euro will trade at $1.25 through year-end before weakening to as low as $1.15 in 2011, according to Nordea.

Ray Farris, head of foreign-exchange strategy in London at Credit Suisse, whose margin of error in the survey was 4.81 percent, said he wasn’t able to immediately comment.

The European currency will rise versus the yen, climbing to 114 yen in the fourth quarter and 127 yen by the end of 2011, from 109.36 today, median forecasts show. The pound will fall to $1.44 this quarter, and strengthen to 81 pence per euro in the first quarter, the estimates show. Sterling was at $1.5192 and at 83.08 pence per euro today.

Service Industries in U.S. Expand Less ......

Service Industries in U.S. Expand Less Than Forecast (Update2)

By Shobhana Chandra

July 6 (Bloomberg) -- Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half.

The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. Readings above 50 signal expansion. Orders slowed for a third month and employment declined.

Companies such as Bed Bath and Beyond Inc. may find it harder to boost sales without faster job growth as government stimulus wanes. Private hiring last month rose less than forecast, consumer confidence plunged and home purchases fell, indicating the recovery from the worst recession since the 1930s is vulnerable.

“The economy has entered a soft patch,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, whose forecast of 53.9 was the closest to today’s reading among economists in the Bloomberg survey. “Households are continuing to soldier on, albeit without much vigor.”

Stocks rose from a 10-month low, rebounding from a 5 percent drop for the Standard & Poor’s 500 Index last week, which took the gauge to its cheapest valuation since March 2009. The S&P 500 rose 1.8 percent to 1,041.12 at 10:39 a.m. in New York.

Forecasts in the Bloomberg survey of 59 economists for the Tempe, Arizona-based ISM’s index ranged from 52 to 56.6.

New Orders, Employment

The group’s index of new orders for non-manufacturing industries declined to 54.4 in June, the lowest this year, from 57.1 a month earlier. The employment gauge fell to 49.7 last month from 50.4.

Export orders dropped to 48 in June, the lowest since February, from 53.5. A gauge of prices-paid fell to 53.8 from 60.6.

The figures on services follow reports last week that showed a slowdown in manufacturing and weakness in housing, at the same time Europe grapples with a debt crisis and China tries to slow its economy.

Employment at companies rose 83,000 last month, less than the 110,000 increase forecast by economists in a Bloomberg survey, Labor Department figures showed on July 2. Including government, payrolls fell for the first time this year because of a drop in federal census workers. The jobless rate dropped to 9.5 percent from 9.7 percent as the labor force shrank.

Consumer Confidence

The outlook for jobs is one reason consumer confidence sank more than forecast in June, according to a Conference Board report. It raises the risk household spending, which accounts for about 70 percent of the economy, will falter.

Bed Bath & Beyond, a Union, New Jersey-based retailer, last month forecast current-quarter and annual earnings that trailed analysts’ estimates.

“It appears the consumer continues to face economic challenges, and the pressures of the macroeconomic environment still persist,” Leonard Feinstein, the company’s co-chairman, said on a conference call on June 23.

Concerns about unemployment and reluctance to make large purchases were also reflected last week in lower-than- anticipated auto sales in June for General Motors Co. and Ford Motor Co., the two largest U.S. automakers.

The ISM services survey covers industries that range from utilities and retailing to health care, housing and finance.

Housing Weakness

Housing, which helped trigger the recession, is showing signs of renewed weakness following the end of a government tax credit of as much as $8,000. The absence of faster job growth and rising foreclosures are depressing property prices.

Economic data in recent weeks and Europe’s sovereign debt crisis underscore why Federal Reserve policy makers renewed a pledge last month to keep interest rates near a record low. Central bankers said the recovery is “likely to be moderate for a time,” according to their statement. Consumer spending still “remains constrained” by joblessness and “tight credit,” they said.

Services have been lagging behind manufacturing, which led the economic recovery that began in the middle of 2009. The ISM reported on July 1 that factories expanded in June at the slowest pace this year as orders and exports cooled, adding to concern financial-market turmoil sparked by Europe’s debt problems will hurt global growth.

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