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For all George Bush’s talk of liberty, democracy and the rule of law, he has retreated on matters of principle before the advancing powers of India and China

In May of 1977 two friends who were well on their way to becoming the most successful film makers in the world were sitting together on a beach in Hawaii.

McCain needs to pick his partner very carefully. A heartbeat away from the Presidency matters more when the heart in question will be 72 at the time of the inauguration. Here are some of the suggestions: 1) Tim Pawlenty The…

The epic contest for the Democratic presidential nomination looks as though it is at last winding down. With his convincing victory in North Carolina and the narrowest of defeats of Indiana, Barack Obama finally appears unbeatable. Mrs Clinton, whose fighting spirit has been one of her greatest assets through this protracted campaign, would be wise to call it a day.

Now that the Bank of England has got off its high horse and decided to support
British banks in much the same way that the European Central Bank has been
supporting Spanish and German banks since last August, governments around
the world are finally committed to publicly funded financial workouts. This
is the “Plan B” that I have described here – the inevitable next stage in
the credit crunch, once it became apparent that a market-based solution was
doomed to fail. Now that Plan B has swung fully into action, global credit
conditions should gradually return to normal in the months ahead. The bad
news is that “normal” does not mean anything like the conditions that have
prevailed in the world financial system and the global economy during the
past few years.
Three lasting changes in the world economy are likely to result from the
credit crunch. First, the US economy, which should start to recover this
summer in response to fiscal and monetary stimulus, will no longer be
powered by housing and consumption, but mainly by exports and manufacturing.
Secondly, the British and European economies, which are 12 to 18 months
behind the US in a broadly similar monetary cycle, will only now begin to
experience an economic slowdown and housing slump as serious as the one that
has almost ended in the US. So, while the credit crunch may be in its final
stages globally, its economic impact will probably be far more noticeable
from now on in Britain and Europe than in the United States.
Thirdly, the emerging economies of Asia and other developing regions will no
longer enjoy export-led growth as consumption in America and Europe becomes
structurally weaker. If the developing countries are to continue growing
rapidly – and I believe that they will – they must rely on domestic
consumption, infrastructure investment and their own home-grown property
booms.
These three fundamental shifts in the world economy are by now widely
recognised. There is, however, another apparent consequence of the credit
crunch that is less understood and is causing consternation and anxiety,
especially in China and other developing countries. This is the upsurge in
oil, food and commodity prices, many of which have almost doubled since the
credit crunch began last August, even though the causal linkage between
soaring commodity prices and a collapsing supply of credit remains obscure.
If anything, the credit-induced slowdown in global economic growth and
consumption since last August should have weakened demand for commodities
and therefore pushed down prices. Yet the reality is that commodity prices
have recently leapt higher every time the global banking system was hit by
some new shock.
As a result, China and other emerging countries, which last year were
preparing to boost domestic consumption to compensate for weaker exports to
the US, are now more worried about inflation and are raising interest rates
to try to slow their domestic growth. This is potentially a very dangerous
development for the world economy, which increasingly relies on domestic
demand from Asia, the Middle East and Russia. This unexpected policy
tightening by emerging nations also explains why stock markets fell far
harder in Asia than in America and Europe in the first quarter of this year.
Why, then, has a global collapse in credit created a boom in commodity demand?
The short answer is that nobody knows. A common explanation in the media is
that soaring commodity prices reflect a global panic about inflation, as the
Federal Reserve Board supports the US banking system by printing money and
slashing interest rates.
This explanation does not pass muster for at least three reasons. First,
because US inflationary pressures are already subsiding as a result of the
credit crunch and the associated fall in house prices and employment.
Secondly, because the ECB and the Bank of England show no sign of imitating
the Fed’s expansionary monetary policies, yet commodity prices are soaring
in sterling and euros as well as dollars. Thirdly, because the commodities
rising fastest – such as rice, wheat and pork – cannot be used as long-term
stores of value and so must reflect the balance of supply and demand for
instant use, rather than fears about loose monetary policy and its possible
effects on inflation many years ahead.
What, then, has suddenly boosted demand for agricultural commodities and how
might this be related to the credit crunch? A possible explanation is that
the rise in prices itself has triggered a self-sustaining upward spiral of
demand, in which investors, wholesalers and final consumers want to buy more
of a commodity each time its price rises and this leads to more hoarding and
still higher prices. Such self-sustaining price trends are normally rapidly
reversed because value-oriented investors and commodity producers start to
trade against the trend, selling more each time the price rises. In present
conditions, however, it is harder than usual for speculators to trade
against the rising price trend, because bank lending has dried up. Several
American grain wholesalers, for example, have been pushed towards bankruptcy
because they have sold futures against grain supplies they bought in advance
from US farmers and have then been unable to finance these temporary “short
positions” until the next harvest comes along.
By draining liquidity in this way from all financial markets, the credit
crunch has exacerbated trend-following behaviour among investors, promoted
stockpiling throughout the global supply chain and encouraged hoarding by
consumers. This financially driven process, rather than a sudden increase in
Chinese and Indian appetites, has probably been the main cause of this
year’s shortfall in global food supplies.
Similar influences may explain other surprising linkages that have suddenly
emerged between financial markets. Since the credit crunch’s start,
commodity prices have developed an uncanny correlation with the euro/dollar
exchange rate (see chart) and this currency trend, in turn, has been
powerfully correlated to two other momentum-driven trends – the collapse in
US Treasury bond yields and the widening of credit spreads.
If all these trends are driven ultimately by lack of liquidity in global
financial markets, they are all likely to turn at about the same time, or in
a fairly tight sequence - and this process may now be starting. The trend in
credit spreads began to reverse in mid-March after the Bear Stearns rescue –
and last week, more or less on cue, the predominant direction of the US bond
market seemed to switch from lower to higher bond yields. If this rise in US
bond yields proves sustainable, the overwhelming currency momentum against
the dollar and in favour of the euro may also start to reverse. If that
reversal occurs, the trend in commodities should soon follow and the panic
about inflation in China and other emerging economies should start to
subside. At that point, we will finally be able to say that the worst of the
global credit crunch is over.

A brush with India’s labyrinthine bureaucracy has convinced Joe Leahy of the scale of the government’s task in working out how to provide the right incentives to turn civil servants into public servants

Amy Yee gets a bear hug from the Dalai Lama, who argues only talks betwen Tibetan leaders and their Chinese counterparts would resolve the conflict now engulfing his homeland.

While Goa does have a harder edge, the laid-back coastal state is no more dangerous than any tourist area in the developed world, writes Joe Leahy

Stock market falls since the budget show investors are punishing poor policymaking by a weak coalition government, writes Jo Johnson

In a populist approach ahead of elections, India’s budget is likely to feature a push to revive the flagging agriculture sector, writes Amy Yee

Beneath the glamour of the city, a groundswell of violent regionalist politics is rearing its ugly head, writes Joe Leahy

Beneath the glamour of the city, a groundswell of violent regionalist politics is rearing its ugly head, writes Joe Leahy

Despite mounting health problems, a renewed effort to crack down on smoking is encountering resistance at all levels of society, says Amy Yee

Despite mounting health problems, a renewed effort to crack down on smoking is encountering resistance at all levels of society, says Amy Yee

Changes afoot in the capital may well herald the beginning of the end of India’s long infrastructure nightmare, writes Jo Johnson

Changes afoot in the capital may well herald the beginning of the end of India’s long infrastructure nightmare, writes Jo Johnson

In India’s worshipful equity culture, no company captures the imagination of retail investors in quite the way Reliance does, writes Joe Leahy

In India’s worshipful equity culture, no company captures the imagination of retail investors in quite the way Reliance does, writes Joe Leahy

A traditional tolerance for poor quality in India is wearing thin as the range of consumer goods grows and customers become more demanding as they spend more, says Amy Yee

A traditional tolerance for poor quality in India is wearing thin as the range of consumer goods grows and customers become more demanding as they spend more, says Amy Yee

In a move that runs against the very culture of driving in Mumbai, a city of 18m, traffic police have begun cracking down on noisy motorists, writes Joe Leahy

In a move that runs against the very culture of driving in Mumbai, a city of 18m, traffic police have begun cracking down on noisy motorists, writes Joe Leahy

The stream of overseas remittances bolstering India’s economy could turn into a mightier river if advances like mobile phone banking take hold, says Amy Yee

The stream of overseas remittances bolstering India’s economy could turn into a mightier river if advances like mobile phone banking take hold, says Amy Yee

The Sensex’s future is looking uncertain, but market bulls have reason for optimism. One wild card, however, is the strong rupee, writes Joe Leahy