Fiscal Study

Having passionately embraced blogging, bulletin boards (BBS) and MMORPG (massively multi-player online role-playing games), China's burgeoning Internet population will soon have an array of three-dimensional virtual worlds and 3D social networks in which to work and play. By the end of 2011, 80% of global Internet users will be involved in some kind of web-based virtual activity. That would give China a virtual population bigger than the entire population of Mexico or the Philippines, writes Asia Times:

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Keeping inflation under control as the economy emerges from a yearlong sluggish spell is certain to be a matter of lively debate for Federal Reserve policymakers, Associated Press reports:

Fed Chairman Ben Bernanke and his central bank colleagues open a two-day meeting, where the economy's current and future performance will be assessed. The strength of the anticipated economic rebound, the depth of the housing slump, problems with risky mortgages, the state of the employment climate, and the direction of gasoline and other energy prices will figure prominently into those discussions.

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The Indonesian economy is likely to expand 6 percent in the first half of 2007, or lower than the government-set target of 6.3 percent, according to a minister, ANTARA News reports:

The government foresaw that the economy would fall short of the target as household consumption would grow 4-4.5 percent, investment 9 percent and government spending 10-11 percent, Finance Minister Sri Mulyani said after a cabinet meeting on the revised 2007 state budget at the Presidential Office here.
"Some variables of macro economic assumptions in the first half of 2007 have been changed," she said. The variables included inflation rate which had been changed to 6 percent from 6.5 percent, the rupiah`s exchange rate against the dollar to Rp8,970 from Rp9,300 per dollar, interest on three-month Bank Indonesia certificates (SBI) to 8 percent from 8.5 percent, and oil price to US$61.4 from US$63 per barrel, she said.

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Amid growing signs of a US economic rebound taking root, the Federal Reserve appears likely to hold interest rates steady again at its upcoming policy meeting, according to analysts, AFP reports:

The central bank, which has consistently highlighted inflation dangers while playing down risks of an economic slump despite financial market expectations to the contrary, is expected to maintain that theme at its two-day meeting opening.
The federal funds rate, at 5.25 percent for the past year, is unlikely to be changed anytime soon, say Fed watchers.

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Co-operation between the minority Liberal-Conservative coalition and its parliamentary support partner, the populist Danish People's Party (DF), is expected to remain solid until the next election, which must be held by February 2009. The Economist Intelligence Unit expects the prime minister, Anders Fogh Rasmussen, to call an election in late 2008, although an earlier date is possible if the government loses its parliamentary majority. Strong budget surpluses will allow the government to maintain a moderately expansionary fiscal policy in 2007-08.

The rate of corporate tax will be reduced from 28% to 25% in July 2007. Personal income tax cuts are likely to be introduced in 2008. We expect GDP to slow gradually from 3.2% in 2006 to 2.3% in 2007 and 1.8% in 2008. Inflation should remain moderate. The current-account surplus fell from 3.8% of GDP in 2005 to 2.4% of GDP in 2006 and is forecast to fall further in 2007, before recovering slightly in 2008.

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The U.S. economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed, Associated Press reports:

The Conference Board said its index of leading economic indicators rose a higher-than-expected 0.3 percent in May, boosted by rising stock prices, higher consumer expectations and the availability of jobs.
Economists said that jobs should continue to be plentiful, despite an unexpected surge in jobless claims last week.

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The U.S. economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed, Associated Press reports:

The Conference Board said its index of leading economic indicators rose a higher-than-expected 0.3 percent in May, boosted by rising stock prices, higher consumer expectations and the availability of jobs.
Economists said that jobs should continue to be plentiful, despite an unexpected surge in jobless claims last week.

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The United States on Wednesday moved to block a World Trade Organization investigation that stems from a Canadian complaint that the U.S. government exceeds its limits on allowable farm subsidies, CBC News reports:

Under the WTO's rules, the formation of a panel can be blocked once.
Canada took its complaint to the Geneva-based WTO earlier in June. Ottawa said that the U.S. government can provide up to $19.1 billion US in annual subsidies to its farmers, but is arguing that U.S. subsidies exceeded WTO limits from 1999 to 2002 and from 2004 to 2005.

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Construction of new homes fell in May as the nation's homebuilders were battered by the crisis in subprime lending and rising mortgage rates, Associated Press reports:

Housing, which is struggling through its biggest downturn in 16 years, is expected to continue to face troubles in the months ahead before starting to stage a sustained rebound in 2008.

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India’s industrial production growth probably slowed in April as the highest interest rates in five years began to damp consumer demand, according to the median forecast of 14 economists in a Bloomberg News survey, The Financial Express reports:

The Central Statistical Organisation will release the production numbers at noon in New Delhi on Tuesday. “The slowdown in April may be the start of the impact of monetary tightening, which was huge,” said Prasanna Ananthasubramaniam, a fixed-income analyst at ICICI Securities Ltd. in Mumbai.

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Wall Street's new masters of the universe, hedge funds and private-equity partnerships, are suddenly finding the universe a less-hospitable place, Wall Street Journal reports:

The latest pressure arose this week when the Senate Finance Committee decided to introduce a bill to tax financial-services partnerships that are publicly traded, as giant Blackstone Group soon will be, at the same higher rate paid by corporations.
This came as a private-equity industry group in the United Kingdom came under scathing attack in a committee of Parliament as it addressed the buyout firms' tax rate there, only about 10%.

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EUROPEAN countries are buffeted by two global forces: atmospheric pressures that, as it were, change the weather, silently transforming societies and the assumptions of public policy. One is climate change (a change in the weather literally). The other is demography, The Economist reports:

The two have a lot in common. Both are easily recognised but less easily understood. Both are products of complex forces and unobtrusive influences. Both create huge effects from minuscule changes. A rise in global temperature by one degree or a fall in fertility by one point may sound trivial but, over 100 years, will make the earth unbearably hot, or reshape the size and composition of societies.

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Bond markets in the UK and Europe slumped on concern that the Bank of England and the European Central Bank will continue to raise interest rates, The Telegraph reports:

The yield on the British ten-year Government bond reached 5.47pc, close to the highest in seven years, while the yield on Germany's ten-year bond jumped tp 4.63pc, the highest in almost five years.

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Retail sales rose more than twice as much as expected in May, while import prices surged, adding to recent data suggesting the U.S. economy is recovering strongly after a slowdown in the first quarter, Reuters reports:

Sales by U.S. retailers rose 1.4 percent in May as consumers shrugged off higher gasoline prices and increased their spending on cars, clothing and building materials, a Commerce Department report showed.

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China's inflation accelerated at the fastest pace in more than two years in May as pork prices soared, increasing the likelihood that interest rates will be raised, Bloomberg reports:

Consumer prices rose 3.4 percent from a year earlier, the National Bureau of Statistics said today. That was more than the 3.3 percent expected by economists. April's inflation rate was 3 percent, matching the central bank's 2007 target.
Meat prices surged 26.5 percent, helping to push inflation above the target and adding to concern that the world's fastest- growing major economy may overheat. Inflation is outpacing returns on bank deposits, encouraging households to put money into a stock market that the government is trying to cool.

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With euro-zone interest rates near a six-year high, European Central Bank policy makers are clashing over the role of the swollen supply of money in pushing up prices, Wall Street Journal reports:

That rare break in the bank's public facade of unity suggests policy makers are divided about how high to push interest rates in the 13-nation currency bloc, and it could rekindle a global debate on the merits of monitoring money supply.
Broad definitions of money supply include currency in circulation -- such as cash in consumers' pockets and retailers' registers -- as well as bank deposits, deposits in money-market mutual funds and commercial-bank reserves at the central bank.

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Japan's economy outperformed both the United States and the euro zone in January-March for the second straight quarter, reinforcing expectations the Bank of Japan will raise rates in August, Reuters reports:

The economy expanded by 0.8 percent in January-March from the previous quarter, revised up from an initial reading of 0.6 percent on robust growth in capital spending. The headline figure matched economists' forecasts, although consumption was revised down slightly from the initial reading.

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Russian president Vladimir Putin called for a radical overhaul of the world’s financial and trade institutions to reflect the growing economic power of emerging market countries – including Russia, The Financial Times reports:

Mr Putin said the world needed to create a new international financial architecture to replace an existing model that had become “archaic, undemocratic and unwieldy”.

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JUDGING by the latest burst of economic euphoria in India you would think that the monsoon had arrived early this year, bringing relief from the country's scorching heat, The Economist reports:

Indian businessmen and politicians are cheering the latest economic numbers, which appear to show that inflation is falling even as growth remains strong. This, they claim, shows that the risk of the economy overheating has faded. Their glee is premature: India's economy, like Delhi this week, remains far too hot.

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Inflation fell to 4.85% for the week ended May 26—dropping below the 5% mark for the first time in the last eight months—from 5.06% the previous week, aided by a fall in the price of food and manufactured commodities, and a high base last year, The Financial Express reports:

Inflation stood at 4.99% in the same period last year. Some analyst said a decline in inflation was very much on the cards. “The base effect, which reduced inflation, is known and understood. There is no surprise in that,” said one analyst.

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A top official seen as a potential Kremlin favorite to succeed President Vladimir Putin next year pledged Saturday that Russia would transform itself into a high-technology and industrial powerhouse and enter the top five world economies by 2020, International Business Times:

In his opening address at an economic forum in St. Petersburg, First Deputy Prime Minister Sergei Ivanov said Russia was taking steps to diversify an economy heavily dependent on oil and gas exports and further open it to investment.

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Russia, the world's 10th largest economy, plans to be one of the five biggest by 2020, according to the First Deputy Prime Minister Sergei Ivanov, Bloomberg reports:

Russia will join the ranks of the world's leading market economies as a full-fledged democracy within a dozen years, Ivanov told global business leaders at the St. Petersburg International Economic Forum today. ``What will Russia be like in 2020? It'll be a democratic state based on the rule of law,'' said Ivanov, who may be a candidate for president after Vladimir Putin's final term ends next year. Per capita gross domestic product will reach $30,000 by 2020 and at least half of Russians will be ``middle class.''

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Although there has been anxiety in financial markets all week about inflation, the Federal Reserve does not have an itchy trigger finger to hike rates, according to an expert on inflation, Market Watch reports:

Instead, inflation has been like a lumpy chair in which one can't get comfortable.
Core consumer price inflation increased 2% year-over-year in April, making it the first time in 14 months that core prices have been inside the Fed's unofficial target zone of 1% to 2%. See full story. In addition, the core CPI over the last three months has risen only 1.9%.

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Federal Reserve Chairman Ben Bernanke predicted the economy will rebound from its anemic start of the year even if the housing slump persists. Wall Street slid, taking the news as a sign the Fed won't lower interest rates, Associated Press reports:

Economic growth in the year's first three months nearly stalled, logging just a 0.6 percent pace. It was the worst quarterly showing in more than four years.
However, Bernanke said he believes some forces that figured prominently in that poor performance — including a bloated trade deficit, cutbacks by businesses in inventory investment and weak federal defense spending — "seem likely to be at least partially reversed in the near term."

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Bank Indonesia is expected to trim its benchmark interest rate a further 25 basis points to 8.50 pct at tomorrow's policy meeting, with May's relatively benign inflation report and a strong rupiah giving it leeway to continue its long cycle of reductions, most economists surveyed by XFN Asia, ANTARA News reports:

However two of those polled said they expect the central bank to sit pat, amid concerns that consumer inflation is likely to pick up this month and next.
The bank has trimmed its benchmark BI rate by a cumulative 400 bps since May last year and it currently stands at 8.75 pct.

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As India's economic ministers patted one another's backs last week, taking credit for the country's gross domestic product (GDP) recording its second consecutive year of more than 9% growth, attention turned to the problem of the parallel "black" economy - the one that remains off the books and beyond the reach of the taxmen, Asia Times reports:

The black economy, which "quintessentially was the phenomenon of the 1970s, is back and booming", said Business World, a leading business magazine, adding that it is distorting the legal economy, pushing up stock and property prices, causing inflation and even making the rupee unusually strong against the US dollar, all of which is taking its toll on the country's industries and taxpayers.

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Economic growth in the euro area slowed to 3 percent while the EU as a whole expanded by a slower 3.2 percent in the first three months of the year as household spending barely moved, according to the European Union, Associated Press reports:

The jobless rate in the 13 nations that use the euro fell to a new low of 7.1 percent in April, despite the slight slowdown, the statistical agency Eurostat said.
The economic figures come after a strong finish to 2007 that saw gross domestic product grow 3.3 percent in the euro area and 3.5 percent in the EU.

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The US economy appeared to be pulling out of a stall as figures showing surprisingly strong job creation and factory expansion pushed stocks into record territory, Financial Times reports:

With inflation also slightly softer, there is little immediate pressure on the
Federal Reserve to change interests rates in either direction.
Alan Ruskin, a currency strategist at RBS, said the figures "should send another dagger in the heart" of those investors betting that the Fed would cut rates.

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Thailand's economic growth rose a stronger-than-expected 4.3 percent in the first quarter from a year ago as an export surge offset weakness in consumption and investment growth, according to the state planning agency, International Business Times reports:

Political uncertainty continues to weigh on the Thai economy, but the surprising strength in the first quarter may explain why the Bank of Thailand said recently that it would wait to see how growth and oil price trends develop before deciding whether to lower interest rates further.
So far this year, the central bank has cut its one-day benchmark rate by 1.5 percentage points to 3.5 percent.

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Spending by Japan's largest companies rose to a record in the first quarter, indicating the world's second-largest economy probably grew at a faster pace than the government initially estimated, Bloomberg reports:

Capital spending climbed 13.6 percent in the three months ended March 31 from a year earlier, the Ministry of Finance said in Tokyo today. The pace was faster than the 10.1 percent median estimate of nine economists surveyed by Bloomberg News.

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Growth in the U.S. economy cooled in the first quarter to an annual rate of only 0.6 per cent, the weakest showing since the end of 2002, CBC News reports:

The U.S. Commerce Department said Thursday that growth in the January-to-March period was down from an earlier government estimate of a 1.3 per cent annual expansion rate.
The first-quarter figure was also down sharply from the 2.5 per cent annualized rate seen in the last three months of 2006.

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Because of endless reports on conflicts, trafficking, corruption, terrorism and extreme poverty, Central Asia's image is largely negative. When Zbigniew Brzezinski, former national security adviser to US president Jimmy Carter, spoke about the "Eurasian Balkans" in his book The Grand Chessboard to describe Central Asia, he was contributing to a pejorative stereotype that does not reflect the complex reality, and certainly does not serve the interests of the people living between the Caspian Sea and the Gobi Desert, Asia Times reports:

True, President Hamid Karzai's Afghanistan is far from stable, Pakistan's political situation is fragile, and post-Soviet Central Asia is in a difficult transition, but the region is certainly not in desperate chaos. If one can measure the constructive role played by Xinjiang in the middle of a new Silk Road, and put aside the irrelevant notion of a "Great Game", Central Asia appears as a source of hope and a land of opportunities. One has to rethink Central Asia as a key component of a Eurasian axis of development.

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IF YOUR biggest shareholder is Berkshire Hathaway, the chances are you are a firm with a future. Moody's, a rating agency in which Warren Buffett's investment company owns a 17% stake, is certainly in fine fettle. Its operating margin last year was 54%; revenue is growing at close to 20% a year, The Economist reports:

This is thanks largely to the explosion in issuance of “structured finance” products: bonds backed by mortgages, car loans and the like, as well as the derivatives linked to them. Rating these products now accounts for almost half of the firm's business. The other giant of the industry, Standard & Poor's (S&P), is also in rude health. It has helped to drive its parent company's shares up by more than 30% in the past year.

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