Institutional Economics: Kirchner
and Deepak Lal: China
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.
Monday, February 28, 2005
Federal Reserve Governor Ben Bernanke: Warnings?
Federal Reserve Governor Ben Bernanke: Doug Noland
And the counterpoint view to this article: The Overstretch Myth
The U.S. economy generates $600 billion-plus Current Account Deficits because we “invest” so much? Such econobabble from a prominent central banker does not inspire confidence. And, more than ever, instilling dollar confidence is an imperative. Tuesday the dollar was hammered on news of the Bank of Korea’s plan to diversify its dollar-denominated reserves. There was also the revelation of an Asian policymakers meeting this week to discuss “global economic imbalances” and how to deal with the faltering dollar. And from today’s Australian: “[Australia’s Treasurer] Peter Costello’s closest advisor fears the US is heading for a devastating financial crash that could ravage Australia’s economic growth. …Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket’s dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world’s economies.”
Languish over the likelihood that the U.S. is on course to precipitate global financial crisis has spilled out into the open. This is surely related ot the heightened appreciation by market participants and global policymakers that the Federal Reserve is not up to the task of reining in U.S. financial and economic excess. Moreover, the much anticipated marketplace-induced adjustment process has failed to materialize. Indeed, exuberant global markets and propagating asset Bubbles ensure a calamitous future “adjustment.” Global policymakers and central bankers should be apprehensive.
The weak dollar has certainly failed to rectify or even slow imbalances – global, domestic or otherwise - and there is little prospect that further devaluation will be any more successful. In the past, a weak currency would induce higher market rates – rates necessary to tighten financial conditions, temper over-consumption and undermine speculative dynamics. Yet the old rules no longer apply to contemporary finance, a momentous blow to the capacity for orderly market-based corrections and adjustments. The need for strong-minded central bankers to guard against inexorable market distortions has never been as great, while, ironically, never has a central bank (the Greenspan Fed) placed greater faith in the efficiency of market processes. And Dr. Bernanke’s comments above suggest that policy efforts to constrain American consumption aren’t on the table – “consumption” being a four-letter word not even open to discussion. Accordingly, the prospect of the Fed purposely precipitating a meaningful economic slowdown to assist the U.S. Current Account Deficit “unwind” is nonexistent. Commencing the arduous process of reestablishing Monetary Order is, then, at a logjam.
This week from Morgan Stanley’s Stephen Roach: “Global rebalancing does not occur spontaneously. It takes adjustments in economic policies and asset prices to spark a meaningful realignment in the mix of global growth. Shifts in currencies and real interest rates are the two major instruments of rebalancing… In the end, it will also require a narrowing of the growth differentials between the US and the rest of the world… A narrowing of the growth spread between the US and the rest of the world is key for a resolution of America’s trade- and current-account imbalances.”
These excerpts do not do Mr. Roach’s exceptional analysis justice; they instead provide the opportunity to distinguish the focal points of my analysis: I have reached the point of having lost what little faith I had in the efficacy of “global rebalancing.” Imbalances simply cannot be rectified by heady non-U.S. global growth. Such a scenario would ensure myriad problematic bottlenecks, shortages and price pressures including significantly inflating global energy and commodities prices. At the same time, global policymakers – especially the Fed – refuse to take decisive action. They respectively missed their opportunities to act. The costs and risks are these days much too high for aggressive policy response – individually or in concert. There is no will to face The Bubble Issue.
Importantly, asset inflation has become a global systemic issue. Mortgage Credit is growing at double-digit rates in the U.S., Europe, and China (and elsewhere). Meanwhile, speculative securities leveraging and attendant liquidity creation is endemic internationally, and there is no international body or coordinated central bank policy response to moderate – let alone rein in - Global Wildcat Finance. Resulting uncontrolled liquidity excess is The New Global Phenomenon, nonetheless central bank balance sheets balloon on the back of unrelenting dollar flows. It is amazing that marketplace perceptions of quiescent inflation persist in the face of today’s unparalleled global backdrop of abundant liquidity and Endemic Easy Credit Availability.
Importantly, global interest rates have converged like never before, and they have consolidated right down toward artificially low U.S. levels. Moreover, the massive international liquidity pool offers an overhang of constant downward pressure on the converged price of global finance. Less appreciated but no less significant, financial systems internationally have “converged” toward the U.S. model. Depressed interest rates augment already intense worldwide asset-based lending and securities speculation, only exacerbating the Global Liquidity Bubble. The dysfunctional U.S. Credit system has now fully impaired the global financial system, leaving faint hope that market pricing mechanisms will instigate either a gradual or orderly “adjustment process.”
The bottom line is that the entire spectrum of international rates – the global price of finance - needs to shift meaningfully higher. This amounts to the only effective policy measure to rein in asset-based lending and speculating excess. The dilemma is that central bankers from the ECB to China and Asia are frozen by the vulnerable dollar and the prospect of financial crisis. To raise rates would only incite greater financial flows away from the U.S. and its ailing currency. There is, as well, the issue of massive speculative leveraging throughout. The Fed is locked into a policy of “baby steps” that ensures that U.S. rates at best stay barely a half-step ahead of rising inflationary pressures, while inciting only greater speculative excess.
There is much written these days referencing “real” and “neutral” rates, but these notions have little practical meaning without an effort to factor in asset inflation. Asset prices are, after all, the centerpiece of contemporary Credit and liquidity creation. To instead fixate on CPI – the misplaced contemporary inflation target – guarantees ineffectual monetary management. Having succumbed to this analytical misjudgment and, in the process, having fallen so far behind the curve, there is now the prospect that much higher Fed funds may be required to garner any meaningful impact on U.S. and global excesses and imbalances.
Dr. Bernanke is deluding himself if he actually believes that stronger global growth and more equitable trade treaties and practices will work to rectify our Current Account Quagmire. I also think he is too optimistic in expecting that today’s deficits can be sustained “for awhile” and “take awhile to unwind.” The inevitable adjustment period will commence only with the problematic bursting of the Mortgage Finance Bubble; no more, no less. And, not surprisingly, this Mighty Bubble scoffs at Cowardly Little Baby Steps. Are speculators suffering from higher financing costs? Are 4% ARMs to dissuade manic California, Florida, or Manhattan mortgage borrowers? Then how about even lower teaser and interest-only mortgages? And let’s not forget that 2004 saw the greatest inflation of home equity in history, and it’s there just waiting to be tapped to upgrade to a more appealing residence or to boost consumption. January then brought another $10,000 windfall to the average California homeowner. Credit conditions are easier today than they were a year ago – or ever were.
My fear that we are heading toward financial crisis is not rooted in the mindless ranting of an embittered permabear – but from the discipline of my analytical framework. The U.S. Credit Bubble is creating unrelenting and unwieldy dollar liquidity that continues to inundate global financial systems. The marketplace pricing mechanism for global finance is severely impaired, while speculative dynamics are empowered. Excess is only begetting greater excess, and policymakers, meanwhile, function like deer caught in headlights.
The question I ponder this evening is how this expected crisis manifests. Does it unfold first in the currency or interest-rate markets? Is it precipitated by a spike to $60 or $70 crude and a panic “melt-up” in global commodity markets? What market “accident” could set off a chain reaction of speculator unwind? Are spreads an accident in wait? The ten year? MBS? And, of course, the dollar is certainly vulnerable to a marketplace dislocation, although we can also assume that global central bankers are now on heightened alert. I will admit to being absolutely intrigued by the degree of complacency that is now ingrained in The Bulletproof Bond Market. All the recent talk of a shortage of bonds recalls major Bubble tops of years past. The reality of the situation is that it would require only a marginal bout of de-leveraging to create way more than adequate supply.
Out of Aces - 1907
And the counterpoint view to this article: The Overstretch Myth
“The current account deficit is a concern. What that is basically – there are two ways of looking at the current account deficit. One is looking at it from the trading perspective, which most people are familiar with the idea that we are actually importing a lot more than we are exporting. So, in that sense we have a current account deficit. But another way to look at it is that we are investing more than we’re saving. If you look at investment in terms of capital investment by firms, you look at residential investment - that is building new houses. You have seen a lot of investment but we have a relatively low savings rate. And so, having a low savings rate, we have to borrow from foreigners to make up the difference between our saving and the investment we want to do. So, what’s called capital inflows – the money flowing in from foreigners to finance our investment is another way of looking at the current account deficit. So these different perspectives give you different ways of thinking about how you would address this problem. The trade perspective says, yes, part of the issue is getting balance in our trade. And that suggests that we should work with the world trade organization and other trade agencies to try to get fairer and free trade with other countries... On the other side, we have the savings and investing perspective. We have relatively low savings, we have a federal deficit which is subtracting from our savings. And that suggests that part of reducing the current account deficit would be to try to stimulate our savings. Reduce the deficit and take other actions that would increase our savings and therefore reduce capital inflows that are coming in – which is the other face of the current account deficit. Depending how you look at it, there are a variety of policies that should be undertaken. I think the current account deficit is going to be with us awhile. It will take a while to unwind. It can’t go on at this level for ever. It is going to eventually have to come down. And I think it will eventually come down. But policies like increasing our savings would probably be a step in the right direction to help that happen.”
The U.S. economy generates $600 billion-plus Current Account Deficits because we “invest” so much? Such econobabble from a prominent central banker does not inspire confidence. And, more than ever, instilling dollar confidence is an imperative. Tuesday the dollar was hammered on news of the Bank of Korea’s plan to diversify its dollar-denominated reserves. There was also the revelation of an Asian policymakers meeting this week to discuss “global economic imbalances” and how to deal with the faltering dollar. And from today’s Australian: “[Australia’s Treasurer] Peter Costello’s closest advisor fears the US is heading for a devastating financial crash that could ravage Australia’s economic growth. …Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket’s dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world’s economies.”
Languish over the likelihood that the U.S. is on course to precipitate global financial crisis has spilled out into the open. This is surely related ot the heightened appreciation by market participants and global policymakers that the Federal Reserve is not up to the task of reining in U.S. financial and economic excess. Moreover, the much anticipated marketplace-induced adjustment process has failed to materialize. Indeed, exuberant global markets and propagating asset Bubbles ensure a calamitous future “adjustment.” Global policymakers and central bankers should be apprehensive.
The weak dollar has certainly failed to rectify or even slow imbalances – global, domestic or otherwise - and there is little prospect that further devaluation will be any more successful. In the past, a weak currency would induce higher market rates – rates necessary to tighten financial conditions, temper over-consumption and undermine speculative dynamics. Yet the old rules no longer apply to contemporary finance, a momentous blow to the capacity for orderly market-based corrections and adjustments. The need for strong-minded central bankers to guard against inexorable market distortions has never been as great, while, ironically, never has a central bank (the Greenspan Fed) placed greater faith in the efficiency of market processes. And Dr. Bernanke’s comments above suggest that policy efforts to constrain American consumption aren’t on the table – “consumption” being a four-letter word not even open to discussion. Accordingly, the prospect of the Fed purposely precipitating a meaningful economic slowdown to assist the U.S. Current Account Deficit “unwind” is nonexistent. Commencing the arduous process of reestablishing Monetary Order is, then, at a logjam.
This week from Morgan Stanley’s Stephen Roach: “Global rebalancing does not occur spontaneously. It takes adjustments in economic policies and asset prices to spark a meaningful realignment in the mix of global growth. Shifts in currencies and real interest rates are the two major instruments of rebalancing… In the end, it will also require a narrowing of the growth differentials between the US and the rest of the world… A narrowing of the growth spread between the US and the rest of the world is key for a resolution of America’s trade- and current-account imbalances.”
These excerpts do not do Mr. Roach’s exceptional analysis justice; they instead provide the opportunity to distinguish the focal points of my analysis: I have reached the point of having lost what little faith I had in the efficacy of “global rebalancing.” Imbalances simply cannot be rectified by heady non-U.S. global growth. Such a scenario would ensure myriad problematic bottlenecks, shortages and price pressures including significantly inflating global energy and commodities prices. At the same time, global policymakers – especially the Fed – refuse to take decisive action. They respectively missed their opportunities to act. The costs and risks are these days much too high for aggressive policy response – individually or in concert. There is no will to face The Bubble Issue.
Importantly, asset inflation has become a global systemic issue. Mortgage Credit is growing at double-digit rates in the U.S., Europe, and China (and elsewhere). Meanwhile, speculative securities leveraging and attendant liquidity creation is endemic internationally, and there is no international body or coordinated central bank policy response to moderate – let alone rein in - Global Wildcat Finance. Resulting uncontrolled liquidity excess is The New Global Phenomenon, nonetheless central bank balance sheets balloon on the back of unrelenting dollar flows. It is amazing that marketplace perceptions of quiescent inflation persist in the face of today’s unparalleled global backdrop of abundant liquidity and Endemic Easy Credit Availability.
Importantly, global interest rates have converged like never before, and they have consolidated right down toward artificially low U.S. levels. Moreover, the massive international liquidity pool offers an overhang of constant downward pressure on the converged price of global finance. Less appreciated but no less significant, financial systems internationally have “converged” toward the U.S. model. Depressed interest rates augment already intense worldwide asset-based lending and securities speculation, only exacerbating the Global Liquidity Bubble. The dysfunctional U.S. Credit system has now fully impaired the global financial system, leaving faint hope that market pricing mechanisms will instigate either a gradual or orderly “adjustment process.”
The bottom line is that the entire spectrum of international rates – the global price of finance - needs to shift meaningfully higher. This amounts to the only effective policy measure to rein in asset-based lending and speculating excess. The dilemma is that central bankers from the ECB to China and Asia are frozen by the vulnerable dollar and the prospect of financial crisis. To raise rates would only incite greater financial flows away from the U.S. and its ailing currency. There is, as well, the issue of massive speculative leveraging throughout. The Fed is locked into a policy of “baby steps” that ensures that U.S. rates at best stay barely a half-step ahead of rising inflationary pressures, while inciting only greater speculative excess.
There is much written these days referencing “real” and “neutral” rates, but these notions have little practical meaning without an effort to factor in asset inflation. Asset prices are, after all, the centerpiece of contemporary Credit and liquidity creation. To instead fixate on CPI – the misplaced contemporary inflation target – guarantees ineffectual monetary management. Having succumbed to this analytical misjudgment and, in the process, having fallen so far behind the curve, there is now the prospect that much higher Fed funds may be required to garner any meaningful impact on U.S. and global excesses and imbalances.
Dr. Bernanke is deluding himself if he actually believes that stronger global growth and more equitable trade treaties and practices will work to rectify our Current Account Quagmire. I also think he is too optimistic in expecting that today’s deficits can be sustained “for awhile” and “take awhile to unwind.” The inevitable adjustment period will commence only with the problematic bursting of the Mortgage Finance Bubble; no more, no less. And, not surprisingly, this Mighty Bubble scoffs at Cowardly Little Baby Steps. Are speculators suffering from higher financing costs? Are 4% ARMs to dissuade manic California, Florida, or Manhattan mortgage borrowers? Then how about even lower teaser and interest-only mortgages? And let’s not forget that 2004 saw the greatest inflation of home equity in history, and it’s there just waiting to be tapped to upgrade to a more appealing residence or to boost consumption. January then brought another $10,000 windfall to the average California homeowner. Credit conditions are easier today than they were a year ago – or ever were.
My fear that we are heading toward financial crisis is not rooted in the mindless ranting of an embittered permabear – but from the discipline of my analytical framework. The U.S. Credit Bubble is creating unrelenting and unwieldy dollar liquidity that continues to inundate global financial systems. The marketplace pricing mechanism for global finance is severely impaired, while speculative dynamics are empowered. Excess is only begetting greater excess, and policymakers, meanwhile, function like deer caught in headlights.
The question I ponder this evening is how this expected crisis manifests. Does it unfold first in the currency or interest-rate markets? Is it precipitated by a spike to $60 or $70 crude and a panic “melt-up” in global commodity markets? What market “accident” could set off a chain reaction of speculator unwind? Are spreads an accident in wait? The ten year? MBS? And, of course, the dollar is certainly vulnerable to a marketplace dislocation, although we can also assume that global central bankers are now on heightened alert. I will admit to being absolutely intrigued by the degree of complacency that is now ingrained in The Bulletproof Bond Market. All the recent talk of a shortage of bonds recalls major Bubble tops of years past. The reality of the situation is that it would require only a marginal bout of de-leveraging to create way more than adequate supply.
Out of Aces - 1907
Thursday, February 24, 2005
"Will the Bretton Woods 2 Regime Unravel Soon? The Risk of Hard Landing in 2005-2006".
"Will the Bretton Woods 2 Regime Unravel Soon? The Risk of Hard Landing in 2005-2006".
The paper can be found online at: Link
The paper can be found online at: Link
Wednesday, February 16, 2005
Debt Trap Dynamics: Time To Think The Unthinkable
Marshall Auerback
With the government and external deficits both so large and the private sector so heavily indebted, it is said that satisfactory growth in the US cannot be achieved without a large, sustained and discontinuous increase in net export demand. After perusing the trade data from last year, it is doubtful whether this will happen spontaneously through a continuous fall in the external value of the dollar, and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.
The truth of the matter is this: Across three decades, only one economic event has been guaranteed to produce balanced US trade: a recession. When the economy is contracting, people naturally buy less of everything, including imports. Historically, on the four occasions when the line of exports briefly converged with the line of imports in the post-war period, the country was in recession. Each time economic growth was restored, the trade deficits resumed. A more ominous contradiction occurred during the 2001 recession: The trade gap was so enormous it persisted throughout. Again, in 2004, despite a significant fall in the dollar’s trade weighted index, the external account continued to haemorrhage. This suggests that American dependency on foreign producers has advanced to a dangerous new level.
Economists, politicians, and business executives have repeatedly voice unease about the imbalances in the global financial system, which have been reflected in the dollar's steep fall against the euro and other currencies until recently. But most expressed skepticism that the Bush administration would reduce the trade and budget deficits, which have fed those imbalances. The White House has said that it does not view these issues as a major problem because foreigners still view the American economy as an attractive investment, and Mr Greenspan has recanted some of his earlier expressed concern about the dangers of ignoring America’s mounting imbalances.
The scope of the global imbalances and the potential for crisis makes piecemeal, orthodox solutions to the global imbalance problem unworkable and far too slow. The U.S. service-based economy, with more limited economies of scale than those of newly industrializing economies such as China, will not be able to export its way out of the problem. The only demand left for US goods is largely concentrated in industries such as aerospace and high technology. But these are industries where exports pose national security risks, particularly if the exports are directed toward “strategic competitors” such as China, which generally have extremely poor records in terms of safeguarding intellectual property rights.
As we have noted many times before, there is a danger that over time, the US economy will find itself in a “debt trap”, with an accelerating deterioration in its net foreign asset position and its overall current balance of payments (as net income paid abroad begins to explode). We have never been in a position before where the world’s leading economy has been subject to this condition, so it is difficult to make the case for traditional remedies, such as trade devaluation (where the corresponding knock-on effects would invariably create a huge international growth shock, thereby throwing into doubt the strategy of the US achieving net export growth). Because the US is such a vast economy, it cannot eliminate its current account deficit as readily as a smaller economy. When it tries to improve its trade balance through devaluation or through restrictive demand management, its sheer size affects the economies of its trading partners adversely and to an appreciable degree. Understandably, they object and resist. When foreign economies resist dollar devaluation and the dissipation of their current account surpluses, the U.S. may have to raise interest rates in order to induce creditors to continue financing its debt build-up.
So the problem is likely to get worse, which could ultimately lead to “solutions” that prove highly disruptive to the existing system of multilateral trade and cooperation which has developed over the past several generations. A resort to out and out military force cannot ultimately be ruled out.
If a full-blown crisis does occur, the macroeconomic challenge would be unlike anything the United States has faced in more than half a century. While this would be a time of wrenching, painful change, the new adverse circumstances might also inspire a great shift toward radically different political solutions than have hitherto been considered within the realm of acceptability.
The first imperative--an unavoidable necessity--would be to suppress consumption through credit-restraining measures, fiscal caution or tax reform, and to stimulate greater domestic savings, yet somehow to keep the economy growing. If this great adjustment is left to market forces alone, the predictable consequences will be to punish the innocent--struggling households and small businesses--first.
The jump-shift strategy may ultimately take the form of a “wartime strategy” – not the phony “war on terror” strategy invoked after the September 11, 2001 attacks (in which Messrs O’Neill and McTeer, amongst others, exhorted Americans to go back to the shopping malls, to show the terrorists that they “couldn’t win”). A more accurate precedent is World War II, an extraordinary era of economic development that virtually shut down many forms of domestic consumption (cars and housing) while the government's spending on war production launched major new industries (electronics, petrochemicals, modern aircraft and many others). Essentially, accelerated investment and forced savings replaced consumer spending as the leading fuel for economic growth. After the war, pent-up desires and needs became the economic demand that drove the long postwar era of prosperity.
Of course, an important difference from the World War II example is that it is difficult to see how reconstruction could be financed primarily through deficit spending, given that the country is already burdened by growing indebtedness. This leads to the possibility of the US repudiating its existing debt obligations to external creditors. A decisive President might start by bringing up a taboo subject--tariffs--and inform the world that the United States is prepared to impose a temporary general tariff of 10 or 15 percent on all US imports. Every multinational would have to rethink its industrial strategy, because some of its production might be stranded in the wrong country.
The idea of tariffs is so alien to conventional wisdom it probably sounds illegal. In fact, there is provision for “temporary adjustments” under the new World Trade Organisation rules. It is also worth noting in any case that the legal technicalities of a global multilateral system didn’t stop Richard Nixon, who stunned the world in 1971 when he abruptly announced a 10 percent import surcharge, devalued the dollar and unilaterally discarded the Bretton Woods monetary system. Nor did it stop President Roosevelt in the 1930s, during which he declared it illegal to own circulating gold coins, gold bullion, and gold certificates. In essence, the federal government forced itself into the position by refusing to repay its bond holders in gold coin, forcing them to accept US dollars instead. Hence, subsequent to FDR’s executive order, all holders of such bonds were forced to accept legal tender currency instead of "gold coin of the present standard of value." The act of confiscating gold itself was a violation of private property rights and was illegal – but the taboo was broken. As author Eric Englund notes, “[B]y not paying bondholders in gold coin, the U.S. government has technically defaulted on past Treasury bond obligations.” Americans (and their foreign creditors) might come to see more of these types of actions from future American President.
It is true that such actions on the part of the US may well provoke reactions in kind. On the other hand, given the lack of restraint evident in the country’s current foreign policy aspirations, it is hard to envisage that an economic response to the Americans’ abrogation of existing obligations would come without some possibility of a robust military response (or at least the threat of one). The US has already show itself willing to address the problem that it does not make enough of what the rest of the world wants by going to war to monopolise control of the supply and distribution of what the world needs, petroleum. There are other war aims, of course, but control of the global hydrocarbon net is certainly the most important. As market strategist Chris Sanders has noted, “The truth is that the dangerously destabilising idea has rooted in Washington that, in the words of Vice President Cheney, ‘deficits don’t matter (we proved that in the 90s).’ He is right of course in pure power terms; a fuller expression of Cheney’s dictum might well add, ‘as long as we are able to force everyone else to accept them (deficits).’”
Already, it appears clear that the US is driven to rely more on military adventure because the economic house is in disarray and "overstretched". They can't just bludgeon their way economically anymore. They have to use the stick. Any close look at the inauguration speech bears out the reliance on forcing the world to conform to us dictates. Why should this not extend ultimately to existing debt arrangements if the US finds itself facing an Argentina-like predicament? All these outcomes may sound quite improbable at this moment. Certainly, the establishment would brush them aside. But do not dismiss the possibility that dramatic change and epic political reforms lie ahead. As we have said many times before, Washington’s elites will not go down without a fight.
With the government and external deficits both so large and the private sector so heavily indebted, it is said that satisfactory growth in the US cannot be achieved without a large, sustained and discontinuous increase in net export demand. After perusing the trade data from last year, it is doubtful whether this will happen spontaneously through a continuous fall in the external value of the dollar, and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.
The truth of the matter is this: Across three decades, only one economic event has been guaranteed to produce balanced US trade: a recession. When the economy is contracting, people naturally buy less of everything, including imports. Historically, on the four occasions when the line of exports briefly converged with the line of imports in the post-war period, the country was in recession. Each time economic growth was restored, the trade deficits resumed. A more ominous contradiction occurred during the 2001 recession: The trade gap was so enormous it persisted throughout. Again, in 2004, despite a significant fall in the dollar’s trade weighted index, the external account continued to haemorrhage. This suggests that American dependency on foreign producers has advanced to a dangerous new level.
Economists, politicians, and business executives have repeatedly voice unease about the imbalances in the global financial system, which have been reflected in the dollar's steep fall against the euro and other currencies until recently. But most expressed skepticism that the Bush administration would reduce the trade and budget deficits, which have fed those imbalances. The White House has said that it does not view these issues as a major problem because foreigners still view the American economy as an attractive investment, and Mr Greenspan has recanted some of his earlier expressed concern about the dangers of ignoring America’s mounting imbalances.
The scope of the global imbalances and the potential for crisis makes piecemeal, orthodox solutions to the global imbalance problem unworkable and far too slow. The U.S. service-based economy, with more limited economies of scale than those of newly industrializing economies such as China, will not be able to export its way out of the problem. The only demand left for US goods is largely concentrated in industries such as aerospace and high technology. But these are industries where exports pose national security risks, particularly if the exports are directed toward “strategic competitors” such as China, which generally have extremely poor records in terms of safeguarding intellectual property rights.
As we have noted many times before, there is a danger that over time, the US economy will find itself in a “debt trap”, with an accelerating deterioration in its net foreign asset position and its overall current balance of payments (as net income paid abroad begins to explode). We have never been in a position before where the world’s leading economy has been subject to this condition, so it is difficult to make the case for traditional remedies, such as trade devaluation (where the corresponding knock-on effects would invariably create a huge international growth shock, thereby throwing into doubt the strategy of the US achieving net export growth). Because the US is such a vast economy, it cannot eliminate its current account deficit as readily as a smaller economy. When it tries to improve its trade balance through devaluation or through restrictive demand management, its sheer size affects the economies of its trading partners adversely and to an appreciable degree. Understandably, they object and resist. When foreign economies resist dollar devaluation and the dissipation of their current account surpluses, the U.S. may have to raise interest rates in order to induce creditors to continue financing its debt build-up.
So the problem is likely to get worse, which could ultimately lead to “solutions” that prove highly disruptive to the existing system of multilateral trade and cooperation which has developed over the past several generations. A resort to out and out military force cannot ultimately be ruled out.
If a full-blown crisis does occur, the macroeconomic challenge would be unlike anything the United States has faced in more than half a century. While this would be a time of wrenching, painful change, the new adverse circumstances might also inspire a great shift toward radically different political solutions than have hitherto been considered within the realm of acceptability.
The first imperative--an unavoidable necessity--would be to suppress consumption through credit-restraining measures, fiscal caution or tax reform, and to stimulate greater domestic savings, yet somehow to keep the economy growing. If this great adjustment is left to market forces alone, the predictable consequences will be to punish the innocent--struggling households and small businesses--first.
The jump-shift strategy may ultimately take the form of a “wartime strategy” – not the phony “war on terror” strategy invoked after the September 11, 2001 attacks (in which Messrs O’Neill and McTeer, amongst others, exhorted Americans to go back to the shopping malls, to show the terrorists that they “couldn’t win”). A more accurate precedent is World War II, an extraordinary era of economic development that virtually shut down many forms of domestic consumption (cars and housing) while the government's spending on war production launched major new industries (electronics, petrochemicals, modern aircraft and many others). Essentially, accelerated investment and forced savings replaced consumer spending as the leading fuel for economic growth. After the war, pent-up desires and needs became the economic demand that drove the long postwar era of prosperity.
Of course, an important difference from the World War II example is that it is difficult to see how reconstruction could be financed primarily through deficit spending, given that the country is already burdened by growing indebtedness. This leads to the possibility of the US repudiating its existing debt obligations to external creditors. A decisive President might start by bringing up a taboo subject--tariffs--and inform the world that the United States is prepared to impose a temporary general tariff of 10 or 15 percent on all US imports. Every multinational would have to rethink its industrial strategy, because some of its production might be stranded in the wrong country.
The idea of tariffs is so alien to conventional wisdom it probably sounds illegal. In fact, there is provision for “temporary adjustments” under the new World Trade Organisation rules. It is also worth noting in any case that the legal technicalities of a global multilateral system didn’t stop Richard Nixon, who stunned the world in 1971 when he abruptly announced a 10 percent import surcharge, devalued the dollar and unilaterally discarded the Bretton Woods monetary system. Nor did it stop President Roosevelt in the 1930s, during which he declared it illegal to own circulating gold coins, gold bullion, and gold certificates. In essence, the federal government forced itself into the position by refusing to repay its bond holders in gold coin, forcing them to accept US dollars instead. Hence, subsequent to FDR’s executive order, all holders of such bonds were forced to accept legal tender currency instead of "gold coin of the present standard of value." The act of confiscating gold itself was a violation of private property rights and was illegal – but the taboo was broken. As author Eric Englund notes, “[B]y not paying bondholders in gold coin, the U.S. government has technically defaulted on past Treasury bond obligations.” Americans (and their foreign creditors) might come to see more of these types of actions from future American President.
It is true that such actions on the part of the US may well provoke reactions in kind. On the other hand, given the lack of restraint evident in the country’s current foreign policy aspirations, it is hard to envisage that an economic response to the Americans’ abrogation of existing obligations would come without some possibility of a robust military response (or at least the threat of one). The US has already show itself willing to address the problem that it does not make enough of what the rest of the world wants by going to war to monopolise control of the supply and distribution of what the world needs, petroleum. There are other war aims, of course, but control of the global hydrocarbon net is certainly the most important. As market strategist Chris Sanders has noted, “The truth is that the dangerously destabilising idea has rooted in Washington that, in the words of Vice President Cheney, ‘deficits don’t matter (we proved that in the 90s).’ He is right of course in pure power terms; a fuller expression of Cheney’s dictum might well add, ‘as long as we are able to force everyone else to accept them (deficits).’”
Already, it appears clear that the US is driven to rely more on military adventure because the economic house is in disarray and "overstretched". They can't just bludgeon their way economically anymore. They have to use the stick. Any close look at the inauguration speech bears out the reliance on forcing the world to conform to us dictates. Why should this not extend ultimately to existing debt arrangements if the US finds itself facing an Argentina-like predicament? All these outcomes may sound quite improbable at this moment. Certainly, the establishment would brush them aside. But do not dismiss the possibility that dramatic change and epic political reforms lie ahead. As we have said many times before, Washington’s elites will not go down without a fight.
Friday, January 28, 2005
The #1 Law of Economics
The #1 law of economics is; You can only free-trade until cheaper labor out-trades you!
Mercantilism is a great way to advance statecrafted wealth!:-) It's how the U.S. started out in 1791. Alexander Hamilton was a genius at setting up our first great mercantilist system to counter England's Hegemony and real financial suzerainty. Well, 200 yrs. later and the table's been reversed. Now, we face China with her powerful statecrafted mercantilist system attacking America's statecrafted hegemony, and our actual financial suzerainty. How long can America survive supporting the rest of the world? Good question, I can't answer that, but I do know unless our hegemonic law structures are changed back toward real world balances, we will face financial destruction by, not only China, but all her mercantilist minions all over the globe.
It's really a sad state of affairs when the greatest economists and nation on earth can't figure out the simplicity of the above. The battles of hegemony, mercantilism and the cheapest labor have been going on since the beginning of organized economic societies, whether Egyptian, Greek, Roman, Myan, Hapsburg, Spanish, or English and American. What's it take to see logical common sense? Does everyone think China will go the way of Japan's mercantilism? They should think again because either way China goes, success or collapse, collapses the entire system this time. There won't be a second chance. So, I would suggest we start looking seriously at a little repair work here at home. There are many solutions. The one I would suggest is a sliding scale law structure of say 10% per year change, toward rebalancing the global economies through the anti-hegemonist anti-mercantilist policies of J.M. Keynes' full and fair balance of payments system, that was never enacted in the `40's.
More On Mercantilism.
Mercantilism is a great way to advance statecrafted wealth!:-) It's how the U.S. started out in 1791. Alexander Hamilton was a genius at setting up our first great mercantilist system to counter England's Hegemony and real financial suzerainty. Well, 200 yrs. later and the table's been reversed. Now, we face China with her powerful statecrafted mercantilist system attacking America's statecrafted hegemony, and our actual financial suzerainty. How long can America survive supporting the rest of the world? Good question, I can't answer that, but I do know unless our hegemonic law structures are changed back toward real world balances, we will face financial destruction by, not only China, but all her mercantilist minions all over the globe.
It's really a sad state of affairs when the greatest economists and nation on earth can't figure out the simplicity of the above. The battles of hegemony, mercantilism and the cheapest labor have been going on since the beginning of organized economic societies, whether Egyptian, Greek, Roman, Myan, Hapsburg, Spanish, or English and American. What's it take to see logical common sense? Does everyone think China will go the way of Japan's mercantilism? They should think again because either way China goes, success or collapse, collapses the entire system this time. There won't be a second chance. So, I would suggest we start looking seriously at a little repair work here at home. There are many solutions. The one I would suggest is a sliding scale law structure of say 10% per year change, toward rebalancing the global economies through the anti-hegemonist anti-mercantilist policies of J.M. Keynes' full and fair balance of payments system, that was never enacted in the `40's.
More On Mercantilism.
Wednesday, January 26, 2005
Davos - US Consumer - Weakest Link In World Economy
DAVOS US consumer ´weakest link´ in world economy - Morgan Stanley UDPATE
Wednesday, January 26, 2005 11:24:51 AM
Link
In a bearish assessment of global economic prospects for 2005, Roach told an introductory meeting of the World Economic Forum that rampant US consumption had been the main driver of the spectacular rates of growth achieved in 2004
However, with economies all around the world increasingly reliant on exporting their goods to the US, a moderation in US spending could have serious repercussions for the global economy
"For me, something just doesn't add up. The self indulgent American consumer ... is an accident waiting to happen," said Roach, a long-time pessimistic on the US economy
Rather than using the fruits of the increased economic activity, US consumers are funding their massive spending spree through borrowing against the inflated values of their homes. "We are in the early stages of a residential property price bubble in the US. Consumers know this and that is why they are turning their homes into a massive ATM machine," explained Roach
US consumers "suck money" out of their properties to fuel imports from Asia. In turn Asian countries buy US dollars, keeping interest rates low and allowing US householders to borrow even more, according to Roach
"This is an utterly insane way to run the world economy. You know that, we know that, but the Federal Reserve is in denial about that," he said
Roach suggested that the Federal Reserve had engineered the boom in the US property market as a means of bolstering the US economy. By stoking house prices through low borrowing costs, the Fed ensured that US consumption and, by extension economic growth, remained robust, he said. "The Fed knows it is culpable as the bubbleblowers in keeping this asset-driven US economy alive," he said. With US rates rising from the "unconscionably" levels of recent years, there will inevitably be a fall back in US property price inflation and hence consumer spending, explained Roach. "When the music stops ... and US rates go up we'll see how asset-dependent the US consumer has become," warned Roach
Jacob Frenkel, vice chairman of US insurance giant American International Group, said rampant US consumption was just one of the economic imbalances capable of wreaking havoc on the world economy. The massive trade deficit the world's largest economy is running could also stop global economic growth in its tracks
"The US current account is not a a problem for the US. It brings about risks for the world economy," he said. "I'm not concerned not because of the fact that there is no way to deal with it (the current account deficit) but because of the way it is not being dealt with," he said. He called on the newly elected US government to face up to the soaring budget and account deficits by introducing measures to encourage saving and discourage consumption
Frenkel, a former head of the Israeli Central Bank, urged representatives at a forthcoming G7 Meeting of Finance Ministers to address profligate US fiscal spending. "There must be debates on US policy measures. They must not just a focus on the dollar," as a remedy for the US trade deficit, said Frenkel
Link
Wednesday, January 26, 2005 11:24:51 AM
Link
In a bearish assessment of global economic prospects for 2005, Roach told an introductory meeting of the World Economic Forum that rampant US consumption had been the main driver of the spectacular rates of growth achieved in 2004
However, with economies all around the world increasingly reliant on exporting their goods to the US, a moderation in US spending could have serious repercussions for the global economy
"For me, something just doesn't add up. The self indulgent American consumer ... is an accident waiting to happen," said Roach, a long-time pessimistic on the US economy
Rather than using the fruits of the increased economic activity, US consumers are funding their massive spending spree through borrowing against the inflated values of their homes. "We are in the early stages of a residential property price bubble in the US. Consumers know this and that is why they are turning their homes into a massive ATM machine," explained Roach
US consumers "suck money" out of their properties to fuel imports from Asia. In turn Asian countries buy US dollars, keeping interest rates low and allowing US householders to borrow even more, according to Roach
"This is an utterly insane way to run the world economy. You know that, we know that, but the Federal Reserve is in denial about that," he said
Roach suggested that the Federal Reserve had engineered the boom in the US property market as a means of bolstering the US economy. By stoking house prices through low borrowing costs, the Fed ensured that US consumption and, by extension economic growth, remained robust, he said. "The Fed knows it is culpable as the bubbleblowers in keeping this asset-driven US economy alive," he said. With US rates rising from the "unconscionably" levels of recent years, there will inevitably be a fall back in US property price inflation and hence consumer spending, explained Roach. "When the music stops ... and US rates go up we'll see how asset-dependent the US consumer has become," warned Roach
Jacob Frenkel, vice chairman of US insurance giant American International Group, said rampant US consumption was just one of the economic imbalances capable of wreaking havoc on the world economy. The massive trade deficit the world's largest economy is running could also stop global economic growth in its tracks
"The US current account is not a a problem for the US. It brings about risks for the world economy," he said. "I'm not concerned not because of the fact that there is no way to deal with it (the current account deficit) but because of the way it is not being dealt with," he said. He called on the newly elected US government to face up to the soaring budget and account deficits by introducing measures to encourage saving and discourage consumption
Frenkel, a former head of the Israeli Central Bank, urged representatives at a forthcoming G7 Meeting of Finance Ministers to address profligate US fiscal spending. "There must be debates on US policy measures. They must not just a focus on the dollar," as a remedy for the US trade deficit, said Frenkel
Link
Wednesday, January 12, 2005
Auerback - A Rude Awakening
What Could Go Wrong In 2005?
...And then there is the problem of crude: The one thing Mr Bush has never mentioned in Iraq is oil, but as former Secretary of State James Baker presciently indicated years ago in a Council on Foreign Relations study of world energy problems, oil can never lurk far from the forefront of American policy objectives:
“Strong economic growth across the globe and new global demands for more energy, have meant the end of sustained surplus capacity in hydrocarbon fuels and the beginning of capacity limitations. In fact, the world is currently precariously close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades. These choices will affect other US policy objectives: US policy toward the Middle East; US policy toward the former Soviet Union and China; the fight against international terrorism.”
The CFR report made clear another salient point: “Oil price spikes since the 1940s have always been followed by recession.” In its current debt-riddled condition, this could bring on something far worse than a garden-variety economic downturn for the US.
The most recent spike in the price of oil was not simply a reflection of rising political uncertainty in the Middle East. There are reasons to expect higher levels over the next two to three decades than over the past two: strong demand from emerging economies, notably China and India, being the most important.
The parallel drive for energy security on the part of both the US and China has makings of a major war over oil being precipitated at some point in the future. Yukon Huang, a senior advisor at the World Bank recently noted that China's reliance on oil imports, plus problems with environmental protection, including serious water shortages, pose significant threats to the country's economic development over the next three to five years. The World Bank official said sustainability issues were a much greater threat to China's development than political or economic risks, such as the massive quantity of bad loans held by the nation's state-owned banks or a potential conflict over Taiwan.
China’s response to this challenge is likely to bring them increasingly into conflict with the US. Venezuelan President Hugo Chavez has recently returned from a Christmas trip to China where he apparently sold America's historic oil supply to the Chinese together with prospecting rights. Even Canada (in the words of President Bush, “our most important neighbors to the north”) is negotiating to sell up to 1/3 of its oil reserves to China. CNOOC, China’s third largest oil and gas group, is actually considering a bid of more that $13bn for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates an emerging competition between China and the US for global influence – and resources.
The drive for resources is occurring within the context of a world in which alliances are being formed amongst major oil producing and consuming nations (outside the US) as a kind of post-Cold War global lineup against perceived American hegemony: Brazil, China, India, Iran, Russia and Venezuela. Russian President Putin’s riposte to the US strategy of increasing its military presence in some of the nations of the old Soviet Union (and thereby ensure that they cut all links with Moscow) has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran. Russia and China have recently announced large joint military exercises and the EU is negotiating to drop its ban on arms shipments to China (much to the publicly expressed chagrin of the Pentagon). Russia has also offered a stake in nationalized Yukos to China.
This is pretty brazen behavior by all concerned, but is symptomatic of the growing perception of the US as a declining giant, albeit one with the capacity to strike out lethally when wounded. American military and economic dominance may still be the central fact of world affairs today, but the limits of this primacy (which dates back to the fall of the Berlin Wall) are becoming increasingly evident, just as dollar’s fall reflects this in economic terms. It all makes for a very challenging backdrop in 2005. This could therefore be the year when longstanding problems for the US finally do matter. Do not expect Washington to accept the dispersal of its economic and military power lightly... What Could Go Wrong In 2005? - Link
...And then there is the problem of crude: The one thing Mr Bush has never mentioned in Iraq is oil, but as former Secretary of State James Baker presciently indicated years ago in a Council on Foreign Relations study of world energy problems, oil can never lurk far from the forefront of American policy objectives:
“Strong economic growth across the globe and new global demands for more energy, have meant the end of sustained surplus capacity in hydrocarbon fuels and the beginning of capacity limitations. In fact, the world is currently precariously close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades. These choices will affect other US policy objectives: US policy toward the Middle East; US policy toward the former Soviet Union and China; the fight against international terrorism.”
The CFR report made clear another salient point: “Oil price spikes since the 1940s have always been followed by recession.” In its current debt-riddled condition, this could bring on something far worse than a garden-variety economic downturn for the US.
The most recent spike in the price of oil was not simply a reflection of rising political uncertainty in the Middle East. There are reasons to expect higher levels over the next two to three decades than over the past two: strong demand from emerging economies, notably China and India, being the most important.
The parallel drive for energy security on the part of both the US and China has makings of a major war over oil being precipitated at some point in the future. Yukon Huang, a senior advisor at the World Bank recently noted that China's reliance on oil imports, plus problems with environmental protection, including serious water shortages, pose significant threats to the country's economic development over the next three to five years. The World Bank official said sustainability issues were a much greater threat to China's development than political or economic risks, such as the massive quantity of bad loans held by the nation's state-owned banks or a potential conflict over Taiwan.
China’s response to this challenge is likely to bring them increasingly into conflict with the US. Venezuelan President Hugo Chavez has recently returned from a Christmas trip to China where he apparently sold America's historic oil supply to the Chinese together with prospecting rights. Even Canada (in the words of President Bush, “our most important neighbors to the north”) is negotiating to sell up to 1/3 of its oil reserves to China. CNOOC, China’s third largest oil and gas group, is actually considering a bid of more that $13bn for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates an emerging competition between China and the US for global influence – and resources.
The drive for resources is occurring within the context of a world in which alliances are being formed amongst major oil producing and consuming nations (outside the US) as a kind of post-Cold War global lineup against perceived American hegemony: Brazil, China, India, Iran, Russia and Venezuela. Russian President Putin’s riposte to the US strategy of increasing its military presence in some of the nations of the old Soviet Union (and thereby ensure that they cut all links with Moscow) has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran. Russia and China have recently announced large joint military exercises and the EU is negotiating to drop its ban on arms shipments to China (much to the publicly expressed chagrin of the Pentagon). Russia has also offered a stake in nationalized Yukos to China.
This is pretty brazen behavior by all concerned, but is symptomatic of the growing perception of the US as a declining giant, albeit one with the capacity to strike out lethally when wounded. American military and economic dominance may still be the central fact of world affairs today, but the limits of this primacy (which dates back to the fall of the Berlin Wall) are becoming increasingly evident, just as dollar’s fall reflects this in economic terms. It all makes for a very challenging backdrop in 2005. This could therefore be the year when longstanding problems for the US finally do matter. Do not expect Washington to accept the dispersal of its economic and military power lightly... What Could Go Wrong In 2005? - Link
Thursday, January 06, 2005
Thursday, December 30, 2004
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.
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.
Monday, December 20, 2004
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
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
Monday, December 13, 2004
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.
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.
Thursday, December 09, 2004
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
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
Wednesday, December 01, 2004
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...
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
Tuesday, November 30, 2004
China Tells Currency Speculators to Get Lost:
China Tells Currency Speculators to Get Lost:
William Pesek Jr.
Here's an excellent currency article by Andy Xie.
A further one by Stephen Roach.
A most important article by Robert Skidelsky - The Bretton Woods System.
-- The world of currency markets is one of winks, nods and secret handshakes. In it, key policy makers rarely, if ever, say exactly what's on their mind. Chinese Premier Wen Jiabao has done just that and traders should pay close attention.
Wen said, as he often does, that China won't relax the currency's fixed exchange rate to the dollar under pressure from other countries. Yet he went a step further this week, issuing a warning of sorts to currency speculators.
``To be frank, it's not possible to launch changes to the yuan when speculation is so rife,'' he said here in Vientiane, Laos on Sunday. ``Rampant speculative activities on the yuan,'' he added, will make the introduction of any measures ``impossible.''
In other words, traders who test China's resolve may only delay a change in its currency peg. It means that the more investment banks churn out reports predicting yuan revaluations -- and the more speculators react to them -- the longer the process may play out.
Reality, Not Playbook
Wen isn't reading from the playbook of Mahathir Mohammad, the former Malaysian prime minister who infamously did battle with speculators during the 1997-1998 Asian crisis. Wen's comments were less of a threat than an admission of reality.
China understands how much the world wants it to let the yuan rise. Its officials also know it would be a powerful goodwill gesture that would reap political benefits in capitals all over the globe.
Yet China's economy isn't ready for a currency shift, and debt has much to do with it. The four biggest commercial banks in Asia's No. 2 economy are shackled with untold numbers of bad loans, putting its financial system in a highly fragile state.
Standard & Poor's thinks it would cost $656 billion to resolve bad loans at China's banks, though some analysts say the figure is probably much higher. Repairs are indeed under way, though not as fast as credit-rating companies would like.
Bad Loans
In January, China began using tens of billions of dollars of foreign exchange reserves to bail out lenders, and it's been pressuring bank executives to dispose of bad loans. More recently, it set new rules designed to make it easier for overseas investors to buy the more than $450 billion of bad loans held by China's four biggest commercial banks and their asset management companies.
Yet it's a work in progress. The last thing China wants is currency instability for the first time since 1995, when it pegged the yuan. While it's important that China reduce its currency advantage to restore a bit of equilibrium in global trade trends - - and placate the U.S. and Japan -- it's more important that it does it right.
China, Wen said, needs ``a stable macroeconomic environment, a normal market mechanism and a healthy financial system'' before it alters the peg. ``China needs to consider impact of the yuan on China and on the region.''
That's little comfort to Asian governments struggling to adjust to the dollar's 5.2 percent drop against the euro and 4.1 percent slide against the yen this year. As the dollar falls, China grows even more competitive in Asia. The trend threatens the export industries of the 10 members of the Association of Southeast Asian Nations, or Asean.
A Harbinger?
The good news is that this week's Asean meeting here in Vientiane may be a harbinger of Asian governments looking past China's dollar peg and letting currencies rise.
``We have to live with the fact that there will be a weaker U.S. dollar next year,'' Indonesian Trade Minister Mari Pangestu said in an interview. ``I don't think Indonesia should depreciate its currency to maintain its export competitiveness.''
Since Indonesia is by far Southeast Asia's biggest economy, such thinking shouldn't be dismissed. Japan also has shocked currency traders in recent weeks by doing nothing as the yen surged against the dollar. South Korea, which, like Japan, tends to manage its currency closely, also has been more tolerant of the rising won.
Sign of Confidence
It's an important step for this region -- a sign of confidence that may attract more foreign capital and lower bond yields. It will encourage economies and companies to reform instead of relying on cheap exchange rates as a crutch. And letting the dollar fall may be necessary to get record U.S. budget and current-account deficits under control.
A Chinese revaluation has been thought to be the key to getting Asians to let their currencies rise. Yet Japan's is by far Asia's biggest economy; only when Tokyo lets markets set the yen's value will China and others follow suit. If Japan does in fact allow the yen to appreciate, China may feel more comfortable taking a similar step.
Last week, analysts at Bank of America Corp. and Merrill Lynch & Co. made headlines predicting China may relax its 8.3 peg to the dollar by April to slow inflation and cool economic growth. That's probably wishful thinking, as Chinese officials are suggesting these days. Speculators might want to keep that in mind and trade accordingly.
William Pesek Jr.
Here's an excellent currency article by Andy Xie.
A further one by Stephen Roach.
A most important article by Robert Skidelsky - The Bretton Woods System.
-- The world of currency markets is one of winks, nods and secret handshakes. In it, key policy makers rarely, if ever, say exactly what's on their mind. Chinese Premier Wen Jiabao has done just that and traders should pay close attention.
Wen said, as he often does, that China won't relax the currency's fixed exchange rate to the dollar under pressure from other countries. Yet he went a step further this week, issuing a warning of sorts to currency speculators.
``To be frank, it's not possible to launch changes to the yuan when speculation is so rife,'' he said here in Vientiane, Laos on Sunday. ``Rampant speculative activities on the yuan,'' he added, will make the introduction of any measures ``impossible.''
In other words, traders who test China's resolve may only delay a change in its currency peg. It means that the more investment banks churn out reports predicting yuan revaluations -- and the more speculators react to them -- the longer the process may play out.
Reality, Not Playbook
Wen isn't reading from the playbook of Mahathir Mohammad, the former Malaysian prime minister who infamously did battle with speculators during the 1997-1998 Asian crisis. Wen's comments were less of a threat than an admission of reality.
China understands how much the world wants it to let the yuan rise. Its officials also know it would be a powerful goodwill gesture that would reap political benefits in capitals all over the globe.
Yet China's economy isn't ready for a currency shift, and debt has much to do with it. The four biggest commercial banks in Asia's No. 2 economy are shackled with untold numbers of bad loans, putting its financial system in a highly fragile state.
Standard & Poor's thinks it would cost $656 billion to resolve bad loans at China's banks, though some analysts say the figure is probably much higher. Repairs are indeed under way, though not as fast as credit-rating companies would like.
Bad Loans
In January, China began using tens of billions of dollars of foreign exchange reserves to bail out lenders, and it's been pressuring bank executives to dispose of bad loans. More recently, it set new rules designed to make it easier for overseas investors to buy the more than $450 billion of bad loans held by China's four biggest commercial banks and their asset management companies.
Yet it's a work in progress. The last thing China wants is currency instability for the first time since 1995, when it pegged the yuan. While it's important that China reduce its currency advantage to restore a bit of equilibrium in global trade trends - - and placate the U.S. and Japan -- it's more important that it does it right.
China, Wen said, needs ``a stable macroeconomic environment, a normal market mechanism and a healthy financial system'' before it alters the peg. ``China needs to consider impact of the yuan on China and on the region.''
That's little comfort to Asian governments struggling to adjust to the dollar's 5.2 percent drop against the euro and 4.1 percent slide against the yen this year. As the dollar falls, China grows even more competitive in Asia. The trend threatens the export industries of the 10 members of the Association of Southeast Asian Nations, or Asean.
A Harbinger?
The good news is that this week's Asean meeting here in Vientiane may be a harbinger of Asian governments looking past China's dollar peg and letting currencies rise.
``We have to live with the fact that there will be a weaker U.S. dollar next year,'' Indonesian Trade Minister Mari Pangestu said in an interview. ``I don't think Indonesia should depreciate its currency to maintain its export competitiveness.''
Since Indonesia is by far Southeast Asia's biggest economy, such thinking shouldn't be dismissed. Japan also has shocked currency traders in recent weeks by doing nothing as the yen surged against the dollar. South Korea, which, like Japan, tends to manage its currency closely, also has been more tolerant of the rising won.
Sign of Confidence
It's an important step for this region -- a sign of confidence that may attract more foreign capital and lower bond yields. It will encourage economies and companies to reform instead of relying on cheap exchange rates as a crutch. And letting the dollar fall may be necessary to get record U.S. budget and current-account deficits under control.
A Chinese revaluation has been thought to be the key to getting Asians to let their currencies rise. Yet Japan's is by far Asia's biggest economy; only when Tokyo lets markets set the yen's value will China and others follow suit. If Japan does in fact allow the yen to appreciate, China may feel more comfortable taking a similar step.
Last week, analysts at Bank of America Corp. and Merrill Lynch & Co. made headlines predicting China may relax its 8.3 peg to the dollar by April to slow inflation and cool economic growth. That's probably wishful thinking, as Chinese officials are suggesting these days. Speculators might want to keep that in mind and trade accordingly.
Wednesday, November 24, 2004
The Dollar's Demise?
Here's an article to cheer you up or down. A few more economists had soon awaken to the world's currency realities. If not, we're in for a hell of a ride. If I were the president, I'd replace the entire administration with Keynesian economists, and straighten this mess out, pronto! It's only a currency law problem! It's the `73 change of law of the Bretton Woods System. That damn Nixon is still busting our butt.
Is the dollar’s role as the world’s reserve currency drawing to a close?
WHO believes in a strong dollar? Robert Rubin, Bill Clinton’s treasury secretary, most certainly did. John Snow, his successor but two, says he does but nobody believes him—if only because he wants other countries’ currencies, in particular the Chinese yuan, to go up. Mr Snow’s boss, President George Bush, in one of his mercifully rare forays into economics last week, also said he wants a muscular currency: “My nation is committed to a strong dollar.” Again, it would be fair to say that this was not taken as a ringing endorsement. “Bush’s strong-dollar policy is, in practical terms, to maintain a pool of fools to buy it all the way down,” a fund manager was quoted by Bloomberg news agency as saying. It does not help when the chairman of your central bank, Alan Greenspan, whose utterances on the economy are taken rather more seriously than Mr Bush’s, has said the day before that the dollar seems likely to fall: “Given the size of the current-account deficit, a diminished appetite for adding to dollar balances must occur at some point,” were his exact words. The foreign-exchange market immediately decided that it was sated, and the dollar fell to another record low against the euro.
Mr Greenspan’s words were of huge moment, and not just because he spoke clearly, unusual though this was, nor because the Federal Reserve rarely comments on foreign-exchange movements. No, Mr Greenspan’s words were significant because he was tacitly admitting what right-thinking economists the world over have long believed: that the emperor has no clothes.
Mr Greenspan’s previous line had been that America’s ever-expanding current-account deficit was not a problem when capital could flow so freely around the world; and that, in effect, it would continue to flow to America because the country is such a wonderful place in which to invest. Now he is saying that it won’t, or at least that investors will demand a cheaper dollar, or cheaper assets, or both, to carry on financing America’s deficit.
But Buttonwood suspects that the deeper significance of Mr Greenspan’s admission is that the game that has been played since the collapse of the Bretton Woods system in the early 1970s is drawing to a close. The dollar’s status as the world’s reserve currency—its preferred store of value, if you will—is gradually coming to an end. And, ironically, the fact that it has become so popular in recent years will only hasten its demise.
One man who undoubtedly believes in a strong dollar is Japan’s prime minister, Junichiro Koizumi. Unlike America, Japan has been putting its money where its leader’s mouth is. On behalf of the finance ministry, the Bank of Japan has bought more dollars than any other central bank has ever done. At last count, it had the equivalent of $820 billion in foreign-exchange reserves, most of it denominated in the American currency.
As goes Japan, so goes the rest of Asia. In an interview this week with the Financial Times, Li Ruogu, the deputy governor of China’s central bank, the People’s Bank of China, said that his country would not be rushed into revaluing the yuan, and that America should put its own shop in order. Mr Ruogu’s bank, too, has been a huge buyer of dollars in recent years. China and the rest of developing Asia now have $1.4 trillion of reserves, mostly dollars. This is more than the combined reserves of the rest of the world (excluding Japan). Thanks mostly to Asian intervention, foreign-exchange reserves at the world’s central banks have climbed from $2 trillion in 2000 to $3.5 trillion in 2004.
It used to be that countries amassed reserves as a war chest to protect against a run on their currencies of the sort suffered by East Asia in 1997, or Russia in 1998. But Asian countries have snaffled up far more than would be justified to prevent such crises. Their aim in accumulating these reserves is generally different now: to stop their currencies rising against the dollar and so keep their exports competitive. In effect, they are trying to peg their currencies; China’s peg is explicit. Huge foreign-exchange reserves are the result.
Some pundits have dubbed this arrangement the new Bretton Woods. The Bretton Woods arrangement (a post-second world war agreement that tied the dollar to gold and other currencies to the dollar) collapsed in 1971. The present arrangement seems similarly doomed to failure. The big question is whether the world will suffer similarly ill effects when it collapses.
Past saving?
The upward pressure on Asian countries’ currencies stems either from their saving too much and consuming too little, or from America saving too little and spending too much. American politicians, naturally, tend to concentrate on the first interpretation, because it stops them having to recommend unpleasant remedies, such as cutting deficits or encouraging Americans to save more. But Mr Greenspan’s most recent comments show that he recognises the problem is more home-grown. Personal saving in America, as a percentage of household income, slumped to just 0.2% in September, close to a record low. Indeed, the savings rate has been declining remorselessly since 1981, when it reached a high of 12.5%. This lack of saving shows up in the current-account deficit, which is a record near-6% of GDP and rising.
In effect, foreigners are saving on America’s behalf. In a recent study for the New York Fed, two economists, Matthew Higgins and Thomas Klitgaard, point out that the United States now absorbs more than the measured net saving of the rest of the world combined (suggesting someone’s got their figures wrong somewhere). The American economy cannot continue to expand at its current rate without those foreign savings. The question is whether foreigners will be happy to carry on financing this growth with the dollar and asset prices at their present level. The private sector is already voting with its wallet: it has been financing an ever smaller percentage of the deficit, and there has been a net outflow of direct investment. That leaves the public sector—ie, central banks—and those, in particular, of Asia.
At the heart of the central banks’ calculations is a trade-off: intervening to keep your currency down can be costly, but it is good for exports. Though the costs of intervention are hard to quantify, they are potentially big. Because the domestic money supply is expanded—those dollars must be paid for with something—it can cause inflation (though this can be neutralised through “sterilisation”, ie, bond sales). But the big potential cost is in amassing a huge stash of dollars with precious little exit strategy. Quite simply, Asian central banks now own too many of them to exit en masse, for their exit would cause the dollar to crash and American interest rates to soar, which would cause huge losses on their holdings of Treasuries.
Get out while you can
The biggest risk, of course, is that lenders would lose pots of money were the dollar to fall. As the printer of the world’s reserve currency, America can pass on foreign-exchange risk to the lenders because, unlike other indebted countries, it can borrow in its own currency. Messrs Higgins and Klitgaard reckon that for Singapore, the most extreme example, a 10% appreciation against the dollar and other reserve currencies would lead to a currency capital loss of 10% of GDP. Though loading up with even more dollars might of course stop the dollar from falling for a while, it would increase the risk of still larger losses were it eventually to do so. America already needs almost $2 billion a day from abroad to finance its spending habits, and the situation deteriorates by the week because America imports more than it exports, which worsens the current-account deficit.
The incentives to flee the Asian cartel (to give it its proper name) thus increase the bigger the game becomes. Why take the risk that another central bank will leave you carrying the can? Better to get out early. Because the game is thus so unstable it will come to an end, and probably a messy one. And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.
Saturday, November 20, 2004
The U.S. Current Account
Lawrence Summers is finally catching up to what I wrote him about in the nineties. Article by Marshall Auerback.
Roach, on why the dollar should be lower.
Another currency view by Willia Pesek Jr.
The US as a Net Debtor:The Sustainability of the US External Imbalances - Nouriel Roubini - Stern School of Business, NYU and Brad Setser - Research Associate, Global Economic Governance Programme, University College, Oxford
Lawrence Summer's official speech.
Roach, on why the dollar should be lower.
Another currency view by Willia Pesek Jr.
The US as a Net Debtor:The Sustainability of the US External Imbalances - Nouriel Roubini - Stern School of Business, NYU and Brad Setser - Research Associate, Global Economic Governance Programme, University College, Oxford
Lawrence Summer's official speech.
Monday, November 15, 2004
Tuesday, November 02, 2004
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