Friday, October 31, 2003

Thaksinomics On Track

Continuing evidence Thaksinomics is not just a fluke. I'll be keeping my eye on this little country more than any other. This is the world's only real experiment in FDR-TVA style macroeconomics. It bears watching. I'm hoping it lasts to serve as a workable model for the rest of the world's real macroeconomic solutions.

Riding on Macro Tigers
Daniel Lian (Singapore)

A Real and Virtuous Super Upswing

It has been our long-held view that the Thai economy has entered a sustained period of economic upswing. This upswing should last at least a few more years -- ‘a super economic cycle’. The primary forces behind Prime Minister Thaksin Shinawatra’s ‘super cycle’ have been initial creative macro policies to reverse cyclical doldrums and asset deflation, followed by well-thought-out policy initiatives to create structural resilience in domestic demand. Capital creation projects to create structural domestic demand resilience are at the core of such initiatives.

This exercise has been strengthened by two efforts: first, growing non-mass-manufacturing winners to position Thailand as a niche economy; and second, an intensive effort by the government to squeeze efficiency out of the Thai public sector and the economy in general. Putting the timetable of these capital creation projects together and assuming a continued rise in other ‘second track’ economic activities, we believe the Thai economy -- which barely started to accelerate in 2002 -- will continue to grow rapidly until at least 2007 or 2008. This upswing should feature an acceleration of GDP growth from 1.9% in 2001, when Mr. Thaksin assumed office, to 6-8% in the next few years, on our forecasts.

Two Macro Tigers

Mr. Thaksin’s economic program in a sense has successfully bred two macro tigers, one the real economy, and the other the asset markets. During the first two-and-a-half years of his tenure, these tigers reinforced each other and forged a healthy symbiotic relationship. While the revival of asset markets and credit demand has featured prominently over this period, both have kept the same healthy pace and have supported each other. ...Article Continued
Other Article Link

Thursday, October 30, 2003

Keynesian Economics - Again?

Just a good short overview of John Maynard Keynes' theories:

Keynesian Economics
by Alan S. Blinder

Keynesian economics is a theory of total spending in the economy (called aggregate demand) and of its effects on output and inflation. Although the term is used (and abused) to describe many things, six principal tenets seem central to Keynesianism. The first three describe how the economy works.

1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policy. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policy, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policy affect aggregate demand. A few economists, however, believe in what is called debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below). ...Article Continued

Wednesday, October 29, 2003

The Philosophy of Cant - Monbiot

Oh, how I wish I could say it as well as Monbiot:

George Monbiot: "The Philosophy of Cant"

Europe wrecked the world trade talks, but it may accidentally have forced the poor world to assert its power.
By George Monbiot

Were there a Nobel Prize for Hypocrisy, it would be awarded this year to the European trade negotiator, Pascal Lamy. A week ago, in the Guardian's trade supplement, he argued that the World Trade Organisation "helps us move from a Hobbesian world of lawlessness, into a more Kantian world -- perhaps not exactly of perpetual peace, but at least one where trade relations are subject to the rule of law".1 On Sunday, by treating the trade talks as if, in Thomas Hobbes's words, they were "a war of every man against every man", Lamy scuppered the negotiations, and very possibly destroyed the organisation as a result. If so, one result could be a conflict, in which, as Hobbes observed, "force and fraud are ... the two cardinal virtues."2 Relations between countries would then revert to the state of nature the philosopher feared, where the nasty and brutish behaviour of the powerful ensures that the lives of the poor remain short.

At the talks in Cancun, in Mexico, Lamy made the poor nations an offer they couldn't possibly accept. He appears to have been seeking to resurrect, by means of an "investment treaty", the infamous Multilateral Agreement on Investment. This was a proposal which would have allowed corporations to force a government to remove any laws which interfered with their ability to make money, and which was crushed by a worldwide revolt in 1998. In return for granting corporations power over their governments, the poor nations would receive precisely nothing. The concessions on farm subsidies Lamy was offering amounted to little more than a reshuffling of the money paid to European farmers. They would continue to permit the subsidy barons of Europe to dump their artificially cheap produce into the poor world, destroying the livelihoods of the farmers there.

Of course, as Hobbes knew, "if other men will not lay down their right ... then there is no reason for anyone to divest himself of his: for that were to expose himself to prey." A contract, he noted, is "the mutual transferring of right", which a man enters into "either in consideration of some right reciprocally transferred to himself, or for some other good he hopeth for thereby."3 By offering the poorer nations nothing in return for almost everything, Lamy forced them to walk out. ...Article Continued

A Billion Children In Poverty!

Stories like this bring you to tears - a horrendous human tragedy! To the IFI's - Do something - Now!

Terms of Trade

Lost livelihoods

From Maxine Frith, "Global trade keeps a billion children in poverty, says Unicef,"

International targets to reduce child poverty are going to be missed because globalised trade and cuts to aid budgets are creating an ever-greater chasm between the richest and poorest countries.

More than one billion young people in the developing world are now living in conditions of severe deprivation, according to a report for the United Nations Children's Fund (Unicef). Tens of millions of children in developing countries still do not have access to basic human needs such as food, water and sanitation, the study found.

The report is the first attempt to scientifically measure world poverty, and paints a grim picture of how little the lives of the world's poorest people have improved in the last few years.

A UN declaration in 2000 pledged that by 2015, it would halve the proportion of people whose income was less than one dollar a day and achieve a similar reduction in the number of people suffering from hunger. The declaration also pledged to cut the death rate among the under-fives by two thirds and ensure that all children could complete primary school.

Shailen Nandy, a co-author of the report, said: "At this rate, the goals are unlikely to be met, given declining international commitment to development aid. The results of cutting public spending on basic social services have been an increase in poverty and inequality, a fact which organisations like the World Bank need to acknowledge."

Campaigners warned that globalisation, and pressure on developing countries to liberalise trade, were adding to poverty. ...Article Continued

Tuesday, October 28, 2003

Monbiot - The Flight to India

George Monbiot has posted an article to the Guardian which helps expand on my post yesterday. His new book "The Age of Consent" is an interesting yet dangerous read - very powerful arguments - Genius?

George Monbiot

The jobs Britain stole from the Asian subcontinent 200 years ago are now being returned

If you live in a rich nation in the English-speaking world, and most of your work involves a computer or a telephone, don't expect to have a job in five years' time. Almost every large company which relies upon remote transactions is starting to dump its workers and hire a cheaper labour force overseas. All those concerned about economic justice and the distribution of wealth at home should despair. All those concerned about global justice and the distribution of wealth around the world should rejoice. As we are, by and large, the same people, we have a problem.

Britain's industrialisation was secured by destroying the manufacturing capacity of India. In 1699, the British government banned the import of woollen cloth from Ireland, and in 1700 the import of cotton cloth (or calico) from India. Both products were forbidden because they were superior to our own. As the industrial revolution was built on the textiles industry, we could not have achieved our global economic dominance if we had let them in. Throughout the late 18th and 19th centuries, India was forced to supply raw materials to Britain's manufacturers, but forbidden to produce competing finished products. We are rich because the Indians are poor.

Now the jobs we stole 200 years ago are returning to India. Last week the Guardian revealed that the National Rail Enquiries service is likely to move to Bangalore, in south-west India. Two days later, the HSBC bank announced that it was cutting 4,000 customer service jobs in Britain and shifting them to Asia. BT, British Airways, Lloyds TSB, Prudential, Standard Chartered, Norwich Union, Bupa, Reuters, Abbey National and Powergen have already begun to move their call centres to India. The British workers at the end of the line are approaching the end of the line. ...Article Continued

Sunday, October 26, 2003

Thaksinomics - The New New Deal!

Dr. Thaksin Shinawatra deserves the Nobel Prize in economics. He has instituted policies in his nation not seen anywhere in the world since F.D.R. His policies are even much further reaching, thus improving the lives of all in his nation. He deserves the entire world's immediate attention. All IFI's, NGO's, heads of state, politicians, economists, all social/political leaders and people in general should familiarize themselves with his success story in Thailand. It is nothing short of miraculous. It is also complete from the ground up - from poor local communities to the rich major cities. The entire world could be rejuvinated by following Dr. Thaksin's lead. It is also possible - globally!

Keynote Address - Thaksinomics

Our policy does not merely make capital accessible and move it closer to the grassroots, but with capital, we also provide them with options of economic activities. The One Tambon-One Product or OTOP project -- a Tambon is what we call a group of villages or a sub-district -- was also introduced to draw on the local expertise, know-how, skill and innovation. Each tambon will work on the kinds of products it is good at. The government will assist them in the area of marketing throughout the country and around the world. After 2 years, the success of OTOP has been more outstanding than anyone could have anticipated. The OTOP sale in its second year was over 17 billion baht or 420 million US dollars.

And for the local businesses to prosper, I believe in encouraging local entrepreneurial talent. The local SMEs, as a fundamental factor of our economic success, must be promoted. The SMEs? activities represent the majority of the economic activities of the country. The SMEs are a major contribution to the national growth and a major source of employment. For these reasons, I had the SME Promotion Office and the SME Bank set up to promote existing and increasing the number of entrepreneurs in a systematic way with a view to expanding the national productivity base, provide R&D support, and offer tax cuts and investment incentives.

We have employed a multipronged approach of tax incentives for new businesses, rationalization of export procedures, and stimulation of grass-roots demand. Such measures have boosted domestic consumption, decreased over-capacity of production, and enabled our diversified export items to flow to the new sector of global demands. This has been done in such a successful way that has surprised even some of us in the Government! ...Article Continued

Friday, October 24, 2003

Potential Dollar Scenarios

A fair and balanced article. I can't say I support a restrictive gold standard as a solution, but Dr. Sennholz has written, an otherwise, very fair and accurate article. I would sooner see a "units of production" standard backing the world's currencies... I still applaud him for his candor.

Potential Dollar Scenarios

Dr. Sennholz is President of The Foundation for Economic Education, Irvington-on-Hudson, New York and a consultant, author and lecturer of Austrian Economics. His web site is

Never before in recent history have monetary and fiscal policies been as 'stimulative' as today, and yet, the American economy remains weak and vulnerable. The Federal budget deficit for the 2003 fiscal year was posted at $555 billion, some six percent of GNP; it may continue to rise in coming years when new tax reductions add their weight. The Federal Reserve System has opened its flood gates and reduced all interest rates to their lowest levels since the 1950s. Its basic rate now stands at just one percent permitting the stock of money in all its forms to soar at frightening rates. Government and Federal Reserve officials are convinced that this combination of stimuli is bound to facilitate an annual growth rate of 3.75 to 4.75 percent, just like that of the late 1990s.

The fact that this opinion is widely held by many officials and economists is no evidence that it is accurate; indeed, in our age of inflation and economic manipulation, an official pronouncement is more likely to be political than sensible. With the gates wide open, the rush of liquidity is bound to inflict serious harm not only on the American economy but also on global conditions. The Federal Reserve's utter disregard of the market rate of interest, which guides the efficient employment of all factors of production according to consumer choices, is bound to do great harm to the economic structure. It causes severe maladjustments and imbalances which market forces sooner or later are bound to correct.

Record-low interest rates encourage present consumption and generate massive debt. In just five years, total financial as well as non-financial American debt has surged by 51 percent or $10.9 trillion to more than $32 trillion, three times the annual Gross National Product. The Federal government itself is chafing under $6.8 trillion debt and adding $1.6 billion a day every day. At present interest rates, this debt alone commands charges of $300 billion a year, or more than $1,000 per man, woman, and child. It may be no concern for officials and politicians who, like Franklin D. Roosevelt, reassure us that internal debt merely is a debt by the nation to the nation and interest payments just are payments to ourselves. But it frightens this observer. It may soon distress millions of households which, tempted by low mortgage rates, converted their housing equities into consumer goods and new debt. During the last quarter alone American households added $397.6 billion in mortgage debt and another $40 billion in credit card debt. The annualized rate amounts to more than $1.5 trillion or approximately fifteen percent of GNP. If it is true that the living standard of Americans has been stagnant for years, we must draw the startling conclusion that this boost in debt was needed to maintain it. If the rate of new indebtedness should ever decline, or the people should choose to repay some debt, living standards would surely plummet.

Facing the mountain of debt, even President Roosevelt would be frightened today as nearly one-half of the U.S. Treasury debt is held by foreigners. The Bank of Japan alone owns $440 billion of Treasury securities, the Bank of China some $122 billion and more every day. Other Asian governments hold $166 billion. They have become major creditors because U.S. trade deficits, which are a direct consequence of the super stimulation, now exceed $500 billion a year. Yet, U.S. dollars do not readily plunge in foreign exchange markets, as other currencies would, because they are special, they are the primary reserve currency of the world. Central and commercial banks and millions of individuals all over the world hold and use them; some central banks eagerly purchase them in order to assist their own export industries. In Keynesian fashion, they promote employment by weakening their own currencies. ...Article Continued

Jobs - What Goes Around, Comes Around

Well, it's about time someone posted a good historical perspective of jobs and economics. I think this is as much clarity as anyone needs. Even though the article is about England, America - ouch!


"Britain's industrialisation was secured by destroying the manufacturing capacity of India. In 1699, the British government banned the import of woollen cloth from Ireland, and in 1700 the import of cotton cloth (or calico) from India. Both products were forbidden because they were superior to our own. As the industrial revolution was built on the textiles industry, we could not have achieved our global economic dominance if we had let them in. Throughout the late 18th and 19th centuries, India was forced to supply raw materials to Britain's manufacturers, but forbidden to produce competing finished products. We are rich because the Indians are poor.

Now the jobs we stole 200 years ago are returning to India. Last week the Guardian revealed that the National Rail Enquiries service is likely to move to Bangalore, in south-west India. Two days later, the HSBC bank announced that it was cutting 4,000 customer service jobs in Britain and shifting them to Asia. BT, British Airways, Lloyds TSB, Prudential, Standard Chartered, Norwich Union, Bupa, Reuters, Abbey National and Powergen have already begun to move their call centres to India. The British workers at the end of the line are approaching the end of the line." ...Article Continued

Thursday, October 23, 2003

B.I.S. - Derivatives On The March - Speculation?

This is the market that reveals the true size of the global transactions bubble. It is the most complex of markets. It bears watching.

O.C.C. Derivatives 2003
Exchange-traded markets return to life - B.I.S.

Following a long period of stagnation, exchange-traded markets have experienced a remarkable recovery since 2001. Whereas turnover in the exchange-traded financial contracts monitored by the BIS averaged about $360 trillion in the second half of the 1990s, average activity in the first two years of the new millennium rose by nearly 80% to $644 trillion. Much of that higher turnover resulted from an unprecedented increase in the trading of short-term interest rate contracts to an average of $512 trillion in 2001 and 2002. Activity in government bond contracts also increased substantially, even if by less in absolute amounts.

This recovery can be attributed to a number of factors, some of which appear to have been cyclical and others of a longer-term nature. The main cyclical factor seems to have been monetary easing since early 2001. Long-term factors include a possible shift away from the OTC market due to concerns about counterparty credit risk and the introduction of new hedge accounting rules. While more extensive research would be required in order to quantify the relative contribution of the various factors, this box offers a preliminary discussion of the most likely recent sources of market growth.

Stock index contracts return to expansion

Trading in stock index futures and options returned to expansion in the second quarter of 2003 after a slight contraction in the previous quarter. Aggregate turnover rose by 11% to $18.6 trillion. As was the case with fixed income contracts, the growth in activity was higher in the Asia-Pacific region, up 20% to $6.3 trillion, and in North America, up 9% to $8.3 trillion, than in Europe, where business expanded by only 2% to $3.9 trillion. Stock index business rises in Korea and the United States. ...Report Continued

Wednesday, October 22, 2003

The Theory of Money - Douglas Vickers

This article by Doug Noland is some three years old yet very important, as it describes our and the world dilemma accurately, today. It is based on John Law, Douglas Vickers' - "The Theory of Money" and Richard Cantillon. It may be of help in understanding the U.S. and world monetary system problem, and future course. ...Link

"The use of banks has been the best method yet practiced for the increase of money." John Law (1671-1729)

"The paper credit which, with such encomiums to themselves they boast to have set up, what effects has it produced, but only to lull the nation asleep, while the ready money that should even carry on our common business, has been exported." "�Can this imaginary wealth stand the shock of a sudden calamity?" Charles Davenant (1656-1714)

"When a State has arrived at the highest point of wealth�it will inevitably fall into poverty by the ordinary course of things. The too great abundance of money, which so long as it last forms the power of States, throws them back imperceptibly but naturally into poverty." From Richard Cantillon�s Essai (written between 1730 and 1734)

It is our basic premise that the U.S. monetary system (as well as global) is both fundamentally and severely flawed, and that an extremely unstable system again finds itself acutely vulnerable. Particularly here in the U.S., the preponderance of monetary expansion has come to revolve around asset price inflation. This is unsustainable, dysfunctional, and should today be recognized as a big problem. It is furthermore our strong contention that the very foundation of current economic prosperity is overwhelmingly monetary in nature. The boom has not been the consequence of new technologies, New Economies, New Eras or New Paradigms, and, as well, it is certainly not due to some miraculous increase in productivity. Instead, this has been primarily a historic financial bubble fueled by extreme money and credit inflation � or stated another way: absolutely reckless lending and speculative excess.

The boom has created little in the way of true economic wealth, but instead only the seduction of a massive inflation in perceived financial wealth; just mountains of financial claims. In fact, the source of this fateful boom is conspicuous in the data. Since 1995, broad money supply has increased a staggering $2.6 trillion, or 60%. Total credit market instruments have surged an astounding $9.3 trillion, or 54%, to $26.5 trillion. And, most unfortunately, since 1998, extraordinary excess has regressed into an absolute monetary fiasco, with broad money supply having jumped $1.5 trillion (27%) and credit market instrument $5.3 trillion (25%). Today, it is our strongly held view that we are falling head first into what should be appreciated as a very complex monetary crisis, the inevitable consequence of nurturing years of runaway credit bubble excess. It is, moreover, quite disconcerting to recognize how ill prepared we are as a country � citizens, businessmen, politicians, investors, central bankers and, particularly, the financial sector.

We have before compared the present cycle to John Law�s great Mississippi Bubble in France around 1720. Law, of course, introduced paper money and a �managed currency� system that fostered manic financial speculation and a spectacular bubble. This unsound boom abruptly gave way to an inevitable devastating financial and economic bust, discrediting John Law, his monetary theories and banks generally. This week, I am again highlighting monetary theory, hoping to shed further light on the gravity both for what has transpired and for what lies ahead. For valuable insights into Law�s system and monetary theory in general, one of our favorite sources is Dr. Douglas Vickers� Studies in the Theory of Money 1690-1776, first published in 1959. We will use a few quotes and analysis that are particularly pertinent today: note that a key aspect of Law�s failed system was a monetary authority with responsibility for regulating money supply.

"The central theoretical argument behind (John) Laws� banking proposals was concerned with the regulation of the supply of bank money to the demand for it in such a way that the desired and physically potential volume of trade may be realized (�by this money the people may be employed�) and the value of the currency maintained." Douglas Vickers, The Theory of Money

"This paper money will not fall in value as silver money has fallen or may fall�But the commission giving out what sums are demanded, and taking back what sums are offered to be returned; this paper money will keep its value, and there will always be as much money as there is occasion or imployment for, and no more." John Law

"This principle of the issue of notes and their return to the issuing authority dependent on the needs of trade was to recur in the later history of banking theory. The fallacy now, as later, lay in the failure to recognize that the reflux of notes gave the issuing authority power to contract its outstanding issue, but did not in any way compel it to do so. The assumption upon which the contrary proposition is based is that businessmen�s demands for currency for trade purposes could be regarded as independent of the actions of the monetary authorities. It was on precisely the fact that interdependent relationships within the monetary system did exist, however, that the purely theoretical adequacy of Law�s proposal foundered." Douglas Vickers, The Theory of Money

This is a key paragraph from Dr. Vickers. Importantly, John Law�s Mississippi Bubble was destined to fail as it lacked appreciation for "interdependent relationships within the monetary system" - or monetary processes. Law admitted as much after the spectacular collapse in 1720: "There are good reasons to think that the nature of money is not yet rightly understood." For too long the Fed has acted to peg short-term interest-rates and ensure "adequate liquidity in the marketplace" - basically nurturing leveraged speculation - without regard for the monetary processes set in motion that have come to structurally impair the U.S. financial system and economy through a massive inflation in money and credit.

From the current feeble understanding (and lack of interest) in the nature of monetary processes, it is clear that there has been a most unfortunate disregard for history; that many harsh lessons have been forgotten over the past 280 years. We don�t know if the current monetary boom is, like Law�s scheme, a big monetary experiment gone terribly awry, or if it has simply been a case of a reckless and wildcat financial sector combined with ineptness and negligence from the Greenspan Federal Reserve. Either way, there are clear and quite disconcerting parallels between these two booms. I will try to highlight some of the key monetary aspects that I believe clearly illuminate the serious flaws and vulnerabilities in the current monetary system.

"In the first place, the essence of Law�s scheme was his proposal for the monetization of certain existing assets�in the second place, Law�s proposal to base the issue of notes on the security of the value of land begs the essential question of the stability of value of the land itself. Quite apart from changes in real asset values dependent upon growth or variation in their intrinsic income-producing potential, the money value of the assets could change as did the availability of the notes of issue themselves. The theoretical possibility existed of an unlimited expansion of the note issue, pari passu with an induced and cumulative upward movement in the money values of the assets eligible as security." Douglas Vickers, The Theory of Money ...Article Continued

China - India - S.E. Asia - Japan - The Real Story!

You've never read a must read like this before:

Economic Development in China -- Lessons for India - Capital Ideas Online

......Just another story of similar thing in Thailand. So when you go to Bangkok you notice that there are lots of empty apartments and you might ask what are these? These are stupid. When they built these apartments they knew they were stupid. But they built these apartments not to house people but to generate loss in transactions which could be skimmed. So once again we have got some Chinese in here and they owned these companies. So by the time he got to 51 percent of that -- he only owned 1/16 of the equity of this company. This company at the bottom built the apartments. Where did they get the money from? It gets the money from the family bank. So the family bank lends money to these apartments, this company buys the land from this company at 10 times the price and buys cement from this company at 10 times the price. So pretty soon it becomes unable to repay the loan. And that would be the end of the story except that this is the beginning of the Asia Pacific century and Citibank shows up and says gosh, this is the Asia Pacific Center. We need to establish a branch in Bangkok. And so they show up and they meet with the locals and they start making loans to the construction company and these loans are guaranteed by this bank. Of course the bank is already insolvent but they don't know that, because the accounting is not what it should be. So what they do is due diligence firstly they get a mortgage of the land to secure their loan and the mortgage is based on the valuation provided by one of the cousins of this family and the loan is guaranteed by this insolvent bank. So the best thing that will happen to all of the above is the Asian financial crisis. Because that throws up a huge mass of giant discussions in the course of which the Citibank gets the IMF to force the Thai government to honor the guarantees of this bank. So this bank is already insolvent but because the Thais need the IMF to support their exchange rate they have to agree to take up the loans of Citibank. So Citibank gets away scot-free and all these guys get away scot-free and the only people who suffer are the Thai taxpayers because they are so busy coping with the Asian financial crisis that they don't really know what is going on.

So, I have told you some stories and I will skip some statistics and tell you about the evidence that this is going on on a very large-scale in East Asia. What you do is you look at the dividends -- the point is that dividends by definition are paid out to people in proportion to their capital exposure. So if there is a company at the bottom of the pyramid than the controlling shareholder gets very few of the dividends only 30 percent of 50 percent of 50 percent of 50 percent of 30 percent. So they are more interested in shifting value out of the company by some unfair related party transactions like the type I have described. So one sure fire way of identifying where the ripoff is this taking place is looking at the correlation between the dividend rates and the position in the pyramid. Where the position in the pyramid can be measured in the following way. ...Article Continued

Tuesday, October 21, 2003

Thailand's 'quiet revolution' in Thaksinomics:

Here's an interesting experiment in new/old economics. Let's hope it works. I love ideas toward achieving subsidiarity. Thailand's prime minister Thaksin Shinawatra bears serious introspection.


Bloomberg's William Pesek on Thailand's 'quiet revolution' in Thaksinomics:

John Maynard Keynes. Milton Friedman. Karl Marx. Adam Smith. Thaksin Shinawatra. The last name, that of Thailand's prime minister, rarely gets grouped with modern history's best-known economic theorists. But Thaksin, a self-made billionaire, is vying for a role as economic visionary in Asia, if not the entire developing world. Thailand is using this year's meeting of 21 Asia-Pacific Economic Cooperation nations as a coming-out party for ``Thaksinomics.'' Here in Bangkok, a DVD touting its merits is being passed out. It carries Thaksin's smiling face on the cover and boasts that his plan makes nations less reliant on exports and ``offers a new role for Thailand in the global economy.''

Some local commentators say Thaksin should be on the shortlist for a Nobel prize in economics. And with Thai stocks up 80 percent this year, his reputation as an economic guru is growing. The buzz has the Philippines scrambling to adopt Thaksin's plan for economic revival. Malaysia and Indonesia also are giving it a look. Yet Thaksinomics could have a dark side that leaders should consider before jumping to adopt it: debt. The thrust of the ``dual track'' plan is to keep on exporting, while stimulating the domestic side of the economy. It's all about getting Asia out of the trap of export dependence and, here, Thailand has had remarkable success. The economy is growing about 6 percent this year, the second fastest in Southeast Asia after Vietnam.

Thaksin has been especially aggressive with what's called ``managed asset reflation,'' which aims to boost demand among households and businesses without creating another bubble. This $136 billion economy was, after all, at the epicenter of the 1997 Asian financial crisis. Bangkok's move to devalue the baht set the meltdown in motion. Yet Thaksinomics may be little more than old-fashioned pump priming dressed as something new and revolutionary. At its root is cheap money: official interest rates are at a record-low 1.25 percent, meaning credit has never been so affordable or accessible. Household spending sprees on cars, motorbikes, homes and cellular phones are driving the nation's post-crisis recovery.

So are Thaksin's efforts to force banks to lend to farmers and other rural Thais. The state-run Government Savings Bank and the Bank for Agriculture and Agriculture Cooperatives were ordered to lend about $2 billion to tens of thousands of villages for households to invest in small businesses and farm produce. Thailand's debt-driven boom looks great today, but what happens when the economy slows? Considering Thailand's unimpressive progress in ridding banks of bad loans, this is no small risk. In July, Standard & Poor's estimated bad loans in the financial system accounted for about 30 percent of assets. ...Article Continued

Monday, October 20, 2003

China: Sharp Slowdown Ahead

A little early warning from Andy Xie in China.

Morgan Stanley

Andy Xie (Hong Kong)

The Chinese economy is likely to slow down sharply next year. It is now growing at the fastest pace in ten years. Electricity consumption has grown at 14.9% on average for the past five quarters versus an average of 7.9% in the 1990s. We believe that the economy will revert to normal growth rates next year.

We expect growth rates for the export and property sectors to halve next year. Exports have been growing at 30% YoY this year and could decelerate to 15% next year, as foreign direct investment decelerates. Commercial property under construction is likely to rise by 26% this year to 1,170 billion square meters. Inventory in the property sector appears to be rising rapidly and selling prices falling. We believe that this sector could grow by 10% next year at best.

Our current GDP forecast for 2004 is 7.8%. This is still compatible with our current view. We are marking up this year?s growth rate to 8.5% to be in line with government guidance. ...Article Continued

Sunday, October 19, 2003

Asia, Its Reserves and the Coming Dollar Crisis

I feel this book by Richard Duncan so important, I am posting an article about it again. Anyone seriously wanting or needing accurate thoroughly researched information must read this article and associated book.

Asia, its reserves and the coming dollar crisis

By Richard Duncan
Author of the new book, The Dollar Crisis, Richard Duncan explains why the dollar is the source of global deflation.

FinanceAsia: Posterity may remember it as a seminal book in the field of 21st century economics. Indeed, rarely has a book offered such a grim yet well argued view of the current economic situation facing the world and Asia. The author - a former Salomon banker, and World Bank staffer - is Richard Duncan and the book is called the Dollar Crisis. In this essay, the American explains why the US dollar is at the root of global deflation, and recent bubbles, and what it will mean for Asia.

During the 30 years since the breakdown of the Bretton Woods International Monetary System, the global economy has been flooded with dollar liquidity. International reserves are one of the best measures of that liquidity. During the quasi-gold standard Bretton Woods era, international reserves expanded only slowly. For example, total international reserves increased by only 55% during the 20 years between 1949 and 1969, the year Bretton Woods began to come under strain. Since 1969, total international reserves have surged by more than 2000%. This explosion of reserve assets has been one of the most significant economic events of the last 50 years.

Today, Asian central banks hold approximately $1.5 trillion in US dollar-denominated reserve assets. Most of the world's international reserves come into existence as a result of the United States current account deficit. That deficit is now $1 million a minute. Last year, it amounted to $503 billion or roughly 2% of global GDP. The combined international reserves of the countries with a current account surplus increase by more or less the same amount as the US current account deficit each year. So central bankers must worry not only about their existing stockpile of dollar reserves, but also about the flow of new US dollar reserves they will continue to accumulate each year so long as their countries continue to achieve a surplus on their overall balance of payments.

With the depreciation of the dollar rapidly gaining momentum, Asian central bankers are scrambling to find alternative, non-dollar denominated investment vehicles in which to hold their countries' reserves. Consequently, this is a topic that is attracting considerable attention in the press.

There is a related issue of much greater importance being entirely overlooked, however. The surge in international reserves has created unprecedented macroeconomic imbalances that are destabilizing the global economy. The global economic disequilibrium caused by these imbalances is the subject of this article. It is also the subject my recently published book, THE DOLLAR CRISIS: Causes, Consequences, Cures (John Wiley & Sons, 2003).

Since the breakdown of Bretton Woods, dollars have replaced gold as the international reserve currency. The international monetary system now functions on a Dollar Standard rather than a Gold Standard. ...{Article Continued}

Saturday, October 18, 2003

Doug Noland - Credit Bubble

Lot's of people mistakingly think the market has no downside fault, recently. How quickly they forget when false confidence enters their foolish bones. It must creep in through their toes, clear to their greedy demented little brains. I really truly feel sorry for those who can not read the handwriting on the walls of global finance. I fear we're in for a rough ride - maybe not this year, but surely next. A world of massively excessive credit and liquidity - massive global debts - and a truly severe shortage of demand - where will real sustainable growth come from - deflationary/bubble increasing China? What is the marketable limit to our deficit growth? ...{Derivatives - C.H.I.P.S. - Dollar}

Credit Bubble

...And now some brief thoughts regarding the current Extraordinary Environment. For the first time in history, we operate in a global financial system dictated by unfettered money and Credit creation. There is absolutely no control over the quantity or quality of monetary expansion. There’s no gold standard, no dollar standard, No Standards. Things have regressed to “Wildcat Finance” on an unprecedented global scale.

The U.S. is in the midst of an historic Credit Bubble that is coveted by a self-serving Wall Street and nurtured by our incompetent Federal Reserve. It has gotten so out of control that the Fed’s role is simply to sustain an unsustainable Bubble and hope to avoid a debt collapse. This is disastrous central banking. I fear that Wall Street is self-destructing; I fear that our Credit system is self-destructing. And these dynamics are going to have a major influence on our careers and lives, so I urge independent study.

The great American economist Hyman Minsky was known – and harshly criticized - for arguing that Capitalism is “flawed.” Much of his analysis evolved from his brilliant understanding of the “roaring twenties” and the subsequent financial collapse and Great Depression. Very liberally paraphrasing Minsky, there are miraculous attributes of risk-taking and profit-seeking in the real economy that interplay with the financial system’s tenacity for achieving both earnings gains and expansion. But, when left unchecked, there is a propensity for over-expansion and increasingly risky behavior. The system can run out of control, which spawns financial fragility, economic distortions, and eventual self-destruction.

Minsky’s powerful analysis is quite pertinent today. But I would argue that instead of “flawed,” Capitalism is, instead, inherently vulnerable. I will try out my Eyeball Analogy: One could argue that there is a serious “flaw” in the design of our eyeballs – something with such a critical function shouldn’t be so soft, delicate, and left unprotected to the elements. Yet it is the very nature of this organ’s amazing functionality and capabilities that create its vulnerability. Your eyeball and Capitalism are not flawed, but they are – by their very nature – Inherently Vulnerable. Article Continued

Friday, October 17, 2003

Rogue Nation: American Unilateralism and the Failure of Good Intentions

Clyde Prestowitz - Real Audio Feed

"Examining the erosion of goodwill toward the United States, Prestowitz lays out a scathing criticism of American foreign policy. He insists that America's intentions are usually good, and that the world admires Americans when they live up to their own ideals. However, according to Prestowitz, the world is able to see, with glaring clarity, some of the hypocrisies of American foreign policy and this is a primary source of resentment." ...{Audio Link}

China - Overheating?

Here's the latest news from China. We had better pay attention!

China's 3rd-Qtr GDP Grows 9.1%, Faster Than Expected

--- China's economic growth accelerated to 9.1 percent in the third quarter, driven by increased investment as Sony Corp. built factories and China United Telecommunications Corp. expanded its network to meet demand.

The rate was higher than the 6.7 percent reported in the second quarter and the 8.7 percent median forecast of five economists surveyed by Bloomberg News. Growth for the full year will probably be about 8.5 percent, the pace achieved in the first nine months, National Bureau of Statistics Deputy Director Qiu Xiaohua, said at a press briefing in Beijing.

China's economy, the sixth largest in the world, is growing more than twice as fast as the five biggest -- the U.S., Japan, Germany, the UK and France. Including Hong Kong, China is now the top export destination for South Korea and Taiwan and one of the three biggest overseas markets for Japan, Thailand and Singapore.

``China is really the engine that drives the entire region,'' Ford Motor Co. Chief Executive Officer William Clay Ford Jr. said at a separate briefing in the Chinese capital. ``We do expect to expand aggressively in China.''

Ford, the world's No. 2 carmaker, today said it plans to spend as much as $1.5 billion boosting production at its plant in the city of Chongqing, southwestern China. The company, keen to grab a bigger slice of the world's fastest-growing auto market, said it will add a second factory and an engine-making plant.


Sony, the world's second-biggest consumer electronics maker, said it has invested $8 billion so far in China and predicts the country will become its No. 2 market -- behind the U.S. -- within five years. China Unicom, the nation's No. 2 mobile-phone-service provider, ordered a $139 million code- division-multiple-access network from Nortel Networks Corp. in the third quarter.

Fixed-asset investment, which includes foreign direct investment and accounts for about a third of China's economy, rose 31 percent in the first nine months of this year as companies such as Sony invested in new plant and machinery, and the government built roads, bridges and dams. That's helping to create jobs and boost incomes in the world's most populous nation.

The government said 6.25 million jobs were created in the first nine months and the official urban jobless rate at end- September was 4.2 percent. The average disposable income in towns and cities -- home to two-fifths of China's 1.3 billion people -- rose 9 percent to 6,347 yuan ($767) in the first nine months of this year, the statistics bureau said today.

Cheap Labor

Even as incomes climb, Chinese wages are among the lowest in the world. The hourly pay for a Chinese manufacturing worker is 61 cents rather than the $16.14 paid in the U.S., according to a study by economists at the Federal Reserve Bank of Dallas.

Cheap labor is helping convince Sony, Siemens AG and other overseas companies to choose China as a hub for their operations. Siemens, the world's biggest engineering company, has invested more than $700 million in the 40 units it has in China. Chief Executive Officer Heinrich von Pierer, in an interview Monday with Der Spiegel magazine, said he could hire 12,000 Chinese software programmers for the cost of 2,000 German ones.

Foreign direct investment into China rose 12 percent to $40.2 billion in the first nine months of this year. This directly accounts for about 5 percent of the nation's gross domestic product and the factories built with these funds produce half China's exports.

Overseas sales, which make up about 30 percent of the economy, increased 30 percent in the third quarter and factory production rose 32 percent. Retail sales, which account for more than two-fifths of the economy, rose about a 10th. {Article Continued}

Thursday, October 16, 2003

Warning - Socialist Point of View!

I do not subscribe to this point of view, but I thought it a well written and informative article worth sharing. It gives us a bird's eye view of others' ideas, that may not jive with our own perspective, yet is none the less an important issue in understanding others' thoughts. The entire article is worth a read.

The Eruption of Militarism and The Crisis of American Capitalism
by Barry Grey
...Contradictions of American capitalism

What underlies this colossal hubris?

At the most fundamental level there is the underlying crisis of the world capitalist economic system, whose contradictions find their most concentrated expression in the crisis of American capitalism. For nearly four decades now the bourgeoisie has been confronted with a chronic state of stagnation and decline in the rate of profit, particularly in basic industry. Beginning with the Carter administration in the late 1970s, and then in earnest under Reagan and his successors, the US ruling elite has sought to offset this problem by ripping up the relations of relative class compromise that predominated in the 1950s and 1960s and enormously intensifying the rate at which the American and international working class is exploited.

On the domestic front this entailed the deliberate introduction of mass unemployment and a campaign of union-busting and wage-cutting, combined with the deregulation of industry, tax cuts for big business and the wealthy, and attacks on social programs. In the field of foreign policy it meant a vast buildup of the military and a far more aggressive policy of confrontation with the Soviet Union and military intervention around the world. At the same time the US pursued a deliberate policy of driving down the market price of raw materials imported from abroad, in the process bankrupting the economies of the so-called Third World.

In the end, however, this policy of intensified militarism abroad and social reaction at home did not, and could not, resolve the underlying crisis. As a result, the business boom of the 1980s and 1990s was increasingly fueled by outright fraud and criminality. Swindling, corruption and accounting fraud grew to unprecedented proportions as the corporate elite generated much of its profits by "cooking the books." This not only produced the inevitable collapse of the speculative bubble in 2000, it brought to the fore of American corporate and political life the most backward, predatory and reactionary social elements.

The collapse of the Soviet Union removed a significant restraint on the global imperialist ambitions of the American ruling elite. It left the US in a position of unchallenged military supremacy, and encouraged those elements within the political establishment who believed that American capitalism could resolve all of its problems by means of military force. This was notoriously summed up after the first Persian Gulf War by the Wall Street Journal, which editorialized that the central lesson of that intervention was, "Force works!"
Article continued

Tuesday, October 14, 2003

Auerback - Dire Warnings!

Are most people worried about the wrong things? Many worry about corporations taking over the world. Others are extremely concerned about the environment. Still others are most concerned about political corruption. Well, it is true these are all real concerns and by me as well, but I have much more serious concerns than all these put together. I am concerned with what controls all the above. By this I simply mean the money - the dollar as the reserve currency of the entire world - $6trillion external liabilities - U.S. Treasury figures. Now why do I call this the reserve currency of the entire world? Because it is adding to the fractional reserves of all our trading partners' banking systems, thus multiplying not only their reserve capacities, but ours as well - on the quasi-return trip. The problem with this is an increase in world overliquidity at the same time the world is suffering from a true lack of global demand. I simply ask, can we reflate ourselves and the entire world out of its deflationary position with all the overly indebted/bankrupt nations - without contributing errors toward the next crash? Marshall Auerback poses the same question?

The Great Sucking Sound of Imports

.....While this may seem to be a stable situation in the near term, there are a number of reasons to see it as ultimately unsustainable and hugely dangerous over the medium term. For one thing, we believe there is a fundamental flaw in the approach of Dooley, Folkert-Landau, and Garber. Their analysis fails to take account of the enormous differences between the US external financial position today versus the time of the Bretton Woods, where the US had a massive current account surplus and effectively accounted for about half of all global activity. The sheer magnitude of the American debt today is enormous, and thus the asserted ability of the “trade account” nations (principally China and the Asian NICs) to indefinitely absorb investment adjustments made by those in the “capital account” regions surely must have limits. The Federal Reserve flow of funds analysis points to an even bigger number of $7.6 trillion of US financial assets held by the rest of the world. In this context, a 5 per cent "trim" is equivalent to a $380.6b desired sale by the foreign private sector of US dollar denominated financial assets. This would amount to a 40 per cent surge in foreign official holdings in one year (one quarter?), assuming the Dooley et al mechanism is put in motion, and foreign central banks monetize the purchase of these desired foreign private sales. This is a peculiar form of international economic stability which depends on grotesquely large currency intervention over years to keep the currency of the centre country from collapsing.......

.....Unfortunately, the U.S. is a country with a trade deficit and must also borrow to pay the interest on its debt. Because the interest rate on that debt exceeds the U.S.’s growth rate, the compounding of capitalized interest payments alone will tend to raise the nation’s relative indebtedness. Because the U.S. is such a vast economy, it cannot eliminate its current account deficit as readily as a smaller economy. When it tries to improve its trade balance through devaluation or through restrictive demand management, its sheer size affects the economies of its trading partners adversely and to an appreciable degree. Understandably, they object and resist. When foreign economies resist dollar devaluation and the dissipation of their current account surpluses, the U.S. may have to raise interest rates in order to induce creditors to continue financing its debt build-up. For this reason, it is reasonable to expect that the chronic U.S. current account deficit and mounting external debt will ultimately raise long term U.S. interest rates. And this, in turn, will speed up the compounding of the interest due on the U.S. external debt and will make the debt trap dynamics even more vicious. At that point, what author Charles Kindleberger (Manias, Panics, and Crashes, Basic Books, 1989) calls a “credit revulsion” might ensue, producing a catastrophic outcome for the U.S. economy not like that of the early 1980s, the 1994 Mexican crisis, or the Asian financial crisis of 1997/98. Not even US multinationals will patriotically stand in the way of that particular freight train. ...{Article continued}

Monday, October 13, 2003

Herman Daly - Economic Heresy?

Herman Daly has long been a lone wolf in the Ph.D. halls of professional economics, yet if anyone wants to truly make sense of present eco-enviro-social reality you must read his work. He is no one to be taken lightly as he has the experience of working at the World Bank for six years, as their senior environmental economist. If you want or need a thoroughly awakening eco-environmental point of view, Herman Daly offers more than you can imagine. His ethicosocial and biophysical limits shine a fresh light on the economics field, even though he has been writing about these issues for almost a decade, now. If you are serious about new economics you can't miss this read {Beyond Growth - The Economics of Sustainable Development}. ...{Amazon Link}

The Economic Heresy of Herman Daly

..."Once you sit down and draw a little picture of the economy as a subset of the larger ecosystem, then you're halfway home as far as ecological economics is concerned. That's why people resist doing that," he says. "That means you would have to say well, there are limits, we're not going to be able to grow forever. That means the economy must have some optimal scale relative to the larger system. That means you don't grow beyond the optimum. How do we stop growing? What do we do? These are very threatening questions."

It is because these questions strike so deeply at shared hopes and ambitions, says Daly, that most economists do not ask them. "The source of economists' influence in the world of power, at least in recent times, has been through growth. The solution to all economic problems has been growth. If you're poor, the solution is growth. If you have unemployment, the solution is you have to increase investment, that means growth. The population explosion -- well, there's a demographic transition, if we just grow enough then people will stop having so many children. And what's the problem with unjust distribution of income? Well, it's just that we don't have enough, so if we grew more it would be easier to divide a big pie than a little pie. It's just so inconvenient if growth is limited that it's been hard to contemplate." ...{article continued}

Friday, October 10, 2003

Understanding Globalization - Soros

This is an excellent summary of George Soros' views of the world - what it is and what it can be. Since George's Quantum Fund made over a billion dollars on one trade in 1992 against sterling, it is appropriate to respect his opinions, or at least give them forbearance. I, myself, have a great deal of admiration for his market savy and monetary system knowledge. He also has an excellent interview at: ...{Soros Link}

Patricia A. Alvarez | Understanding Globalization

....When Soros first addressed the public in 1987 with The Alchemy of Finance: Reading the Mind of the Market, he chose a title highlighting the ability of his superbly successful Quantum Fund to transform investor dollars into gold. That work centered on the strategy his hedge fund had employed to extract rewards by assuming risk. Experience as a trader had taught him that classical equilibrium theory, the idea that perfect competition guides prices to correct valuations, ignored important features of a market's operations. Confident that his financial wizardry conferred the credentials of a social scientist and intent on remedying this flaw in the mechanism, Soros posited instead a Theory of Reflexivity to explain price gyrations. Simply stated, reflexivity refers to a feedback process that distorts natural swings in the market. Rather than the passive indifference assumed in equilibrium theory, market participants all exhibit a bias, and their collective bias creates a trend that exaggerates prices and leads to instability.

Using his theory, Soros handily demystified the boom-bust cycle. He explained that the problem of distortion is especially acute in the credit markets that underpin domestic and world economies. There, a boom results when bias for a certain market's prospects leads to a trend of extending credit, stimulating its economy while artificially inflating the collateral behind loans. As expansion continues, valuations increase to a point where credit is insufficient to induce further growth. The failure to provide additional financing reduces asset valuations, depresses economic activity, causes fear, and ends in a panic. While ascent in the boom phase is gradual, a bust in the credit market is severe and more compressed than in other arenas because investors quickly liquidate loans just at the point where asset values are lowest. Order could be restored, Soros said, by empowering an international bank similar to the U.S. Federal Reserve to minimize troughs and peaks in the world's capital markets.

At the time he published Alchemy, Soros' main concern was the international debt crisis that had resulted from an unparalleled trend of lending to the less-developed nations. Although the situation cried out for a correction to remove its destabilizing bias, Soros ominously noted, "We continually go to the brink and then recoil when we see the abyss opening up at our feet." The real U.S. economy, he warned, was becoming progressively more unsound, with an artificially high-priced dollar, propped up by the financial authorities of "Reagan's Imperial Circle" in a way that guaranteed a future calamity. In the meantime, the nation's industrial producers were losing market share to cheap imports. The danger in the situation, for Soros, was its potential to jeopardize the international free market in goods and services that was steadily making headway against protectionism.

Feeling vindicated by the 1987 crash on Wall Street and by his own successful challenge to fixed currency exchange rates in Europe, yet humbled by the failure of "reflexivity" to become a household word, Soros felt compelled to reissue Alchemy in 1994. His revised edition modified his claim, admitting his theory governed special cases more than normal conditions, yet refusing to concede its irrelevance. He marveled that U.S. government actions had averted a recession, but noted that its policies brought temporary relief at the cost of long-term damage, especially to the dollar. No less disturbing to him, however, was the emergence of Japan as the world's financial strongman. He argued that a society such as Japan's, so "fundamentally different" from those in the West because "the interests of the individual are subordinated to the interests of the social whole," could not be trusted to lead a system premised on democratic equality. Soros flailed about here for a comprehensive solution to the woes he had successfully documented and set the stage for a further installment.

The Asian Crisis of 1997, a quintessential bust, spurred the analyst's comments the following year. In The Crisis of Global Capitalism [Open Society Endangered], Soros shifted his attention from the center of the financial system to its periphery. Having lifted their long-held prohibitions on repatriation of capital, that acted as stop signs on the financial highway, the liberalizing governments of Korea, Thailand, and Indonesia found themselves happily awash in short-term "hot money" that poured in from investors responding to the new opportunity for a high return. Not surprisingly, the financier found reflexivity at work, with the bias of market participants distorting the prices of collateral in these economies beyond their real worth and fueling a trend guaranteeing that money invested there would reap far less than originally projected. The lack of transparency in Asian economic institutions misled investors until it was too late to avoid a market collapse. Once the trend had turned from a positive to a negative bias, hot money fled faster than it had entered, leaving those nations with deflated currencies, high rates of corporate insolvency, and explosive social problems. ...{article continued}

Corporate Labor Arbitrage

Steven Roach up to his usual best:

Steven Roach

....Yet my real fear is that this blame game is only beginning. The trade deficit and the China factor are today’s lightening rods. If Washington stays fixated on these problems, the risks of trade frictions and protectionism can only grow. But if the angst of America’s jobless recovery persists -- something I fully expect -- there is a good chance that the politics of protectionism could morph into something else. Next on my list of likely culprits is Corporate America -- namely, US multinationals who have turned to offshore outsourcing as a means of competitive survival. Here, as well, I believe the case against this key aspect of globalization is a weak one. Low-cost sourcing expands domestic purchasing power. But in doing so, it poses a serious challenge to high-wage workforces of high-cost US producers -- not just in manufacturing industries but increasingly in the once sacrosanct services sector (see my October 6 dispatch, “The Global Labor Arbitrage”). And that could fan the political flames even more. After all, US Commerce Department data show that nonbank American multinationals employed some 9.6 million workers in offshore subsidiaries in 2000 (latest official data point) -- up nearly 50% from 1990. My concern is that US politicians could begin to turn their attention to this aspect of the job drain, holding US multinational corporations responsible for shifting product and work offshore. For a Washington power structure that refuses to accept responsibility for its role in causing America’s massive trade deficits, another such twist in the blame game would not be surprising. ...{article continued}

Thursday, October 09, 2003

William Greider & Bretton Woods

For those of you who would like a clear overview of the Bretton Woods System and its history, plus his expanded ideas of capitalism which are not in his new books, W. Greider offers it here:

frontline: the crash: interviews: william greider

Could you go back and talk about the end of World War II, the position the United States was in, the theories behind Bretton Woods--we had just been through one of these moments of financial crash in a big way.

At the end of World War II, we had two rare conditions. One, most of the industrial world, excluding the United States, was in ruin, including our allies in Europe, and, of course, our enemies, Germany and Japan. Secondly, we were still recovering in a sense from the depression of the '30s when a similar catastrophe took down everything, literally shut down the global trading system. That was a great opportunity for the United States to lead and to sketch out the new principles that would, first of all, get international trade going in the Marshall Plan, help rebuild Europe, similar program in Japan, help their industries come back to life ...

It was a rather broad program, but with a very conscious understanding that you do have to have some operating rules over this global financial system and over trade. Ideally, they should be liberal in the sense that they're open to all and fair, etc. But you can't just simply let the markets do it. It won't happen. So the centerpiece of Bretton Woods was a system of stable currencies. The stability was built around the guarantee from the United States that everybody's currency would be in relation to the dollar. If they liked, they could bring the currency in debt paper or whatever, and exchange it for dollars or exchange it for gold.

That system broke down in the U.S. inflation in the early 1970s. Since then, there hasn't been any operating regime. Currencies are on their own. They're subject to market prices every day. We know over the last 25 years we have had this extraordinarily destructive instability at the center of the global system. That is, in currencies themselves. You buy a product in yen one year and six months later it's worth 30% more compared to the dollar or 30% less. The same with the Deutsche mark. Then all of those smaller, lighter currencies, the gyrations are even more extreme.

So if you were going to reform a system now, you would begin probably not with the details of how to do it, but with some broad principles. How do we want the system? We would have to begin with some way of whether it's an institution or simply new operating rules that guarantees people and countries and companies that they're not going to be hostage to these wild gyrations in finance. Not just currency values, but the sort of free flow, the sloshing back and forth of speculative capital, of short-term lending, and all those other things. This is hard to do. That's why nobody wants to get their head into it. But I think present events demonstrate that if you don't tackle those problems, the instabilities will keep swaying back and forth. One year it may be Southeast Asia that's victimized by it and another year it's Latin America or Eastern Europe or maybe us. It's almost not meaningful as to who the target is this season. The question is the system itself. ...{article continued}

Conservatives Outraged by Radicalism

I love it when Republicans bite Republicans. This article is a few months old, but well worth a look:

Even traditional conservatives outraged by radicalism of the right

By Clyde Prestowitz,

For a moment during the spring, neoconservatives associated with the Bush administration thought they had died and gone to heaven. The quicker than expected fall of Saddam Hussein seemed to justify their vision of a new America that would reshape world politics. The United States would use its overwhelming military power to crush tyrannical regimes, they declared, and establish American-style capitalist democracies in their place. Domestically, the neocons’ only question was whether the tax cuts aimed at reshaping American society would be merely big or gigantic. As time passes, however, it has become increasingly clear that this course is neither neo nor conservative and that it may lead more quickly to hell than to heaven.

This was not the foreign policy agenda traditional conservatives like myself voted for in 2000. Concerned about growing anti-American feeling around the world, we were pleased when candidate Bush spoke of adopting a humbler attitude in foreign policy and of reducing US overstretch abroad.We also anticipated that a new Bush administration would embrace long-standing conservative objectives such as smaller government, fiscal responsibility, tax cuts crafted with a goal of balancing budgets, strong protection of individual rights, and support for healthy state and local governments. There

was certainly no mention in Bush’s campaign of revolutionary schemes to transform the world.

So imagine our surprise when instead of a new humility, the fledgling Bush administration embraced a new arrogance. Traditional conservatives were no fans of the Kyoto agreement on global warming—many thought it unfair to US interests. But why so loudly reject a treaty that could have been left in limbo without any meaningful effect on the United States? Why make enemies so needlessly? Domestically, the initial Bush tax cut proposals seemed surprisingly large. But traditional conservatives held their fire. The cuts did seem to provide stimulus at a time when the economy was sinking dangerously, and the forecasters said we could maintain a balanced budget even with the cuts. ...{article continued link}

Wednesday, October 08, 2003

The Expansion Conundrum

For those of you who feel the economy Is doing fine, check this out:

Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst,

Over recent months the skeptics among us have stood back in wonder and disbelief as indexes soared closer and closer to the sun. Waxen wings were deemed unmentionable as most were transfixed by the beauty and relief of soaring flight. Sure, they are many wise voices mentioning the inevitability of rapid decent if and when heat triumphs over structural lack of integrity.

What can we make out through the haze of uncertainty shrouding the current “economic expansion?” We know, if we believe the, Census Bureau, that it teeters on wobbly legs. This news came in the form of declining median household income of 1.1%, approximately $500 per year between 2001 and 2002. This occurred alongside rising poverty, severity and rate, and a first world-leading rate of child poverty. Not to worry, spending increased nonetheless. If that was not enough, we watched global currency policy coordination slip and drag the greenback along with it. This is less than shocking given rising protectionism and declining economic co-prosperity among leading blocs. What does all this indicate?

Consumption drags our economic sled. At more than 70% of GDP its growth is clearly of paramount import. The income needed to sustain recent levels of aggregate economic activity has yet to emerge from labor earnings. This has been papered over by feverish optimism, debt growth and asset income. The great equity boom (1982-2000) kept many heads above water. When equity speculation gave out, housing and bond market surges picked up some of the slack, but not enough to prevent real pain. These secondary bubbles acted to limit the severity and length of the initial economic decline. This substitute source of wealth was fueled by 13 Federal Reserve System rate cuts, global lending and the reallocation of resources toward housing and bonds. To the extent that this worked it required global cooperation, optimism and wave after wave of debt provision. Perhaps this goes some way toward explaining why the technically measured recession was short lived yet, economic pain and suffering persists.

The debt crutch has proved essential to the patient who cannot stand without it. Consumption has, and continues to run, well ahead of earnings. This was facilitated by the emergence of staggering indebtedness, particularly in the period since 1990 when private debt more than doubled. What made this possible? Strong dollars and massive external imbalances. The strong dollar policy was adhered to by trading partners with an avid demand for US assets. They gladly loaned Yen, Pounds, Swiss Francs, Yuan and would-be Euros. After all they had to if we were to keep buying their exports. They are loaning us back our money. Even this far into the “recovery,” debt and asset appreciation strain to save the day. Markets react euphorically to the lack of depth and duration of pain. {article continued link}

Monday, October 06, 2003

The Corporatocracy

Two major NGO's, IFG and NEF have now published thorough and intelligent counter views against the prevailing "Washington Consensus" IFI's (international financial institutions). Ph.D. economist David Korten is the lead editor of the IFG's [international forum on globalization] report/book, "Alternatives to Economic Globalization," while Nobelist Joseph Stiglitz and ex-World Bank economist Herman Daly are lead contributors of the NEF [new economic foundation] book "Real World Economic Outlook." These are both stinging indictments of the failed Bretton Woods Institutions - failed as is obvious by the recent crises history of the `90's and on into today.

David Korten's group of nineteen have attributed most of the blame in multinational corporations, while to be fair there is plenty of blame here for the failed Bretton Woods system and politics, their overwhelming emphases are on the worst violation prone big corporations. On the other hand Stiglitz, Daly, Pettifor, and others at NEF have laid most of the blame on politics and bankers from the `60's to the present day. Here is a short excerpt from their work:

....A cycle of illusions

How did we get into this mess? Real World Economic Outlook challenges standard explanations for the launch of the "globalisation" experiment. We contest the view that "deregulation of capital flows" - the very core of the "globalisation project" was brought about by a form of "spontaneous combustion" caused by new technology. Nor do we share the view of many activists that globalisation is "corporate-driven."

Instead, we argue, globalisation was triggered by elected politicians, and central bankers, in both the US and the UK. In the post-Vietnam war era, led by Richard Nixon and later Ronald Reagan, these politicians sought ways to avoid making the "structural adjustments" necessary to the American economy if debts incurred by foreign wars were to be repaid by US taxpayers. Rather, these politicians preferred to disband the existing system of paying off debts by exchanging gold, and opening up capital markets, so that the US could borrow to pay off its debts. ...{article link continued}

The strongest point of Korten's group's argument is made in the new/old word "subsidiarity", meaning "renationalization of capital" and the "community rooting of capital for the development of national and local economies", oddly enough stated best by the other group's economist Herman Daly, below:

....The model of international community upon which the Bretton Woods institutions rests is that of a "community of Communities", an international federation of national communities cooperating to solve global problems under the principle of subsidiarity. The model is not the cosmopolitan one of direct global citizenship in a single integrated world community without intermediation by nation states. To globalize the economy by erasure of national economic boundaries through free trade, free capital mobility, and free, or at least uncontrolled migration, is to wound fatally the major unit of community capable of carrying out any policies for the common good. That includes not only policy for purely domestic ends, but also international agreements required to deal with those environmental problems that are irreducibly global (C02, ozone depletion). International agreements presuppose the ability of national governments to carry out policies in their support. If nations have no control over their borders they are in a poor position to enforce national laws, including those necessary to secure compliance with international treaties.

Cosmopolitan globalism weakens national boundaries and the power of national and subnational communities, while strengthening the relative power of transnational corporations. Since there is no world government capable of regulating global capital in the global interest, and since the desirability and possibility of a world government are both highly doubtful, it will be necessary to make capital less global and more national. I know that is an unthinkable thought fight now, but take it as a prediction-ten years from now the buzz words will be "renationalization of capital" and the "community rooting of capital for the development of national and local economies", not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competetivness. "Global competitiveness" (frequently a thought-substituting slogan) usually reflects not so much a real increase in resource productivity as a standards-lowering competition to reduce wages, externalize environmental and social costs, and export natural capital at low prices while calling it income. ...{article continued}

Obviously, these two groups share many of the same ideas, even though they see different causes, results, and cures. I have to say after reading NEF's extensive reveiws and IFG's complete book, that at this time I would highly recommend reading both thoroughly. There is a tremendous amount of needed information offered, that will be required to rebuild this very shaky system, should or when it collapses of its own abuse.

Friday, October 03, 2003

"The Hoover Effect"

Here is the real world debt and capital flows situation made as plain as it can be. New Economics Foundation is the parent site of Jubilee Research. Both support the same great work:



As the World Bank and IMF hold their annual meetings to discuss the state of the global economy, nef has released groundbreaking data demonstrating that the global economy - as structured by western politicians and bankers - is acting as a giant “hoover”. The new analysis of global inequalities shows that globalisation is sucking wealth and resources out of the poorest countries and concentrating it in the hands of a few in the richest countries, particularly the United States.......

........According to the report, the “hoover effect " of the global economy is caused largely by an international financial structure skewed to benefit the rich. The dollar led construction of the international financial system means that poor and rich countries alike are obliged to keep financing the US deficit, through the purchase of US “IOUs” (Treasury Bills).

In the absence of a global key currency standard, the US Treasury Bill now plays the part that gold once played in the global economy. This system, according to nef’s report, has led to the increased transfer of resources from poor countries, and the concentration of wealth in rich countries. There is a net flow of $48 billion every year from the poorest people to the richest, easily outstripping annual aid grants of £32billion.

As financial instability increases countries are forced to hold high levels of US dollar reserves, usually in the form of US Treasury Bills. They are, in effect, making very low interest rate loans to the United States, while at the same time borrowing from abroad (including from the United States, the World Bank, and the IMF) at very high rates of interest.

Capital flight and outflows of Foreign Direct Investment, to the tune of $97.8 billion every year, leave poor countries for banks in Switzerland, the United Kingdom and the United States in particular. Some of this money is legal investments made by residents of developing countries in Northern countries, but much of it is illegal capital that finds its way into the accounts of all too willing banks in the North. ....{article link continued}

World Bank? - Herman Daly

Here is a point of view about international credit and capital well made. Herman Daly is now one of the contributing authors, along with Joseph Stiglitz, at Jubilee Research writing views for creating a new world:

Herman Daly Farewell Speech
Herman Daly Books

......Move away from the ideology of global economic integration by free trade. free capital mobility. and export led growth-and toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option. having recourse to international trade only when clearly much more efficient.

At the present time global interdependence is celebrated as a self-evident good. The royal road to development, peace, and harmony is thought to be the unrelenting conquest of each nation's markets by all other nations. The word "globalist" has politically correct connotations, while the word "nationalist" has come to be pejorative. This is so much the case that it is necessary to remind ourselves that the World Bank exists to serve the interests of its members, which are nation states, nation communities-not individuals, not corporations, not even NGOs. It has no charter to serve the one-world without borders cosmopolitan vision of global integration- of converting many relatively independent national economies, loosely dependent on international trade into one tightly integrated world economic network upon which the weakened nations depend upon for even basic survival.

The model of international community upon which the Bretton Woods institutions rests is that of a "community of Communities", an international federation of national communities cooperating to solve global problems under the principle of subsidiarity. The model is not the cosmopolitan one of direct global citizenship in a single integrated world community without intermediation by nation states. To globalize the economy by erasure of national economic boundaries through free trade, free capital mobility, and free, or at least uncontrolled migration, is to wound fatally the major unit of community capable of carrying out any policies for the common good. That includes not only policy for purely domestic ends, but also international agreements required to deal with those environmental problems that are irreducibly global (C02, ozone depletion). International agreements presuppose the ability of national governments to carry out policies in their support. If nations have no control over their borders they are in a poor position to enforce national laws, including those necessary to secure compliance with international treaties.

Cosmopolitan globalism weakens national boundaries and the power of national and subnational communities, while strengthening the relative power of transnational corporations. Since there is no world government capable of regulating global capital in the global interest, and since the desirability and possibility of a world government are both highly doubtful, it will be necessary to make capital less global and more national. I know that is an unthinkable thought fight now, but take it as a prediction-ten years from now the buzz words will be "renationalization of capital" and the "community rooting of capital for the development of national and local economies", not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competetivness. "Global competitiveness" (frequently a thought-substituting slogan) usually reflects not so much a real increase in resource productivity as a standards-lowering competition to reduce wages, externalize environmental and social costs, and export natural capital at low prices while calling it income.

The World Bank should use the occasion of its fiftieth birthday to reflect deeply on the words of John Maynard Keynes: "I sympathize therefore, with those who would minimize rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel-these are the things which should of their nature be international. But let good be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national." ....{article link continued}

World Debt Crisis?

The Jubilee Research Foundation is doing some amazing work, bringing to light realities of the international financial world often hidden from view. Nobelist Joseph Stiglitz, along with many other famous economists are contributers. They offer the best alternative view to the official IMF's bi-ennial report on the global economy. I strongly recommend you check out this site seriously:

The coming first world debt crisis
Ann Pettifor

The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided, says Ann Pettifor of the Real World Economic Outlook, only by serious efforts to bring regulation and balance to the international economy.

The report predicts that a giant credit bubble, created by central bankers and finance ministers (the engineers of decades of “easy money”) has now reached a “tipping point”. This point – at which the “bubble” of financial assets exceeds GDP by nine times – has triggered financial crisis elsewhere. Another “tipping point” would be a rise in interest rates – not unlikely for economies like the US and UK which have massive foreign deficits.

The financial system: unbalanced, unfair, unsustainable

On a global level, there is $100 trillion of debt outstanding, but only $33 trillion of income with which to repay those debts. Even the drastic recent stock market falls have barely dented the credit superstructure. When this credit bubble bursts in the United States and Britain, it will be middle-class consumers that will first bear the brunt of the financial crash. ......

....A cycle of illusions

How did we get into this mess? Real World Economic Outlook challenges standard explanations for the launch of the “globalisation” experiment. We contest the view that deregulation of capital flows – the very core of the globalisation project – was brought about by a form of “spontaneous combustion” caused by new technology. Nor do we share the view of many activists that globalisation is “corporate-driven”.

Instead, we argue, globalisation was triggered by elected politicians, and central bankers, in both the US and the UK. In the post-Vietnam war era, led by Richard Nixon and later Ronald Reagan, these politicians sought ways to avoid making the “structural adjustments” necessary to the American economy if debts incurred by foreign wars were to be repaid by US taxpayers. Rather, these politicians preferred to disband the existing system of paying off debts by exchanging gold, and opening up capital markets, so that the US could borrow to pay off its debts. ...{article link continued}

Protectionism? Stephen Roach

Commentary from one of America's premiere economists at Morgan Stanley:

America's Political Gambit
Stephen Roach

.........The currency lever does address one aspect of America’s job shortfall. Taken to its extreme, it has the potential to affect relative cost comparisons between domestic and foreign labor input. But problems arise with respect to both long lags and the order of magnitude of the dollar depreciation required to make US labor rates more attractive. Those shortcomings of the “weak-dollar cure” are what have opened the door to the dangerous alternative of protectionism. Politicians believe it is now up to them to take explicit action to deal with unfair competitive pressures that are impeding US job creation. Both houses of the US Congress have already taken such initiatives, targeting China and its currency policy as the culprit. Senate legislation to impose steep tariffs on China has six co-sponsors, and a comparable bill in the House has over 60 co-sponsors. Lacking the patience to wait for market-based currency realignments to rebalance the world, America’s short-sighted politicians have made China bashing the new sport in this jobless recovery.

Where this stops is anyone’s guess. But unless there is quick and meaningful relief on the US job front, pressures for the political fix will only grow. The most worrisome aspect of this possibility is that there is no effective counterweight anywhere in the political spectrum. That is not the way politics normally work in America. Usually, Congress threatens to go over the cliff and the White House steps in at the last minute and prevents disaster. The Reagan administration’s resistance to Japan bashing in the 1980s is a classic example of how these checks and balances work. That’s not the case today. Political support for actions against China is broad-based -- by party, ideology, and geography. Nor does today’s White House seem philosophically and pragmatically prepared to take a stand in opposition to such actions. Indeed, by leading the charge on steel tariffs in 2002, the Bush administration has already laid its protectionist cards on the table.

In a jobless recovery -- and this one is unlike anything the modern-day US economy has ever experienced -- politics take on a new importance in shaping financial market outcomes. For America and the rest of this US-centric world, I fear the political gambit has only just begun. ...{article link continued}