TUESDAY JANUARY 4, 2011 A18

VIEWPOINT

US mustn’t overreact to good news

BY PAUL KRUGMAN Various economic indicators, around 2.5 per cent a year just with that kind of growth, the un- terest rates this year – or at least
THE NEW YORK TIMES ranging from relatively good hol- to keep up with rising productiv- employment rate would be close that is what the futures market
iday sales to new claims for un- ity and population, and, hence, to 9 per cent at the end of this seems to think. Doing so in the
face of high unemployment and

I
F THERE is one piece of eco-
nomic wisdom I hope peo-
ple will grasp this year, it is
this: Even though we may have
stopped digging finally, we are
still near the bottom of a very
deep hole in the United States.
Why do I need to point this
out? Because I have noticed
many people overreacting to re-
cent good economic news. What
particularly concerns me is the
risk of self-denying optimism –
that is, I worry that US policy-
makers will look at a few favour-
able economic indicators, de-
cide that they no longer need to
promote recovery and take steps
that send us sliding right back
to the bottom.
So, about that good news:
employment insurance (which
have finally fallen below
400,000 a week), suggest that
the great post-bubble retrench-
ment may finally be ending.
Construction shows no sign
of returning to bubble-era levels.
Forecasters have been mark-
ing up their predictions –
growth as high as 4 per cent this
year now looks possible.
Hooray! But, then again, not
really. Jobs, not gross-domes-
tic-product numbers, are what
matter to American families.
And when you start from an un-
employment rate of almost 10
per cent, the arithmetic of job
creation – the amount of growth
you need to get back to a tolera-
ble job picture – is daunting.
First of all, we have to grow
keep unemployment from ris-
ing. That is why the past 11/2
years were technically a recov-
ery but felt like a recession:
GDP was growing, but not fast
enough to bring unemployment
down.
Growth at a rate above 2.5
per cent will bring unemploy-
ment down over time. But the
gains are not one for one. For a
variety of reasons, it has histori-
cally taken about two extra
points of growth over the course
of a year to shave one point off
the unemployment rate.
Now, do the maths. Suppose
that the US economy were to
grow at 4 per cent per year, start-
ing now and continuing for the
next several years.
Yet, the maths says that even
year, and still above 8 per cent
at the end of next year.
Seriously, what we are look-
ing at over the next few years,
even with pretty good growth,
are unemployment rates that
not long ago would have been
considered catastrophic – be-
cause they are.
So, what can be done to accel-
erate this all-too-slow process of
healing? A rational political sys-
tem would long since have creat-
ed a 21st-century version of the
Works Progress Administration
– we would be putting the unem-
ployed to work doing what
needs to be done, repairing and
improving our fraying infra-
structure.
There is even a significant
chance that the Fed will raise in-
minimal inflation would be cra-
zy, but that does not mean it
will not happen.
So, back to my original point:
Whatever the recent economic
news, we are still near the bot-
tom of a very deep hole. We can
only hope that enough policy-
makers understand that point.
myp@sph.com.sg
HELPDESK
Overreacting: 反应过度的
fǎn yìng guò dù de
Daunting: 令人沮丧的
lìng rén jǔ sàng de
Rational: 理性的 lǐ xìng de
Fraying: 损坏的 sǔn huài de

FOREX GUIDE

EUR to fall further behind USD

This is a new section in JANUARY CALL
my paper where we Trade call: Sell EUR/USD 1.379
1.374
explore the forex market Entry price: 1.3335 1.369
and events that may Stop loss: 1.3445
1.364
1.359
influence trading 1st profit: 1.3225 1.354
1.349
2nd profit: 1.3115
What’s happening in the 1.344
1.339

reaL Singapore
1.334
1.329
1.324
1.327 1.319
1.314
1.309
1.305
Two men BY MARIO SANT SINGH 1.300
1.295
wrestle in the Nov 15
2010
Nov 22
12pm
Nov 29
8pm
Dec 7
4am
Dec 14
12pm
Dec 21
8pm
Dec 29
4am
middle of road THE “January Effect” is a calen- SOURCE: FX PRIMUS
dar-related anomaly in the financial
markets where the prices of certain versely, I expect it to drop against US unemployment rate on Friday
financial securities tend to rise in the Swiss franc. I expect figures to come in at 9.7
the month of January.
This is because the Swiss franc is per cent, down from the previous
First discovered in the early 9.8 per cent.
Ferrari driver fast becoming the preferred choice
1980s by then research student Don-
for safe-haven destinations over the
tries to overtake ald Keim of the University of Chica-
USD. Last year, investors flocked to TRADE CALL
go, the phenomenon occurs due to
illegally in tunnel an increase in buying, because inves-
the currency, attracted by the coun- Sell EUR/USD at 1.3335
try’s steady growth and sound fiscal
tors typically sell in December to off- On the last day of 2010, EUR/USD
position.
set capital gains. reached a high of 1.3424 but failed
As Switzerland is an export-ori-
Many investors also repatriate to gain momentum past that. No-
their money at the year’s end to tidy ented country, one would have as- tice the slight gap down when pric-
Abused dog sumed that its economy would be
up their balance sheets. Is the “Janu- es opened to start a new week in the
left with huge ary Effect” evident in the forex mar- hurt by the strength of its currency new year.
gash on head kets? last year. To everyone’s surprise, I expect prices to continue to fall
however, its export sector was unaf- due to downward momentum. We
Let’s have a look, in particular, at
fected even though the Swiss franc will have two targets on this trade.
the USD. In seven out of the last 10
rose to record highs against the
years, the EUR and the Swiss franc
have lost ground against the USD EUR and the USD last year. Entry price = 1.3335
Will you pay In fact, on the last day of 2010, Stop loss = 1.3445
in January.
$6.60 for a packet This was especially evident last the USD fell to an all-time low of 1st profit = 1.3225
of ‘famous’ 0.92997 against the Swiss franc. 2nd profit = 1.3115
year, when the credit crisis sent in-
nasi lemak? vestors into the safe-haven USD.
Amid Europe’s debt problems, I TOP NEWS THIS WEEK myp@sph.com.sg
expect this to continue this month United States non-farm employment
for the EUR/USD currency pair. change on Friday The writer is the founder and
However, I do not see the USD I expect figures to come in at chief executive of FX1 Academy,
strengthening markedly against the 135,000 (previous numbers were which provides education in forex
Swiss franc during this time. Con- 39,000). trading.