Deficit Disorders - Bill Bonner
Simply Unsustainable - Max Fraad Wolff
Monday, March 28, 2005
Wednesday, March 23, 2005
Waiting For The Big Wave!
Waiting for the big wave
Katy Delay is a freelance columnist in economics and government, and maintains a blog at Link.
By all logic, this nation should be in deep water right about now. In the 1980s, wise kahunas foretold a watery day of reckoning within the following two or three decades if nothing were done to counteract the scourge of chronic inflation that has proceeded unhampered since the early 20th Century.
We all note that indeed nothing has been done. On the contrary, the waves of increasing prices haven't let up for a moment, growing at a rate of at least 2-3% a year since 1900. So, since the dollar is now falling on the international marketplace, should we begin preparing for the crashing Big Wave as predicted? History says there will be retribution in the long run; but there are at least four elements of our modern economy that might explain the stealth with which it is approaching.
One of those is the extent of the recent technology boom. The discovery of electronics is the equivalent of the wheel in its significance to the economy. Computers and high-speed communications have brought productivity not only to an all time high, but frankly to another cosmic level; and through this factor alone, general prices should have decreased several points, just as they did back in the 1800s during the industrial revolution. (By the way, contrary to popular opinion, natural, gradual price deflation enriches everyone equitably and indiscriminately, by increasing our purchasing power. As prices decrease, relative or "real" wealth – i.e. our ability to raise our standard of living and save for the future – increases.)
Yet this hasn't happened. Why? Because the expected price decreases have been offset every year by a lowering of the dollar's value through "out of thin air" credit creation and currency inflating that camouflages improper price increases. Both the wasted cost devaluation and the parallel dollar debasement can remain invisible for years – at least until people wake up, as they are beginning to do.
But you will say, "Then why doesn't the CPI (consumer price index) reflect this inflating theft properly?" This is the second reason for our Big Wave's invisibility: economic statistics are misleading and inaccurate, to the point where one wonders just how naive economists must think we are. The dirty little secret is that they have always had difficulty measuring even something as "simple" as true output, or gross domestic product (GDP); and more complicated economic variables such as what I call "IEI," for "inflating embezzlement index" (the amount of hot-air credit in our economy) remain even more elusive. Believe it or not, the experts are just estimating the figures, hoping to possess the right data to start with (like the M1 and M2 aggregates you've heard of) and praying – or in some cases assuming with the hubris typical of far too many in the scientific community – that it is not garbage in, garbage out. IEI has proven to be particularly quixotic. No economist has come anywhere near accuracy, except perhaps Edward C. Harwood of the American Institute for Economic Research; and even AIER admits to having difficulty since the 1970s, given the arduous and all but impossible underlying statistics-gathering involved.
So let's have some fun conjecturing: How much purchasing power might we really be losing on an annual basis, above the 3% the Fed has already admitted to? If our measurement of GDP were more in tune with reality, we just might find that real national wealth should have increased by something on the order of – just to take a wild guess based on the contribution of new technologies in my personal life – some 7 to 10% per year since 1980. This should bring about a lowering of CPI (remember, lowering of prices is the equivalent of an increase of the populace's wealth) of at least a few percentage points a year, say 2%, to be modest. That, added to the 3% so-called "inflation" rate we are seeing in our CPI basket of prices, makes a total of 5% a year, or 100% of our wealth confiscated over a 20 year period, at the very minimum; and that's based on these GDP estimates alone. The punch line is that no one can certify that this is incorrect. Do you suppose this is one explanation why our dollar can't get no respect these days?
A third element that may be contributing to this exquisite prolongation of our Big Wave's dénouement is that the US is perceived as a bastion of economic strength compared to every other nation in the world. We're called the "world's tallest midget." Based on that, billions of our "good-as-gold" dollars, stocks, and US bonds and assets are being held as the safest investments. To top it off, the dollar is also used as a substitute money by foreign citizens of less financially secure countries. For example, no one is really certain just how many of our dollar bills are hidden in the coffers of the likes of Saddam Hussein, or held by Russian mafiosi, ready to pay for that chalet in the Swiss alps or a mansion on the Cote d'Azur. The money simply changes hands, never returning to its berth.
More recently, however, these dollars are buying less and less, and the bonds are decreasing in worth, so our fiscal rogues and central bankers are wont to diversify. By way of illustration, a recent Columbian street gang bust turned up a suitcase full of euros. Now, this alone does not constitute a direct challenge to the dollar's esteemed status (it may simply be a reflection of evolving European drug preferences); but one thing is certain: the dollar is no longer the only game in town.
If the drug lords and OPEC are already getting skittish, what will happen when the world's central bankers decide to act upon the realization that the dollar is not as good as gold, releasing a tidal wave of currency and bonds that will head home for lack of takers? The Fed will have to get the excess cash off the American streets in order to avoid pandemonium (imagine the scene: too many greenbacks chasing too few goods, and Greenspan in pursuit at the rear) they will also have to increase Fed rates further, which may slow the American economy and force prices to move erratically. But wait: the Fed has led us to believe that they have prices under control. They will be in a quandary. I wish I could be a fly on the wall of their boardroom when it happens.
But you can't be in two places at once, so I prefer to perch under this huge wave's crest, hoping to catch another good ride when the devil's plans play out. It's sad: if only all of humanity – not just the bankers, the US government and the smart speculators – could ride at the pinnacle of this technological progress that is holding us afloat today. Instead, the usual losers will remain clustered in herds along its flanks, trying to go about their business of competing sportsmanlike for the small swells, though increasingly unnerved by the moody seas and disrupting gulps of salt water. Like our Asian friends, their short memories will not allow them to conceive of the tsunami that may be about to bowl them ashore – or maybe even tumble us all asunder.
Katy Delay is a freelance columnist in economics and government, and maintains a blog at Link.
By all logic, this nation should be in deep water right about now. In the 1980s, wise kahunas foretold a watery day of reckoning within the following two or three decades if nothing were done to counteract the scourge of chronic inflation that has proceeded unhampered since the early 20th Century.
We all note that indeed nothing has been done. On the contrary, the waves of increasing prices haven't let up for a moment, growing at a rate of at least 2-3% a year since 1900. So, since the dollar is now falling on the international marketplace, should we begin preparing for the crashing Big Wave as predicted? History says there will be retribution in the long run; but there are at least four elements of our modern economy that might explain the stealth with which it is approaching.
One of those is the extent of the recent technology boom. The discovery of electronics is the equivalent of the wheel in its significance to the economy. Computers and high-speed communications have brought productivity not only to an all time high, but frankly to another cosmic level; and through this factor alone, general prices should have decreased several points, just as they did back in the 1800s during the industrial revolution. (By the way, contrary to popular opinion, natural, gradual price deflation enriches everyone equitably and indiscriminately, by increasing our purchasing power. As prices decrease, relative or "real" wealth – i.e. our ability to raise our standard of living and save for the future – increases.)
Yet this hasn't happened. Why? Because the expected price decreases have been offset every year by a lowering of the dollar's value through "out of thin air" credit creation and currency inflating that camouflages improper price increases. Both the wasted cost devaluation and the parallel dollar debasement can remain invisible for years – at least until people wake up, as they are beginning to do.
But you will say, "Then why doesn't the CPI (consumer price index) reflect this inflating theft properly?" This is the second reason for our Big Wave's invisibility: economic statistics are misleading and inaccurate, to the point where one wonders just how naive economists must think we are. The dirty little secret is that they have always had difficulty measuring even something as "simple" as true output, or gross domestic product (GDP); and more complicated economic variables such as what I call "IEI," for "inflating embezzlement index" (the amount of hot-air credit in our economy) remain even more elusive. Believe it or not, the experts are just estimating the figures, hoping to possess the right data to start with (like the M1 and M2 aggregates you've heard of) and praying – or in some cases assuming with the hubris typical of far too many in the scientific community – that it is not garbage in, garbage out. IEI has proven to be particularly quixotic. No economist has come anywhere near accuracy, except perhaps Edward C. Harwood of the American Institute for Economic Research; and even AIER admits to having difficulty since the 1970s, given the arduous and all but impossible underlying statistics-gathering involved.
So let's have some fun conjecturing: How much purchasing power might we really be losing on an annual basis, above the 3% the Fed has already admitted to? If our measurement of GDP were more in tune with reality, we just might find that real national wealth should have increased by something on the order of – just to take a wild guess based on the contribution of new technologies in my personal life – some 7 to 10% per year since 1980. This should bring about a lowering of CPI (remember, lowering of prices is the equivalent of an increase of the populace's wealth) of at least a few percentage points a year, say 2%, to be modest. That, added to the 3% so-called "inflation" rate we are seeing in our CPI basket of prices, makes a total of 5% a year, or 100% of our wealth confiscated over a 20 year period, at the very minimum; and that's based on these GDP estimates alone. The punch line is that no one can certify that this is incorrect. Do you suppose this is one explanation why our dollar can't get no respect these days?
A third element that may be contributing to this exquisite prolongation of our Big Wave's dénouement is that the US is perceived as a bastion of economic strength compared to every other nation in the world. We're called the "world's tallest midget." Based on that, billions of our "good-as-gold" dollars, stocks, and US bonds and assets are being held as the safest investments. To top it off, the dollar is also used as a substitute money by foreign citizens of less financially secure countries. For example, no one is really certain just how many of our dollar bills are hidden in the coffers of the likes of Saddam Hussein, or held by Russian mafiosi, ready to pay for that chalet in the Swiss alps or a mansion on the Cote d'Azur. The money simply changes hands, never returning to its berth.
More recently, however, these dollars are buying less and less, and the bonds are decreasing in worth, so our fiscal rogues and central bankers are wont to diversify. By way of illustration, a recent Columbian street gang bust turned up a suitcase full of euros. Now, this alone does not constitute a direct challenge to the dollar's esteemed status (it may simply be a reflection of evolving European drug preferences); but one thing is certain: the dollar is no longer the only game in town.
If the drug lords and OPEC are already getting skittish, what will happen when the world's central bankers decide to act upon the realization that the dollar is not as good as gold, releasing a tidal wave of currency and bonds that will head home for lack of takers? The Fed will have to get the excess cash off the American streets in order to avoid pandemonium (imagine the scene: too many greenbacks chasing too few goods, and Greenspan in pursuit at the rear) they will also have to increase Fed rates further, which may slow the American economy and force prices to move erratically. But wait: the Fed has led us to believe that they have prices under control. They will be in a quandary. I wish I could be a fly on the wall of their boardroom when it happens.
But you can't be in two places at once, so I prefer to perch under this huge wave's crest, hoping to catch another good ride when the devil's plans play out. It's sad: if only all of humanity – not just the bankers, the US government and the smart speculators – could ride at the pinnacle of this technological progress that is holding us afloat today. Instead, the usual losers will remain clustered in herds along its flanks, trying to go about their business of competing sportsmanlike for the small swells, though increasingly unnerved by the moody seas and disrupting gulps of salt water. Like our Asian friends, their short memories will not allow them to conceive of the tsunami that may be about to bowl them ashore – or maybe even tumble us all asunder.
Wednesday, March 16, 2005
"Throw the Book at China!"
Throw the Book at China - Kirchner:
The IIE's Fred Bergsten says it is time the IMF and US Treasury started enforcing the rule book on China's manipulation of its exchange rate:
Fred Bergsten even goes so far as to call for IMF counter-intervention in foreign exchange markets and the erection of trade barriers under WTO auspices. This is dangerous and unnecessary in my view. But if the IMF will not enforce its own rule book, we have to ask, what is it good for?"
The IIE's Fred Bergsten says it is time the IMF and US Treasury started enforcing the rule book on China's manipulation of its exchange rate:
key industrial countries and international institutions have done virtually nothing to counter these blatant market distortions. Despite their professed fealty to market principles, the US and European governments have limited themselves to ineffectual consultations with the perpetrators. Massive currency interventions by the Asian countries directly violate the charter of the International Monetary Fund, which calls on members to avoid manipulating exchange rates in order "to prevent effective balance of payments adjustment". The chief culprit is China, whose continued dollar peg has helped weaken its currency by more than 10 per cent since 2002.
The US and the Europeans, the IMF's leading shareholders, must insist the fund start implementing its rules. This calls for the managing director to send a consultation mission to each member country suspected of "manipulation" and, if resolution is not prompt, then to refer the problem to the fund's executive board. The list of target countries should start with China. In addition, the Treasury Department must start fulfilling its legislative requirement to label these countries, most notably China, as "currency manipulators" in its next semi-annual report to Congress on the topic due later this month.
Fred Bergsten even goes so far as to call for IMF counter-intervention in foreign exchange markets and the erection of trade barriers under WTO auspices. This is dangerous and unnecessary in my view. But if the IMF will not enforce its own rule book, we have to ask, what is it good for?"
Monday, March 14, 2005
Monday, March 07, 2005
The Liquidity Conundrum
China, the global wages dynamic and the global resources dynamic - is this all the story or is this a much more complex dynamic? My answer to this is one you may never have thought of. I've recently been involved with many academic and intellectual groups pouring over the world's problems, and mainly from economic perspectives. What has struck me as novel is the fact the U.S. and many western nations preached for the downfall of Marxist pholosophy nations for over 75 years, yet never penned hardly a word about what the world would be like if their dream came true - what the economic, ie., wage, inflation and resource dynamics set in play would truly be. By this I mean Marxist nations for all these years had barely any inflation in wages and internal resource prices compared to the western world. Then I got thinking about colonialism and imperialism exerting a very similar economic dynamic in the countries where practiced for centuries - and then them also re-entering the free capitalist system mostly after WWII. Most of the colonial nations didn't experience the rates of inflation their host countries did either, much the same as the Marxist countries, since they were manipulated low - kind of like capitalism's socialist surrogates. This means that a huge, more than huge, economic dynamic has been released on the world, first by the post colonial period after WWII, and then by the post Marxist period since the early `90's.
After thinking about the above I got thinking about what my grandfather had told me about time - ie., empire time and timing of nations' integrations and re-integrations. Looking back over history we all recognize the many great, and not so great empires that have existed. They all existed for a time - time and the timing of empires and nations' existence is key to my thinking. If we boil this down to a basic model of ET=WIR, or empire time equals wages, inflation and resources, I think we can see quite a simple example of otherwise complex data. It matters not which empire or nation we use as our model as all work the same to these four factors - time, wages, inflation and resources, since these four items can represent everything present in any and all empires and nations. Nations and empires all started out with cheap wages, low inflation and cheap reasources. Time, there it is again, time changes this dynamic and only time does. Now, that may seem quite obvious but, over time any empire or nation, such as the U.S., starting out with practically free for the taking resources, which in itself would have created cheap wages, was a huge dynamic on the then existing capitalist world. Defining this further, we were a mercantilist nation entering the hegemonic capitalist world of the European empires. By us haveing such cheap wages and resources we couldn't help but accidentally grow into the greatest power and wealth nation the world has ever known, but now we face the same problem from China that we then posed on the capitalist hegemonic world of 1791. We are now the hegemon and China is the mercantilist with the cheap wages and internal resources - not to mention her mercantilist minions all over the globe.
This timing dynamics has been going on since the dawn of economic time. Any one nation or potential empire starts out with the cheapest wages and resources, whether it be Egypt or the Myan's, and over time inflates to higher levels than the periphery, and at some point the periphery becomes a new center. This happens due to nothing more than the time and timing growths and integrations of wage prices, inflation rates and resource prices. Low price nations and empires become high price nations and empires over time, and thus trade places one after another through the process of perpetual economic suzerainty - the never ending cycly of the circle of nations' time cycles. So time and re-timing the global cycles into and by global re-balancing through sliding time scale law structures is the only way this author sees to solving this greatest of history's global problem.
After thinking about the above I got thinking about what my grandfather had told me about time - ie., empire time and timing of nations' integrations and re-integrations. Looking back over history we all recognize the many great, and not so great empires that have existed. They all existed for a time - time and the timing of empires and nations' existence is key to my thinking. If we boil this down to a basic model of ET=WIR, or empire time equals wages, inflation and resources, I think we can see quite a simple example of otherwise complex data. It matters not which empire or nation we use as our model as all work the same to these four factors - time, wages, inflation and resources, since these four items can represent everything present in any and all empires and nations. Nations and empires all started out with cheap wages, low inflation and cheap reasources. Time, there it is again, time changes this dynamic and only time does. Now, that may seem quite obvious but, over time any empire or nation, such as the U.S., starting out with practically free for the taking resources, which in itself would have created cheap wages, was a huge dynamic on the then existing capitalist world. Defining this further, we were a mercantilist nation entering the hegemonic capitalist world of the European empires. By us haveing such cheap wages and resources we couldn't help but accidentally grow into the greatest power and wealth nation the world has ever known, but now we face the same problem from China that we then posed on the capitalist hegemonic world of 1791. We are now the hegemon and China is the mercantilist with the cheap wages and internal resources - not to mention her mercantilist minions all over the globe.
This timing dynamics has been going on since the dawn of economic time. Any one nation or potential empire starts out with the cheapest wages and resources, whether it be Egypt or the Myan's, and over time inflates to higher levels than the periphery, and at some point the periphery becomes a new center. This happens due to nothing more than the time and timing growths and integrations of wage prices, inflation rates and resource prices. Low price nations and empires become high price nations and empires over time, and thus trade places one after another through the process of perpetual economic suzerainty - the never ending cycly of the circle of nations' time cycles. So time and re-timing the global cycles into and by global re-balancing through sliding time scale law structures is the only way this author sees to solving this greatest of history's global problem.
Andy Xie "The End Is Debt Deflation":
The global economy is experiencing the biggest bubble ever. The bubble began with the Asian Financial Crisis and went through the tech bubble, the property bubble and, finally, the China bubble. It has been one big and long bubble. The main reason is because the major central banks have been targeting inflation in a fundamentally deflationary environment, releasing too much liquidity into the global economy. How is it going to end?
There are two obvious trends in this bubble: Anglo-Saxon consumers have been borrowing a lot against their rising property values to support consumption, and Chinese companies (actually, government-related entities) have been borrowing a lot to create production capacities. To mirror the surge in liquidity, the indebtedness of Anglo-Saxon consumers and Chinese investors has risen sharply. The current boom, therefore, is debt-funded. Debt levels can continue to rise as long as asset prices keep rising.
Whatever triggers the collapse, it will show up first in declining asset prices. Property is the likely candidate. Property prices in New York, London, and Shanghai could decline at the same time. When property prices begin to decline, it would cause the global economy to weaken. The weakening economy would decrease the cash-flow of property speculators who would have to sell to unwind. The unwinding would lead global asset prices to collapse in general.
The major central banks may try to ease aggressively to fight the unwinding spiral. However, it would be too late to revive money demand. Most speculators who are driving demand for money today would have been cut down already. The global economy is likely to experience a period of debt deflation."
Friday, March 04, 2005
‘Bretton Woods II’ and Sino-Mercantilism
‘Bretton Woods II’ and Sino-Mercantilism, Kirchner
The ‘Bretton Woods II’ appellation for East Asia’s managed exchange rate regimes is misleading in almost every respect. IIE scholars have been taking issue with ‘BW II’ as a framework for analysis and are appropriately sceptical about its sustainability. Whereas many see this as a potential problem for the US, it is a much larger problem for those economies in East Asia running managed exchange rate regimes. Morris Goldstein and Nicholas R. Lardy highlight some of the problems the ‘BW II’ framework poses for China:
the revived Bretton Woods system is just another ill-informed employment-oriented case for exchange rate undervaluation…the approach underestimates the costs of sterilization, particularly those associated with financial repression. If, as seems likely, both the US current account deficit and China’s reserve accumulation, currently $610 billion, (£318 billion), become much larger, these sterilization costs will rise…
The revived Bretton Woods system sets out a faulty development strategy for China. Rather than seeking to promote an enclave economy based on an undervalued exchange rate and on domestic financial repression, China must expedite financial reform, particularly in banking; liberalise interest rates and reduce reliance on administrative controls and guidance. It must move towards greater flexibility in the exchange rate over the medium term, including an immediate 15-25 per cent appreciation of the renminbi relative to a currency basket. These policies will promote domestic financial stability and more balanced employment growth, improve the allocation of investment and the management of the economy, and help ensure continued access for China’s exports.
The ‘Bretton Woods II’ appellation for East Asia’s managed exchange rate regimes is misleading in almost every respect. IIE scholars have been taking issue with ‘BW II’ as a framework for analysis and are appropriately sceptical about its sustainability. Whereas many see this as a potential problem for the US, it is a much larger problem for those economies in East Asia running managed exchange rate regimes. Morris Goldstein and Nicholas R. Lardy highlight some of the problems the ‘BW II’ framework poses for China:
the revived Bretton Woods system is just another ill-informed employment-oriented case for exchange rate undervaluation…the approach underestimates the costs of sterilization, particularly those associated with financial repression. If, as seems likely, both the US current account deficit and China’s reserve accumulation, currently $610 billion, (£318 billion), become much larger, these sterilization costs will rise…
The revived Bretton Woods system sets out a faulty development strategy for China. Rather than seeking to promote an enclave economy based on an undervalued exchange rate and on domestic financial repression, China must expedite financial reform, particularly in banking; liberalise interest rates and reduce reliance on administrative controls and guidance. It must move towards greater flexibility in the exchange rate over the medium term, including an immediate 15-25 per cent appreciation of the renminbi relative to a currency basket. These policies will promote domestic financial stability and more balanced employment growth, improve the allocation of investment and the management of the economy, and help ensure continued access for China’s exports.
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