FRB: Press Release--FOMC statement--June 30, 2004
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.
In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
Wednesday, June 30, 2004
Monday, June 28, 2004
Stephen Roach - Disequilibrium Economics
Disequilibrium Economics
Equilibrium is the anchor of macro analysis. It is tantamount to a condition of balance, or stability, that helps foster sustained economic growth. Yet equilibrium is largely a theoretical construct — very different from the disequilibria that depict actual conditions in the real world. The transition from disequilibrium to equilibrium has long been central to the policy and financial market debates. Ever-present shocks can be far more destabilizing for economies in disequilibrium than for those in equilibrium. Therein lies the key risk in today’s world.
Equilibrium is the anchor of macro analysis. It is tantamount to a condition of balance, or stability, that helps foster sustained economic growth. Yet equilibrium is largely a theoretical construct — very different from the disequilibria that depict actual conditions in the real world. The transition from disequilibrium to equilibrium has long been central to the policy and financial market debates. Ever-present shocks can be far more destabilizing for economies in disequilibrium than for those in equilibrium. Therein lies the key risk in today’s world.
Thursday, June 24, 2004
Monday, June 21, 2004
"Derivatives Wild Card"
Not that I agree totally with this article, but I do agree derivatives bear considerable watching, and that nowhere's near enough professionals understand this market anywhere's near well enough. On the other hand derivatives are one of the best ways of sharing the entire global capitalist risk - with the caveat, they do pose great systemic risk and cost. The costs side of the equation is my greatest concern - not only the speculative, hedging, and arbitrage ability costs, but the massive costs associated with the shear size of the total global turnover in transactions - this turnover transactions figure as recorded by the BIS is $874 trillion. With its formidable growth in recent years, there is surely a systemic limit to these costs even at small percentages of transactions' fees - the sum becomes phenomenal with continued growth. Will it be enough to bring down the entire system if not checked?
Derivatives Wild Card
By Chris Laird
In poker, a wild card can be used to change the rules and introduce excitement. In finance, derivatives do the same thing.
While studying derivatives, I have noticed that even the major financial authorities comment that derivatives are an unknown factor. And the derivatives experts agree the risks are huge, and in many respects indefinable. Which brings me to my point, that derivatives are a new wild card in international banking and finance.
What this means is that nobody knows when or how the derivatives balloon will pop, or what effects it will have. Even in the derivatives field itself it is recognized that there are only a few experts who truly understand the instruments, and that many institutions are lacking in a comprehensive view of the very instruments they are betting 197 trillion dollars on. One thing is certain though, if the derivatives wild card comes into play, systemic monetary collapse is in the cards. We don't know how the hand will be dealt, but the DERIVATIVES WILD CARD will probably be in the hand.
I cannot believe that with $197 trillion in derivatives outstanding as of Dec 2003 (BIS), that there aren't large bad bets made. I cannot believe that they have completely offset their hedges calculating all of the party risks, systemic risks, liquidity risks. I don't believe that the derivatives models are reliable in identifying all the interrelated risks, nor can they be.
The creators and users of derivatives will have us to believe that the instruments are mathematically stable, that they are offset by risk analysis, governed by scientific models. That they are predictable, in fact so predictable that the derivatives users can take $4 billion, and leverage it to over a trillion dollars of notional amounts in derivatives and get away with it. They say that is safe. Wrong!
In the LTCM crisis, LTCM had about 4 billion in net asset value, with assets totaling over 100 billion, and about $1.2 TRILLION in derivatives bets. That represented 5 percent of the derivatives market at that time. That's incredible leverage. When the unexpected happened, (Russian debt defaults), un predicted behavior of LTCM's derivative models resulted in $4 billion evaporating, and left the dealer banks and counter parties of the LTCM derivatives bets defaulting like dominoes, until the FED wrote a blank check. For an explanation of these terms see my GE article entitled Derivatives 101 Big Bets.
But the amounts of derivatives are much greater today. We had 197 trillion in derivatives out at the end of 2003, according to the Bank of International Settlements. In 2001 that figure was 111 trillion. The amount of derivatives has almost doubled in 2 years! Also, of the outstanding derivatives today, the majority by far are interest rate derivatives ( interest rate swaps ) created mostly during the falling interest rate times of recent years.
Here are some stats from the BIS for the first half of 2003.. (footnote 4)
Grand total, Dec 2003 $197 trillion
Interest rate contracts $141 trillion
The interest rate contracts represent 71 percent of the derivatives outstanding. (notional amounts). I believe that the present changing interest rate market represents a gigantic risk to derivatives. If there is only a half point change in interest rates, or 50 basis points, the interest risk exposure comes to $705 billion for $141 trillion, based on interest rate swaps.
Since interest rates are rising today, what are the odds that a percentage of those interest rate derivatives are ALREADY UNDERWATER? Do the calcs. Consider $141 trillion, and say only 1 percent go bad. Well, that's only $1.41 trillion! The point is the carrying charges of those $141 trillion in interest rate derivatives are going up. That is simply one heck of a lot of money by anyone's measure.
I'm willing to bet that, right now, there are large secret derivatives losses being carried by many financial entities as we speak. When any significant weakness in the financial system reveals itself, we will have a wave of cascading derivatives losses as the derivatives wild card comes into play, or derivatives will initiate a systemic monetary crisis caused by cascading defaults. By the way, I don't think that just flooding liquidity into the system will save the day this time either, but that is another story.
Perspective of a central banker on derivatives.
Tony Latter, Deputy Chief of the Hong Kong Monetary Authority stated that derivatives pose "the potential to bring disaster" (footnote 2). That derivatives may pose systemic risks (footnote 3). If you go to the footnote link and read the BIS article, you'll find that while Mr. Latter briefly touches on the subject of the risks involved, he really only talks generically about what a central bank is to do about it. I find the rather limited statement that central banks are there to ensure accountability unconvincing, because he states that they rely on self governance and risk assessment by the financial entities making the derivative bets. I am not impressed by the supposed self governance of many diverse entities wagering $197 trillion and depending on the central banks to bail them out.
If you think about it, the S&L crisis which resulted in about $120 billion in Federal bailouts, pales by comparison to these present numbers of hundreds of trillions in derivatives speculation and hedging today.
I find it interesting that central bankers recognize that risk management is key to the use of derivatives, but the derivatives experts themselves state that analyzing the risk is very problematic and complicated, i.e. assigning risk calculations not only for party defaults, but to systemic risks as well, and that many of the risk models are dated.
Either way, derivatives do introduce gigantic unpredictability to our financial world, they are relatively new, and they are a real financial wild card to the world.
Chris Laird
Footnotes
(1) The chairman of the Hong Kong Monetary authority stated that derivatives are an unknown-known risk ..."Despite for the most part providing a beneficial service, derivative trading also has the potential to bring disaster. Mere mention of the word Barings is no doubt sufficient to make the point. ..." BIS
(2)The chairman of the Hong Kong Monetary authority also stated that risks should be properly identified..."I should perhaps make the point here that supervision is not aimed at suppressing activity, but rather ensuring that risks are properly identified and managed, and that disasters which might threaten systemic stability are avoided. Particular emphasis is placed on ensuring that management possesses sufficient understanding of the derivatives business and the associated risks, and has the appropriate internal mechanisms in place for monitoring and control. BIS
(3) the effects of leveraging in the LTCM crisis mentioned in my GE editorial Derivatives 101 Big Bets Big Bets
(4) BIS 2003 derivatives statistics BIS ...Link
Saturday, June 19, 2004
Asia Pacific: Asia's Rural Tears
Asia Pacific: Asia's Rural Tears
By Daniel Lian
Asia’s “Sacred” Economic Model: The Big Re-think
India’s surprise election result last month and a recent piece by Andy Xie, our chief economist for Asia/Pacific, reignited my interest in structural issues relating to Asian economic development, long held as a model to be adopted by other developing regions.
In India, the Congress Party scored an unexpected victory over the incumbent BJP, despite the latter’s record in economic restructuring and growth. For most political analysts, the reason was clear in hindsight: the fruits of economic development under the BJP had not spread sufficiently to the rural sector. Market participants were starkly reminded that rural development matters to economics and investment.
Andy Xie, in his recent piece “Gambling, Arbitraging, and Successful Development” (June 2, 2004), argues that a “high savings rate is a necessary condition for rapid economic development” and “in East Asia, exports to rich economies are the source of income that make saving possible.” He further argues, “The wage income and profits from the export sector are the starting point of economic growth, and as these new incomes are spent or saved, the multiplier effect makes the rest of the economy tick.”
Andy essentially was spelling out the generic formula for the economic “success” of East Asia that has long been held as sacred by Asian policy makers, the Washington Consensus, and supra-national development agencies. In a nutshell, the formula rests on cheap labor, high savings, and an export-oriented development model.
Cheap labor attracts mass-manufacturing FDI from multinational corporations (MNCs), and high savings suppress domestic demand, making possible trade and current-account surpluses. Both labor income and profits earned from the export sector create a multiplier effect that rapidly lifts the economy. As such, FDI levels and export growth are often seen as the only measures of economic performance.
Imbalanced Strategy and the Asian Pork Barrel
Importantly, Andy Xie points out that while “cheap labor creates wealth in Asia, the wealth tends to be distributed disproportionately to the rich.” Inequitable wealth distribution highlights the partial failure of the East Asia Economic Model (EAEM). EAEM, in my view, is an incomplete and now quasi-defunct model because economic growth often proves extremely imbalanced, resulting in substantial equity and social issues.
Economic success has “camouflaged” the rent-seeking culture that permeates most of Asia, and which typically favors politicians, government insiders, and large local corporate owners. Political patronage and rent-seeking create tremendous government inefficiencies and protect the monopoly power of large local corporate owners.
Substantial parts of the “super” corporate profits, regular government spending, and government concessions and contracts constitute the “Asian pork barrel.” This pork barrel is created at the expense of many constituencies: minority shareholders – whose rights often are not respected; urban workers – whose real purchasing power is artificially suppressed by a vastly undervalued exchange rate and a lack of wage bargaining power; rural dwellers and farmers – who tend farmland that is heavily taxed and low yielding as rural and agriculture development gets left behind; and indigenous SMEs – who do not receive the subsidies through infrastructure, protracted tax holidays or tax incentives that are enjoyed by rent-seeking local large corporates and by MNCs.
Rural Cries
Of the four disadvantaged groups mentioned above, rural dwellers and farmers suffer the most from policy discrimination and pork-barrel politics, in our view. The urban-rural divide can be serious. In China, on a rough estimate, rural dwellers are 60% of the population but account for less than 30% of national income. Farmers’ relative share of national income could be substantially lower. In India, 60% or more of the population belongs to the agriculture-rural sector but their output accounts for not more than 25% of GDP. In Thailand, more than 40% of the labor force belongs to the agricultural sector and produces less than 11% of GDP.
Policy ignorance by the authorities and the rural sector’s lack of political power help entrench the urban-rural divide. Policy makers ignore rural development in the belief that i) industrialization will create jobs in the cities and towns that will be filled by the migration of surplus agricultural labor; and ii) the multiplier effect of manufacturing-based export growth will ultimately lift a shrinking rural-agricultural sector. To me, such propositions are naïve.
Asia Awakening and Mr. Thaksin’s Proactive Response
Some Asian policy makers seem to be waking up to the cries erupting in rural areas. In India, the new coalition government is promising to spread the fruits of economic development. In China, policy makers are starting to address some of the “regressive” tax measures inflicted on farmers. Rural development has become a big campaign issue in the Indonesian elections, and Prime Minister Abdullah Badawi of Malaysia has declared the rural-agriculture sectors and SMEs as a major policy emphasis of his nine-month regime.
Mr. Thaksin and his Thai-Rak-Thai party were elected on a pro-rural platform in early 2001, and the Thai government is the only one in Asia to initiate a comprehensive policy response to the malaise of EAEM and the rural cries. Over the past three years, Thailand has aggressively pursued a well-thought-out “second” development track, in which emphasis has been placed on developing the rural, agricultural, and SME sectors, and which has been quite successful in reviving domestic spending and relieving the country’s past dependence on external demand.
However, Mr. Thaksin’s successes thus far have been largely macro-based. Creative initiatives have revived the economic confidence of Thai citizens and businesses by expanding domestic demand, and have attempted to correct the macro malaise of EAEM. However, no major breakthroughs have been made in terms of micro-based structural changes. Formidable challenges lie ahead for Mr. Thaksin, such as eradicating the rent-based culture, sharpening government efficiency, and improving corporate governance.
Bottom Line: The Inevitable Rise of Social Capitalism
Signals abound that some forms of social capitalism are emerging in Asia in attempts to balance the past excesses of EAEM, namely: the recent “surprise” Indian electoral outcome, a development policy shift in Malaysia, a probable change in rural-agricultural policy in China, promises of rural-agricultural reforms by all major parties and presidential candidates in the Indonesian election campaign, and the now deep-rooted dual-track development strategy pursued by Mr. Thaksin in Thailand over the past few years.
The Asian social capitalism that eventually evolves is unlikely to be a doctrine that completely rejects capitalism or the existing EAEM strategy. In my view, it will need to include the dismantling of the rent-based complex, and the balancing of past excesses — in terms of dependence on external demand, mass manufacturing and other FDI by MNCs, high savings, and artificially suppressed real wages and exchange rates — with a platform that addresses the long-term development needs of the urban poor, rural, resource, SME, and the government and corporate sectors. ...Link
By Daniel Lian
Asia’s “Sacred” Economic Model: The Big Re-think
India’s surprise election result last month and a recent piece by Andy Xie, our chief economist for Asia/Pacific, reignited my interest in structural issues relating to Asian economic development, long held as a model to be adopted by other developing regions.
In India, the Congress Party scored an unexpected victory over the incumbent BJP, despite the latter’s record in economic restructuring and growth. For most political analysts, the reason was clear in hindsight: the fruits of economic development under the BJP had not spread sufficiently to the rural sector. Market participants were starkly reminded that rural development matters to economics and investment.
Andy Xie, in his recent piece “Gambling, Arbitraging, and Successful Development” (June 2, 2004), argues that a “high savings rate is a necessary condition for rapid economic development” and “in East Asia, exports to rich economies are the source of income that make saving possible.” He further argues, “The wage income and profits from the export sector are the starting point of economic growth, and as these new incomes are spent or saved, the multiplier effect makes the rest of the economy tick.”
Andy essentially was spelling out the generic formula for the economic “success” of East Asia that has long been held as sacred by Asian policy makers, the Washington Consensus, and supra-national development agencies. In a nutshell, the formula rests on cheap labor, high savings, and an export-oriented development model.
Cheap labor attracts mass-manufacturing FDI from multinational corporations (MNCs), and high savings suppress domestic demand, making possible trade and current-account surpluses. Both labor income and profits earned from the export sector create a multiplier effect that rapidly lifts the economy. As such, FDI levels and export growth are often seen as the only measures of economic performance.
Imbalanced Strategy and the Asian Pork Barrel
Importantly, Andy Xie points out that while “cheap labor creates wealth in Asia, the wealth tends to be distributed disproportionately to the rich.” Inequitable wealth distribution highlights the partial failure of the East Asia Economic Model (EAEM). EAEM, in my view, is an incomplete and now quasi-defunct model because economic growth often proves extremely imbalanced, resulting in substantial equity and social issues.
Economic success has “camouflaged” the rent-seeking culture that permeates most of Asia, and which typically favors politicians, government insiders, and large local corporate owners. Political patronage and rent-seeking create tremendous government inefficiencies and protect the monopoly power of large local corporate owners.
Substantial parts of the “super” corporate profits, regular government spending, and government concessions and contracts constitute the “Asian pork barrel.” This pork barrel is created at the expense of many constituencies: minority shareholders – whose rights often are not respected; urban workers – whose real purchasing power is artificially suppressed by a vastly undervalued exchange rate and a lack of wage bargaining power; rural dwellers and farmers – who tend farmland that is heavily taxed and low yielding as rural and agriculture development gets left behind; and indigenous SMEs – who do not receive the subsidies through infrastructure, protracted tax holidays or tax incentives that are enjoyed by rent-seeking local large corporates and by MNCs.
Rural Cries
Of the four disadvantaged groups mentioned above, rural dwellers and farmers suffer the most from policy discrimination and pork-barrel politics, in our view. The urban-rural divide can be serious. In China, on a rough estimate, rural dwellers are 60% of the population but account for less than 30% of national income. Farmers’ relative share of national income could be substantially lower. In India, 60% or more of the population belongs to the agriculture-rural sector but their output accounts for not more than 25% of GDP. In Thailand, more than 40% of the labor force belongs to the agricultural sector and produces less than 11% of GDP.
Policy ignorance by the authorities and the rural sector’s lack of political power help entrench the urban-rural divide. Policy makers ignore rural development in the belief that i) industrialization will create jobs in the cities and towns that will be filled by the migration of surplus agricultural labor; and ii) the multiplier effect of manufacturing-based export growth will ultimately lift a shrinking rural-agricultural sector. To me, such propositions are naïve.
Asia Awakening and Mr. Thaksin’s Proactive Response
Some Asian policy makers seem to be waking up to the cries erupting in rural areas. In India, the new coalition government is promising to spread the fruits of economic development. In China, policy makers are starting to address some of the “regressive” tax measures inflicted on farmers. Rural development has become a big campaign issue in the Indonesian elections, and Prime Minister Abdullah Badawi of Malaysia has declared the rural-agriculture sectors and SMEs as a major policy emphasis of his nine-month regime.
Mr. Thaksin and his Thai-Rak-Thai party were elected on a pro-rural platform in early 2001, and the Thai government is the only one in Asia to initiate a comprehensive policy response to the malaise of EAEM and the rural cries. Over the past three years, Thailand has aggressively pursued a well-thought-out “second” development track, in which emphasis has been placed on developing the rural, agricultural, and SME sectors, and which has been quite successful in reviving domestic spending and relieving the country’s past dependence on external demand.
However, Mr. Thaksin’s successes thus far have been largely macro-based. Creative initiatives have revived the economic confidence of Thai citizens and businesses by expanding domestic demand, and have attempted to correct the macro malaise of EAEM. However, no major breakthroughs have been made in terms of micro-based structural changes. Formidable challenges lie ahead for Mr. Thaksin, such as eradicating the rent-based culture, sharpening government efficiency, and improving corporate governance.
Bottom Line: The Inevitable Rise of Social Capitalism
Signals abound that some forms of social capitalism are emerging in Asia in attempts to balance the past excesses of EAEM, namely: the recent “surprise” Indian electoral outcome, a development policy shift in Malaysia, a probable change in rural-agricultural policy in China, promises of rural-agricultural reforms by all major parties and presidential candidates in the Indonesian election campaign, and the now deep-rooted dual-track development strategy pursued by Mr. Thaksin in Thailand over the past few years.
The Asian social capitalism that eventually evolves is unlikely to be a doctrine that completely rejects capitalism or the existing EAEM strategy. In my view, it will need to include the dismantling of the rent-based complex, and the balancing of past excesses — in terms of dependence on external demand, mass manufacturing and other FDI by MNCs, high savings, and artificially suppressed real wages and exchange rates — with a platform that addresses the long-term development needs of the urban poor, rural, resource, SME, and the government and corporate sectors. ...Link
Thursday, June 17, 2004
Pimco Chief Says Global Outlook Unstable
Pimco chief says global outlook unstable
By Deborah Brewster
The outlook for the global economy is the most uncertain for 20 or 30 years, according to Bill Gross, the influential chief investment officer of Pimco, the world's biggest bond fund manager.
"Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute.
"More than any point in the past 20 or 30 years, there's potential for a reversal," he warned in an interview with the Financial Times.
"We have become a levered global economy, specifically in Japan and the US.
"With all this consumer debt, business debt, government debt, smaller movements in interest rates have a magnified effect . . . a small movement can tip the boat."
Pimco manages $400bn in bonds, about a third of which is outside the US, and has outperformed the market over the past 30 years. Mr Gross is one of the few bond managers whose views can move the market.
He said there were bubbles in commodities and the UK housing market, as well as the US currency.
"The US dollar is being supported by the kindness of strangers - Japan and China.
"It should be 20 per cent lower than it is. Japan and China will change their stance, we don't know when but we know they will. The dollar isn't overvalued against the euro but it is against Asian currencies."
The threat of economic instability, he said, stemmed in part from "the advent of financial alchemy" - in particular, the growing use of hedge funds.
"Even banks are employing the 'carry' trade - borrowing short and lending long.
"They're doing things they haven't done before. There's lots of risk in the economy now compared with even five years ago."
Mr Gross supported calls for hedge funds to be regulated, describing them as "basically unregulated banks".
"They are amazingly similar in the leverage they use and have the same structure, borrowing at 1 per cent and lending or investing longer, and they take it to an extreme because they go into stocks, commodities, real estate.
"If banks are regulated, hedge funds should be. I think there's a lot of risk there," he said, citing the 1998 collapse of Long Term Capital Management.
Pimco's plan was to "stay ahead of reflation" by keeping money out of the US and in countries such as the UK and Germany that would not be as badly hit by inflation.
The highest level ever of Pimco's money was invested outside the US, in part because of growth in the fund's non-US asset management business.
The proportion would be even higher, he said, except that many US clients, such as pension funds, had a ceiling on how much they could invest abroad.
"If the US is not bond-investor friendly, we take our money and move it somewhere it is," he said. ...Link
By Deborah Brewster
The outlook for the global economy is the most uncertain for 20 or 30 years, according to Bill Gross, the influential chief investment officer of Pimco, the world's biggest bond fund manager.
"Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute.
"More than any point in the past 20 or 30 years, there's potential for a reversal," he warned in an interview with the Financial Times.
"We have become a levered global economy, specifically in Japan and the US.
"With all this consumer debt, business debt, government debt, smaller movements in interest rates have a magnified effect . . . a small movement can tip the boat."
Pimco manages $400bn in bonds, about a third of which is outside the US, and has outperformed the market over the past 30 years. Mr Gross is one of the few bond managers whose views can move the market.
He said there were bubbles in commodities and the UK housing market, as well as the US currency.
"The US dollar is being supported by the kindness of strangers - Japan and China.
"It should be 20 per cent lower than it is. Japan and China will change their stance, we don't know when but we know they will. The dollar isn't overvalued against the euro but it is against Asian currencies."
The threat of economic instability, he said, stemmed in part from "the advent of financial alchemy" - in particular, the growing use of hedge funds.
"Even banks are employing the 'carry' trade - borrowing short and lending long.
"They're doing things they haven't done before. There's lots of risk in the economy now compared with even five years ago."
Mr Gross supported calls for hedge funds to be regulated, describing them as "basically unregulated banks".
"They are amazingly similar in the leverage they use and have the same structure, borrowing at 1 per cent and lending or investing longer, and they take it to an extreme because they go into stocks, commodities, real estate.
"If banks are regulated, hedge funds should be. I think there's a lot of risk there," he said, citing the 1998 collapse of Long Term Capital Management.
Pimco's plan was to "stay ahead of reflation" by keeping money out of the US and in countries such as the UK and Germany that would not be as badly hit by inflation.
The highest level ever of Pimco's money was invested outside the US, in part because of growth in the fund's non-US asset management business.
The proportion would be even higher, he said, except that many US clients, such as pension funds, had a ceiling on how much they could invest abroad.
"If the US is not bond-investor friendly, we take our money and move it somewhere it is," he said. ...Link
Wednesday, June 16, 2004
Trade Treaties - What Is and What Can Be
MacroMouse - Trade Treaties - What Is and What Can Be
...Ooh, big subject, how shall I proceed? For the last 50 some years, I have been thinking about such subjects, and for the last 25 years I have been researching and writing about these and other closely related economic interests. I have only recently realized trade treaties can encompass most of the entire international macroeconomic picture, if perceived from a central position of truly balanced global prices. Of course, this isn't the real world. The world we live in is that of major structural, nations' and treaties'
imbalances. How can I render my thoughts valid, yet offer a simple summary of my view and ideas?
It seems to me this is the greatest battle brewing in the world, between the free-marketeers and the market regulators or treaty ammenders. The problem with me is I'm on neither side, in the fashion normally understood - I'm sitting in the middle watching the battle. I take neither the side of the "Washington Consensus" nor those against it and for the types of regulations and treaty abolishments, thus far put forward. I think we need to rethink and re-debate this very deeply, with much better sources of information and knowledge evolution. International trade treaties are the most crucial element of the future status and health of capitalism - thus needing much serious and critical thought to proceed with improvements to our trading system.
The problem for me arises when either the right or left says they have the final answer, and thus act on it. The right is acting on a false equilibrium model[qualifier - three axioms of, being false] that has polluted economics for more than a century, is clearly wrong, and has been proven wrong by such notables as Ph.D. Professor Paul Davidson, from Tennessee - thus most all the right's trade information and theory is based on a false premise, and often comes to wrong conclusions. On the other hand, the left or labor's position, draws its findings and conclusions from incomplete data, statistics, and theory, and is also thus based on a false premise, and comes to different wrong conclusions. The truth is the data, statistics and theory have never been fully collected or proven - as is shown in C.H.I.P.S. and B.I.S. statistics[the most complete sets available], so all we have is the empirical evidence of history, to found our premises of thought. This is why I have erected a new equilibrium model of true future global balances - to figure from a model future back to today, as the Greeks and founding fathers did years past.
By using such a model, joined with past empiricism, I have been able to more clearly interpret macro-economics and the global trading system. In my opinion, we need a global pricing standard for the WTO, or any other international treaties, to make them valid and truly workable. At present we have none. This standard should be based on laws that work toward a truly balanced pricing mechanism, of wages, prices and currencies - globally. These are all elements of present trade negotiations, but nobody in these negotiations has defined what a true balance is or could be. If we define that balance as a future perfect balance, ie., the erected model, in every nation on earth, with every other nation on earth, we have something valid to work toward - true purchasing price parity equilibrium. In other words, out in the future, a loaf of bread should cost the same price in every nation - all wages should have comparable structures - and all currencies should trade at par - one for one, or very close[often must be adjusted slightly for productivity diffs.]. Though this model may be far in the future, it at least, defines a real standard of value to work toward, which proper trade laws can be built around.
As an example, we should support laws toward re-aligning currencies, wages, and prices to true purchasing price parity equilibrium, to create a level playing field, to stop excess offshoring, outsourcing and insourcing, neutralize nefarious trade and transactions' extractions, return the IMF, World Bank, and WTO to work the public good again, rebuild global subsidiarity to sustainable levels, to found truly viable comparative advantage - globally, reduce speculation and excess debt and create jobs - by saving trillions of dollars through said global re-balancing. I am not alone in my opinions, many other professional economists are also calling for a similar real global re-balancing. Even Greenspan and Bernanke, at the Fed, have supported reform but fear of action yet rules supreme.
...Ooh, big subject, how shall I proceed? For the last 50 some years, I have been thinking about such subjects, and for the last 25 years I have been researching and writing about these and other closely related economic interests. I have only recently realized trade treaties can encompass most of the entire international macroeconomic picture, if perceived from a central position of truly balanced global prices. Of course, this isn't the real world. The world we live in is that of major structural, nations' and treaties'
imbalances. How can I render my thoughts valid, yet offer a simple summary of my view and ideas?
It seems to me this is the greatest battle brewing in the world, between the free-marketeers and the market regulators or treaty ammenders. The problem with me is I'm on neither side, in the fashion normally understood - I'm sitting in the middle watching the battle. I take neither the side of the "Washington Consensus" nor those against it and for the types of regulations and treaty abolishments, thus far put forward. I think we need to rethink and re-debate this very deeply, with much better sources of information and knowledge evolution. International trade treaties are the most crucial element of the future status and health of capitalism - thus needing much serious and critical thought to proceed with improvements to our trading system.
The problem for me arises when either the right or left says they have the final answer, and thus act on it. The right is acting on a false equilibrium model[qualifier - three axioms of, being false] that has polluted economics for more than a century, is clearly wrong, and has been proven wrong by such notables as Ph.D. Professor Paul Davidson, from Tennessee - thus most all the right's trade information and theory is based on a false premise, and often comes to wrong conclusions. On the other hand, the left or labor's position, draws its findings and conclusions from incomplete data, statistics, and theory, and is also thus based on a false premise, and comes to different wrong conclusions. The truth is the data, statistics and theory have never been fully collected or proven - as is shown in C.H.I.P.S. and B.I.S. statistics[the most complete sets available], so all we have is the empirical evidence of history, to found our premises of thought. This is why I have erected a new equilibrium model of true future global balances - to figure from a model future back to today, as the Greeks and founding fathers did years past.
By using such a model, joined with past empiricism, I have been able to more clearly interpret macro-economics and the global trading system. In my opinion, we need a global pricing standard for the WTO, or any other international treaties, to make them valid and truly workable. At present we have none. This standard should be based on laws that work toward a truly balanced pricing mechanism, of wages, prices and currencies - globally. These are all elements of present trade negotiations, but nobody in these negotiations has defined what a true balance is or could be. If we define that balance as a future perfect balance, ie., the erected model, in every nation on earth, with every other nation on earth, we have something valid to work toward - true purchasing price parity equilibrium. In other words, out in the future, a loaf of bread should cost the same price in every nation - all wages should have comparable structures - and all currencies should trade at par - one for one, or very close[often must be adjusted slightly for productivity diffs.]. Though this model may be far in the future, it at least, defines a real standard of value to work toward, which proper trade laws can be built around.
As an example, we should support laws toward re-aligning currencies, wages, and prices to true purchasing price parity equilibrium, to create a level playing field, to stop excess offshoring, outsourcing and insourcing, neutralize nefarious trade and transactions' extractions, return the IMF, World Bank, and WTO to work the public good again, rebuild global subsidiarity to sustainable levels, to found truly viable comparative advantage - globally, reduce speculation and excess debt and create jobs - by saving trillions of dollars through said global re-balancing. I am not alone in my opinions, many other professional economists are also calling for a similar real global re-balancing. Even Greenspan and Bernanke, at the Fed, have supported reform but fear of action yet rules supreme.
Monday, June 14, 2004
Hard Truth of China's Soft Landing?
Hard truth of China's soft landing
By John Dizard
And this from Stephen Roach as a kind of counterpoint.
There's been a debate about whether China will be successful in gradually slowing its economy down to a "soft landing". Over the past couple of weeks a consensus opinion has emerged that a combination of administrative measures and market forces is working effectively to achieve that happy ending.
Consensus opinion is dead wrong.
Not only will there not be a soft landing in the future, but a hard landing is already here. This has been an investment boom such as the world hasn't had since the early years of the forced-march Soviet industrialisation, reaching near half of gross domestic product. The figures just out show a decline in the year-over-year increases since February but, more significantly, a very rapid decline in the month-to-month numbers.
"There was a 20 per cent fall in investment from March to April," says one economist on good terms with the Chinese authorities, and the numbers from April to May seem to have fallen even faster. Investment numbers are lumpy on a month-to-month basis, but we'veseen enough data from the beginning of the year to know that production has peaked. Certainly by December, the year-over-year numbers will be negative.
"China also had a trade surplus in May, another indicator that investment is falling off. This is really going to hit Japan, which has been helped by exports to China, but the Koreans and the Thais will be even harder hit."
This supports the idea I floated last week: China will be seeking to devalue the renminbi by next year. US politics are in the way here. Mickey Kantor, one of the Kerry campaign's trade advisers, has been saying that China's fixed exchange rate has amounted to an illegal export subsidy. The subsidy is supposed to come from an excessively low value of the renminbi against the dollar, artificially lowering Chinese export prices. In effect, Mr Kantor is demanding that the Chinese float their currency against the dollar. He is assuming the renminbi would rise against the dollar, and thus lower the Chinese trade surplus with the US.
What if the Chinese were to say: "We surrender, Mr Kantor. We'll float the renminbi against the dollar. You win."? With an investment collapse under way, and already-promised liberalisation of Chinese institutions' ability to invest abroad, a freely floating renminbi could easily plunge against the dollar. Since the Chinese government is apparently planning to cut public sector investment, the economy would need to offset the investment and state sector weakness with more exports. It is not clear where those exports would go.
But if Mickey Kantor's crowd gets a floating renminbi soon, they might find an even more receptive market here.
It takes a while to sort through Alan Greenspan's speeches and testimony to find out what wasn't said, and his statements in the week are full of half-revealed truths. For example, he told us that "an unwinding of the carry trade is notably under way".
In other words, people in the market have put on short positions in the equivalents of the 10-year Treasury bond, so the potential systemic risk from a rise in rates isn't there any more.
Wait a moment. Risk does not just disappear when market operators hedge their positions. Who's being saved here, and who's being fitted with a concrete parachute?
Apparently Chairman Greenspan was talking about the hedging programs of the 22 primary dealers such as Goldman Sachs, Morgan Stanley, Merrill Lynch and the dealing arms of Citigroup and JPMorgan Chase, Banc of America Securities and so on. Those firms are the instruments through which the Fed executes its monetary policy. In the collective mind of the Fed, they feel pain more acutely than the rest of us, and need succor and support if they are to perform their natural role.
So who are the chumps? Who's been buying the bonds, the duration that the primary dealers haven't been buying?
Let's see . . . who would be the dumbest, most self-destructive people at the card table? How about the foreign central banks?
According to Gerald Lucas, a bond strategist at BoA Securities: "A number of the foreign central banks that intervened to support the dollar in the months past have been recycling their bank deposits into Treasury bonds. If you look at the auction for the five year Treasury on June 9, indirect bidders were a record 56.6 per cent. A lot of those will be foreign central banks." Some of these banks have been pushing out the maturities of their bonds purchases from the traditional two-to-five-year range to ten years.
Of course, there are bond buyers other than foreign central banks, such as pension funds, life insurance companies, and other so-called "real money buyers". "Real money" means you didn't borrow to buy the paper. Mr Greenspan's warning was a way of saying that the boat has sailed without them, at least for the rest of the tightening cycle.
But the profit and loss accounts of US Treasury investors are going to look pretty good soon by comparison with those of the owners of the Japan government bonds. Of that, more later. ...Link
By John Dizard
And this from Stephen Roach as a kind of counterpoint.
There's been a debate about whether China will be successful in gradually slowing its economy down to a "soft landing". Over the past couple of weeks a consensus opinion has emerged that a combination of administrative measures and market forces is working effectively to achieve that happy ending.
Consensus opinion is dead wrong.
Not only will there not be a soft landing in the future, but a hard landing is already here. This has been an investment boom such as the world hasn't had since the early years of the forced-march Soviet industrialisation, reaching near half of gross domestic product. The figures just out show a decline in the year-over-year increases since February but, more significantly, a very rapid decline in the month-to-month numbers.
"There was a 20 per cent fall in investment from March to April," says one economist on good terms with the Chinese authorities, and the numbers from April to May seem to have fallen even faster. Investment numbers are lumpy on a month-to-month basis, but we'veseen enough data from the beginning of the year to know that production has peaked. Certainly by December, the year-over-year numbers will be negative.
"China also had a trade surplus in May, another indicator that investment is falling off. This is really going to hit Japan, which has been helped by exports to China, but the Koreans and the Thais will be even harder hit."
This supports the idea I floated last week: China will be seeking to devalue the renminbi by next year. US politics are in the way here. Mickey Kantor, one of the Kerry campaign's trade advisers, has been saying that China's fixed exchange rate has amounted to an illegal export subsidy. The subsidy is supposed to come from an excessively low value of the renminbi against the dollar, artificially lowering Chinese export prices. In effect, Mr Kantor is demanding that the Chinese float their currency against the dollar. He is assuming the renminbi would rise against the dollar, and thus lower the Chinese trade surplus with the US.
What if the Chinese were to say: "We surrender, Mr Kantor. We'll float the renminbi against the dollar. You win."? With an investment collapse under way, and already-promised liberalisation of Chinese institutions' ability to invest abroad, a freely floating renminbi could easily plunge against the dollar. Since the Chinese government is apparently planning to cut public sector investment, the economy would need to offset the investment and state sector weakness with more exports. It is not clear where those exports would go.
But if Mickey Kantor's crowd gets a floating renminbi soon, they might find an even more receptive market here.
It takes a while to sort through Alan Greenspan's speeches and testimony to find out what wasn't said, and his statements in the week are full of half-revealed truths. For example, he told us that "an unwinding of the carry trade is notably under way".
In other words, people in the market have put on short positions in the equivalents of the 10-year Treasury bond, so the potential systemic risk from a rise in rates isn't there any more.
Wait a moment. Risk does not just disappear when market operators hedge their positions. Who's being saved here, and who's being fitted with a concrete parachute?
Apparently Chairman Greenspan was talking about the hedging programs of the 22 primary dealers such as Goldman Sachs, Morgan Stanley, Merrill Lynch and the dealing arms of Citigroup and JPMorgan Chase, Banc of America Securities and so on. Those firms are the instruments through which the Fed executes its monetary policy. In the collective mind of the Fed, they feel pain more acutely than the rest of us, and need succor and support if they are to perform their natural role.
So who are the chumps? Who's been buying the bonds, the duration that the primary dealers haven't been buying?
Let's see . . . who would be the dumbest, most self-destructive people at the card table? How about the foreign central banks?
According to Gerald Lucas, a bond strategist at BoA Securities: "A number of the foreign central banks that intervened to support the dollar in the months past have been recycling their bank deposits into Treasury bonds. If you look at the auction for the five year Treasury on June 9, indirect bidders were a record 56.6 per cent. A lot of those will be foreign central banks." Some of these banks have been pushing out the maturities of their bonds purchases from the traditional two-to-five-year range to ten years.
Of course, there are bond buyers other than foreign central banks, such as pension funds, life insurance companies, and other so-called "real money buyers". "Real money" means you didn't borrow to buy the paper. Mr Greenspan's warning was a way of saying that the boat has sailed without them, at least for the rest of the tightening cycle.
But the profit and loss accounts of US Treasury investors are going to look pretty good soon by comparison with those of the owners of the Japan government bonds. Of that, more later. ...Link
Friday, June 11, 2004
The Euro's Big Chance
The Euro's Big Chance
by Niall Ferguson
The dollar's reign as the world's undisputed reserve currency could be drawing to a close
"The convention whereby the dollar is given a transcendent value as an international currency no longer rests on its initial base... The fact that many states accept dollars in order to make up for the deficits of the American balance of payments has enabled the US to be indebted to foreign countries free of charge. Indeed, what they owe those countries, they pay in dollars that they themselves issue as they wish.
.. This unilateral facility attributed to America has helped spread the idea that the dollar is an impartial, international means of exchange, whereas it is a means of credit appropriated to one state." ...Link
by Niall Ferguson
The dollar's reign as the world's undisputed reserve currency could be drawing to a close
"The convention whereby the dollar is given a transcendent value as an international currency no longer rests on its initial base... The fact that many states accept dollars in order to make up for the deficits of the American balance of payments has enabled the US to be indebted to foreign countries free of charge. Indeed, what they owe those countries, they pay in dollars that they themselves issue as they wish.
.. This unilateral facility attributed to America has helped spread the idea that the dollar is an impartial, international means of exchange, whereas it is a means of credit appropriated to one state." ...Link
Wednesday, June 09, 2004
Tuesday, June 08, 2004
The Effects of $80 Oil
The Bear's Lair: The effects of $80 oil
By Martin Hutchinson
-- With oil prices touching $42 a barrel on the New York Mercantile Exchange, many economic commentators have gone into denial, pointing out the many reasons why prices can be expected to relapse again to the $30-35 range. Yet there is an alternative scenario, in which supply disruption causes oil prices to rise much further, and it's worth looking at how such an event would play out.
Marginally the most probable scenario is still that oil prices will gradually subside, returning the oil sector of the economy to approximately its state over the last few years, with prices significantly higher than in the 1990s, but still well below the peaks reached in 1980-81. However a number of factors in the last few years have made oil market disruptions more likely. The spare capacity in world oil production, around 8 percent at the time of the first Gulf war in 1991, is now down to around 3 percent, since only Saudi Arabia has sufficient revenues and is sufficiently non-market oriented to maintain substantial spare production capacity. ...Link
By Martin Hutchinson
-- With oil prices touching $42 a barrel on the New York Mercantile Exchange, many economic commentators have gone into denial, pointing out the many reasons why prices can be expected to relapse again to the $30-35 range. Yet there is an alternative scenario, in which supply disruption causes oil prices to rise much further, and it's worth looking at how such an event would play out.
Marginally the most probable scenario is still that oil prices will gradually subside, returning the oil sector of the economy to approximately its state over the last few years, with prices significantly higher than in the 1990s, but still well below the peaks reached in 1980-81. However a number of factors in the last few years have made oil market disruptions more likely. The spare capacity in world oil production, around 8 percent at the time of the first Gulf war in 1991, is now down to around 3 percent, since only Saudi Arabia has sufficient revenues and is sufficiently non-market oriented to maintain substantial spare production capacity. ...Link
Monday, June 07, 2004
Economic Unorthodoxy: An Interview with Doug Henwood
"Economic Unorthodoxy: An Interview with Doug Henwood"
...DH: There is a fantasy among some people who don’t like present economic conditions that there’s been an innovation they call globalization that has been responsible for economic life taking an unpleasant turn. Capitalism from its onset has been indifferent to borders. It broke out of its regional origins, helped to create national economies and then spread well beyond that. Go back 500 years to European conquest of the Western hemisphere and later with 19th century European conquests of Africa and Latin America – these had a lot to do with the evolution of capitalism. People tend to forget that. They forget that in the late 19th century there were extensive trade relations, cross-border capital flows and gold was a kind of stateless international money that could move around without any sort of passport. There was a sort of de-globalization of capital in the World War I crisis – they tried to put it back together after the war but it didn’t work too well. Then we had a period of depression in the 1930s and war in the 1940s. But as soon as the war was over, the US was busy trying to reconstruct a global economy under its leadership and in its image and interest. All of this talk of globalization masks that history.
Of course there are always differences. The politically dominant role of the US now is not like earlier epochs with great rivalry among the European colonial powers. Now multinational corporations operate in various places around the world, though they aren’t exactly without precedent either. So there are innovations, and it does seem that things move a lot faster than they used to. I just want people to think more carefully about the long history of capitalism’s internationalizing
tendencies that gets occluded by a word like globalization. ...Link
...DH: There is a fantasy among some people who don’t like present economic conditions that there’s been an innovation they call globalization that has been responsible for economic life taking an unpleasant turn. Capitalism from its onset has been indifferent to borders. It broke out of its regional origins, helped to create national economies and then spread well beyond that. Go back 500 years to European conquest of the Western hemisphere and later with 19th century European conquests of Africa and Latin America – these had a lot to do with the evolution of capitalism. People tend to forget that. They forget that in the late 19th century there were extensive trade relations, cross-border capital flows and gold was a kind of stateless international money that could move around without any sort of passport. There was a sort of de-globalization of capital in the World War I crisis – they tried to put it back together after the war but it didn’t work too well. Then we had a period of depression in the 1930s and war in the 1940s. But as soon as the war was over, the US was busy trying to reconstruct a global economy under its leadership and in its image and interest. All of this talk of globalization masks that history.
Of course there are always differences. The politically dominant role of the US now is not like earlier epochs with great rivalry among the European colonial powers. Now multinational corporations operate in various places around the world, though they aren’t exactly without precedent either. So there are innovations, and it does seem that things move a lot faster than they used to. I just want people to think more carefully about the long history of capitalism’s internationalizing
tendencies that gets occluded by a word like globalization. ...Link
Thursday, June 03, 2004
Wednesday, June 02, 2004
Tuesday, June 01, 2004
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