Brad Setser

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Open thread — I’ll be back on Friday

by Brad Setser
May 24, 2005

I am going to be away from my desk for a few days, and am not sure I will have internet access — I’ll try to check in, but if not, I am sure that you will find plenty to discuss.


  • Posted by w


    Now that Brad is out of the picture, what about reinsurance and new disclosure:

    Re: The latest proposed disclosures would require an insurer to report to state insurance regulators any agreement that has the effect of altering policyholders’ surplus by more than three percent, or representing more than three percent of premium or losses. The new disclosure is designed to identify any reinsurance contract that has been accounted for differently under statutory accounting principles compared to general financial statement purposes. Additional reporting requirements regarding contract terms and management’s intention in entering the contract have been included to improve transparency, reports NAIC.

    NAIC study group members also worked toward developing a standard attestation form to be signed by the insurer’s CEO and CFO acknowledging reinsurance contracts that the company has taken “credit” for on its financial statements.

    “We believe that these issues need to be addressed with a sense of urgency,” said Joe Fritsch, Director of Insurance Accounting Policy for the New York Insurance Department and chair of the study group. “State insurance regulators have seen nothing to alleviate our concerns since we began our rigorous review of these practices.”

  • Posted by Movie Guy

    Gee. We can’t just talk about cars?

    Ok. Can you offer more background? I remember something about this subject from a few months ago, but…

    Maybe we can get around to discussing trade policy before Friday. Might be our only chance.

    And cars…

  • Posted by MTC

    “I am sure that you will find plenty to discuss.”

    Possible topics:

    1) The ubiquity of comment spam
    2) Comment spam as the sign of the end of times
    3) Spam, spam, spam, spam, spam, baked beans, spam, spam, spam and comment spam
    4) Men who read comment spam and the women who love them for it
    5) The same thing, except with the men’s and women’s roles reversed, with comment spam
    6) “Anti aging skin care” products, I guess

  • Posted by anne

    Again, I would like to understand why the costs of financial services are so expensive through Europe. Why is there almost no price competition for financial services? Where is a European Vanguard? Why do Europeans not complain of the cost of financial services? Same for the Japanese.

  • Posted by anne

    Another question is why does Australia have a government budget surplus and a balance of trade deficit, while we have a budget deficit and a trade deficit? Where does the difference reside?

  • Posted by Stormy
  • Posted by jprime314

    While Q&A is still open, I’ve got the following query:

    Do we have any sense of what fraction of China’s current economic prosperity is dependent on 1) inward-FDI & foreign consumption of Chinese exports, VERSUS 2) Chinese domestic consumption)?

    In other words, how vulnerable is China’s economy to shocks & slowdowns coming from the US/EU/Japan? Or is China’s current boom self-sustaining?

    Can anyone recommend/summarize any good studies or articles that get at this question

  • Posted by kr

    re: fin svcs costs in Europe, see this week’s Economist – special section on eurobanking… some good stuff buried in there

  • Posted by st

    With Brad gone I suspect we’re going to be barraged with more of anne’s bird posts…

    JK, anne (though I do think there are probably preferable places to post that stuff :)

  • Posted by Stormy

    I would like to hear movieguy’s ideas on trade.

  • Posted by Randall


    Why be mean to someone who others find so pleasant? What would you barrage us with? I look forward to reading the posts and comments, and Anne is a reason why.

  • Posted by Randall

    Why not learn to appreciate the stunning photography and variety in a single city park. I have been suprised.

  • Posted by Ian

    dragging this back on topic…

    Does anyone think that there will be a reaction in the markets if the French vote no on the EU constitution on Sunday? Or do you think it’s already priced in?

    Italian and Greek bonds are now trading at wider spreads to german bunds than they were a couple of months ago. CDS (credit default swaps) spreads have also widened for the weaker eurozone credits (Portugal, Italy, Greece). Meanwhile the euro looks to be in the midst of bearish period against the dollar. Stephen Jen of Morgan Stanley thinks the euro is going back to parity with the dollar.

  • Posted by w

    I had a slow motion vision of the bubble popping, and from the inside, I can now say it will come to a head in the form of a trickle-down economic engine that runs too low on fuel; then a little sputtering, balloon flapping and then the gas rips apart the stress flaws. The giant sucking sound some were listening for has morphed into a new digital library sound which can be found near the old alarm button…

  • Posted by js

    I was just rereading the Roubini-Setser analysis of BW2 and still find myself unable to believe in an orderly demise of the BW2 system. If anything, their great analysis seems to understate the gravity of the problem. Does anyone else find the assumptions necessary for an orderly (“orderly” I take to mean controllably non-recessionary, non-deflationary and non-inflationary) exit from BW2 untenable? It seems to me that either too much is expected from the participants, or unrealistic (at best, highly unlikely) changes are required. It also seems to me that policy options available to governments in response to any kind of unravelling of BW2, often have very undesirable consequences, sometimes excaberating problems they are supposed to alleviate. Domestic demand on the scale required to supplant export driven economies involves cultural and socio-economic conditions that most likely cannot be generated before BW2 reaches a crisis state. Increased export growth on the part of net importers requires a currency adjustment of large scale. Reduction of consumption in a net importer implies either curtailed money supply (however it is achieved) to consumers or a cultural shift. A curtailed money supply would undermine, in the case of the US, asset price appreciation which has been propelling growth via consumer spending. A decline in asset price appreciation, or significant increase in borrowing costs, is now excluded as a good option because of credit conditions and possible systemic risk (unless you make the big and questionable assumption of sufficient capitalization on the part of key players and government enthusiasm for bailouts.)

    There is nothing orderly (in the context of exiting an unbalanced system like BW2 with the respective current economic conditions of its participants) about a sufficiently weak dollar, an internal export/import economic shift, a reduction in consumer spending or governmental fiscal responsibility. It is not even clear, to me, that it is in the interest of political power to have orderly adjustments. History abounds with those who have reaped the benefits of chaos and disorder; hegemony is served equally by order and disorder.

  • Posted by gillies

    “Meanwhile the euro looks to be in the midst of bearish period against the dollar. Stephen Jen of Morgan Stanley thinks the euro is going back to parity with the dollar.”

    let me share something that made me laugh out loud . . .

    i have been asking brad – why is so much fuss made over the china / america currency relationship when a revaluation by china will not do very much to resolve the deficits ?

    the answer from the financial times quoted by the asia times made me laugh out loud.

    the bush gang – the bush family, their network of connections, warren buffett, the carlyle group – are shorting the dollar.

    its not the economy, stupid. its the great bear raid on america. like anne, they thought the dollar was headed south. it was their policies which sent it south after all. like all of their policies it was not well thought through.

    go to my blog
    – and look for ‘the great bear raid on america.’

    have a good laugh. this one’s on me. enjoy it.

    i bought 50 dollars before christmas ( 1.33 to the euro)
    tomorrow i will buy 50 more.
    just for the hell of it.

  • Posted by Alexis

    About Re-insurance:
    Seems to me the whole financial paper network = funny money shell games. I noticed a number of govt. entities are also using off-shore Re-Insurance Cos. Think they’re “Hedging” all over the place. How many trillions in derivatives involved in all their financial funny money games?
    Also, noticed all the ___ ___Bonds each level of govt. has issued over past decade+. Govt. agencies are in the funny money games in deep ___ too.


    About Trade Topic for today and to continue this week:
    1) We must preserve manufacturing here –at least major purchases that we need to use in our daily lives such as major home appliances, alternative enrergy technologies, and similarly.
    We are educated fools if do not insist on …bottom line.
    Our problems re Exports/Imports numbers are indeed, major.

    2) Think we need some form of tariffs…and/ or Export/Import Certificates as Buffet recommended
    for companies.

    3) We have to find a way around all the so-called American corps…transnational corporations and not really American corps any more that they must manufacture so much here…or pay some heave penalties…or not sell here. Reagan did it with Japanese auto makers.
    Tariffs on high end imported goods the answer to?

    3) Am sick and tired of all prof. services costs (at will without regard to the reality of the economy) …and so many of them are buying foreign made products–without a care as to the consequences to the country and its workers.
    They’re clueless and/or worse, don’t care.

  • Posted by gillies

    ‘the great bear raid on america.’

    the u r l for the asia times forex commentary was this –

    if it is a piece of mischief making, it is a plausible and audacious one. also – note the date on my own blog piece. it was not influenced by the above.

  • Posted by Stormy


    I take it that “great bear raid” is a personal variant on “starve the beast”? One way of starving it is to take all its food for yourself.

  • Posted by glory

    re: french no; philip coggan has a one up

    The euro’s recent weakness must owe something to referendum concerns, suggesting rejection could be in the price. State Street points to another indicator; in recent months equity flows into the large accession countries the Czech republic, Hungary and Poland have declined sharply. But the real barometer could be the spread on Turkish government bonds; a French no vote would make Turkish accession look extremely unlikely.

    he sez, “Investors are rediscovering political and country risk in the eurozone,” but that “Investors still seem to regard the credit risk of European countries as negligible. Credit Suisse First Boston points out that the range of credit spreads across individual US states is 70 basis points, compared with just 18 basis points for the eurozone.” oh and in the long run (like anne :) he continues to worry about italy.


  • Posted by gillies

    sometimes i write carelessly and post hastily –

    let me repeat this one clearly.

    i believe that bush family / bush family proxies and connections, have shorted the dollar. i believe that the pressure on china to revalue – agreed by almost all not to be the answer for the united states economy – is inspired by a short term, self-interested ploy to profit from the devaluation of the dollar.

    i believe that the chinese use of the word ‘speculation’ is a coded signal that they have spotted this and are not playing ball.

    i believe that the bush gang are for the bush gang, not for america, and what you can smell is the sweating of stale bears waiting for something that might not now be going to happen.

  • Posted by Ian


    Playing a bit of the devil’s advocate…

    1.) Why? If I can purchase a good made in china or elsewhere that is cheaper than an American-made one, whats the problem? I don’t care where my refrigerator comes from. I only care if it works and isn’t too expensive.

    I don’t understand what the intrinsic value of having a large manufacturing base is. Why does it matter anymore? Besides issues of national pride, does it matter in an economic sense whether people are employed in service industries or manufacturing industries?

    Use the apple ipod as an example. You look on the box and it says “made in china/designed in California.” The value added to the ipod by the design/marketing/branding done in the United States is much greater than the value added by some factory in china putting together laptop hardrives and white plastic bodies.

    2) Why should we protect some industries with tariffs at the expense of everyone? For example, the sugar lobby is one of the key groups opposed to CAFTA. Because of subisdies and import restrictions given to sugar farmers, the price of sugar in the united states is higher than the world price. This benefits sugar farmers, but hurts everyone else in the united states. We are talking about like helping 10,000 people at the expense of 300 million people.

    3) I would argue that one of America’s greatest assets is its strong corporations. It makes sense for Toyota or Honda to manufacture cars in the US because they can avoid protectionism. But don’t think that they aren’t doing it for an economic reason either. They have non-union workforces, young workforces, and don’t have a lot of legacy liabilities. Compare that to GM or Ford, who have the legacy liabilities of generations of workers. I think that the US government will ultimately end up having to take on most of the legacy liabilities from the us carmakers in order to prevent them from going bankrupt. I actually think I have just gone a little off topic here.

    4) Once again, the US economy is driven by consumer spending. One can argue about the ethics of buying American or buying foriegn, but most consumers buy on other attributes, like brand, price, function, etc…

  • Posted by anne

    There are times we argue that a government deficit that is larger than household saving will have to produce a deficit in the trade balance. Then, what of Australia? Australia has a government surplus and positive household saving, but a trade deficit. Why the lack of symmetry? Should Australia worry about a trade deficit that is proportionate in size to ours?

  • Posted by anne


    The question is not “loaded.” There is something here that bothers me, and I am wondering why there is no symmetry.

  • Posted by glory

    (good one up :)

    btw, re: an orderly demise of the BW2 system; i think the key would be if productivity could keep pumping, then rates can stay low (and house prices up!) and the rest of the world can keep sending us their savings with the understanding that we can redeploy them more efficiently elsewhere so that they keep manufacturing the stuff we want at low, low prices; meanwhile, as developing countries steadily move up the economic ladder and become more consumption oriented, those assets abroad become more geared toward servicing their domestic markets and trade imbalances naturally correct over time without undue adjustment in our living standards; protectionism and non-productive property and housing bubbles notwithstanding, o’course… which is the real hole in the argument i think – that those savings aren’t being put to productive uses.

    still, as the saying goes, you don’t have to run faster than the bear, you just have to run faster than the next guy 😀

    like i think this fits quite readily with both gross‘ (and mcculley‘s) view of the world…

    What consensus fundamentalists are missing is a fundamental structural implication of the prevailing Bretton Woods II (BW II) regime: a structural decline in the equilibrium level and term structure of real interest rates. This reality is a function of two key, fundamental drivers: 1) Downward pressure on U.S. wage growth from lower-priced non-U.S. labor, which effectively flattens the U.S. Phillips Curve, implying a reduced inflation impulse per unit of decline in the U.S. unemployment rate; and 2)
    High savings rates in booming emerging market countries, which are generating a glut of global savings and contributing to a deficiency of global aggregate demand.

    These two forces, together, imply that the Federal Reserve – the center of the BW II universe, just as it was in BW I – must pursue a structurally kinder, gentler real Fed funds rate policy, so as to: 1) Generate robust aggregate demand growth in America, which is exported via the U.S. current account deficit to a demand-deficient world, and 2) Support lofty valuations and inflation in asset prices, in particular property, to provide a source of capital gains to supplement the income of American workers challenged by tepid wage gains.

    Yes, it’s a perverse way to run a railroad or a global economy: America goes deeper and deeper into hock to the rest of the world while riding a wave of asset price speculation and inflation. Certainly not a fundamental textbook path to long-term prosperity! It is, however, precisely the fundamental textbook path to avoiding, or at least postponing, a short- to intermediate-term global spiral into a deflationary depression.

    BW II, by linking mercantilist emerging market countries, notably China, into a de facto monetary union with the United States, represents a positive shock to global aggregate supply relative to global aggregate demand. Consequently, it is America’s global civic duty to live beyond its means. And it is the Federal Reserve’s global civic duty to facilitate American hedonism, because in the face of a positive structural shock to global aggregate supply, notably labor, American hedonism is not inflationary.

    and that’s the key, not inflationary in the US, nor anywhere else… that’s certainly what global bond yields are telling us 😀


  • Posted by gillies

    “in the face of a positive structural shock to global aggregate supply, notably labor, American hedonism is not inflationary.
    and that’s the key, not inflationary in the US, nor anywhere else… that’s certainly what global bond yields are telling us.”

    i believe that the bush gang are taken by surprise by this lack of inflation. the dollar was supposed to go south.

  • Posted by Alexis

    1. Holding up the price of sugar is not that important in the greater scheme of the U.S. economy. Also, sugarless would be far better for long-term health prospects.

    2. The structure and infrastructure of U.S.
    enabled those corporations to prosper.

    Manufacturing source matters to me because:
    A country cannot long endure on hot air and paper professionals( let alone all their funny money schemes).
    Within 10 years maximum, U.S. would be a third world country.
    “Intellectualizing idiots’ theories & effects have destroyed other countries. The univs. have been doing that to U.S. for past 20+years.

    3. Am a believer in slicing and re-inventing every decade. Same applies to court processes, medical costs & practioners, and so on. Strong belief in lean, clean, self- discipline, and lifelong learning/skill development (vs. intellecualizing garbage & education hot air idiocy. Middle-class values were the glue to U.S.
    Agree re Unions. Unions began to benefit their leaders too much, while the workers became too soft, etc. ( & largely unneeded med. costs are a whole other topic)
    Big problems with so-called free market theories is there is no rational planning. Think most who want to work have a right to a living wage. [else why live– or even how live? Yes, as long as cos. are making a profit].

    4. American consumers are dumbos and spoiled. Some of us are disgusted with U.S. society. Yuppies and their offspring guppies. (educated idiots) They gorge on things, gorge on entertainments & sports. They’re yuppy and guppy idiots playing (and also playing with other people’s hard earned moneys & others’ lives.

  • Posted by A;exis

    Manufacturing is very important in my thinking.
    A country cannot long endure on hot air, paper professionals, and funny money schemes.
    U.S. would become like a third world country.
    If manufacturering here, as well as export/import percentages do not change, U.S. is done for shortly.

    Am a strong believer of slicing & re-inventing every institutions each decade. Has been neanderthal, free market falsities, and no rational thinking/ planning to me.

    All unions, including govt. employee unions, became too soft and expecting far too much while benefiting their leaders. U.S. has too much debt to pick up the legacy liabilities. It’s all going to hit the wall when all the overpaid verbenefited govt. workers try to collect.

    U.S. consumers? Are dumbos and spoiled. Yuppies and offspring guppies.
    Gorging on things, entertainments, sports, etc.

  • Posted by Stormy


    The idea of the property bubble being compensation for low/flat wages does seem a bit perverse, especially, as we have seen, the bubble is really a “froth” in selected posh neighborhoods.

    Any dynamic system will seek equilibrium in the long run, ask any physicist or chemist. Yes, in the long run, everything will even out…we just have to be the beneficent uncle. It sounds so kindly…and such a convenient argument for the profiteers.

    My own sense is that during that waiting something is going to break and break hard. If nothing else, it will be American labor which finally decides that enough is enough.

    The well-heeled and well-connected are doing fine; but you cannot constantly pull out more and more of the safety net, keep wages flat, property and commodity prices rising –and hope Church-based charities will clean up the mess.

    There is a growing anger in America that all the jingoism and bible-thumping fervor will not contain. And it will grow.

    The hedonism is for the 1%; the rest eat cake.

  • Posted by Stormy

    I do buy into a variant of gilles “great bear raid,” except the raid is already going on. Hedging the dollar is peanuts.

    How did Australia handle their commitment to East Timor: a one-year levy on people making over $100,000.

    What did the U.S. do with Iraq? Why, round-up the poor, send them to Iraq and give a tax break to the rich.

    There is something really sick here.

  • Posted by js


    Hey, you used the term “bubble”, I think our fearless clarifier off all things economical terms it “froth” now. Or better yet, a bunch of tiny bubbles. Maybe we could call it Al’s Champagne party.

    “as developing countries steadily move up the economic ladder and become more consumption oriented, those assets abroad become more geared toward servicing their domestic markets and trade imbalances naturally correct over time without undue adjustment in our living standards”

    That still generates the disorderly unravelling imo, because it demands something that can’t be given on a short term horizon (say 2-4 as per the Roubini-Setser timeframe) forcing the system into collapse. But that’s a matter of opinion, if you believe Chinese (and other EM) society, culturally, economically and politically, can support a shift to domestic consumer demand 1)on that short of a time frame and 2)on a scale to match a lack of growth in exports, then perhaps there is an orderly unwinding on their side. However, that still leaves the US possibly not receiving as much CB funding (do you think Washington is going to become fiscally responsible in the next 24 months? consumers stop taking equity out of inflated assets?) and a diminished demand for dollars, leading into a lower dollar and higher rates to support our debt. If the US consumer stops asset equity withdrawal spending, that makes us look very recessionary. Rates have to stay low, or go lower, and wages have to go up at some point to keep the asset bubble/equity spending game going. You also need a lot of faith in the dollar. Reserve currency, Oil denomination, perceived security of US debt… the “if” side of the equation of preserving status quo with no disorderly unravelling is too long I think.

    “It is, however, precisely the fundamental textbook path to avoiding, or at least postponing, a short- to intermediate-term global spiral into a deflationary depression.”

    I agree with Gross on this, but only with his caveat that any variant of a Bernanke response changes the whole equation. Do you think the Fed. would allow disinflation? Hell will freeze over first imo.

    I don’t think global bond yields are speaking to a new deflationary paradigm. A huge portion of the demand is coming from CBs, and they can have very different motives than private money. It’s true that Gross is betting on a short term lowering of long term rates, but it’s just that, short term. I read him as agreeing with Roubini-Setser, I think he just disagrees on the time-frame.

    I think real inflation has enormous advantages for the US (not what is reported by the CPI with its exclusions, subsitutions and hedonic calculations, that has to stay very low), as does a weak dollar. After all, at the end of the day, you need some kind of magic to deal with a 7 trillion dollar debt don’t you? Can you fit 7 trillion dollars in one Helicoptor?

  • Posted by touche

    You people don’t understand the implications of increasing productivity in the new millenium! The whole point of productivity is to eliminate labor costs. Productivity has finally increased to the point where the need for humans in the global economy is on the decline. Humans are becoming redundant. Alas! Productivity now implies lower wages for the working stiff.

  • Posted by anne

    Imagine, the long term Treasury yield is 4.04%. Short term interest rates rise, long term rates fall, the spread betwwen yield grows less and less. No matter what central banks are doing, this bond market is astonishing. Investors are telling us there will be no general price pressure for years to come, no inflation pressure at all. Astonishing, but since the bond market is a better guide to the economy than the stock market, I pay attention.

  • Posted by anne

    We really would like to know who the buyers of the riskier mortgages are. These mortgages are not being extended by Freddie Mac or Fannie Mae, but then by whom?

  • Posted by anne

    Likely the French are going to vote against the European Constitution, and this alone could keep the Euro weak for quite some time.

  • Posted by anne|36|…

    Long-eared Owl
    New York City-Central Park, North Woods.

  • Posted by anne|301|…

    Brown Thrasher
    New York City–Central Park, Azalea Pond.

  • Posted by anne

    A sad but remarkable article:

    Will the Birds Stop Returning to Delaware Bay?

    CAPE MAY COURT HOUSE, N.J. – The red knots were already three days late on their flight north from the bottom of the world and the people waiting for them were beginning to get nervous. The birds’ dining table was not even set.

    On the full moon of the fifth month of the year, horseshoe crabs crawl up on the beaches of Delaware Bay to mate, as they have for 200 million years. A decade ago, they covered the beach like cobblestones, and flocks of red knots, chubby brown-flecked shorebirds the size of robins, would stop to eat the crabs’ eggs, doubling their body weight before flying nonstop for three days straight to reach Southampton Island in Canada, just below the Arctic Circle. There they would spend a few weeks bulking up again and breeding before flying back to their winter home, Tierra del Fuego, at the southern tip of South America. The annual round-trip migration covers an estimated 20,000 miles….

  • Posted by touche

    DOR, That’s definitely your suggestion and not mine. (Don’t shoot the messenger)

  • Posted by Stormy


    How and for whom does the IPOD make money? Take the final selling price of the IPOD…and pie-chart out the take.

  • Posted by Stormy


    The disappearance of the spread is another way of saying a number of things:

    1. No inflationary pressure
    2. No pressure on wages—they will stay flat…and in the states actually lose ground. The mark-up of many articles—due to incredibly cheap labor abroad—gives plenty of slack between actual cost and retail price. Ironically, at some point, prices may have to fall if the consumer base starts to shrink.
    3. Commodities, ironically, will be where the money will go.

    (Part of Australia’s problem is the bottleneck getting the ore to the ships, thus driving the cost up: An infrastructure issue. Of course, the exchange rate is not helping, either.)

    Looks like deflation to me.

    But there are a number of wild cards that could mix all this up:

    1. Oil
    2. War—with Iran. The nuclear issue may have put back till August/September.
    3. Global warming. Already, some large insurance companies are getting nervous. For economic geeks, those companies are the ones to watch…. Personally, I watch the scientists, too. My own feeling is that in 5 years, this will actually “start” to enter the economic consciousness. Within twenty, it will be a reality we cannot escape. Watch the oil companies as well. Already they are positioning themselves towards nuclear.
    4. Smart money no longer looks to the dollar—and the U.S. is left with a big bill. Money seeks advantage; and the U.S. may not offer one. I think this one will happen at some point.

    Have you seen “Winged Migration”?

  • Posted by PC

    Blame It On China – see

    Glad to see there are some “responsible” Americans out there who are ready for face up to the mess “they” created instead of blaming big bad China.


    Three cheers for Congressman Ron Paul!

  • Posted by Stormy


    That second link does not work???

  • Posted by Stormy

    You have to go to his website first.

  • Posted by Stormy

    Apparently the Fed is a bit confused as well:

    “Mr. Harris said Fed officials might be genuinely baffled by contradictory evidence: energy prices and commodity prices were higher and productivity growth was slower, but employment costs were barely keeping up with inflation.”

  • Posted by Stormy

    “Nationwide, the median price for sales of existing homes, which does not factor in newly built ones, rose to $206,000 last month, up 15.1 percent over the last year and breaking the $200,000 level for the first time.”

    Now think of the median wage–around 34-35,000?

  • Posted by jm

    Ah, I negelected to explicitly address, “What is the reason for preserving manufacturing in the US?”.

    If US manufacturing were being overwhelmed by competition in a truly free market, and its decline were a consequence of a genuine lack of comparative advantage, then there would be little reason to preserve it.

    But that is not what is happening. We must ask the question appropriate to the real situation, which is, “What is the reason for allowing blatant mercantilist predation through exchange rate manipulation and non-tariff trade barriers to annihilate manufacturing in the US?”

  • Posted by Steve

    Anne — I think it’s worth remembering that low interest rates don’t necessarily mean low inflation. Interest rates are often decomposed (with linear approximation) into something like the following:

    observed rate = expected real risk free rate + expected inflation + default risk premium + other risk premium

    For a government’s bonds in its own currency, the default risk premium is zero, and for domestic investors, other risk (mostly exchange rate risk) is close to zero as well. So, for domestic investors buying government bonds, we have

    observed rate ~= real risk free rate + expected inflation

    If the observed rate is very low, it is tempting conclude that markets are suggesting a low risk free rate and low inflation. But there are other possibilities. For example, it is only nominal interest rates that have a zero bound — real risk free returns can and do dip below zero periodically. So the market might be saying that real, risk adjusted returns are expected to be occasionally negative, and inflation is not expected to be so low. Or perhaps inflation is expected to be sometimes negative, and real interest rates are not so low.

    Since the actual market includes foreign investors, we might conclude that the “other risk premium” is negative — for example, that foreign investors strongly expect the dollar to rise — and therefore real US returns and inflation are expected to be moderate, but dollar-seeking foreigners are bidding down the yields.

    Also, this whole line of reasoning fails to hold if significant actors enter the market with the expectation of achieving real USD returns below the expected real risk-free interest rate on their investments. You have to figure central banks as potentially in this category.

    All this is to say that you cannot conclude from the current 10 yr treasury yield that the market expects inflation will be under control for years to come. That’s only one of many conclusion you might draw. With so many inflationary and disinflationary forces perched against one another in precarious balance, it’s not so easy to call.

  • Posted by Steve

    By the way, the story about birds and horseshoe crabs disappearing makes me very sad. I remember hanging out as a kid on Delaware beaches and marveling with disgusted fascination at an endless carpet of cockroach-like horseshoe crabs. I was told they were like dinosaurs, unchanged for millions of years. And despite their ugliness, they are very gentle. I never knew the birds to miss them, but I’d miss them anyway as well.

    As always, your posts are a delight.

  • Posted by anne


    “By the way, the story about birds and horseshoe crabs disappearing makes me very sad. I remember hanging out as a kid on Delaware beaches and marveling with disgusted fascination at an endless carpet of cockroach-like horseshoe crabs. I was told they were like dinosaurs, unchanged for millions of years. And despite their ugliness, they are very gentle. I never knew the birds to miss them, but I’d miss them anyway as well.”

    I too remember how exciting it was to watch the horseshoe crabs, and how my dad explained what it meant for a horseshoe crab to be millions of years old. I was startled and saddened by the article. Imagine a bird that migrates 20,000 miles. Imagine. Oh dear.

    Thank you Steve, thank you, thank you. Suddenly I am even more sad, as my memories are yours.

  • Posted by Stormy

    Anne and jm,

    On the Cape, wrapped and preserved in the seawrack, we found delicate and nearly translucent tiny baby horseshoe crabs, around an inch or two in size. They are beautiful.

    So much is being lost. Those buried in concrete cities have no idea of what is happening. As long as the food is on the table, all is right with the world. And those growing up now will never know. What they see now will be the new yardstick. Who in the financial world will speak for the trees and the birds and even the lowly horseshoe crab?

  • Posted by anne


    “On the Cape, wrapped and preserved in the seawrack, we found delicate and nearly translucent tiny baby horseshoe crabs, around an inch or two in size. They are beautiful.”

    Imagine :) A beautiful passage.

  • Posted by anne

    Steve, Stormy, JM,

    I am thinking about all of your interesting points.

  • Posted by DF

    The boss is gone, let’s have some fun.

    Here are some general thoughts :

    Overoptimism leads to over pessimism.
    That’s a general law, Buddha made it clear some 2700 years ago.

    This is the roots of bubbles.
    Of course bubbles are also the product of markets.
    When the all forms of plannification are destroyed in an economy, anticipations are free,
    people then make selffulfilling prophecies, that create those booms and bust.

    Lesson 1, out of the coming crisis, more plannification will follow.

    When as a country are poorer than your neighbour, the best option for growth is running an export surplus toward it in manufactured growth, and help it go on with an undervalued currency and policies favoring low wages (no union allowed etc.).

    Thus, investment flow towards you and increase your industrial base, productivity increases, while wages keep low, thus allowing for large savings by corporations immediatly reinvested.

    Soon the rich countries you export to have some difficulty to absorb all your production, then subsidize it through cheap credit.

    Of course, sooner or later. BUST. You have a too big industrial base for your consumers at home.

    Merge the two countries and what you have is a classic tale of boom bust through overinvestment, lagging wages lead to a boom in profits, asset prices, demand can only follow through increased credit.

    Lesson 2 : If wages do not keep up to productivity, then productivity (via production) will fall till it matches wages. (It might fall below wages indeed for a time being)

    Lesson 3 : Since China is the cause for lagging wages in the USA-Europe, since USA-Europe are destabilizing factors for China (think unfair subsidies to western farmers that speed up the rural transition in CHina by reducing agricultural prices world wide), since there is no world body to organize some world plannification (call it orderly disruption of BWII if you like, that’s plannification).
    Then expect protectionism on the rise in order to allow for some plannification at home.
    Protectionnism will prove very costly. But again, the only other way would be world plannification. ANyone ready for it ?

    4 you start in 1950 and 50 % of money is bills and coins, money created by the central banks.
    Fast forward 2005, 5% of money supply is issued by the central banks (the fed in the USA). 95% is then backed on the expansion of credit, on debt.

    Thus we have fantastic debt levels. Debt/GDP ratio is higher than 1929. And government debt is underscored by public accounting methods.

    With a fall in production, wages, overindebted consumers stop to increase their level of debt, they start to save more : money supply then falls, deflation. Debts become very expensive. Bankrupties. Deflation. Etc.
    If say the amount of debt falls by 2%, then the FED would have to double its money supply to compensate for this. They sure will need many helicopters. They might buy all the US bonds, with a deficit at 6% of GDP that’s equivalent for the FED as doubling its money supply. Therefore even if the FED was very agressive in its inflationnist stance, it would need to act a lot if debt levels are to fall back to long term levels.
    There’s a long way to go from 5% of money supply being the central banks money until we reach 50%.
    It took 50 years to move from 50 to 5%. I doubt it could move in 2 years from 5 back to 50, but if it was possible it would be great. Imagine : 80% of debts would be cleared by money creation, all those lenders would end with worthless cash. Don’t count on it.

    That’s it. Here we have : plannification, fall in production, protectionism, deflation depression.

    Where’s the hope ?
    Well I bet, most of the oncoming successes will come through network cooperative production. Where’s all the hype now ? It’s called linux, creative commons, social entrepreneurship.
    That’s the new path.

  • Posted by Stormy

    Arnold meets his match

    As I said earlier, there is a growing anger.

    For now, all the clever arguments against “big government” have had held sway–and they will for a while yet. But people are starting to see the con job. The real special interests are finally coming into focus.

  • Posted by anne

    There there is the answer to Australia’s trade deficit, after a while of data hunting. Australia has a government budget surplus and a trade deficit, how and why? The answer is that Australia has negative household saving and has long had negative household saving. Then, there is symmetry as there had to be with an America with slightly positive household saving and a government budget and trade deficit.

  • Posted by Movie Guy


    The following post by Anantha Nageswaran was originally posted under the Bernanke thread. Reposted here with permission:

    A visit (or Visits) to Brad’s BLOG is a daily ritual for me. For the most part, I tend to agree with his lucid analysis and conclusions. With such a rigorous analysis behind his statements, it is but natural that his conclusions are robust.

    Nonetheless, let me be bold (Or, foolish) enough to venture to differ. There is a tendency to run down the Americans or hold the country and its macro-economic policies largely responsible for the global imbalances. Part of it must be because most of the regular commentators on the BLOG are not necessarily sympathisers of President Bush and his policies.

    I am an Indian living in Singapore for the last six years and I had lived in Zurich for five years before that. So, I presume I could claim some neutrality in this debate.

    Until very recently, I was a bear on the US dollar citing the twin deficits and their likely continuation. However, I have had a re-think. Of course, it is not that I enrolled in the Republican Party in the US. I have no interest in that.

    It must be said that exchange rate determination models are hard to pin down. It is not often the case that current account deficits explain exchange rate movements. Also, sometimes interest rate differentials do a good job and on other occasions they break down. Hence, it is not necessarily automatic that a rising current account deficit should necessarily result in a weaker dollar.

    In hindsight, there are some explanations for the USD rebound and that it need not be a disaster for the US current deficit. First, the near universality of dollar bearishness at the turn of the year – and I was part of it – is part of the explanation for dollar’s recent strength.

    Further, the dollar’s recovery against the Euro need not necessarily result in a higher current account deficit, for its weakness over the last two years has not necessarily resulted in a surge in US exports to the region. Aggregate demand in the Eurozone has become so weak that exchange rate competitiveness in the exporting countries might not help at all.

    For every piece of evidence on America’s structural imperfections, Europe has matched it with more than one piece of evidence of its own economic malaise. With the return on holding American dollar exceeding that on the Euro by a full percentage point and rising, the saga of the Euro is well and truly over. More importantly, I do not believe that it is bad news for the US current account deficit.

    The keys to the US current account deficit are therefore two: Asian exchange rates and the housing bubble induced consumption. On the former, there are stop-and-go signs that Asians are beginning to get the message. Korea is a recent example although it is far from clear that there is a consensus in the country on not intervening in the foreign exchange market.

    But, the point is that more than what happens to the Euro-USD, what happens to Asian currencies against the USD is going to be far more important. If that happens, unlike Brad, I would not worry even if the USD were to strengthen against the Euro.

    He has been focusing on the Asian Reserve accumulation since 2002 and has therefore tended to question Bernanke’s statement that the ‘savings glut’ was an outcome of the Asian crisis.

    Honestly, he is right. Whether it is a savings glut or inadequate domestic investment opportunities relative to domestic savings is hair-splitting. The link below shows that it excess of savings over investments was there from 2000 onwards and it had become worse of course, lately.

    Prior to the crisis, East Asian economic formula was about investment spending (Mostly real estate) and export growth through competitiveness achieved through fixed exchange rates and low wages in the export sector. Now, it is all about exports only.

    This can also be seen in the Investment/GDP ratio in most Asian economies in the web site of the Asia Regional Information Centre of the Asian Development Bank:

    One cannot minimise the role of Asian mercantilism in the global imbalance. Faced with an asset price deflation and a geo-political shock (911), America did what text books suggest. It is a different matter that IMF conditionalities did not allow Emerging economies to follow the same prescription. It is also a different matter that the Bush administration used the opportunity to push ideologically driven fiscal measures rather than cyclically driven measures. But, the need for monetary and fiscal stimulus was unquestionable.

    Hence, it was very unavoidable that American current account deficit would rise. Europe was and is dead and Asia had lost confidence in itself. So, the only global economic growth engine was the American consumer. Yes, it was not the US and China. China was growing because of the US. Even the most ardent China admirer, Stephen Roach, concedes the absence of domestic demand drivers in that country. Further, look at the mess that Thailand and Korea have created for themselves with experiments in domestic consumption. They still are cleaning up the credit card mess. There goes through the window, claims of natural Asian thrift. It is, perhaps, more policy induced.

    So, why blame the American consumer instead of being grateful to him? Who knows what the world would have endured had America decided to belt up from 2003? So, is it also fair that Mr. Martin Wolf wants the American Treasury Secretary to crawl on his knees before his Chinese counterparts? At the minimum, Communist Party of China Central Committee members should be down there below the table, first.

    If Asian economies begin to face up to the costs of their exchange rate management, then it is half the battle won, for America, on the current account deficit and global rebalancing. The other half is in dealing with the housing market that has supported American consumption.

    One needs as much luck as skills in handling that. America might be close to getting that stroke of luck. China might be beginning to count the cost of its ‘growth at all costs’. The weekly ‘Greed and Fear’ news letter of Credit Lyonnais Securities Asia Equity Strategist (CLSA) Mr. Christopher Wood dated May 19th and titled, ‘Kamikaze capitalism’ is a very good read on China’s darkening economic clouds and its economic strategy that is beginning to outlive its usefulness.

    Therefore, the pressure exerted by China on the global price of crude oil has a good chance of abating. If the price of crude oil stays below USD 50, then there is a good chance that corporate spending in the US would revive. That might also give a more solid underpinning to household income and Networth than home price gains through a pick-up in hiring. The unambiguous all-round solidity and strength in the April employment report could be the harbinger of things to come.

    Then, with a gentle rise in the long-term interest rates, the housing market could correct so ‘smoothly’ as is happening in the UK without triggering any major economic slowdown. Let us face it: even if there is a recession, the American democracy and its USD 12 trillion economy could handle its consequences far better than the Central Committee of the Chinese Communist Party and its USD1.6 trillion economy.

    So, the battle against its imbalances is not over for America. But, the signs are more encouraging than they have ever been in the last few years. Further, our distaste for the ‘absolutes’ of the neo-cons should not blind us to the reality that America has been playing its geopolitical cards quite adroitly, regardless of whether we agree with the tactics used. After China did not rule out the use of force against Taiwan, both America and Japan declared Taiwan as their strategic concern in the region. Then, China’s orchestrated anger against Japanese ‘non-acceptance’ of its wartime atrocities backfired. Now, China has been forced to impose 400% export duty on its Textile exports. The European Union has not only been impotent but its hypocrisy in dealing with Iran and China too has been exposed.

    Hence, America might be beginning to get it right. I know that this has been a provocative exercise – if only in an intellectual sense (I hope) more than an analytically tight exercise. But that is the purpose. We all are vulnerable to the feeling of comfort that comes from sticking to familiar and entrenched positions. If this piece just forces us to re-examine our comfort zones, then it would have been a useful exercise, even if the conclusions are not changed.

    Posted by: Anantha Nageswaran at May 23, 2005 03:11 AM

    An excellent post.

  • Posted by anne

    What should immediately be asked is why do Australians feel no qualms about having negative household savings? The answer is excellent widespread pension plans. Australians have a security in retirement that neither the British nor Americans have.

  • Posted by Stormy

    I am impressed with the spirit and content of Anantha Nageswaran’s post.

  • Posted by Guest

    But even after reading the post a number of times, I am not convinced that long-term prospects are good. While it may be true that the Fed policies were the smart ones to play—maybe the only ones to play–, the housing bubble is being played by speculators and the newly found wealth of a very few. On the other hand, the polices of the White House and Congress are as much responsible for the housing bubble as is the Fed. Keeping taxes on the wealthy would have helped mute the bubble.

    From Anantha’s point of view, if we have the housing bubble to thank, then we indeed are indebted to the very well off for buying those second and third homes.

    Regarding the euro, the dollar, and the yuan—all three are tightly linked .

    Euro/dollar :: Euro/Yuan; the peg keeps it mathematically there.

    What happens to the euro when the dollar and yuan are de-linked? And how will that affect the euro/dollar? The euro/yuan? In fact, it is not only the euro that will be affected, it is every other currency in the world. People talk about a simple readjustment in the dollar/yuan. That will not be the case.

    It is true that the U.S. is a gigantic economy, and maybe the world should be thankful for it’s spending its wealth in lean times. But what I hear in the background are shudders rippling through its body politic. It takes a long time for giant to fall.

  • Posted by gillies

    i bought $50 today in my local small town bank, which cost me euros 41.

    i bought $50 early december as a christmas present for a daughter which cost about euro37.50.

    this is to put my money where my mouth is. transaction fees would eat into any gain if you did this as an investment. this is just for the hell of it. the gain or loss would perhaps buy a cup of coffee.

    anne. you look at the rationality of the bond market from your own perspective. imagine my $50 purchase were $50 billion. now give me 4% interest for the year. now add 5% more for the appreciation of the dollar (so far) since new year, and then some percentage for the rise in the values in the bond market. are we getting ten per cent plus per annum ? now if i am japanese and borrow the money at zero per cent. am i getting ten per cent of $50 billion – for next to nothing ?

    then there is the added bonus – by moving in packs we foreigners actually boost the dollar by what we are doing. it is going up because it is going up. we don’t go because it’s a party – it’s a party because we go.

    these markets are being shifted as by weight of money – not fundamentals nor academic theory. and by short term operators forcing longer term operators to come to heel. and by the dealers’ need for volatility so as to turn a profit. you know all that.

    now add in a bit of DF’s philosophy. all you need now is a name –
    ‘pendulum economics.’

    drive the market down ruthlessly. that is how to make it easier to drive it up ruthlessly when the time comes.

    daily forex turnover $1500 billion.
    u s short term securities $200 billion.
    daily NYSE equities $20 billion.

    these figures from a book may be out of date. in fact they are . . .but you get the general picture. that weight of money is too big to end up anywhere.( instant bubble instant bust.) so it is going back and forth like a tiger in a cage, or a pendulum.

    why is the dollar going up ? because it went down.

    i have read today somewhere that the weight of money now leads the fundamentals, not the other way around.

    all of this may lack precision – but may stimulate new ways of looking at things for those more at home with the figures and the detail.

    this side of limited nuclear war, i do not think america will permit an iranian oil bourse operating in euros. but even if dollar hegemony succumbs, i think it would have to be to a basket in which the dollar would be about 60 per cent, in any case.

    so is my 50 dollar bet safe ?

    for the moment it might be exactly as safe as the 50 renminbi small change in the pocket of brad setser’s other suit.

  • Posted by Stormy

    When you look at the graph of the euro/dollar it matches exactly the graph of the euro/yuan.

    The reason is the peg. Mathematically it makes the euro/dollar exactly the same as the euro/yuan; it a simple proportion.

    Releasing the yuan has a significant effect or the euro/dollar. But which way? Whole lot of betting going round on this one…every currencies’ relationship to the dollar and yuan is up for grabs.

    Am I missing something here?

  • Posted by Alexis

    Excuse a few typos of yesterday & barometric changes headache.

    Do not appreciate admonishment from a few for advocating middle-class values. Strength of some of those values go back to Greeks and Romans. Such commenting displays arrogance and myopia in thinking that some of don’t know more when in reality we have rejected theoretical hot air from our univ educations for best choice pragmatic solutions.

    So, as the question was posed yesterday: what are the solutions for resolving American trade deficit?

    A country that does just moves hot air around, plays with funny money schemes, allows foreign interests to buy up trillions of its companies[including utility cos] and assets, and takes on huge debt cannot long endure. It will become a third world type country. It’s only a matter of time. Many of us are not sunshine patriots.


    Since this is a far reaching site, there may be more than a few who have other vested interests.

    Also, might question the Indian observer and his objectivity regarding American citizens long-term interests?

  • Posted by anne

    Notice that the high yield bond market has stabilized.

  • Posted by aeolius


    I am stuck with the throwaway line used by Jack Crooks at Atimesyou quoted the other day. It was suggested that Kissinger and Carlyle were pushing a 10% Yuan revaluation for their own profit.
    I went and took a google-look at both of these groups and suddenly for the first time I began to believe in a Conspiracy.
    Do you think that there is a “They” who has enough weight to stand in the middle of the see saw and push the dollar up and down and cash in on both ends?
    Pynchon in “Gravities Rainbow” suggests that sometimes when you believe that someone is manipulating your life it is not paranoia. It is because someone IS manipulating your life.

  • Posted by MC3

    After living a crash in a “3rd world country”, i found a lot of similarities in the economic conditions from that moment with the current US status.
    I dont know if all of these elements were important in the final implosion, but i believe that these elements cannot be present all at the same time without negative consequences:

    – Huge domestic credit expansion.
    – Huge twin deficits.
    – Relaxed tax controls.
    – Disconnection between the real and the financial economy.
    – An economy based on services rather on production, that affected the type of employment in the labor market and forced a reconfiguration.
    – Dissapearing industry (i.e., the cheap chinese textil).
    – Increasing gap between rich & poor people.

    The end of the illusion came when the external financing was stopped. Consequences were all from text books: saving people lost their money (in these moments you learn that the money is just the promised money), borrowers went into bankrupcy, banks were saved by the government, inflation soared, poverty reached the half of population, etc.

    An american friend cannot understand why his house today has a value of 0.5m when he purchased it at 120k. Neither me, to be honest, but i know the end of history, so i told him maybe a good moment to sell and wait…

  • Posted by anne

    Interesting post, Susan, among a raft of interesting posts. How nice that there is so much to think through :)

  • Posted by anne


    Voyeur nonetheless, do post. What is especially nice is to have people with such dissimilar backgrounds contribute to the ideas and arguments.

  • Posted by anne

    A Red Knot
    However can this bird migrate 20,000 miles?

  • Posted by anne|20|…

    Northern Cardinal in a Snowbank
    New York City–Central Park, The Oven.

    My mom has several times seen a Cardinal settle on a sill of the house as a snow storm moves in and allow itself to be buried through the storm, emerging when it is over.

  • Posted by anne

    What is driving the weaker European economies is still American imports, America is surely not the cause of European slowness of growth. American long term interest rates are surprisingly low despite 8 increases in short term rates by the Federal Reserve, and surely our mix of interest rates is not preventing Europe from lowering short term rates. By growing below potential, Europe is not providing for the future nor preventing inflation but needlessly limiting living standards.

  • Posted by Guest

    “So, the battle against its imbalances is not over for America. But, the signs are more encouraging than they have ever been in the last few years.”

    Actually, the signs are looking worse than ever, especially for consumer debt. There’s no stopping it now.

  • Posted by DOR


    One of the solutions to the US trade deficit has to be returning American standards of living to sustainable levels. It requires shifting household outflow from consumption to debt repayment and savings. This would likely cause a recession, and considering the level of imbalances in the economy, a bad one.

    It also involves boosting government savings dramatically, to reduce the capital account surplus. Again, recession-making stuff.

    It hurts, it isn’t fun and it isn’t optional.

  • Posted by MTC

    anne –

    Thank you for your pounding away at bond market behavior. If you had not been so insistent, I might have relegated the 10 year’s downward drift to the category of “just one of those things” (or “‘shoganai,” as we say over here).

    The FT’s “Short View” column today tackles the 10 year bond. Ignore the first observation–it is distracting. Pay attention to the part about the Fed:

    “But might the bond markets be rational? Eric Lonergan, the Cazenove strategist, says bond investors watching the US economy are looking in the wrong direction. ‘There are increasing signs of global integration at the long end of the bond market,’ he says. ‘Bank of International Settlements data suggest Japanese banks were the biggest buyers of global government bonds in 2004.’

    As a result, Mr. Lonergan believes US yields are being dragged down by bond markets elsewhere. ‘The market has been fixated by the Fed funds rate when it should have been looking at eurozone rates,’ he argues.”

    If Lonergan is right then globalization has deepened to the point where the Federal Reserve can no longer rely on the funds rate as instrument to manipulate the tempo of the U.S. economy.

    Someone enlighten me.

    First, if the Fed Open Market Committee can no longer rely on funds rate to guide the U.S. economy, what exactly is going to be discussed at the Committee’s meetings?

    Second, can anyone think of any historical precedents, instances where the actions of the world’s other central banks trounced the Fed’s attempts to steer the U.S. economy?

  • Posted by MTC

    gillies –

    Thank you for your “i bought $50 today in my local small town bank, which cost me euros 41” comment. In thinking about currency movements, the devil is in the details.

  • Posted by anne

    Thank you, MTC :)

    There has evidently been no comparable period for us, and I know of no period in which a central bank repeatedly raised short term interest rates while receiving enough of a capital inflow to actually lower long term rates.

    “Shoganai,” a nice term.

  • Posted by touche

    “If Lonergan is right then globalization has deepened to the point where the Federal Reserve can no longer rely on the funds rate as instrument to manipulate the tempo of the U.S. economy.”

    There has been quite a few comments on these blogs saying exactly this.

  • Posted by anne

    Buffett Pays $5.1 Billion for Utility and Promises More Deals

    LONDON – Warren E. Buffett struck a deal on Tuesday to buy the electric utility PacifiCorp for $5.1 billion from Scottish Power, his largest purchase in eight years. Sounding a bullish note for the energy industry in general, he promised to buy similar assets in the future.

    Mr. Buffett, whose investing style has been scrutinized this year because of an investigation into the insurance industry, one of his longstanding favorites, said Tuesday that energy companies were a good fit with his company, Berkshire Hathaway, because they need capital and provide steady returns.

    He also trumpeted an eagerness to do big deals and a willingness to look outside the United States….

  • Posted by jm

    MTC, touche, anne: Have you read this Richard Duncan piece?

    Duncan’s “The Dollar Crisis” is a very serious and complete discussion of the problem. I have the first edition. An updated paperback editionis now out.

  • Posted by jm
  • Posted by MTC

    touche –

    “There have been quite a few comments on these blogs saying exactly this.”

    Perhaps, but then do we not still hang on Chairman Greenspan’s Delphic pronouncements? Why do we bother, if he and his cohorts are only pushing on strings, not pulling them?

    Remember, it was not so long ago that Time magazine put Greenspan, Rubin and Summers on its cover as “The Committee to Save the World.” Now Greenspan cannot even nudge U.S. interest rates in a desired direction–which, to speak in the vernacular, is sort of the reason why the Federal Reserve was set up in the first place.

  • Posted by anne


    Thank you, I will read the essay this morning.

  • Posted by DF

    The best way for the USA to solve its deficits is for the FED to officially target an inflation level of 5-6%
    For a start it should monetise a huge part of the US deficit.
    And for the US governement to favor union laws a high minimum wage etc.

    This should :
    Move asset prices down immediatly.
    Move interest up.

    If the FED is very agressive it might :
    Erase debt with inflation. Which is good
    Prevent debt deflation by issuing lots (I said lots) of cash.

    Let’s sum it up, the only way to prevent a recession is to stop to pour money from poors and middle class to upper class useless interest earners and invert flows.

    That’s pendulum economics indeed.

  • Posted by Movie Guy


    I posted my discussions of trade and trade policy on the second open thread.


  • Posted by gillies

    the precedent for not being able to use interest rates as a lever lies here. ireland has a currently thriving economy – but the basic interest rates are now the euro interest rates. we have no choice. our housing market is a bubble – possibly partly because our interest rates are set by the e c b to stimulate the stagnant and huge german economy. the vigorous and small irish economy might prefer less stimulation, but has to live with it.

    i also think the japanese near zero interest rates ‘export’ interest rate downward pressure to america.

    i also say, at the risk of repeating – that the ratio of loose return-seeking money to genuine business transactions is drowning out the fundamentals.

    the investment of the moment has a lot in common with media celebrity. you know, those people who are famous because they are famous. the power of the loose funds in a world without serious borders is massive. the current hot investment is anywhere the loose money chooses to go. perhaps the climactic bubble will be in tulip bulbs.

    the price of oil has far less to do with o p e c than with these leveraged loose money ‘pendulum economics’ scenarios.

  • Posted by gillies

    aeolius –

    the bush gang ( exlude bush himself – as he would only be in it via proxies) the bush family interests, the cheney/halliburton/rice/oil industry interests, the kissinger associates ‘consultancy, the carlyle group, those who control the arab oil money in the u s stock market, and buffet plus gates (just a passenger?) are a network, definitely.

    a conspiracy is just a network you don’t like the smell of.

    it is as simple as that.

  • Posted by DOR

    MTC, think of the Fed as an aging gunfighter in a Western movie. He can’t draw as fast as he used to, his eyesight isn’t nearly as sharp and his aim is a bit less steady. However, his reputation means he doesn’t need to pull his gun.

    Shoganai: Mei banfa in Putonghua (emphasis on the “ban”)


  • Posted by Alexis

    Agree re the network cited and effects of, gillies.