Friday fun: Not about Gordon Brown

Lest we become little more than a Labour gossip rag, a much-needed break from British politics.

Have you ever wondered what German football, 1970's fashion, fat sideburns and Brazilian samba have in common (I know, who hasn't)? Well, you can sleep soundly tonight boys and girls...



I love Germany.

That Was The Week That Was

Politique
-G7 finance ministers meet in Rome following the passage of an $787bn US stimulus package. US Treasury Secretary Geithner received a not-so welcome reception at the meeting, with some ministers critical of the US deficit and "Buy America(n)" provision present in the final bill. While the meeting provided window treatment to the tensions over protectionism, it is clear that a substantive lack of coordination and consensus is setting the global economy up for a period of tense economic relations. G7 communique text here.

-The Israeli election ended in a stalemate as Kadima won a shock 1-seat minority victory over Likud. The insurgent candidacy of far-right party Yisrael Beitenu and its leader Lieberman shook the political establishment, banishing Labour to the political wilderness and winning the key to an eventual coalition government.

-Venezuelans voted again on abolishing term limits. Chavez has raised tensions in the run up to this vote by denouncing an opposition and US-led "coup" plot.

-For the first time, Pakistan officially acknowledged that "some part of the conspiracy" against Mumbai was carried out on its soil.

Economia
-US Treasury secretary Geithner unveiled an "outline" of the Obama administration's financial system rescue plan. The heavy on intentions, light on details presentation was immediately rebuffed by markets, commentators and policymakers begging for more clarity and substance.

-Karl-Theodore zu Guttenberg assumed the economic portfolio in Angela Merkel's coalition. The move comes less than a week after it was announced that German industrial output fell in December by its largest margin since unification.

-In testimony before Congress, US director of national intelligence Dennis C. Blair said that the global economic crisis was the most urgent threat to US, and global, security. The global political instability, economic uncertainty and diminished US authority stemming from the crisis surpassed the threats posed by terrorism and nuclear proliferation.

The Rest
-In the FA Cup, Everton beat Villa, ManU over Derby, and Swansea forced a replay against Fulham at the Cottage. In other Prem news, Big Phil went bye bye. In Serie A, Becks looked set to return to L.A. after the MLS imposed Friday deadline (or tactic?) passed without a deal. In Spain, Raul broke the all-time goals record at Real Madrid.

-In the biggest study of its kind, researchers found that regular multivitamin use did little to prevent cancer or heart disease in older women.

-Walking down Amsterdam Avenue in Manhattan yesterday, my wife and I stumbled upon a disheveled, mad scientist looking Malcolm Gladwell. As we approached the best-selling author, he very clearly slowed down to walk parallel to us, awkwardly incapable of disguising the fact that he was eavesdropping on our animated, but admittedly unremarkable, conversation. I am convinced that we are now the subject of his next book, Caring for the Elderly, and demand royalties.

Inflation or Deflation? The Fed and Market Expectations

Well, we are exactly one month from the announcement that inflation in the United States had reached a 17-year high of 5.6%. Now Paul Krugman is reporting that expected rate of inflation has fallen to the point where we may be talking about deflation. Granted, this chart is apparently based on core inflation which does not include oil & food - two of the main drivers of recent inflation - but oil has also retreated over recent weeks, easing some of the pressure.

This journal reported earlier that inflation was probably going to be a temporary, one-year hit, but this is a bit surprising. This development may also shore up Ben Bernanke's position against the inflation hawks* on the Fed Open Market Committee, who have been pushing for interest rate hikes for some time - hikes which would increase the cost of borrowing and dampen the rebound capacity of the American economy. In a nutshell, the hawks believe that the Fed's current low rate of interest is enough to fuel inflationary expectations; if Krugman's interpretation of bond rates is accurate, then the market disagrees. The Fed meets again on Tuesday so stay tuned for that.

Unfortunately, the specter of inflation is still haunting much of the rest of the world like that nearly-headless Harry Potter character. Instead of stimulating export growth, the plummeting pound sterling has so far only raised the prospective costs of imports for the UK. Meanwhile, the European Central Bank is also struggling with entrenched inflationary expectations as Germany's largest trade union is setting itself up for the largest pay hike in 16 years, to the tune of 7 or 8%. What higher inflation in Europe will mean for the rest of the global economy is something worth considering closely.

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*This post is the first of many appearances by Harold, the inflation hawk. His brother, Pete the deficit hawk, has been vacationing in the tropics for a while, with dire consequences.

I will take your wealth...

...but not your politics. Or so says Germany, which has just passed a new law making it easier to block investments that would lead to foreign (non-EU) investors owning more than 25% of German firms. This is clearly a shot across the bow for sovereign wealth funds (SWFs) based in politically unsavoury countries like Russia, China and Saudi Arabia, where opaque investment guidelines and fear of political leverage has raised public attention on the issue. Nor is Germany the first country to make a move on this issue: Australia beefed up its foreign investment screening criteria earlier this year, and many other wealthy countries are reviewing their current policies. For a very detailed and thoughtful analysis on current trends regarding SWFs and foreign investment criteria, see Rachel Ziemba here.

Given the number of classmates that just spent their summers researching the IPE implications of SWFs, I'm expecting a flood of comments/emails explaining to me what Germany's new law means for the relationship between investment, trade, and politics. While I'm waiting on that, I will point you to two editorials on the subject: the first by Paul Maidment over at Forbes, the second by the Economist. The cartoon in the 2nd link alone is worth the jump.