Good News from Bond Markets: Is QE Already Working?

The Fed's decision to start printing money has generated no shortage of debate. On one hand, devaluing the US dollar to try to inflate asset prices in hopes of kick-starting spending, investment and job creation seems like a cheap trick that's bound to go badly -- after all, as critics point out, it seems to encourage the US to just keep on racking up larger and larger debts. On the other hand, the Federal Government seems unable or unwilling to produce stimulus packages large enough to do the job, leaving it to the Fed to figure out how to lower unemployment. Many argued that QE2 might not work, since handing cash to banks might not result in expanded credit. Banks aren't stupid: if economic conditions mean that lending out more will only result in more bad debts, they'll sit on their cash or use it to buy more bonds and sell those to the Fed for a profit. Or they'll lend it to their own traders and other hedge funds so it can be invested in higher-yielding bonds or stocks or other securities at home or overseas.

Some have argued that the goal of QE2 is to lower interest rates and therefore borrowing costs. This is only partially true. While the goal of quantitative easing is to pump cheap cash into the economy, the goal is not to push down long-term interest rates for homeowners to refinance. That might make sense: the promise that the Fed will buy $600 billion in Treasury bonds would drive up the price and drive the corresponding yields lower. In fact, the opposite is happening. Remember that inflation is the enemy of bonds, since it reduces the real value of repayments in the future. More importantly, inflation generally coincides with higher interest rates, which make existing bonds with lower rates less attractive as assets, particularly since they can end up yielding negative real returns. So the prospect of the Fed pumping cash into the economy and creating inflation should tend to push prices for longer-term bonds lower and yields higher.

In fact, this is what has been happening since Fed Chairman Ben Bernanke first suggested that he might launch a new program of bond purchases back in late August at Jackson Hole, Wyoming. Since then, yields on short-term Treasuries have dropped, while yields on longer-term Treasuries have climbed. The result is what is known as a steepening yield curve, which because it suggests rising inflation in the future, also implies accelerating economic growth. Here is the result in charts (with thanks to Stockcharts.com:

Here's the yield curve the day before Beranke's Jackson Hole speech:

And here it is today:

The difference in yields is small, but the overall effect is a steeper curve.

In Fast-Growing Asia, New Attention on Quality Over Quantity

Automakers received an unexpected boost in August, when Asian sales surged thanks to variations on the American "cash for clunkers" scheme to encourage consumers to turn in old gas guzzlers and buy new, cleaner models. The US plan, you may recall, was designed in part to help rescue the American auto industry, but ended up doing more to boost sales of Japanese and Korean cars. So Tokyo decided in April to offer consumers rebates if they would also purchase new hybrid cars. And in June, China followed suit, offering even larger subsidies to consumers in five cities that bought more environmentally friendly cars.

More than just a plan to revive domestic auto sales, the moves are part of a broader shift among Asian policy makers from pursuing economic growth at all costs to promoting what is widely known as "green growth." Asian governments used to focus almost exclusively on GDP growth as the barometer of policy success, but as rapid development creates growing environmental and social stresses, more policy makers are focusing on how to make their economies better, and not just bigger. Fast-growing economies in which citizens face crippling pollution and destabilizing disparities in income aren't necessarily healthier economies. So governments are quickly bringing sustainable growth, once a rallying cry for non-governmental organizations, into the policy mainstream.

2010 Is the International Year of Biodiversity: This Is Good News for the Planet

The United Nations declared 2010 to be the International Year of Biodiversity, a celebration of life on Earth and of the value of biodiversity for our lives. This is good news for the planet, highlighting steps that have already been taken and those that can yet be taken to safeguard the variety of life on earth: biodiversity.

According to the United Nations Environment Programme, “restoring lost and damaged ecosystems - from forests and freshwaters to mangroves and wetlands - can trigger multi-million dollar returns, generate jobs and combat poverty.” It maintains that “far from being a tax on growth and development, many environmental investments in degraded, nature-based assets can generate substantial and multiple returns.” These include restoring water flows to rivers and lakes, improved soil stability and fertility vital for agriculture and combating climate change by sequestrating and storing carbon from the atmosphere.

And governments worldwide are already taking action. For instance, initial studies compiled by The Economics of Ecosystems and Biodiversity indicate that restoration of grasslands, woodlands and forests offer some of the highest rates of returns. Examples include:

• The Turkish city of Istanbul has increased the number of people served with wastewater treatment over 20 years from a few hundred thousand to over nine million ‑ 95% of the population ‑ by rehabilitating and cleaning river banks, relocating polluting industries, installing water treatment works and re-establishing river-side vegetation.


• In Vietnam, planting and protecting nearly 12,000 hectares of mangroves has cost just over $1 million but saved annual expenditure on dyke maintenance of well over $7 million.


• In Rwanda, the Democratic Republic of Congo and Uganda, strict law enforcement has helped restore the critically endangered mountain gorilla population back to a slight increase in the Virungas National Park ‑ and is generating large revenues from tourism.


• Restoration of over 500 hectares of mangroves in India's Andhra Pradesh region has increased the population of edible crabs and fodder for livestock thereby boosting local incomes while increasing biodiversity such as otter and birds, at a cost of only $3 million over seven years.


• Coastal ecosystems in Biscayne Bay, Florida have been restored for annual benefit worth $1.7 million.


• Banning unsustainable fishing methods, reintroductions of native fish species and re-planting of native aquatic grasses have transformed the once highly polluted and degraded Lake Hong in China. Since 2003, water quality has improved dramatically, rare birds like the Oriental White Stork have returned after 20 years and fisher folk have seen incomes triple.

Beyond governments, businesses are also lending a helping hand. Cimpor’s Conservancy in South Africa has eradicated some 65% of invasive plants. In addition, a large portion of this successful clearing exercise has seen the reintroduction of indigenous grasses that serve as a major food source for certain birds. In Brazil, the company’s quarry in Atlantic Forest area, one of the most endangered tropical biomes in the world, and considered as one of the largest biodiversity repositories globally, is being carefully rehabilitated. CEMEX is also doing conservation and restoration in Costa Rica, Mexico and France, among other places, to keep its quarries and surrounding areas healthy. Mondi has a sustainable wetlands program in South Africa, and Syngenta has one in Spain. Lafarge protects onsite wildlife and biodiversity.

And the list goes on. All of these drops in the bucket eventually overflow and the result is a healthier world with greater biodiversity benefitting all inhabitants.

According to Achim Steiner, UN Under-Secretary General and UNEP Executive Director: "The ecological infrastructure of the planet is generating services to humanity worth by some estimates over $70 trillion a year, perhaps substantially more.” Due to the impact of biodiversity on all our lives, 2010 is thus THE year to undertake biodiversity efforts and highlight what has already been done.