Check out all the great contributions that were published during the past week on RGE’s Nouriel Roubini's Global EconoMonitor, RGE Analyst’s EconoMonitor, Finance & Markets Monitor, Peterson Institute for International Economics Monitor, Global Macro EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor.

On Nouriel Roubini's Global EconoMonitor, Nouriel discusses the extent to which the U.S. labor market is struggling as job losses are likely to continue until the end of 2010 at the earliest, and the unemployment rate will most likely peak close to 11% and remain at a very high level for two years or more.  Please read The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses

Please watch Video of Roubini Speech in Tel Aviv.

On the RGE Analyst’s EconoMonitor, as President Obama met with Chinese leaders this week, external pressure is building on China for currency appreciation. But Chinese officials will be reluctant to undermine the nascent exports recovery, particularly if it seems to be ordered up from overseas. Adam Wolfe and Rachel Ziemba look at the internal and external pressures on the RMB, China’s likely exit strategy from its extremely loose monetary policies and the consequences of such a move. See What is China's Exit Strategy?

In Obama Tours Asia with a Full Agenda, the RGE Analyst Team examine President Obama’s highly anticipated maiden visit to Asia and provide analysis on many of the looming political questions.

In Obama Sets New Myanmar Policy in Motion, Julie Ginsberg analyzes the implications of the policy shift from isolation to engagement by the Obama administration with respect to relations with Myanmar.

In U.S. Retail Sales Grow in October, But Watch the Holiday Season Christian Menegatti and Prajakta Bhide assess the latest U.S. retail sales data.

In Latin American CDS: Fully Recovered, What are the Risks? Alejandro Rivera, Elisa Parisi-Capone and Bertrand Delgado take a close look at Latin America’s 5yr CDS fundamental and counterparty risk dynamics.  They conclude that counterparty risks explain most of the sharp movement in CDS spreads, both during and after the crisis.  However, they highlight that as we move forward, given the aftermath of the crisis, not only a risk reversal but also some country specific deterioration will likely affect CDS behavior.

In "Deja Vu: Will the U.S. Undergo a Reprise of 1937?", RGE Analyst Mikka Pineda identifies striking similarities in U.S. inflation attitudes between the mid-1930s, when the U.S. began to show signs of recovery from the Depression, and 2009. The report serves as a qualitative accompaniment to her Comparing Three Crises report published earlier this year. The eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009 - both historic junctures when recovery was thought to have begun - suggests the U.S. teeters on the edge of a double-dip.

On the Finance & Markets Monitor, Robert Reich distinguishes between an asset-based recovery and a Main Street recovery; the former, while influencing the stock market temporarily, will probably lead to a big stock market correction and a double dip.  Read The Great Disconnect Between Stocks and Jobs .

In Note to Jamie Dimon: Repeating Something Doesn’t Make It True, James Kwak argues against the argument that says big banks serve an important role.

In A Cheaper Dow 10,000 ? Barry Ritholtz considers the overall markets’ valuation and points out that most investors would be better off with an asset allocation strategy rather than traditional stockpiling or even index approaches.

Also on the Finance & Markets Monitor:

Comparing Market Rallies by Barry Ritholtz

Operation Direct Growth by Carlo Resta

Slow Cat, Fast Mouse by James Kwak

On the Peterson Institute for International Economics Monitor, Simon Johnson offers testimony before the Joint Economic Committee hearing on The Impact of the Recovery Act on Economic Growth, and discusses current U.S. issues, comparisons with Japan, and proposals for change.

In Is King Euro Naked? Carlo Bastasin makes the case for why a political government for the euro area would be desirable.

On the Global Macro EconoMonitor, there was much discussion of trade imbalances as a weak dollar and an undervalued renminbi have the U.S. and China engaging in political exercises, but will there be reform?  See the following:

China Slams U.S. for Inflating Global Asset Prices Via Carry Trade by Edward Harrison

Who’s Afraid Of A Falling Dollar? by Simon Johnson

China Lambastes Dollar “Carry Trade,” Diverting Attention from Its Currency Manipulation by Yves Smith

China and the American Jobs Machine by Mark Thoma

As the financial crisis has left many advanced economies with staggering government debt, Carlo Cottarelli discusses how these countries should go about improving their fiscal conditions and implementing their exit strategies.  Read: Post-Crisis: What Should Be the Goal of a Fiscal Exit Strategy? and Balancing Fiscal Support with Fiscal Solvency.

On the U.S. EconoMonitor, Edward Harrison challenges President Obama’s understanding of how the economy works based on the administration’s decision to focus first on reducing the deficit and then on jobs, and offers better solutions.  Read Obama: Debt Could Cause a Double Dip Recession.

In Counting "Jobs Saved" by Obama Fiscal Stimulus, Jeffrey Frankel takes issue with those who don’t believe that the fiscal stimulus is creating jobs.

In Unlike the New Deal, Obama’s Plan does not put People on the Public Payroll, Mark Thoma looks at some at the politics involved in helping people get back to work.

Also on the U.S. EconoMonitor:

An Open Letter to Harry Reid on Controlling Health Care Costs by Robert Reich

News from 17 November 1930: “We Face a Winter of Hunger and Distress” by Edward Harrison

On the Emerging Markets Monitor, Michael Pettis continues to stress that trade imbalances are due to the policies that are in place, which is making China vulnerable because of its dependence on U.S. consumption.  Please read Lecturing Each Other on Trade.

On the Asia EconoMonitor, China Economist is on the side of those who believe there is a dangerous property bubble that is inflating in China and he presents some harrowing pollution pictures.  See: Property: The Bubble that Keeps on Inflating and Pictures of Pollution in China.

On the Latin America EconoMonitor, Alejandro Schtulmann analyzes the implications of the spike in violence in Mexico as the drug cartels push back against law enforcement.  See Drug Violence: Reaching a New Pinnacle.

On the Europe EconoMonitor, Edward Hugh analyzes the economic data to determine Just How Much of a Eurozone Rebound Really Was There in Q3?

In A Mini-Split on the MPC, David Smith reports that there was a little bit of division on quantitative easing from the Bank of England’s monetary policy committee’s November meeting, as well as the cut in the rate on commercial bank reserves at the Bank.

ECB Shows the Exit: Timing and Signposts, Aurelio Maccario considers what to expect from the ECB over the next couple of months.

President Obama embarked on his highly-anticipated maiden visit to Asia last week, furthering his efforts at global outreach. The trip comes as global leaders are reckoning with an unsynchronized exit from economic policies that have helped end the worst recession of the post-war era. Policy changes in Asia, particularly among major U.S. creditors, will be essential to rebalance global growth: APEC members (including those in the Americas) absorb 55% of U.S. goods exports and provide a major market for U.S. service exports, while Asia depends on U.S. consumers and foreign direct investment (FDI) to drive economic growth. With the trip, Obama aims to renew U.S. political and economic influence in a region that analysts claim was ignored by the previous administration, addressing key issues like economic cooperation, climate change, free trade and the regional balance of power. By spending nine days abroad as domestic issues like health care and unemployment vie for his attention, the president acknowledges the growing importance of the U.S. relationship with a rising Asia.

Obama’s first stop was Japan, a key U.S. ally and the host of a large (and increasingly contested) U.S. military concentration. Next, Obama stopped in Singapore, where he attended the APEC meeting. Obama, whose cap-and-trade legislation is stalled in Congress, was among the world leaders who accepted that a binding carbon emissions deal was unrealistic, saying the best that could be hoped for was a “politically binding” deal. On the sidelines of the APEC meeting, Obama met Russian President Dmitry Medvedev to discuss U.S.-Russia ties, the new arms control treaty and possible sanctions on Iran and North Korea. While in Singapore, Obama attended the first U.S.-Association of Southeast Asian Nations (ASEAN) summit, which was also attended by Myanmar’s leader, before arriving in China. His final stop will be South Korea, where talks of disarming North Korea may overshadow discussions on the U.S.-South Korea trade agreement.

Tensions and Reassurance in China

Ahead of Obama’s visit to China, U.S. officials have focused on a new goal of “strategic reassurance” that China will seek to maintain global stability as the country’s influence grows. A bilateral deal on climate change would have sent a powerful signal on this accord. Although U.S. and Chinese leaders signed several agreements on clean energy initiatives, in part because of job creation goals, neither side was ready to make any binding commitments on carbon reduction.

Similarly, the U.S. sought Chinese support on Afghanistan, Iran and North Korea, but no meaningful cooperative agreements have been aired publically. Over the past year, however, Chinese and U.S. leaders have been meeting more often than they have during past U.S. administrations, and linkages at all levels of governments have increased.

Trade and currency issues dominated the U.S.-China meetings, as they have in past meetings, though the relevant discussions were brief. The U.S. claimed a weak renminbi (RMB) would prevent the correction of global imbalances that both sides seek, but China put the blame on U.S. debt levels. This visit comes as market actors are increasingly pricing in a renewed gradual appreciation of the RMB over the next six months, as detailed in the recent RGE Analysis What Is China’s Exit Strategy? by Adam Wolfe and Rachel Ziemba.

Just before Obama’s arrival, a senior Chinese official criticized the loose U.S. monetary policy for the first time. As in their trade meeting in Hangzhou last month, China and the U.S. pledged to work together to avoid a trade war as pressure builds in both countries’ export sectors. As the global economy has begun to stabilize, the number of anti-dumping complaints has grown. Calm heads may prevail in the end, but, again, no strong commitments came from Obama’s visit or the meeting of trade leaders on October 29.

China sent a political message by skipping some of the goodwill gestures that usually accompany a U.S. presidential visit. Ahead of the visit, Chinese dissidents were reportedly rounded up, a striking contrast to the token prisoner releases that tended to precede visits from Presidents Clinton and Bush. Likewise, Obama’s “town hall” meeting in Shanghai was not televised live across China as past U.S. presidential speeches were. In addition to asserting China’s desire to level the political playing field, the moves may reflect insecurity on the part of China’s leadership, stemming in part from concern that the domestic economic recovery remains “unstable, unbalanced and not yet solid.” Even if it is better positioned to resist U.S. pressures, China still has a limited ability to alter policy in Washington, in part because China’s pursuit of macroeconomic stability from the dollar peg constrains other policies, including reserve diversification. U.S. Secretary of Commerce Gary Locke has bluntly defended the designation of China as a “nonmarket economy” for antidumping cases.

While the United States recently reported 3.5 per cent GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest. In fact, official measures of GDP may grossly overstate growth in the economy, as they don't capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Properly corrected for this, third-quarter GDP may have been 2 per cent rather than 3.5 per cent.

The story of the U.S. is, indeed, one of two economies. There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Consider the following facts. While America's official unemployment rate is already 10.2 per cent, the figure jumps to a whopping 17.5 per cent when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the past three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest a number above two million.

Moreover, the total effect on labour income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers' hours, placing them on furlough or lowering their wages as a way to share the pain.

Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of U.S. jobs can be fully outsourced over time to other countries. Thus, a growing proportion of the work force – often below the radar screen of official statistics – is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets.

But non-prime borrowers – about one-third of U.S. households – do not have much access to mortgages and credit cards. They live from paycheque to paycheque – often a shrinking paycheque, owing to the decline in hourly wages and hours worked. And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms. Larger firms – even those with large debt problems – can refinance their excessive liabilities in or out of court, but an unprecedented number of small businesses are going bankrupt. The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans and other consumer credit.

Consider also what is happening to private consumption and retail sales. Recent monthly figures suggest a rise in retail sales. But, because the official statistics capture mostly sales by larger retailers and exclude the fall by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.

And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards. As a result, the household savings rate has risen from zero to 4 per cent of disposable income. But it must rise further, to 8 per cent, in order to reduce the high leverage of the household sector.

To be sure, the U.S. government is increasing its budget deficits to put a floor under demand. But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers and firefighters while also cutting welfare benefits and social services for the poor. Many state and local governments in poorer regions are at risk of bankruptcy without a massive federal bailout.

Moreover, income and wealth inequality is rising again. Poorer households are at greater risk of unemployment, falling wages or reductions in hours worked, all leading to lower labour income, whereas on Wall Street, outrageous bonuses have returned with a vengeance. With the stock market rising and home prices still falling, the wealthy are becoming richer, while the middle class and the poor – whose main wealth is a house rather than equities – are becoming poorer and being saddled with an unsustainable debt burden.

So, while the United States may technically be close to the end of a severe recession, most of America is facing a near-depression. Little wonder, then, that few Americans believe that what walks like a duck and quacks like a duck is actually the phoenix of recovery.

Nouriel Roubini is professor of economics at New York University's Stern School of Business and chairman of RGE Monitor.

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.

Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost.

This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries.

Other measures tell the same ugly story: The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession.

As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures.

The damage will be extensive and severe unless bold policy action is undertaken now.

Roubini is professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics.

On Nouriel Roubini's Global EconoMonitor, the RGE Analysts focus on expected growth and inflation dynamics to determine the course of monetary policy actions in advanced and emerging market economies.  Please read Global Monetary Policy Outlook.

On the RGE Analyst’s EconoMonitor, Katharina Jungen takes the twentieth anniversary of the fall of the Berlin Wall as an opportunity to review the progress of economic convergence between the former German Democratic Republic (GDR) and West Germany.  Katharina notes that due to its economy’s lack of dynamism, not only has the East been lagging behind its western counterpart, but it is also set to be overtaken by other post-communist economies.  In order to revive the catching-up process, which has practically been on hold for the past decade, Katharina argues that a redirection of financial aid from social security transfers towards supporting innovation in small firms is key.  Please read Germany, 20 Years On: Goals Reached?

In Another Bleak U.S. Labor Market Report, Arpitha Bykere and Christian Menegatti argue that U.S. job losses remain high despite easing in the recent months. Amid continued job losses, record low work hours and subdued labor compensation, consumer spending will remain weak, especially as the impact of policy stimulus fades. Sluggish hiring will keep the unemployment rate high for some time and contribute to the slack in the economy.

In The Zombies are Coming... Again, Christian Menegatti and Elisa Parisi-Capone revisit the number and names of zombie banks in the U.S. as of Q2 2009.

In Revisiting 2009 Predictions for Equity Markets Monika Brown reviews and analyzes analyst predictions made in January 2009. A divergence in opinion between the large institutional managers and independent managers is noted.

On the Finance & Markets Monitor, Joseph Mason asserts that the discussion draft for financial reform released by the Senate Banking Committee doesn’t contain much that is worthwhile, and Mason argues that reform requires serious inquiry and understanding into the causes of the crisis; otherwise it is just a political exercise in the run-up to mid-term elections. Read In Crisis Inevitably Breeds Leviathan.

In Senate Bill Would Break-Up TBTF Banks, Barry Ritholtz takes a look at a bill that is gaining ground in Congress that would “break-up” big banks, addressing the too big or too interconnected to fail problem.

On the Peterson Institute for International Economics Monitor, Anders Aslund discusses the complaints that the CIS countries are having with Russia including Russia’s lack of respect for its neighbors’ territorial integrity, gas policy, trade conflicts, and financial issues.  Russia’s reputation as an unreliable and unpredictable partner is contributing to its increasing isolation on the world stage.  See The Leader of the CIS Is Lonely and Weak.

In India: New Letter and Spirit, Arvind Subramanian looks at the radical views of Jairam Ramesh, minister of state for the environment, as India struggles with its identity as an international player with the emergence of the G-20.

On the Global Macro EconoMonitor, James Kwak points out that productivity growth, which is often quoted in the media and is almost always referring to labor productivity, can be all over the map in the short term and especially during recessions; productivity often falls during a recession as output falls faster than companies lay off workers and spikes afterward because output is growing right while companies are laying off workers.  However, in the long term, productivity growth depends on thing like improvements in technology and business processes.  Read Productivity and Layoffs.

In If the Fed is Looking to Inflate Away Problems, What Should Asia Do? Edward Harrison presents a piece by Andy Xie who suggests that China and Japan should form a new free trade agreement.

In Parallels Between US and Japanese Economies Edward Harrison presents a clip of Marshall Auerback elaborating on the similarities between the U.S. and Japanese economies pointing to the misallocation of fiscal resources, crony capitalism, zombie banks, and low interest rates.

On the U.S. EconoMonitor, Fabius Maximus shows how ridiculous it is that most Americans vote their pocketbooks in elections to Congress and the Presidency.  See A Note about the US Economy and the Recent Elections (Yes, We’re Nuts)

In The Fed is Already Transparent, Mark Thoma presents a piece by Anil Kashyap and Frederic Mishkin who are worried that the Ron Paul proposal to audit the Fed will “cripple policy making.”  Thoma adds that the people are frustrated that they don’t feel the Fed is acting on their behalf, and Thoma offers some solutions to make the people feel that they have more influence.

In Inflation Expectations Continue to Inch Higher, James Picerno points out that it appears that the financial system has stabilized and the battle against deflation seems to have been won, but that doesn’t make it any easier to predict precisely how the Fed will act going forward.

Also on the U.S. EconoMonitor:

Unemployment Rate Illusion by Edward Harrison

Understatement of the Year: “Recovery Hampered by Unemployment” by Barry Ritholtz

On the Emerging Markets Monitor, Antonio Carlos Lemgruber recognizes the seriousness of the dollar party and recommends keeping an eye, as usual, on what is happening in the U.S.  Lemgruber sees these “negative” signs occurring as soon as the very beginning of 2010.  Read The Dollar Party.

On the Asia EconoMonitor, Anoop Singh wrestles with the mystery of Asian firms that save but don’t invest and households that hold wealth and don’t consume, which is contributing to global imbalances and constraining its long-term growth potential.  Singh offers corporate governance and financial sector development as vital clues, which present interesting policy implications.  See Asia's Corporate Saving Mystery.

In The IMF on Asia's Recovery and its Sustainability, Claus Vistesen argues that Asian countries “hold little promise in terms of providing a decisive engine for rebalancing through sustainable growth in domestic demand which exceed investment rate, and therefore is cautious on the overall sustainability of the recovery in Asia.

On the Europe EconoMonitor, David Smith reports that in the UK, the Bank’s new forecasts are more upbeat and predict higher inflation, while unemployment figures continued the very encouraging pattern.  See Bank Moderately Upbeat - Good Unemployment News by David Smith

In The Dollar As A Funding Currency, Edward Hugh discusses carry trades and exit strategies.

Last week was a busy one for the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). Policymaking is tricky when different asset classes are sending very different signals about the economy. However, those different signals are themselves a byproduct of policy. In the U.S., bond markets are discounting a sluggish U-shaped recovery or even a double-dip recession, while risky markets are signaling a strong V-shaped recovery ahead.

Which is right? While RGE leans towards the U-shaped camp, we do not expect risky assets to invert their course as long as the Federal Reserve commits to maintaining “exceptionally low levels of the federal funds rate for an extended period.”  So the policy dilemma is one of having to maintain “exceptionally low rates” given the still very difficult real economic conditions, but with the danger of an increasing disconnect between risky asset valuations and the economy–which could eventually snap back and compromise economic and financial stability in the medium term. While this environment reignites the debate on whether central banks should target asset prices or not, RGE maintains that Fed fund hikes are a story for end of 2010 or Q1 2011.

The Bank of England kept its rate on hold at 0.5% for the 8th consecutive month in November with another hold almost certain in December. As the UK economy failed to pull out of recession in Q3 2009, a rise in interest rates is unlikely to occur before Q2 2010; a view supported by evidence in the money markets. The Monetary Policy Committee did move to increase the program of quantitative easing, asking the Chancellor of the Exchequer, Alistair Darling, for an extra £25 billion to be pumped into the economy, bringing the total amount to £200 billion. With interest rates remaining at a historically low level and public finances precarious, quantitative easing has replaced traditional monetary and fiscal policy as the favoured tool of policy makers. The extra £25 billion is likely to act as the final push with the Bank of England attempting to revive an economy operating with spare capacity. It is unlikely that any further increase in quantitative easing will occur, barring a severe economic shock.

The ECB, meanwhile, stayed on hold at 1.0% in November. ECB president Jean-Claude Trichet expressed concern over the excess volatility and strength of the U.S. dollar. Nonetheless, further rate cuts seem unnecessary as signs of economic stabilization and a deceleration of deflation have emerged. Broad money supply growth continues to decelerate and credit to households and non-financial businesses is contracting. The ECB will continue conducting the QE operations it started July 6, but December may be the last tender for its 12-month refinancing operation. Trichet signaled as much, saying "not all our liquidity measures will be needed to the same extent as in the past."

While global monetary policy easing was synchronized, tightening does not need to be.  Australia embarked on its rate tightening phase earlier than other developed world central banks. It raised rates twice, in October and November, by 25 basis points each. Australia avoided a recession in 2009 thanks to commodity restocking and prompt fiscal and monetary easing. Australia will likely remain on a gradual easing path, however, until the strength and sustainability of its recovery becomes clearer. Extra government subsidies for home purchases sparked a buying boom that raised Australia's mortgage debt level to a new high. The expiry of those subsidies at the end of 2009 and the increases in interest rates could restrain the recovery of domestic demand. On the other hand, recovering export demand and the expansion of a Treasury program to buy resident MBS may help offset the decline in direct support to home buyers.

Following in the footsteps of the Reserve Bank of Australia, which was the first among advanced economies to hike rates, Norges Bank (Norway's central bank) recently increased its key policy rate by 0.25 percentage points to 1.5%. The executive board's strategy sets the key policy rate interval at 1.25% - 2.25% until its meeting in March 2010. Given the Norwegian economy's mild downturn and strong recovery prospects, monetary tightening was expected. Norges Bank cautioned that a stronger krone could slow its expected pace of rate increases.

In October, the Bank of Japan (BoJ) adjusted its policy to reflect the modest improvements in credit markets and the economy. Due to thawing corporate credit markets and very weak demand* at the BoJ's special facilities to purchase corporate bonds and commercial paper, the Bank of Japan decided to allow those programs to expire at the end of 2009 as planned. Further purchases would only distort corporate debt pricing as liquidity returns to the market. As a safety precaution against potential disruptions to corporate credit for businesses that cannot access market funding, the Bank of Japan extended until March 2010 its program to offer unlimited low interest rate loans to banks, collateralized with corporate debt. However, at the behest of the Ministry of Finance, the Bank of Japan will keep purchasing government debt. Like other central banks that engaged heavily in unconventional easing, the BoJ will roll back its targeted easing programs before resorting to the blunter tool of rate hikes. The BoJ reiterated its view that deflation will grip Japan until 2011, hence the policy rate will likely stay on hold throughout 2010. See Bank of Japan's Exit from Monetary Easing: Strategies and Timing.

After having to hike interest rates aggressively in the 2006– 2008 period, most central banks from emerging market economies had to undo them rapidly from the end of 2008 to Q3 2009, as output gaps widened significantly and inflation and inflation expectations collapsed as a result of the global crisis. Moreover, currencies experienced strong appreciating pressures from the end of Q1 2009 onwards, facilitating the dovish monetary policy reaction. Now that the worst of the global crisis seems to have past, macroeconomic policies are loose, and economic activities are healing, central banks are facing the difficult task of carefully implementing exit strategies, while avoiding exacerbating appreciative pressures on their currencies and trying to control asset inflation and bubbles.

Asian central banks will be the first among emerging markets to tighten monetary policy as capital inflows and loose policies since late 2008 are raising liquidity and asset inflation. But goods inflation will remain within the central banks’ target in most countries amid a slow recovery in domestic demand, weak credit growth in Asia ex-China, and an output gap. This will delay interest rate hikes into 2010, especially in the export-dependent economies, and constrain aggressive tightening until domestic and external demand improve further. Until then, Asian central banks will continue to fight credit and asset bubbles via liquidity absorption and regulatory and prudential measures, such as in real estate.  Countries that are less export-dependent and have attractive asset markets—India, South Korea and Indonesia—will be the first ones to hike rates and allow currency appreciation. In November 2009, Taiwan banned foreign inflows in time deposits and might resort to further capital controls. If hot inflows maintain their momentum, other Asian countries might use enforcement or regulatory measures to manage capital flows.

In Latin America, there is a marked differentiation on the speed of the economic recovery; however, most countries will experience slow closing of the output gaps over the next year.  Moreover, stable if not strong currencies (BRL, CLP, COP, MXN, and PEN) and limited upward wage pressures should help in containing probable external supply-side shocks emerging from commodity prices and limit inflationary pressures sparked by recovering domestic demand. Although inflation and inflation expectations will bounce back, central banks will most likely achieve their inflation targets in 2010. Nevertheless, monetary authorities will start moving away from a very loose monetary policy stance toward a neutral one in 2010 in order to safeguard medium-term inflation expectations once the recovery has gained momentum.  In this light, central banks mainly will target the monetary policy rate.  However, upward adjustment in other monetary policy instruments (reserve requirements and margin reserve requirements) will likely be implemented.  Those central banks that have acted the most aggressively and face potential surprises to the upside in growth and inflation will initiate the mapping out of excessive accommodation sooner than the rest. 

Rate hikes in Central and Eastern European (CEE) countries are expected to lag those in other emerging market regions given the particularly sharp downturn in the CEE and prospects for a weak recovery. Many central banks are still in easing mode, amid economic contractions and easing inflation. Uneven growth prospects across the region mean monetary policy paths will vary.

Aside from Israel, which in August became the first country globally to begin raising interest rates, Middle East and Africa will remain effectively on hold until late in 2010. Most of the GCC countries peg to the U.S. dollar and thus import U.S. monetary policy. Meanwhile despite the inflationary impact of a weak dollar, tight domestic credit conditions will restrain a liquidity surge.

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 * As of Sept. 30, only 100 billion yen of commercial paper (CP) was offered for the BoJ to purchase - just 3% of the 3 trillion yen allocated by the BoJ for the CP purchasing program. Only 300 billion yen of corporate bonds was offered for the BoJ to purchase - just 30% of 1 trillion yen allocated for the corporate bond purchasing program.

On Nouriel Roubini's Global EconoMonitor, Nouriel provides detailed analysis on how the weakness of the dollar along with near-zero interest rates and quantitative easing are fueling a correlated bubble across global asset classes, which is getting bigger by the day.  Nouriel provides a number of reasons for why and how these carry trades can unravel and cautions policy makers that the bigger the bubble the bigger the crash.  Please read Mother of all Carry Trades Faces an Inevitable Bust.

Don’t miss Nouriel’s CNBC Interview Discussing Carry Trades and Asset Bubbles.

On the RGE Analyst’s EconoMonitor, Arpitha Bykere and Elisa Parisi-Capone analyze the administration’s policies on regulatory reform, housing sector programs and fiscal stimulus. They also highlight the challenges for President Obama going forward, including addressing the fiscal deficit and entitlement burden and passing the healthcare legislation.   Please read One Year after Obama’s Election: Regulatory and Fiscal Challenges.

In Too-Big-To-Fail: Regulatory Reforms of Systemically Important Institutions, Elisa Parisi-Capone considers the initiatives currently on the table to deal with the too-big-to-fail problem. The options range from break-up—which is the one favored by Nouriel Roubini—to stricter regulation and setting the right incentives. While the debate goes on among regulators and academics, the European Competition authority has taken action and ordered the divestment of significant parts of ING, RBS and Lloyds since their bailout packages were deemed to have given them an unfair advantage under State Aid rules.

In Nigerian Oil: Delta Ceasefire, Political Bottlenecks, Lee Hudson Teslik examines what the Delta peace initiative and Nigeria’s push for oil industry regulatory reform will mean for Nigerian output and for international oil companies operating in the country.

On the Finance & Markets Monitor, Rick Bookstaber debates whether innovation promotes economic growth and considers the impact of financial innovation over the past 10-15 years arguing that “just because we are able to take some cash flow and turn it into an instrument doesn’t mean we should.”  Please read Does Financial Innovation Promote Economic Growth?

In Please, Listen to the Lady! Daniel Alpert notes that Sheila Bair, Chairwoman of the FDIC, continues to prove that she has the best interest of the country and the banking system at heart as she advocates for important reforms like funding the proposed resolution fund during fat times.

In How Goldman Bet on a Housing Crash, Barry Ritholtz points out the obvious conflicts of interest in the practice of financial companies that decide to market a financial product, which they consider to be a loser, to unsuspecting customers without sharing their real opinion of the product.  But is it criminal?

Also on the Finance & Markets Monitor:

The Cruel Basic Mathethematics of Losses by Barry Ritholtz

Uh-Oh: Economists Say Recovery, Market Gains Solid by Barry Ritholtz

Wood Warns of Correction, Says “Key Variable in the West is Government Policy” by Edward Harrison

The Return of Mixed Results by James Picerno

On the Peterson Institute for International Economics Monitor, Michael Mussa, a former student and professor at the University of Chicago, sits down with Steve Weisman and assesses the influence - for good and for ill – of economics as espoused at the University of Chicago.  Please read Is the “Chicago School” to Blame in the Economic Crisis?

In Latvia, Lithuania, and the IMF, Anders Aslund compares how the financial crisis has been handled by these countries, which appear to be facing very similar conundrums.

On the Global Macro EconoMonitor, Mark Thoma presents a piece by Mikhail Gorbachev who claims that the global crisis was necessary to recognize the organic defects of the present model of western development, which he believes was imposed on the rest of the world as the only one possible, and pushes for drastic democratic reform.  Thoma adds that the failure of the market-based development model as well as the success of countries with different development models like China has undermined the faith in traditional market-based development strategies.  See The Berlin Wall Had to Fall, But Today's World is No Fairer.

In Do Smart, Hard-Working People Deserve to Make More Money? James Kwak recognizes that financial success often depends on luck and chance and questions why the unlucky deserve less.

In Sustainable Growth? Tim Duy argues that while the GDP report confirms that the recession has come to an end, the drivers of the boost are potentially unsustainable, and thus he isn’t breathing easy yet.

In The Hubris of Economics, Barry Ritholtz provides a rational look at some of the problems with the field of economics.

On the U.S. EconoMonitor, Robert Reich points out that if the goal is to help the most Americans in a time of need, perhaps our priorities need to be refocused.  Read Health Care Reform is Critically Important, But Getting Americans Back to Work is More So.

In Another Crack in Republic’s Foundations: Not the Size of the Debt, But When it’s Due,  Fabius Maximus shrewdly explains the different scenarios that are possible with regards to short-term and long-term bonds, and how the former makes the solvency of the government that much more vulnerable.

In Roubini Predicts “Mother of All Carry Trade Unwinds”, Yves Smith pushes the conversation on how the weak dollar is the funding currency for risky carry trades that are blowing asset bubbles.

Also on the U.S. EconoMonitor:

Bullish Data, Recoveries, Crashes and the Psychology of Forecasting Redux by Edward Harrison

Five Myths About Our Land of Opportunity by Mark Thoma

On Revisions and on Conditioning by Menzie Chinn

Tax Cuts and Recoveries by Mark Thoma

How Obama Can Convince Congress to Enact a Larger Stimulus, and Why He Must by Robert Reich

On the Emerging Markets Monitor, Michael Pettis is still negative about global imbalances despite positive GDP numbers coming out of the U.S. because he sees the drivers of growth to be unsustainable.  He argues that rebalancing is going to happen one way or another, but pushes for less Chinese investment in infrastructure and more distribution of wealth to Chinese households, because it is consumption growth that powers economies over the long term.  Please read What Rebalancing of Chinese and American Consumption?

On the Asia EconoMonitor, Anoop Singh examines how it is that Asia has rebounded sooner and more strongly than the rest of the globe from the economic slump when the region is so heavily dependent on exports for its growth.  See The Puzzle of Asia’s Rapid Rebound.

In Looking back at Indira Gandhi, Ajay Shah presents a piece that takes a look at recent history and provides 5 lessons for today’s Congress in India.

On the Europe EconoMonitor, Simon Johnson reports that pressure from the EU and voices within the Bank of England have pushed the government to begin a process to restructure the banking system.  See Britain To Break Up Biggest Banks.

In Trouble in Ireland as Fitch Cuts Debt Two Notches to AA- and Deficits Soar, as the news gets progressively worse out of Ireland, Edward Harrison asks again whether Ireland is the next Iceland.

CNBC -- The mother of all carry trades faces an inevitable bust, Nouriel Roubini, chairman of RGEMonitor.com, told CNBC.

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CNBC --  'Mother of Carry Trades' Leading to 'Asset Bust': Roubini

By: Jeff Cox

The "mother of all carry trades" that Nouriel Roubini warned of recently is growing and threatening to cause a global implosion, the economist warned in a CNBC interview.

For the second time in as many weeks, Roubini cautioned that investors using cheap US dollars to embrace risk will quickly reverse course once the greenback strengthens.

But he intensified his prediction, saying that the likelihood of the Fed keeping interest rates low and thus weakening the dollar will prolong the carry trade and make it all the more painful when it starts to unwind. Roubini is an economist at New York University and chairman of RGE Monitor.

"Eventually there's going to be an end to this carry trade," he said in an interview. "When that snapback of the dollar is going occur it's not going to be 2 percent or 3 percent, it's going to be more like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they'll have to sell these risky assets across the world and you could have this huge asset bubble going into an asset bust."

With the Fed unlikely to change its monetary stance following the close of its Open Market Committee meeting today, the dollar carry trade will grow through next year and continue to boost the prices of commodities and global equities, he said.

"It's going to eventually occur but it's going to be six months from now, a year from now," Roubini said. "In the meanwhile the bubble's going to become bigger globally and the bigger the bubble the bigger is going to be the crash."

Another problem he cited was the market's pricing in of a V-shaped recovery, which would see the economy improve sharply without a significant additional decline.

Instead, Roubini predicted the bounceback will look more like a U-shaped move, with the expiration of the dollar carry trade and the subsequent popping of the asset bubble exacerbating the slowness.

"It's like a rush to the exits. When everybody tries to go at the same time there will be a stampede," he said. "Risky assets are going to collapse, the dollar's going to snap back. So the risk is that there's not an orderly way of doing it unless you more aggressively signal (a change in monetary policy). That's not what the Fed is telling us, that's not what the other central banks are telling us."

Yet Roubini conceded that at least part of the seven-month stocks rally has been based on fundamentals, but they're not strong enough to justify all of the growth.

"Part of that increase in price is fundamentals, but it's become so rapid and so perfectly correlated around the world," he said. "Price (to) earnings ratios are out of hand. So there's a signal of a bubble and that's what many policy makers in this country are worried out."

Central banks will be looking at the issue of asset bubbles more closely in the months to come, Roubini predicted.

"It's not just Roubini's worried about it," he said. "Globally, people are starting to worry about it because it's getting out of control. That's the reality of it."

If the government creates a new firewall between deposit-taking institutions and investment banks, as was the case before the repeal of the 1935 Glass-Steagall Act in 1999, only the former group would receive access to lender of last resort facilities and deposit insurance. The latter should be subject to receivership should they get in trouble. Advocates of this solution include Paul Volcker (who chaired the Group of 30 report), Mervyn King (Governor of the Bank of England), and even Alan Greenspan favors a breakup, according to recent statements (although he supported the repeal of Glass-Steagall). Among policymakers, King has made a particularly forceful case, noting that "it is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place.”