Brad Setser

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Only some emerging market currencies have corrected this year.

by Brad Setser
June 25, 2006

Emerging market economies with overvalued currencies now – generally speaking –have less overvalued currencies.   The Turkish lira was too strong at the beginning of the year.  Turkey’s current account deficit was big, and set to get worse.  Folks found ways to rationalize it:  using unit labor costs rather than prices, the real exchange rate wasn’t really at a historical high, exports were still growing and so on.   But the lira was pretty clearly overvalued – even if the precise trigger than would prompt a correction wasn’t.

Turkey isn’t alone.  As Steve Johnson of the Financial Times noted, this past week the currencies of most emerging economies with large current account deficits tumbled.  Call it differentiation.   It wasn’t good for those holding Turkish lira.  Or Hungarian florint.  Or South African rand.  

Or for that matter Icelandic Krona and New Zealand dollars, even if neither Iceland nor New Zealand is an emerging economy.

Who isn’t on this list even though its fundamentals suggest it belongs?  Lex nailed it.  The United States.   The current real value of the dollar is such that the US trade deficit should expand with normal rates of US and world growth.  

What hasn’t happened this year?   Overvalued emerging market currencies have fallen v. the dollar, but undervalued emerging market currencies haven’t risen. 

China continues to experiment with variants of 7.99x.    Chinese authorities plan to cross the river by touching every pebble.   The Saudi riyal hugs 3.75, no matter what happens to the price of oil.   Both China and Saudi Arabia have big and growing current account surpluses.

If the currencies of countries with big current account deficits fall against the dollar, but the currencies of countries with big current account surpluses don’t rise, the dollar won’t move that much this year, at least in broad trade-weighted terms. The dollar is not the dollar-euro.  The dollar-RMB and lots of other currencies matter.

And without dollar depreciation, it is hard for me to see how the US can reduce its trade deficit.  At least not without a big slump in the US – or a big fall in the price of oil brought about by something other than a recession. 

This is where I part company with Stephen Roach.   Roach certainly believes that the big US external deficit is a problem.  He just doesn’t think the RMB/ $ has much to do with the US external deficit, or with China’s surplus. 

Roach’s argument is that the US would save too little (and China too much) no matter what the RMB/ $. 

Perhaps.  But it sure seems to me that the availability of easy financing from the Chinese central bank (and a host of oil investment funds) is one reason why the US saves so little.  Roach views the US savings deficit as a product of US policies alone, I don’t. 

It is harder to link China’s unusually high savings rate – and the recent surge in its savings rate in the face of soaring investment – to the RMB.   Though I think the work of Louis Kuijs and others is starting to provide some clues.   The recent increase in savings has been driven by business savings and government savings – and both may be connected to the export boom.

Roach argues that the RMB has appreciated significantly on a broad basis since the end of 2004.   That’s true – so has the dollar.  Remember, the dollar was at 1.35 at the end of 04.  But that is also sort of irrelevant.   Why is the end of 2004 the right baseline rather than the end of 2001?  Or the end of 2002?

The enormous acceleration in Chinese export growth and industrial production growth that started in 2002 clearly is at least correlated with the beginning of the dollar’s real depreciation against the other major currencies.  The dollar slump led to an RMB slump, and, with a lag, a boom in Chinese exports.  Remember, Chinese exports to Europe grew particularly fast in 03 and 04 – and China’s exports to Europe weren’t growing because Europe was growing.     

Obviously, China’s exports have been shaped by other forces as well – China’s entry into the WTO, a shift in the location of final electronics assembly, and so on.  We have a bit of an experiment – from 1997 to 2001, China pegged to an appreciating currency.   From 2002 on, it has pegged to a depreciating currency, setting 2005 aside.   And from 2002 on, China’s export growth was a lot stronger than it was before the dollar started to slump against the major currencies.

All in all, I see far stronger links between China’s currency policy and low US savings than Roach does.  I don’t think the US would be saving as little without a credit line from the PBoC.  And it sure seems that China’s savings boom is correlated with its export boom, even if the channels linking a rise in China's trade surplus to a rise in Chinese savings are a bit more murky than the channels linking Chinese reserve growth to low US savings.

Roach’s Friday column is still particularly worth reading.   A stronger RMB is not all that is needed to bring about a more balanced world. China does need to do more to stimulate internal consumption, and the US does need to do more slow the pace of demand growth (i.e. raise savings). 

And Roach is completely right to continue to highlight the need to think creatively about how to help workers in the advanced countries profit from globalization.   The politics of integration won’t work for long if all the gains from globalization go to capital, and wages – at least for those not at the top – lag productivity growth.  And it isn’t obvious to be that the politics of integration will work for long if the main economic policy response to a shock that hurts labor is to cut taxes on capital … even if Bush did win the popular vote in at least one of the last two elections.


  • Posted by OldVet

    Cutting official US deficits would go far to removing global imbalances. The private excess consumption is also amenable to US policy tools such as raising bank reserve rates to reduce credit issuance. The Fed can raise short term interest rates and make it more attractive to lend than to borrow.

    Nevertheless Mr. Roach acknowledges that traditional ideas on comparative advantage no longer seem to work well, due to “nimble assets” such as capital, technology, and now labor. The natural ratios of comparative advantage that could be found in more closed economies can be duplicated within days for virtually any product or service.

    Absent some mechanism for exchange rates to move in response to the macro consumption/production ratio, all of the developed world will be unemployed except for dishwashers, security guards, nurses, trash collectors, and cops. Rather than demanding low-wage countries change their exchange rates, we can change their effect on the US economy unilaterally with tariffs. I think several commentors incl Reformer Ray have discussed this in past discussions, too. It would be a way to take control of the adjustment process, without demanding other countries do things they don’t want to do. Whatever my other reservations about China’s practices, I don’t think their frugality needs changing as much as higher selective tariff-driven-prices would help the US reduce consumption.

    And as you point out, some wage rises in the US could be mere redistributing of the productivity pie in favor of wage workers, despite the churlish act of the Senate on minimum wages this week. The solution to US imbalances lies within the US, and it would reduce international friction if we stepped up to the plate.

  • Posted by IM

    Excellent post, although I agree with Roach’s theories. Here in Spain, we don’t have our own currency since we belong to the euro zone. We are running an enormous deficit, bigger than US deficit in relative terms. In my opinion, the excess of consumption is mostly associated with the housing boom (easy credit, refinancing…), thus we have higher inflation and the big, big deficit. Other countries in the euro zone don´t run such deficits although we share the common currency and the same rates. So, our deficit, compared with other euro countries is not driven differentially by exchange rates, or monetary policies. The difference must deal with other social and political factors. In parallel, it may well be that other factors, besides monetary policies and currency exchange act to swell US deficit. Housing boom driven consumptiom may be one of the big factors. Also, the enormous differential between China an the US in terms of wages is so big that it cannot be corrected only with variations in exchange rates.

    Best regards,

  • Posted by Robert

    Whatever else you might want to say about Alexander Lukashenko, most will admit he is not stupid. So in reading about some of the laws his government has instituted in Belarus, it was interesting to find a few examples that poked holes in the general doctrine of, in trade wars, all the weapons are suicide bombs.

    Two examples that stuck out to me were, in Belarus, fashion advertisements must use Belarussian models, or no models at all. And, in Belarus, music radio must play Belarussian artists during certain hours of the day. The general principle that stuck out to me was that, for positional goods and services, since changing the total amount has no effect on the utility derived from them, importing them instead of producing them domestically cannot benefit the public utility, even if one’s trade partner has an advantage in producing them. As a result, it seems that barriers to the trade of positional goods can be erected without harming the common weal.

    Unfortunately, however, few goods have only positional value. Most luxury goods have both positional value, and nonpositional value inherent in being a superior product. So a question arises: in instituting a system of tarriffs, it would be useful to be able to divide the price of any good into its positional and non-positional components, and assess the tarriff only against the latter. What experiment might be done to do this measurement?

  • Posted by Stormy

    Some months ago I suggested what I knew would be greeted as a bizarre suggestion: Put some kind of tariff on those goods coming from U.S. based companies overseas. If you wish, place a tariff as well on other goods made in China by foreign firms. Do not tariff goods that indigenous Chinese firms produce.

    Someone countered that our overseas firms would simply move headquarters overseas. My answer: What’s the difference? Everyone has been waiting for revaluation, saying revaluation will bring those firms home. Yup, Yup. Ain’t happening. After China, India; after India, many more in the wings.

    When you have a problem, direct the solution towards the center of the problem; don’t waste time nibble on the edges. And personally, I don’t care if it is a political non-starter.

    Western tnc’s are the problem.

    Consider the following from the link I could not post:

    Foreign Players Dominate China’s Top 200 of Foreign Traders

    “Foreign companies accounted for more than half of China’s foreign trade, taking almost three in every five dollars in imports and exports last year.

    “The 2005 Top 200 list of China’s importers and exporters listed148 foreign companies, up 50 percent from 2001, while four privately-owned Chinese companies also elbowed their way on to the list.

    “Compared with state-owned and collectively-owned firms, foreign and privately-owned companies showed greater growth potential in terms of imports and exports after China became a World Trade Organization (WTO) member,” said Zhang Lichuan, director of the China Customs Statistics Department.

    “United States telecommunications giant Motorola was the top foreign-owned exporter in fourth place with exports worth 6.45 billion U.S. dollars, while Republic of Korea telecommunications and electronics giant Samsung was the top foreign-owned importer, bringing in goods worth 4.32 billion dollars and ranking ninth overall.

    “The list showed 39 state-owned, nine collectively-owned and four privately-owned companies gained the biggest share of export value, while 130 foreign, 60 state-owned, six collectively-owned and four privately-owned companies gained the biggest share of import value.

    “The nature of China’s foreign trade and its economy was reflected in the rankings: top importer was the China Petroleum and Chemical Corp. (Sinopec) with imports valued at 24.72 billion U.S. dollars.

    Chinese oil firms Petrochina, China Petrochemical International Business Corp. and Sinochem ranked fourth, fifth and sixth respectively in imports.

    In 2005, foreign companies reaped 831.7 billion dollars from imports and exports, 58.5 percent of the country’s total, up 7.7 percentage points over 2001.

    “Privately-owned companies raked in 167.4 billion dollars of the import and export value in 2005, 18.2 times more than 2001, from 1.7 percent of the total import and export value in 2001 to 11.8 percent in 2005 with an annual increase of 109.4 percent.

    “Privately-owned companies contributed 17.4 percent of the country’s trade.

    “Zhang said self-employed business people would likely feature prominently on future lists since being allowed engage in foreign trade in July 2004. Imports and exports by self-employed business people jumped to 140 million dollars in 2005 from 4.2 million dollars in 2004.”

    Monopoly Danger in China

    Put that link together with China’s concern that monopolies in China are forming through the activities of foreign firms. (See link on prior Brad blog.)

    This game will not end soon—and when it ends, we will be a country of dishwashers and China is not going to be much better shape either.

    Time to stop dodging where the danger is.

  • Posted by Robert

    The barriers to investment, trade, and migration that have been broken down in recent years were in place for a long time, and the misallocation of resources that accumulated during that time is large. So the benefits to be gained by allowing these misallocations to unwind, and harnessing the power of the unwinding, are large, but the dislocations created by the unwinding process are also large.

    But now that we know this, can we go back? Suppose we could: but then, the misallocation would continue to grow, and the benefits to those in a position to harness the unwinding would become even greater, and the dislocations produced by the unwinding even larger. To slap the invisible hand as it tries to spread western prosperity into a globally thin layer when it tries to do so now, only means that it will hurt even more when it tries to do so again later.

    But then it might seem attractive to say, yes, we must allow the misallocations to unwind, but let us do so at a slow, deliberate pace, so that the dislocations are never that large, and never hurt that much. But this benefits neither the global capitalist nor the developing-world wage-worker: for since they now know that they wish to do buisness with one another, and the regulator knows this, too, the regulator in the position to determine who may trade freely, and who must be behind walls of protection may charge both the capitalist and the wage-worker whatever the market for legislation will bear for the privilege of being allowed to do business: slowing the unwinding merely changes the dynamics of globalisation so those who gain the most are no longer corporate owners, but creatively corrupt public officials.

  • Posted by Steven

    If the US congress/consumers could resist the lure of easy financing and stay within budget, the imbalances would largely disappear. (although interest rates could fall extremely low)
    Easy financing (functional equivelant to Chinese undervalued currency) itself is not the problem, the imbalances are the problem because they bottle up future inflation in Chinese central banks.

    I think this may be Roache’s line of reasoning. The imbalances are a POLITICAL problem (not economic) that many Americans are uncomfortable with, and we can easliy fix it on our side by controlling deficits. With no pressuring the Chinese (or Tariffs) necessary.

  • Posted by DOR

    Steven nailed it on the head: it is far, far less politically painful — particularly in an election year — to blame ‘those nasty foreigners’ than it is to cut spending and raise taxes.

    Hence, the solution to America’s deficits is to blame foreigners.


  • Posted by bsetser

    DOR– why cut spending or raise taxes (tho tax revenues are certainly up due to the corp.income tax Paul O’Neil wanted to abolish) when the rest of the world is so willing to finance you? Or for that matter, why save it a home equity line is avaible whenever you need more cash? If the government doesn’t borrow, the household will just borrow more. So argued Bernanke. And so far he has been right — gov. dissavings is down a bit v. 04, but a fall in household savings has more than compensated.

    Look, I certainly think that the US government should reign in the deficit to help slow us aggregate demand growth. But with high savings in China (intermediated via the central bank into demand for us assets) and the oil countries (particularly the oil countries) Bernanke is not all wrong. A fall in US government spending at current int. rates might push int. rates lower — and spur other forms of spending. There is a shortage of demand outside the US as well. And China is part of that.

    IM — Spain is an interesting case. With higher inflation, the same nominal interest rate results in a lower real interest rate than in the rest of the eurozone. That pushes up housing values, and spurs consumption and residential investment (see the uSA), which helps keep inflation high and real rates low … and so on. Plus, real rates are not just low relative to the rest of europe, but are very low relative to where they traditionally have been in Spain. All sorts of stimuli — I think there is more macro and less culture in your story.

    Incidentally, China’s resistance to allowing its exchange rate to move (And the various controls it has placed on the flow of domestic funds that have locked up tons of money in the banking system) have generated a misallocation of resources as well.

    No doubt, the period when China opted out of the global economy left many resources globally misallocated. But when a country resists natural pressures for appreciation as China is doing – and resists so long and on such a scale — that too generates misallocations. Alas, i do fear that these misallocations have already gotten so big that eliminating them won’t be easy or painless.

  • Posted by Anonymous

    “The imbalances are a POLITICAL problem (not economic) that many Americans are uncomfortable with, and we can easily fix it on our side by controlling deficits.”

    No, it is difficult problem, period. There’s no magic world where economics can be distinguished from politics, and deficit reductions have no impact on real people. Not only that, to balance our budget, we’d need to leave Iraq and cut back on military spending. We’d need to abandon the tax cut and spend philosophy of Republicans. We’d have to cut the budget when people are losing health care and pensions at an escalating rate.

    This has become country enthralled with Republican spin, and only a true crisis will shock the heartland enough to counteract decades of reality distortion.

  • Posted by Stormy

    It is not the nasty foreigners that are the problem. It is the power of FDI in China; that power is an extension of the West.

    I do not understand how people can, on the one hand, acknowledge a primary source of the problem, then, on the other hand, not address it directly.

    So…I as an American am supposed to tighten my personal belt while Dell and Motorola make a bundle.

    Guess I will take up dishwashing.

  • Posted by Guest

    Inequality in America: What, if anything, needs to be done? A meritocracy works only if it is seen to be fair. There are some unfair ways in which rich Americans have rewarded themselves, from backdated share options to reserved places at universities for the offspring of alumni. And a few of Mr Bush’s fiscal choices are not helping. Why make the tax system less progressive at a time when the most affluent are doing best?

    Tackling America’s growing inequality: You do not need to take a definitive stance on why America’s high productivity growth has been so disproportionately captured by a small percentage of Americans to agree that it makes for a potentially volatile political scenario. Alan Greenspan, the former chairman of the Federal Reserve and a Republican, has made the same point in public.

  • Posted by HK

    Brad–I share your concern that though some overvalued emerging currencies were corrected, many undervalued emerging currencies were not. Again, as you argued, this is basically because China and Saudi Arabia (two countries with rapidly growing, and by now perhaps the biggest, current account surplus) continue their dollar-pegging. Until and unless China appreciates its renminbi, East Asian emerging economies will not substantially appreciate their currencies. The same will be true also with respect to Saudi vs. many oil producers.

    Now, China and Saudi are very different in their economic and political situations. And so, ways to induce them to appreciate their currencies may be completely different. China is already a super power, and would become even stronger in coming decades. Ordinary pressure on China will not work. Either appealing to its pride of a responsible international player (e.g., mobilizing increasingly serious worry of Korea and ASEAN countries over China’s exchange rate policy) or imposing real sanction on China’s exports (a la Schumer bill), the US may expect some serious response from China. (Please note that the new, enhanced IMF surveillance, involving China, US, Japan, EU, and, Saudi will not work, since neither elements are included.)

    Saudi is different; its security is and will continue to depend on the US, so that if the US really hopes, it can force Saudi to appreciate its Ryial. So, the issue is whether the US really wishes it. (Please note that oil prices are somewhat different; even if Saudi is forced to try to reduce oil prices, it may fail.)

  • Posted by Guest
  • Posted by Guest

    ««”In reality, it is highly unlikely that governments will allow debt and deficit burdens to spiral out of control,” S&P said.»»

    Really? Never happened before?

  • Posted by Guest

    Its OK if consumers get encouraged to spend more money if the government stops deficit spending. They have to bite the bullet for irrisponsible decisions (and spending on housing is not necessarily bad decision it just increases construction and future housing stock lowering future prices) but if rates were lower, bernanke could have stopped at 4.5% and the imminent asset declines (stock market/housing) could have been lessened.

    But if the risk free Fed rate goes up to 5.5 or north, stocks are going to look much less attractive hence the decline/pain for the next few yrs. Hey we cant blame the chinese for irrational exuberance, there was no import problem during the .com bubble right? They weren’t the ones who pushed assets up so high last time around

    I just think we can do a lot more on our side to clean things up.

  • Posted by Guest

    “…Incoming secretaries Connally and Baker confronted similar situations and policy choices. The United States was facing record external deficits. Foreigners were becoming skittish about continuing to provide the needed financing. Congress was seriously contemplating major protectionist legislation. Japan was widely viewed as a threat to U.S. prosperity, as is China today… Fortunately, the process can start via the International Monetary Fund, which has already obtained agreement for consultations on it among the five key players (the United States, Europe, Japan, China and Saudi Arabia for OPEC) — though it might ultimately require something like the famous Smithsonian Agreement under Connally or the Plaza Agreement achieved by Baker…”

  • Posted by Guest

    “…According to the China Business Post, the crackdown was ordered after top leaders were incensed at last month’s economic statistics that showed fixed assets investment rising 30.3 percent year-on-year in the first five months of this year. At the same time broad M2 money supply expanded by 19.1 percent during the period.

    Both were driven by investment and expanded bank loans into the property sector and followed a plethora of futile efforts to rein in annual investment growth over the past two years to around 16 percent. “The State Council is very anxious, after two years of macro-economic controls, a new phenomenon has appeared and the land situation is now out of control,”…

    With all land in China belonging to the state, collusion between government officials and real estate developers has long characterized the property market as officials grab land cheaply and sell leaseholds to developers for fat profits. The situation has angered city dwellers due to soaring home prices, with resentment rising across the country amid countless incidents of people being kicked off their land after being given little or no compensation. The government said there were 87,000 public protests last year — from 10,000 in 1994 — with many of those due to the controversial land deals. For the government, such a situation has made its efforts to use land policies as a macro-economic control tool to cool the economy ineffective, the ministry spokesman said…”

  • Posted by Guest

    “…To outsiders, hedge funds remain mysterious and shadowy, if not sinister, associated with financial catastrophes such as Black Wednesday, when sterling was bullied from the ERM… Its reach is now wider and more powerful than when George Soros humiliated John Major’s government… Although most hedge funds manage their operations out of financial centres such as London, the funds themselves are incorporated overseas, in countries with minimal regulations… The number of investors seeking to get the returns that hedge funds boast has also been growing… the size and complexity of the sector has made it almost impossible to police…”,,1806044,00.html

  • Posted by Guest

    A bit off topic, but thinking about control and the politics of integration, might another wildcard be the impact of disputes about the rightful owners of underlying assets? In addition to the China property issue, couple more examples directly involving different currencies and economies, but with global implications:

    “Yukos is trying to block the flotation of rival Russian energy firm Rosneft, arguing that the firm’s main Yugansk oil unit was illegally acquired… In its letter, Yukos said doubt over the propriety of Yugansk’s auction meant there was a “serious risk” that the share sale “would constitute the offering for sale of criminal property” under British law…”

    ‘Severstal may sue over steel deal’

  • Posted by OldVet

    Stormy, I’d also prefer an American-made solution to an American-made problem. For 30 years or more the US has failed to act to make trade “free” meaning free of manipulation such as exchange rates, labor law inequalities, environmental protections, and other differential factors. Your point that US special interests (transnational corporations) were at the nub of this US failure sounds about right. The rapid transformation of the US from an industrial economy into a services economy in the US was driven as much by special financial interests to whom US politicians catered, as to any sort of “natural forces”.

    In this light, while a country like China may be manipulating the bilateral exchange rate, it has an overwhelming national goal of industrialization that overrides any other consideration. Rather than engage in government-to-government friction and pressuring, in the face of overwhelming national goals that are contrary to our US interests, it is a better and wiser course to simply act independently to protect what is in our own national interest. Even the “God as we know him” politician Ronald Regan forced the establishment of Japanese manufacturing in the US in exchange for access to US auto markets. It was not all solved by government officials making exchange rate deals in Paris at the Plaza Accord.

    Guest (#?) alludes to a different kind of special financial interest player, hedge funds, not in the traditional mold of transnational corporations. Secretive dealings in finance are more secret than plant locations and trade, which is probably why they’re more popular these days. But it’s another form of the same thing – special financial interest groups.

    What’s been forgotten in the rush to put forth international solutions to national problems is this: we need some distance between our government officials and our special interests, in the same way we need some cool, calm distance between our government officials and officials of other governments. A little professional distance would go a long way to reducing the constant friction, pushing and shoving we see today. If the US made internal policies that affected its stated best interests, without making demands on others, we might still hears cries of anguish but fewer accusations of bullying.

    Brad, I take your point about unintended consequences to reducing government spending deficits creating lower interest rates – but as mentioned, that too is entirely solvable with Fed Reserve/Comptroller of the Currency tightening of bank lending reserve requirements and higher interest rates from the Fed. Higher interest rates might slow down some production, but it would also increase the attraction of saving – especially for a boomer generation that seeks to invest in more secure debt instruments as boomers retire. My main point was that coordinated fiscal/monetary policies can work wonders, and replace the need for public shoving matches with other countries.

  • Posted by Guest

    Not to drive this issue into the ground, but in addition to the hedge funds, another question about how much accounting issues may be distorting the picture:

    “…Remember: Under FAS 133, gains and losses on derivative contracts must be recorded in earnings unless they can be shown to be effective hedges, and banks as well as non-financial companies have to play by that rule when it comes to public filings. But that requires documentation, and how can transactions be documented if they aren’t completed? As Linsmeier observed: “If they are recognizing those derivatives on a timely basis, an open question for me would be: How can you get hedge accounting?” Open Question (Updated), June 23, 2006

    And on the issue of property ownership, the settlement of indigenous land disputes, much of it involving properties that have been developed and are vital to the natural resource industries at the heart of the commodity boom, which in turn affects currency valuations, didn’t know if it may be worth considering possible outcomes of these negotiations:

    “A coalition of indigenous peoples from around the globe on Monday accused Canada of betrayal by campaigning to bloc a United Nations declaration asserting their rights after backing it for years. The declaration, in negotiation for the past 24 years and backed by many European, Latin American and Asian states, is up for approval in the next few days by the U.N.’s new Human Rights Council. But Canada announced last week it wanted a delay for at least two years, saying the document could violate its constitution and wreck talks with its native Indians over control of land and resources…”

    Just a thought.

  • Posted by bsetser

    This is veering a bit too far off topic — commodities have been discussed here over the weekend …

    I would tho be interested in reactions to roubini’s latest blog — he is more convinced than ever that the US hard landing is close. i am a bit more cautious — china seems quite willing to increase its reserve accumulation to hold at 8, oil exporters have tons of chas, increasing the size of the deficit the US can finance, etc.

    I also am not quite sure where Berner’s argument that the current account deficit has peaked comes from — offsetting a $80b deterioration from rising interest rates requires an awfully big surge in exports, which are already growing quite nicely, or a big slump in us import growth, which might reverberate around the world.

    so if we are going to veer off the absence of adjustment in China and saudi arabia, i woudl rather focus on more current account based topics– as the theme of the post was corrections in currencies of countries with deficits, setting the us aside, but not in the currencies of countries with surpluses.

  • Posted by OldVet

    Sorry, back to point. The surpluses built up in healthy economies like Singapore, Thailand, and Korea may not last if Mr. Roubini’s hard landing prediction is correct. First the currencies fall that have current account deficits, which would ultimately include India. Later, in the face of sharply lower demand from the US for goods and service, would follow the “account surplus” country currencies of today. If China adjusts its Renminbi, others in SE Asia and Japan will probably follow suit. Any change in Saudi Arabia’s peg would raise oil prices to the US economy and aggravate inflation.

    The term-paper question appears to be: Will today’s “virtuous” EM country reserve surpluses last long enough to see the end of a real economy slowdown in the US to the other side? For the less-virtuous EM economies, we could see real damage to developmental momentum just when things were looking up.

  • Posted by Guest

    U.S. Office to Monitor China Trade: The U.S. is establishing a special office to monitor China’s compliance with trade agreements.

    U.S. Names Counsel for China Trade: U.S. Trade Representative Susan Schwab said she is appointing Claire Reade to become the first chief counsel for China trade enforcement.

  • Posted by Guest

    Apologies Brad – I have a habit of digging for obscure externalities, correlations and triggers.

  • Posted by DOR


    “why cut spending or raise taxes (tho tax revenues are certainly up due to the corp.income tax Paul O’Neil wanted to abolish) when the rest of the world is so willing to finance you?”

    OK, I’ll bite: (a) because it is dangerous to depend on foreign financing of excess public sector consumption to the extent that the Dubious Administration does; (b) because the higher interest rates necessary to continually attract the capital required tends to distort the Balance of Payments; and (c) because demanding that foreigners wreck their own economies in order to avoid having to live within our own means is morally repulsive.

    “If the government doesn’t borrow, the household will just borrow more.”

    We have run both government and households positive savings at the same time. What’s the problem?

    If the argument is don’t worry about Chinese/Japanese/oilers savings funding US fiscal deficits, then the next step is don’t worry about China-based exporters supporting US household consumption.

    On the issue of timing of the US recession, I’m neutral: anytime in the next 6-12 months is fine with me. What concerns me is the recession’s impact on fiscal revenues. What are the scenarios and implications for a 10% of GDP fiscal deficit? How is a debt-driven recession different from the typical consumer/inflation/interest rate recession?


    Your belt needs adjusting for the same reason so many of us go on a diet after the holidays: over-consumption.


    “The surpluses built up in healthy economies like Singapore, Thailand, and Korea . . .”

    You mean, the ones in crisis and depression just a few short years ago, right? Hardly “healthy”, are they?


  • Posted by Stormy


    I am on a diet; hopefully, I will soon tighten my belt substantially. Chuckle.

    Seriously, I see nothing wrong in U.S. belt tightening: Tighten credit, restore tax cuts, more stringently control lobbying, etc. I would also shut down tax havens, Bahamas, Cayman Islands, etc. Instead of a War on Terror, why not a War on Greed?

    I am glad you changed your characterization from “nasty foreigners” to “China-based exporters.” China per se is not the issue. Multinational behavior is. It is their behavior that is increasing the disparity between the rich and the poor. Multinationals have no interest in raising wages in China or elsewhere. For me, as you know, WTO rules need changing: labor and the environment—very key issues in the coming decades. Trade is not just a matter of profit.

    Be that as it may, I would argue that making American imports more expensive is a form of belt tightening. Why should we get this stuff so cheaply? Perhaps we should pick and choose a bit more. Besides, that kind of tariff would be a nice cash inflow to national coffers. It might also make corporations think twice before they fly overseas to exploit the latest cheap labor market. And they do love cheap labor.

    As to when all this will crash? Energy may well be the trigger. The expression “field to fork” has been bandied about: England gets apples from New Zealand. At some point, the cost of those apples is going to be very expensive. Energy prices are regressive, hitting those least able to cope. We cry and complain in the states, but check out the price of gas in England and elsewhere. The upper middle class complains; but we do not hear much from those below—they are rarely heard, except when the likes of Katrina tears off the covers.

    Though oil stocks seem high now, this summer will be an interesting test of that plentitude. Greenspan noted recently that energy shocks are becoming increasingly likely and from any number of quarters.

    Given the level of our credit, I would say that if oil reaches $80-85, we have the makings for a global crash.

  • Posted by DOR


    Well chosen words, carefully thought out. Thank you.

    I switch between “nasty no-good foreigners” and “China-based exporters” to differentiate between US politicians and op-ed page writers on the one hand, and the source of certain US imports on the other. The two are not interchangeable.

    If the protectionists understood the role MNCs play in the US trade deficit, maybe we wouldn’t have had the textile quota fiasco, the anti-dumping suits to protect products no longer even made in America and the yada yada yada over the value of the Renminbi. (Don’t get me wrong: there are good reasons to let the Rmb rise, but the US twin deficits are not among them.)

    Import duties? Why slap an extremely regressive tax on the poorest people just because the tax cuts for the rich and the pork-barrel political theft have to be paid for? In America, the less money one has, the more one needs cheap imports.

    $80-85/bbl? I seem to remember the same range about $50 ago. Anyway, gas in Hong Kong is over $7 a gallon, and no, I don’t own a car.


  • Posted by DF

    The challenge then is this :
    How to rebalance the world economy without creating a world wide credit crunch ?

    And I bet the solution must come through agressive pro inflationist policy with massive money printing from the central banks.

    It seems to me the CB’s have not grasped the risks of debt deflation yet.
    They remain focused on the transitory inflation due to higher commodity prices due to the investment boom due to the credit bubble.

    I’ll start a newblog called debt deflation soon. Anyone would like to contribute to such a topic.
    Or may be, before that, anyone knows of a blog focusing on debt deflation and the ways to escape it ? If possible not one in japanese.

  • Posted by Guest

    Multinationals have no interest in raising wages in China or elsewhere. For me, as you know, WTO rules need changing: labor and the environment—very key issues in the coming decades. Trade is not just a matter of profit.

    But once all willing cheap labor is employed, the market says that in order to continue growth, firms either must offer higher wages for better labor, or greater capital investment must be employed. If we believe that firms know where the indifference curve between capital and labor lies, then both must happen.

    Since reforms began in 1978, China’s urbanization fraction has growth from 17% to 41%. At this pace, China is one generation away from running out of peasants. The dislocations caused by globalization cannot last forever, or even for a lifetime.

  • Posted by Guest

    re: healthy economies – like Russia? – whose citizens have progressed to experience ‘urban dislocations’?

    “…Russia’s 100 richest people have a combined wealth equal to one quarter of its GDP. House prices in Moscow have approximately doubled in the last six months. An Izvestia investigation this month found at least 10% of the price of every new apartment went to corrupt officials.”,,1806764,00.html

    re: “…As to when all this will crash? Energy may well be the trigger…”

    If an escalation of disputes between indigenous peoples and elites, and among elites vying for control of consolidating energy assets, results in more widespread and prolonged shutting off of the taps, it goes without saying that the impacts of a substantial, sudden reduction in global energy supply would extend far beyond the price and availability of petrol at the pumps. Potentially massive disruptions to consolidating food systems could be magnified the ongoing loss and contamination of farmland.

    re: over consumption

    If the consumption problem estimates include increases in expenditures on pharmaceutical products, perhaps greater attention to this problem is warranted: Drug firms a danger to health: International research exposes flaws in £33bn marketing budget,,1806084,00.html

    If the Gates Foundation’s philanthropic efforts involve substantial donations to food and health corporations, or research into the development of products which are marketed by them, (please correct me if I’m wrong), might attention to the type of marketing budget misallocation problem referred to above also be part of reducing imbalances and the need for philanthropy at the expense of more productive forms of investment?

    Wonder if SWIFT (who/what writes the software, or might it be treasonous to ask?) could be utilized to fight financial terror which may be facilitated from an apparent escalation of greed?

    “… “Equity incentive pay…has the potential to increase credit risk.” The report admits that Moody’s evaluations of this risk focus on the potential for executive mischief, “rather than the direct effects on cash flow.”… Standard & Poor’s is now trying to factor lawsuits into its ratings, though one of their analysts admitted to me that “it’s almost anyone’s guess how lawsuits will affect a company”…” – or a country?

  • Posted by OldVet

    DOR – Sing/Korea/Thailand are “healthy” today, after being less so in 1997. Now they have “healthy” reserves in their CB’s to tide them over if there’s a major decline. Some of the high deficit EM’s are just at the point of strong and sustained expansion in their real economies (e.g., several in Latin America) and vulnerable to export slowdowns as well as interest rate rises. Many of the deficit countries (e.g., Eastern Europe, others) are ripe for improved infrastructure in transport, education, banking, and other types needed to give a real discrete improvement to their economies, and a “big bang” as suggested by Dr. Roubini could set these improvements back.

    The point was that real harm could come to some countries (e.g. Viet Nam, Indonesia) that are poised for sustained growth, IMHO. Oddly enough, somebody on this blog pointed out to me that you can make more money investing in a country with big deficits right after a crash – the ladder out of the hole is taller. But crashes have a negative effect on infrastructure development and public investment. Once again, look at what happened to countries who “crashed” in 1997 – they converted earnings into $ savings rather than infrastructure development, until recently. Ten years later.

  • Posted by DF

    When did Rockfeller start his own foundation ?

    Was not it in the 30’s ?

    Could it be that if Gates and Buffet start to spend their money in foundations it is because there’s no more money to be made in business ? At least not for a while ?

    Of course it must be a coincidence.

  • Posted by Guest

    Stephen Roach: Venting Global Tensions – “If the US consumer finally capitulates — a possibility the consensus has all but dismissed out of hand — commodity markets and the developing world will be the first to feel it.”

  • Posted by Guest

    If charitable foundations are now perceived as one of the world’s more profitable growth sectors, might that be an indication of the donors’ failure to understand or build healthy economies in the first place?

  • Posted by DF

    Nah Guest, I think the donors understand clearly that there’s no money to be made on investment, simply because wages are too low and income distribution is too skewed relative to the production distribution, so instead of having the state taxing their unfairly accumulated wealth, rich people prefer to donate on their own cash, hoping to direct the cash in ways that may profit themselves in oneway (real sales) (but that will not compensate the money given) or another (pride, power …).

    If you can’t control events, pretend to organise it.
    Consumers have no cash, no pb, lend them, they have too much debt, no problem, give them money. Do anything you can in order to prevent them to ask us the money they rightly deserve.
    Better lend to a consumer or give to a beggar, than pay a worker a decent wage. THe two first options give much more power to the lender, charity founder and employer.

  • Posted by Guest

    re: “…But crashes have a negative effect on infrastructure development and public investment…”

    …while faciliating greater concentrations of wealth and dumping more people back into the dark ages?

  • Posted by Guest

    …prompting psychohistorians to set up foundations?

  • Posted by Stormy


    Tariffs are regressive. Excellent point. Yes, they are. Point-counterpoint. (I agree also on the textile flap…really silly.)

    I would have to pick and choose—food would be off the list. I would also use the tariff income to help fund a national health care program. All of our issues are inter-related, alas. Touch one; touch all.

    There is no easy way out of the box into which we have foolishly locked ourselves. One way or another, pain is ahead.

    We do need a comprehensive plan, some vision, something that our myopic politicians of both parties seem incapable of.

    At least in blogs like this, I see serious-minded folk really struggle with these problems. Maybe a politician or two will actually drop by and be enlightened as to the full scope of the real issues.

  • Posted by Gcs

    brad writes
    “Roach views the US savings deficit as a product of US policies alone, I don’t.”

    so then bradthe question arises
    given the tango here
    can the us “policy” its way out of it
    unilaterally ???

    and obviously
    the export binge is why the prc gub can get away with
    both such a damn perverse fiscal under achiever (saver)
    my source of fury
    and cheap creditor
    others source of worry

  • Posted by Guest
  • Posted by Guest

    “…Structural changes, such as increased U.S. savings, and cutting the budget deficit, appear unlikely, as do a wide range of changes such as labour laws or ways to increase consumer spending, which is needed in countries such as Germany, France, Japan and China, [David Powell, a currency analyst at Ideaglobal] said. “Therefore, the majority of adjustment falls on currency flexibility.”

  • Posted by OldVet

    Guest, “…while faciliating greater concentrations of wealth and dumping more people back into the dark ages?”
    Point being that widespread infrastructure has widespread benefits, like robust legal/court/cop systems and highways and electricity everywhere. We are just about at a “tipping point” for global growth on a broad scale, and this global trading imbalance threatens it. It’s not the dark ages, but the absence of forward progress, that bothers me.

  • Posted by DOR

    DF says, “The challenge then is this : How to rebalance the world economy without creating a world wide credit crunch ?”

    We had the credit banquet, now it is time to diet. Everyone is delighted with the balloons, but no one wants to clean up after the party.


    You’re right, of course, about the Asian crisis countries being in far better shape today than in 1997. I believe because of that transition that they will continue to hold excessively large reserves: the motto now is “never again”.

    And, you’re right about infrastructure. I was personally involved in a very large South-east Asian infrastructure initiative in late 1996 and early 1997. By late July 1997, it was DOA.


    Don’t worry about import duties on food from China. Worry instead about children’s clothing, toys, kitchen utensils, furniture, shoes and anything electronic. In other words, the bulk of the goods in K-Mart, Wal-Mart, Target and the like.

    Psychohistory . . . foundations . . . brilliant!

  • Posted by MrBill

    “Nevertheless Mr. Roach acknowledges that traditional ideas on comparative advantage no longer seem to work well, due to “nimble assets” such as capital, technology, and now labor. The natural ratios of comparative advantage that could be found in more closed economies can be duplicated within days for virtually any product or service.
    Written by OldVet on 2006-06-25 15:49:43″

    I think the traditional idea of comparative advantage is simply working too well for some workers, vested interests and the economies of some countries on the whole because basically what some thought was a sustainable competitive advantage is being eroded by gains made elsewhere in the knowlege economy, in intellectual property, and in the scramble up the value added ladder.

    Some thought those gains would only accrue to western economies when in fact not only Eastern Europeans, but Asians and others, are leap frogging workers in the West (in broad brush terms) to take a share of those higher paying jobs and value-added processing and manufacturing.

    Sure on average this may be dilluted by the sheer size of Chindia, but within Chindia a 100 million workers or so is not insignificant in absolute terms. And foreign trained students, FDI, JVs and offshoring has just made the transfer of ideas, technology and manufacturing processes that much easier as evidenced perhaps by Mittal Steel taking over Arcelor or the emergence of China’s first home grown billionares.

  • Posted by Guest
  • Posted by Stormy


    I think we can find plenty of companies to tariff that will keep regressivity as low as possible. I am certainly not going to exempt Walmart. As far as the lower middle and poor are concerned, unfortunately they will take some hurt; maybe Congress will step up to the plate eventually to help them. How about an increase in the minimum wage? Some real health care?

    As far as I can see, the poor and middle class here are only convenient pawns in the argument when it suits the needs of the wealthy and our present batch of politicians and CEO’s. I do think your argument for Walmart in this case fits that vein.

    Regardless, any hard crash will be disproportionally regressive on the poor and middle classes. It alarms me that everyone in the states must pay for the success of those companies that have fled.

    A tariff on American and/or Western imports–from developing nations–will be a great boon to those still in the states and struggling to survive. Jobs here. China’s and other developing countries’ indigenous businesses are not touched.

    The tariffs could be adjusted to either make costs equal or even to give a slight advantage to firms importing. In short, they could be fine tuned.

    Underlying my argument is that trade among unequals is inherently disadvantageous when capital is incredibly mobile and labor in developing countries is dirt cheap.

    As China became a consumer nation, then the tariffs would be slowly dissolved. The point is to mitigate the disparities as much as possible until we have an equal trading partner.

    I refer you to the following article regarding Electrolux backing away from China. Reason? Simply not ready to consume its goods.

    The point: Globalization has to thought out carefully. For a massive country–or any country–to become simply an export machine is disadvantageous not only to others but to itself as well.

  • Posted by Guest

    china may beat the US to the punch by implementing a ‘synthetic appreciation’ in the RMB by raising export tariffs…

  • Posted by Guest

    If China kicks in export tariffs, what’s the real difference between that action and U.S. import tariffs (in the case of the U.S.)?

    The difference is that the U.S. will not collect any revenue from the China export tariffs.

  • Posted by DOR


    Could you explain to me how reversing the Dubious Tax Give-Away would hurt the poor and middle class? And, how through that reversal the reduction in the fiscal deficit – and associated (and rising) interest payments – means less for the poor and middle class? I don’t get it.

    “It alarms me that everyone in the states must pay for the success of those companies that have fled.”

    High priced local products replaced by affordable imports. Ever walk into a store and have to decide whether to buy this or that? (Emphasis on the “or”.)

    “A tariff on American and/or Western imports–from developing nations–will be a great boon to those still in the states and struggling to survive.”

    Unless, of course, those in the States actually have to pay for the now higher-priced products. Seriously, how are 10 million manufacturing production workers getting an extra bit of help going to off-set the other 290 million consumers getting kicked in the teeth?

    “China’s and other developing countries’ indigenous businesses are not touched. ”

    So the 60:40 JV only gets hit with 60% of the tariff you’re thinking of? But, their components go into a 40:60 company’s final assembly . . . what a nightmare to administer!

    Remind me again why the lower and middle classes have to get hurt. Can we fine tune the pain?

    * * *

    Export tariffs would be excellent for China. Not only could they take steps toward rebalancing sources of growth, they could do it without rewarding Dubious for wrecking the US economy.


  • Posted by Guest

    they’ve already employed (and scrapped) them on textiles to preempt US quotas, so i’m guessing they’d be willing to do so again on a wider variety of (low-margin?) products. targeted export tariffs rather than full-scale RMB appreciation would seem to be the way to go…