March 23rd, 2010
05:19 PM GMT
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Ever get the feeling that something is about to happen, but you just don’t know what, or when, or how serious it will be? The last week has given me that feeling of unease in the financial world but I am not entirely sure why.

There were lots of little things that we could get excited about. For instance, the Obama health care package getting closer to a vote in the US congress; the Greek Government flirting with going to the IMF; the UK Treasury borrowing less than it forecast… But there was actually very little to get your teeth into and say “now we have direction”.

So, it is not surprising that the markets on both sides of the Atlantic didn’t do much at all. A look at the daily movements tells the tale. The Eurostoxx 50 closed the week just 0.01% lower. While the Dow Jones in New York gained on four of the five days last week, but barely budged more than 1% over the total week.

This was hardly exciting stuff.

However, if you looked beneath the surface there were indeed matters worthy of note. For instance, the warning by the rating agencies, including Moody’s that the AAA rating on US government debt was at risk because of the high government deficit.

At first blush this is huge. Absolutely monumental. The very thought that the US could lose its gold-plated top notch rating is just about unthinkable.

US treasury bonds are the backbone of the financial system. Any change in the debt rating would not only push up the cost of servicing the debt to the federal government, it would hit the dollar, and of course the value of those investments.

According to the US Treasury, China alone, holds $890 billion dollars worth of bonds. No wonder Beijing has been getting antsy about its investments.

Initially there was a lot of scepticism about these warnings. The US dollar is still the world’s principle reserve currency, with more than 62% of all reserves held in dollars, so there will always be buyers for US debt.

Then there are the agencies themselves. These are the very groups who continued to award investment grade ratings to the sub prime and collateralised debt that exploded during the crises. The agencies’ failure to issue warnings of dangers ahead, means their reputation has been sullied to say the very least.

With those caveats in mind, however, we shouldn’t allow our distaste of the messenger to destroy the message.

At 10%, the US is running a deficit which is unsustainable in the long term. Even though the President has forecast that the deficit will be reduced to 4% by 2013, there are so many optimistic assumptions, forecasts and simple unknowns that it is easy to obfuscate the true picture, and therefore the balance is probably on the downside.

This is really what the warnings from the agencies were about: a call that they should not temporize on cutting the deficit. . Begin now before it is too late and avoid trouble later. Alas, the warnings have been lost – the popular belief that the rating would ever be cut. And so the good ship ‘Borrowing’ sails majestically forward.

A boring week ? Not a bit of it. We may look back on last week as the start of something big.

March 23rd, 2010
02:18 PM GMT
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The UK government has announced that the country will spend nearly $60 million on the creation of a new space agency that it says will help fulfill its ambitions in outer space.

Should we bother exploring space?

The agency will be a hub for the country's space activity and scientists will study data generated by earth observation satellites and analyze information to understand the effects of climate change.

The agency will also focus on advising on the security and resilience of space systems around the world.

The space industry supports nearly 70,000 jobs in the UK and contributes nearly $9 billion to the economy.

The move by the UK government to commit millions of dollars to the space industry is in stark contrast to a recent decision by U.S. President Barack Obama to scrap it's lunar program.

NASA's Constellation program had sought to send astronauts back to the moon by 2020.

Constellation also intended to study the idea of establishing a moon colony. The program was set to follow the U.S. space agency's shuttle missions, which are due to end in September.

Instead of building new spacecraft of its own, NASA is planning to invest in space technology research and spend $6 billion to pay private space groups to develop and build new rockets to take astronauts into orbit.

The plan leaves many open questions about the future of U.S. space travel, including if and when NASA will ever build rockets of its own again, when astronauts will return to space and in what kind of spacecraft.

We want to know what you think.

Do you think it's worth spending billions of dollars in space exploration? Should we bother going back to the moon?

Filed under: BusinessQuest Means Business

March 23rd, 2010
02:54 AM GMT
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The tit-for-tat battle between Beijing and Google may be getting the headlines today, but it’s only an overture for the real battle brewing between China and the West.

On Capitol Hill, a group of lawmakers stood before reporters last week and warned about the evils of China’s undervalued currency, the yuan. Armed with new legislation to punish China, Democratic Senator Charles Schumer said the U.S. was ‘fed up’ with Beijing’s policies, which he says is costing the U.S. jobs, hampering the recovery and fueling its massive trade deficit.

The new bill was the latest in a series of recent and very public moves intended to press China to raise the value of the yuan.

But will these pressure tactics succeed? Probably not. If there is one thing Beijing has been consistent about, it’s that it rarely bows to foreign pressure, especially on issues affecting its economy. And any move to appease the U.S. would be interpreted as a sign of weakness, which Beijing has been reluctant to show.

And what if China did act? Would that solve the problems facing the U.S. economy? Again, probably not.

As economist Stephen Roach of Morgan Stanley said recently while being interviewed on another network, the U.S. isn’t facing a ‘China problem,’ but rather a domestic one. And targeting China is the result of Washington refusing to look into the mirror.

Other economists have also said a stronger yuan will do little to address a high U.S. unemployment rate or a massive trade deficit. And if anything, a stronger yuan would likely do nothing more than stoke U.S. inflation.

And don’t underestimate the weight behind China’s threats to retaliate, should the U.S. follow through with sanctions. Like it or not, China is becoming the driver of the global economy. And that has huge implications for America Inc. With companies like General Motors and Boeing increasingly looking to China for business, a warning from China should give reason to worry.

In fact, signs of a worsening political relationship may already be working its way into business relations. A survey from the American Chamber of Commerce showed a growing number of U.S. companies say they feel unwelcome in China and face discriminatory government policies.

There is little to be hopeful about as trade tensions escalate. The next big volley will likely come April 15th. That's when the U.S. Treasury is to consider whether to label China a currency manipulator in its semi-annual report.  And if many lawmakers on Capitol Hill have their way, they just might.

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