A Simple Reply

Why did Austrailia's economy act differently than Thailand's during the `97 crisis?

The main reason Austrailia's economy acted differently and survived the Asian crises is the fact that she is an advanced developed form of capitalism, compared to the tiger-nations that were an infant form of capitalism or outright mercantilism. The key word here is mercantilism. This is capitalism's oldest nemesis. Any dictionary gives a good enough meaning. All need be done is to substitute t-bills for gold and you have the answer - statecrafted manipulation of values and markets.

Nations who try to over-protect the local market with low exchange rate manipulation for export gain always lose when the rate or market fears turns against them, whereas Austrailia has always [in recent years] possessed a large consumption society to support it in downturns. Of course, the tigers had no well organized internal consumption market to turn to when foreign markets turned against them, so crash they did - too few exports and too little internal demand.

Markets must always be somewhere's near balanced to survive, long term. The balance must be internal and external markets, otherwise punishment is ahead. Even though the U.S., at present, is extremely unbalanced, it is able to survive such massive imbalances because it also possesses the world's largest consumption market, and one of the world's smallest export or import necessity markets. On the other hand, if you look at Japan, you will see an example of her mercantilist troubles played out since the early `90's. Japan was a large export and re-export market far too long, while over-protecting her local economy, thus overpricing her. When the exchange rate turned against her in `85 to `91, crisis developed - a major deflationary crisis. She's still not free and clear. At present, she has a large balance of payments surplus, yet her internal market is still in the dumper, due to the surplus coming from her MNC's overseas profits - after many abandoned the local market, due to exchange rates forcing them out, but originally due to her mercantilist state actions for years.

Now, the entire world is faced with big ol' mercantilist China and her copy-cat minions all over the world. We, the more well developed nations, face massive mercantilist pressures from all the world's low exchange rate and manipulated low rate nations. Just check for balance of payments surplusses by otherwise poor nations, and you will recognize these as mercantilist candidates - capitalism's massive problem. Even looking back at recent history, both Spain's and England's empires over-protected the local country with imperial preference trade laws, thus were mercantilist in nature. Only local entrepreneurial bussiness ventures and spirits, building local consumption markets beat this old demon, then, and now we possess the ability to pass the right trade and exchange laws, if the nations could be awakened from their great, Marxist era, trade sleep...

For an author to check out further writings, I would suggest a native of your own country, Stephen Kirchner at: Link Check out many of his links. As a matter of fact my last post at macromouse was from his site. Institutional Economics site is also listed in the links on macromouse at: Link Also check out Morgan Stanley's year end digest of 25 posts by their top economists from all over the world at: Link If you lose track of this address, as they change it, you can look it up in their site's archive of December 17, 2004. I just read it yesterday. It is quite thorough, and mentions some about mercantilism as does Kirchner's site.

Dollar Adjustment: How Far? Against What?

The Dollar: Where are we going?

by
C. Fred Bergsten and
John Williamson, editors

excerpt conclusions:
In summing up the conference, C. Fred Bergsten pointed to the stalemate that the system has reached. There is general agreement that the United States needs to curb quite substantially the size of its current account deficit. Most observers acknowledge that doing this will require a siz-able depreciation of the dollar. That implies a need for other currencies to appreciate against the dollar. Some currencies have already done so: the euro, the pound, the Swiss franc, the Canadian dollar, and the Australian and New Zealand dollars. (Indeed, some participants felt that several of these currencies might have overshot, although it is hard to believe that this remains true after the renewed strengthening of the dollar in early 2004.) Despite these corrections, the US dollar remains substantially over-valued.

One thing the conference did not reach agreement on is the magnitude of the current dollar overvaluation. Wren-Lewis went straight to estimates of equilibrium bilateral exchange rates, but if one weights and averages these, one would estimate on his measure that the dollar was overvalued by a little under 10 percent at the time of the conference. The figure of Bénassy-Quéré and her colleagues would seem to be about 4 percent, if one looks at their estimate of the dollar’s real effective overvaluation, although weighting their estimates of bilateral misalignments with the Federal Reserve’s weighting system would suggest a rather larger figure, again approaching 10 percent. O’Neill’s preferred estimate would also seem to be about 10 percent.

Mussa, conversely, asserted that a further dollar depreciation of about 20 percent or more would be needed to complete the adjustment process. Mann (2004) is even more alarmist, predicting that an immediate adjust-ment of close to 20 percent (enough to bring the Fed’s broad real index down to an index value of 85, as against its July 2004 value of 101.5) would do little more than stabilize the size of the US current account deficit. And to prevent the deficit from growing again in future years, the initial depre-ciation would need to be followed by a secular depreciation of about 10 percent a year (to offset the Houthakker-Magee asymmetry in the import elasticities and the growing deficit on the investment income account as the United States piles up foreign indebtedness, and to allow for an initial situation in which the value of imports vastly exceeds that of exports). What one can conclude is that the dollar is currently overvalued by at least 10 percent or so, and possibly by substantially more.

Yet the world has run out of volunteers for currency appreciation. Japan has already undertaken some appreciation, and its authorities fear that much more might derail the incipient recovery that looks as though it may finally be under way. China has a fixed nominal exchange rate with the dollar, and its officials parrot phrases about “keeping the yuan stable around a rational and balanced level” (ignoring the facts that stability in the bilateral rate against the dollar implies instability in what really mat-ters, the effective exchange rate, and that the present rate is by no stretch of the imagination reasonable and balanced). Other Asian countries resist substantial appreciation, even when their exchange rates are nominally floating, when this would also mean losing competitiveness against China. Canada and the eurozone are both relieved that the full appreciation of 2003 did not stick. Latin American countries seem determined not to re-peat their past mistake of acquiescing in overvalued exchange rates, and they may well be tempted to err in the opposite direction.

In this situation, there is an acute need to reach some measure of inter-national understanding about a consistent set of balance of payments ob-jectives and the resulting policy implications. Yet this is one responsibility that the IMF, the institution that is supposed to be in charge of supervising the adjustment process, seems singularly reluctant to fulfill. The G-7 and G-20 should tell the IMF that it is high time for it to accept its responsibility to negotiate an agreed-on and mutually consistent set of current account objectives. Unless the Institute’s conference was chronically mistaken, these objectives will have as a corollary an obligation to orchestrate a concerted Asian appreciation against the dollar and to encourage coun-tries with both deficits and surpluses to make the needed complementary adjustments in their policies regarding domestic demand.

No one doubts that adjustment will eventually happen. The sooner it starts, the less the chance that it will take a catastrophic form. If and when the worst happens, the world will surely not look back forgivingly at the present generation of officials who told themselves reassuring sto-ries about the omniscience of markets while allowing the disequilibria to explode.... The Dollar: - Link

The World On "Dollar Welfare" - "Welfare Arbitrage"

I can not understand why the world can not see what our massive deficits and debts actually add up to, and why there is not an outrageous outcry by more economists and citizens. The dollar is actually financing more welfare in foreign nations than it is at home. This massive expenditure is being borrowed from our children and grand-children. When will we awaken?

The Daniel Lian article below is only one of the many listed at the Morgan Stanley site about debating the dollar. I recommend everyone check out the December 10 archive for the full story. It should be scary, but I don't know when it will be.

What Are the Key Structural Issues Facing Asia?
by Daniel Lian

In my view, the global macro imbalance and a resulting significant transfer of wealth are the key structural challenges that Asia needs to address. In this respect, a review of history is helpful to provide context.

The chance of attaining economic sovereignty first presented itself to developing Asia in the 1950s after the end of the Second World War. This period also marked the beginning of the (rapid) end to western imperialism and colonization. The end of colonization meant that Asia had a wide-open platform to pursue economic development. After a brief flirtation with import substitution in the 1950s and 1960s by some Asian countries, most north-east and south-east Asian economies joined the band-wagon of export-orientation. China started to embrace some aspects of market economics in the late 1970s, and India started to experiment with economic liberalization and outward orientation a decade ago. So what is wrong with this seemingly ‘progressive’ path for Asia? The trouble is that it has been an extremely imbalanced development model.

Macro imbalance. The global economy has suffered massive global imbalance for the last several decades. This global imbalance has centered on saving – i.e., Asia’s excessive saving, compared with inadequate saving in the US and parts of the west. From another macro perspective, the imbalance is characterized by Asia’s massive export machine and appetite for Asian goods in the US and parts of the west. In a sense, Asia’s export machine has ensured that its current account surpluses have been finely balanced against the global imbalance in savings.

Unlike Andy, my chief concern is not so much about Asia losing export competitiveness and its sole growth engine, as the dollar structurally weakens, and more about the tremendous welfare costs that will hit the region if it retains its imbalanced model.

Welfare transfer. In my view, the world is experiencing the greatest welfare transfer ever seen across geographical regions and across generations. Such transfers are embodied in the macro imbalance characterized by Asia’s aggressive exports but passive savings in US Treasuries and other foreign (chiefly dollar) assets. Asia’s obsession with exports and savings has enabled present generations of the US and some parts of the developed world to sustain an unusually high rate of consumption, at the expense of current generations in Asia. This is because Asian exchange rates are artificially low and exports and wages are artificially cheap, and Asia has suppressed its present consumption to subsidize buyers of its exports. It also comes at the expense of future generations of the US economy and some parts of the developed world. At some point, present consumption in these countries will have to give way to savings to restore macro imbalances. Future generations will have to bear the economic burden of an aging population, as well as the devaluation of their currencies and the retirement of their public and private debt.

One would think future generations in Asia are the obvious winners as they inherit vast savings accumulated by their hardworking parents. However, their world is extremely uncertain and they face three major risks. First, wealth distribution has been heavily skewed and benefits relatively few. Poor governance means there is a good chance that their wealth will be squandered by the collective bad deeds of rent-seekers through systemic risk in Asia’s financial systems and asset markets. Second, it is hard to believe the unfortunate future generations of the US and other parts of the developed world will work doubly hard in their lifetimes to retire debt accumulated by their parents. It is more likely that they will simply raise inflation to reduce their debt burden at the expense of the future generations in Asia who inherit those excess savings. Third, with the likelihood of deteriorating demography (Asia will be growing older then), lack of intellectual property and economic ownership, and without the excessive consumption behavior of the west, Asia has insufficient economic means to accumulate wealth... Continued in archive of Dec. 10.

The Lost Soul of Democrats

Well I've been searching for it for a long time - some forty odd years... Yes, we lost the election - but why? Now, if you allow me to indulge myself, I think I may be able to shed some light on some new reasons, and maybe point a way to recover our soul, and possibly even find a little new democratic integrity. As a child growing up in the fifties, I saw a very different world of Democrats than what I see today. And, sad to say, that difference today is not a good difference. My childhood memories contain visions of many very strong conservative Democrats, dispersed with a small number of liberal Democrats. Today, of course, that vision has been turned on its head. Now, is this the problem or not?

After researching, writing, participating in N.G.O.'s, and joining many academic/intellectual groups, I find a very disturbing trend. These groups are almost identical twins to the political culture at large. By this I mean the small ideas, in these groups as well as across the nation, are drowning out the large ideas, that usually support the small ideas. The populist left, populist liberals, and the populist centrist Democrat's small ideas are drowning out the necessary, conservative Democrat's large ideas. Now, the way I learned this story was that, logic dictates the large is more important than the small ideas, yet we just witnessed an election where our candidate had not one large idea or any semblance of a grand strategy, such as existed in the past - especially in such examples as Washington/Hamilton, Lincoln, and F.D.R. What is the reason for this? Have the Republicans set the agenda for the Democrats? Have the Democrats become blind to the fact that a conservative raft is necessary to lift the small ideas from the bottom of the deep well of arguement and confusion they have fallen into? Don't the Democrats see the sovereignty of the individual is being exploited, all over the world, by free markets and weak central governments, just as the neo-cons want it?

Historically and empirically, if we look back to better days we find our leaders realized democracy was, often times, too weak to stand on its own legs without the support of a strong central government. Hamilton/Washington, Lincoln, and F.D.R. all full well knew this and made the best out of a bad situation, and the country was greatly rewarded all three times. I mention these three incidents as they represent the greatest achievements in American political history. People may argue, but I think they'd be hard pressed to prop up other eras of greatness. Now this may go against the modern era's thinking, but the facts speak for themselves. Each era was marked by weak democracy being supported and saved by strong conservative government's new and revolutionary action. The easiest one for us to understand, of course, is F.D.R.'s New Deal, with its many liberal and conservative ideas being instituted. I simply argue that without his large and revolutionary conservative political and economic policies instituted, the smaller liberal policies would never have had a chance of survival. It always takes large political and economic reforms to support and fund the smaller, yet necessary as well, liberal ideas. I believe if we realize this, develop and re-enter the large conservative reforms and grand strategies necessary to fund our smaller liberal desires, we can recover a bit of the Democratic soul, and its lost integrity - and possibly win future elections - again.

If we can see great ideas, we can achieve greatness - again!

L.A. Gillespie
Rockland

Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization

As far as I read this, Paul Samuelson has finally exposed enough truth to turn around the equilibrium theory, and free trade theories. This paper, that was originally published in September, is, in my opinion, the most important economic facts ever produced. If enough economists recognize the significance of Paul's refutation of his original work about equilibrium theory and facts, we have a chance of truly solving the world's problems.

If you check out Skidelsky's article I posted yesterday, and look at it in conjunction with this new post by Samuelson, I think you may come to the same conclusion I have. My conclusion is to look at Paul Davidson's and John M. Keynes' full works and realize how valid they truly are, now that the false equilibrium theory has been exposed by Samuelson. I'll have much more on this later...

Paul A. Samuelson
Most noneconomists are fearful when an emerging China or India, helped by their still low real wage rates, outsourcing and miracle export-led developments, cause layoffs from good American jobs. This is a hot issue now, and in the coming decade, it will not go away. Prominent and competent mainstream economists enter into the debate to educate and correct warm-hearted protestors who are against globalization. Here is a fair paraphrase of the argumentation that has been used recently by Alan Greenspan, Jagdish Bhagwati, Gregory Mankiw, Douglas Irwin and economists John or Jane Doe spread widely throughout academia.

Yes, good jobs may be lost here in the short run. But still total U.S. net national product must, by the economic laws of comparative advantage, be raised in the long run (and in China, too). The gains of the winners from free trade, properly measured, work out to exceed the losses of the losers. This is not by mysterious fuzzy magic, but rather comes from a sharing of the trade-induced rise in total global vectors of the goods and services that people in a democracy want. Never forget to tally the real gains of consumers alongside admitted possible losses of some producers in this working out of what Schumpeter called “creative capitalist destruction.”

Correct economic law recognizes that some American groups can be hurt by dynamic free trade. But correct economic law vindicates the word “creative” destruction by its proof [sic] that the gains of the American winners are big enough to more than compensate the losers.

The last paragraph can be only an innuendo. For it is dead wrong about necessary surplus of winnings over losings—as I proved in my “Little Nobel Lecture of 1972” (1972b) and elsewhere in references here cited (see also Johnson and Stafford, 1993; Gomory and Baumol, 2000). The present paper provides explication of the popular polemical untruth... Paul A. Samuelson - Continued

GLOBAL IMBALANCES AND THE LESSONS OF BRETTON WOODS - Barry Eichengreen