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.
Friday, January 28, 2005
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
Wednesday, October 27, 2004
Monday, October 25, 2004
Monday, October 18, 2004
Tuesday, October 12, 2004
Friday, October 08, 2004
Tuesday, September 21, 2004
The Politics of Globalization
I've been trying to boil my ideas down to a grand strategy with a prime directive that is important and pertinent to the moment and dialogical to everyone. I've settled on "Truly Balanced Values" and "It's The Exchange Rates, Stupid." Now, I'm going to leave the exchange rates for the moment and discuss the dialogical problem...I've discovered by working in groups like this, that there is a giant linguistics mountain to hurdle, so we may communicate successfully with each other...
Should we continue playing bankruptcy capitalism? The system is broke financially and politically, yet, the solution is simple - the understanding and implementation is near impossible - our insecurities, fears and misinterpretations are blocking solutions and implementations. On the one hand, we have extreme under-funded wanton democracy and on the other, we have extreme over-funded speculative capitalism or extreme un-funded democracy verses extreme printed capitalism, yet we need a new Keynesian funded and balanced democracy.
The extreme capitalists see the problem as internal to the person, while they amass great concentrations of wealth. The extreme democrats see the problem as external to the person, while yearning for great dispersions of wealth. The three super-concentrations of wealth are tax havens - the oil rich nations and the 3rd world's super-rich. Is extreme democracy's grand strategy no more than desire? Do they see poverty is simply an illusion or reality of our stupidity? Has anyone glimpsed the great balancers of history? - the founding fathers -Washington, Marshall, Madison, and Hamilton or the great middle period balancer - Lincoln, or more recent balancers - Roosevelt and Truman's Keynesian truly funded and balanced ideas and policies? After studying these great men who knew what to do with the closed wallet of concentrated wealth verses the open wallet of dispersed wealth, I easily came to the conclusion, we needed a new global financial democracy, re-founded on the best ideas of these great men's minds.
The entire world's core values are the problem and solution. We need the best balanced autonomous solution - an authentic grand strategy. The prime directive should be based on growth and balance - a truly new and full balance, from the bottom of our values systems to the top and most hierarchical law structures. The middle path is the road of true balance, yet, we must recognize the limits of capitalism and her sovereignty. We must rebalance social democracy verses market concentrations. Growth of the public good supports social democracy, historically, yet, we must ask - "has globalization gone too far?" While answering, we shouldn't seek perfect government, we should seek perfect competitions, because the imbalances inherent in extreme capitalism are defeating its purpose - hands down!
The intuitive universal truths of common sense show us the modern world is adrift on a sea of unknowing, yet, must we endure a visionless world? Using vision logic, can we glimpse truth as a balance of money and values? or has reason gone mad, trapping us in the horrendous global imbalances? I think not. If we use a major global strategy of thinking locally and acting globally, through policy reform proposals geared to spiritualism's balance of ideas - the world perfect ideas or a perfect competition balance of as many truths as possible, we can surmount a grand strategy to rebalance most of America's values through a true new balance - the center of a new democracy.
I'll say it again, we need a grand strategy - a balanced strategy, and the American mind is wide open to change. At present, the system is so imbalanced, it's robbing itself, yet, in the absolute, there are no problems - it's all a matter of perception. There's answers and solutions to all problems - we just can't talk truth - yet! As ol' man Bechtel used to say, "Problems are just opportunities in work-clothes." Yes, it is true, we have a long way to go, but if we concentrate on the real political problems of globalization's two major causes of technological and state action, and globalization's two major aspects of free trade and free capital, we may start to understand the three stages of mythic, real and integral capitalism. We may further be able to work toward a supra-rational omega structure - a global democracy of money invested in perfect competition, instead of our blindness to possibilities. We must curtail the demonizing of truth and wisdom and seek real and balanced solutions!
Here's a compliment to my post - Thaksinomics - A New New Deal
A globalization article by George Monbiot - "The Age of Consent" - "Without global democracy, national democracy is impossible."
A new Stephen Roach post on Globalization - China/Europe/America
A new post by Martin Hutchinson - Economics & Globalization of Russia
A new post - Speculation in Derivatives, etc.
Bluster and Debt Fill the Sails of the USS Macroeconomy
Andy Xie on China and America, Debt Troubles
Should we continue playing bankruptcy capitalism? The system is broke financially and politically, yet, the solution is simple - the understanding and implementation is near impossible - our insecurities, fears and misinterpretations are blocking solutions and implementations. On the one hand, we have extreme under-funded wanton democracy and on the other, we have extreme over-funded speculative capitalism or extreme un-funded democracy verses extreme printed capitalism, yet we need a new Keynesian funded and balanced democracy.
The extreme capitalists see the problem as internal to the person, while they amass great concentrations of wealth. The extreme democrats see the problem as external to the person, while yearning for great dispersions of wealth. The three super-concentrations of wealth are tax havens - the oil rich nations and the 3rd world's super-rich. Is extreme democracy's grand strategy no more than desire? Do they see poverty is simply an illusion or reality of our stupidity? Has anyone glimpsed the great balancers of history? - the founding fathers -Washington, Marshall, Madison, and Hamilton or the great middle period balancer - Lincoln, or more recent balancers - Roosevelt and Truman's Keynesian truly funded and balanced ideas and policies? After studying these great men who knew what to do with the closed wallet of concentrated wealth verses the open wallet of dispersed wealth, I easily came to the conclusion, we needed a new global financial democracy, re-founded on the best ideas of these great men's minds.
The entire world's core values are the problem and solution. We need the best balanced autonomous solution - an authentic grand strategy. The prime directive should be based on growth and balance - a truly new and full balance, from the bottom of our values systems to the top and most hierarchical law structures. The middle path is the road of true balance, yet, we must recognize the limits of capitalism and her sovereignty. We must rebalance social democracy verses market concentrations. Growth of the public good supports social democracy, historically, yet, we must ask - "has globalization gone too far?" While answering, we shouldn't seek perfect government, we should seek perfect competitions, because the imbalances inherent in extreme capitalism are defeating its purpose - hands down!
The intuitive universal truths of common sense show us the modern world is adrift on a sea of unknowing, yet, must we endure a visionless world? Using vision logic, can we glimpse truth as a balance of money and values? or has reason gone mad, trapping us in the horrendous global imbalances? I think not. If we use a major global strategy of thinking locally and acting globally, through policy reform proposals geared to spiritualism's balance of ideas - the world perfect ideas or a perfect competition balance of as many truths as possible, we can surmount a grand strategy to rebalance most of America's values through a true new balance - the center of a new democracy.
I'll say it again, we need a grand strategy - a balanced strategy, and the American mind is wide open to change. At present, the system is so imbalanced, it's robbing itself, yet, in the absolute, there are no problems - it's all a matter of perception. There's answers and solutions to all problems - we just can't talk truth - yet! As ol' man Bechtel used to say, "Problems are just opportunities in work-clothes." Yes, it is true, we have a long way to go, but if we concentrate on the real political problems of globalization's two major causes of technological and state action, and globalization's two major aspects of free trade and free capital, we may start to understand the three stages of mythic, real and integral capitalism. We may further be able to work toward a supra-rational omega structure - a global democracy of money invested in perfect competition, instead of our blindness to possibilities. We must curtail the demonizing of truth and wisdom and seek real and balanced solutions!
Here's a compliment to my post - Thaksinomics - A New New Deal
A globalization article by George Monbiot - "The Age of Consent" - "Without global democracy, national democracy is impossible."
A new Stephen Roach post on Globalization - China/Europe/America
A new post by Martin Hutchinson - Economics & Globalization of Russia
A new post - Speculation in Derivatives, etc.
Bluster and Debt Fill the Sails of the USS Macroeconomy
Andy Xie on China and America, Debt Troubles
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