A new club of creditors …
Andrew Rozanov – a senior manager in the official institutions group of State Street Global Advisors – thinks America’s creditors in Asia and the oil producing world should create a club (sort of like the Paris Club) to protect their interest.
He argues that Russia, the Gulf, China and others with tons of reserves and funds in oil investment funds – the savings glut nations, in Rozanov’s terminology — share two common interests:
- Making sure that G-7 countries (particularly the US) pursue macroeconomic policies that protect the value of the savings glut countries’ investment in the G-7;
- Making sure that the G-7 countries (particularly the US) don’t try to keep their creditors from buying the assets the creditors want to own.
Rozanov (in theworldoday.org; subscription required):
“As large owners and prospective buyers of financial claims and real assets in G7 countries, creditor nations have a common interest in making sure that the G7 nations pursue sounds and sensible policies to secure their value and quality. For example, any actions by debtor nations to suddenly and severely limit foreign ownership of certain “strategic” industries or to inflate away large overseas liabilities would be a natural subject for concern and discussions in such forum.”
I actually think the issue is not whether debtor like the US nations will "suddenly" limit foreign ownership of certain industries. They already have. Ask CNOOC and Dubai Ports World. If anyone in China or the Middle East thinks that their debt holdings can realistically be traded for “real” assets on a big scale, they are smoking something.The US has never promised its creditors that it will:
- Direct its macroeconomic policies to preserving the value of the dollar. The Fed actually has made it clear that it is the one thing it won’t do.
- Allow its current crop of creditors to exchange their holdings of US debt for ownership of US companies on a massive scale.
The US government hasn’t explicitly said it won’t allow China, Russia and the Gulf to exchange debt for direct equity control. But it is pretty clear that the Congress isn’t terribly keen on Chinese or Gulf acquisitions of major US firms. The informal norm here seems pretty clear, at least to me. Debt, you bet; US companies, no way.
The savings glut countries now financing the US have been willing to accept those terms, at least up til now. China didn’t stop buying US debt after CNOOC; the Gulf – particularly with oil heading to $80 – is probably buying more US debt than it did before DPW.
But in a broader sense, Rozanov is right: At some point the world’s creditor countries may decide that they are no longer willing to accept the terms the US offers, and band together to protect their interests.
Indeed, one of the striking features of the current Bretton Woods 2 (*) system is that this new system has developed in the absence of any new institutions – it has emerged as individual countries pursue their own (sometimes poorly defined) interests. I still don’t understand why the GCC thinks it is in its interest for their currencies to follow the dollar down to 2010.
Note: the (*) after Bretton Woods is intended to recognize that oil and resource exporters now play a much bigger role in this system than they did when Dooley, Garber and Folkerts-Landau first laid out their ideas in 2003.
As a result, the institutional structure of the world lags current realities. The G-7 functioned as a club of the IMF’s “creditor countries” for much of the 1990s – it helped them hash out a common approach to financial crises in emerging economies. The Paris Club has long been a forum for much the same set of countries to coordinate the restructuring of their loans to poor and middle income countries. All these institutions, though, are premised on the notion that the world’s big creditor countries are also the world’s rich countries – and that the United States and Europe and Japan are all big creditor countries.
That is still true for Japan, sort of true for Europe (Europe’s overall current account balance is flat, with inflows from emerging market central banks used to finance European investment abroad) and not true at all for the US.
At some point I suspect, the world’s true creditor countries will band together to try to protect their interests. Or at least try. I am not sure if Russia, Saudi Arabia and China will find it any easier to coordinate among themselves than say the US and France.
Clubs of creditors, though, don’t just exist to put pressure on debtors. They also exist to make sure that no individual creditors tries to pursue its interest at the expense of other creditors. And, as Bhavna Gupta notes, the creditor countries do have an incentive to reduce their financing of the US before the other guy does:
“One should not forget that the Asian central banks have considerable dollar holdings too and if the Gulf central banks lag behind in selling off their dollars they would get much worse exchange rates than what they might get if they are first to sell off their dollars and buy Euros. A very simple play of price based on the demand and supply of Euros. The current state of affairs is a bit like the classic 'prisoner's dilemma.
At least potentially. Barry Eichengreen made this argument back in 2004, as did Nouriel and I in 2005. It was one of the reasons why we thought there was a risk the current system of central bank financing of the US would crack.
And so far, there hasn’t been much evidence of disruptive reserve diversification. Yes, folks bought more euros in 2005 than in 2004, but they did so when the euro was falling – not when it was rising – against the dollar. Disruptive diversification would imply selling dollars when the dollar is falling (or selling euros when the euro is falling), not doing the opposite.
But there are some signs that some of the oil exporters are getting a bit tired of financing the US. Not enough to do anything drastic. An extra 10% in euros here, another 10% there.
Right now though the oil exporters are so flush with cash that even if they pare down the dollar share of their portfolio, their total claims on the US will continue to rise strongly … the real alternatives to financing the US is spending far more. And depegging from the dollar. So far, oil exporters haven’t been willing to take those steps.
That is the other thing a club of creditors has to to do: it needs to be able to sanction a debtor that doesn't follow its recommendations. And, as many have noted, a lot of the United States' current creditors cannot saction the US without hurting themselves — or at least their export sectors.
Always interesting to see who’s on the board of this august organization—and exactly what the organization does. Hmmmm bankers; international finance.
http://www.centralbanking.co.uk/
It is more than just a publications firm. It’s a powerful think tank—with real clout.
You have raised this issue many times before, Brad: asset for debt. Looks like they are want to up the ante.
“And, as many have noted, a lot of the United States’ current creditors cannot saction the US without hurting themselves — or at least their export sectors.”
Not sure it will be continue to be a Mexican stand-off, especially if the U.S. consumer starts to wilt.
Why do the creditor nations have to buy US assets with their dollars? Cannot they use the dollars to buy up hard assets in Latin America, in Asia, in Australia, in Europe? Why could not China double or triple its strategic petroleum reserve? I fail to understand why the alternatives are limited to US debt or US equity.
The options are not just US equity or US debt — but if central banks/ emerging markets don’t finance the US deficit, either someone else has to or the US has to adjust. And adjust means buy fewer imports/ export more — with the associated impact on the world. The other constraint is many countries dollar pegs. If they stop buying $ and starting buying something else, the dollar — and all the currencies pegged to the $ — would likely fall.
Thanks for the reply. But isn’t it your view that the US should have to adjust? If China, for example, used its dollars to buy hard assets in Latin America instead of US bonds, this would tend to force the US to begin adjusting. But China would have some hard assets instead of depreciating dollars when the rush out of the dollar began to occur. By continuing to buy US bonds China merely exposes itself (stupidly) to constantly bigger losses when the present system collapses. Why would it continue along this path? Are the Chinese this foolish?
What on earth is the motivation of OPEC countries to peg to the dollar??? They mostly have one export, and it doesn’t compete with a comparable US export.
I have to disagree with the interpretation of the CNOOC situation. In the case of CNOOC, it basically got outbid by Chervon, and it’s hard to say what would have happened if CNOOC was able to put together a better offer. Also, CNOOC made some very crucial mistakes, which really hurt it in bidding for Unocal.
Having said that, I don’t think that Chinese companies will be in a position to make major equity purchases for another five to ten years. The infrastructure for doing this is only slowly going to be put in place, and the Chinese government is trying very hard to make sure that any purchases made will be managed well, unlike the vanity purchases that Japan made in the late 1990’s.
China is starting a QDII program which will let Chinese nationals invest in overseas companies through institutional investors (i.e. mutual funds), and it’s trying to learn how to manage its domestic companies before turning its attentions overseas.
Also, I don’t see the point here. Russia, Saudi Arabia, and China tell the US to reduce its budget deficit, the US says no. Now what? Sink the US economy? Yeah right…..
Sort of interesting to compare the debtor and creditor countries listed in Fitch’s sovereigns ratings (found through http://www.countryrisk.com): http://www.fitchratings.com/corporate/sectors/issuers_list_corp.cfm?sector_flag=5&marketsector=1&detail=&body_content=issr_list
re: “Direct its macroeconomic policies to preserving the value of the dollar. The Fed actually has made it clear that it is the one thing it won’t do.”
Don Kohn: “We will need to take account of any influences on the macroeconomy of the unwinding of the imbalances when that occurs. Continued strong demand for dollar assets will be critical to keeping that unwinding smooth and not disruptive. The Federal Reserve can contribute by being sure the public remains confident that the purchasing power of their dollar assets will not erode unexpectedly.”
Thinking about the previous guest’s comments:
“…In Germany and the US, for example, mortgage and consumer loans constitute 62% and 99% of GDP respectively. In the BRIC countries plus Turkey and Mexico, total loans to households range from just 4% to 14% of GDP, a significant difference to the developed economies. The continued retail growth in these emerging economies is naturally predicated on continued economic expansion as well as improvements in the legal environment and financial infrastructure, not a simple task. But S&P is confident that trends in these areas are broadly positive in most emerging markets and it believes that “retail lending will continue to steam ahead.”
…Citigroup’s net income from international business to 50% in the future, up from last year’s 38%, and much of this is expected to come from consumer financial services outside the US. …synergies between the major banks’ networks are far from fully exploited. If a customer would like to buy property in Canada, France, India, Taiwan, UAE or the US, HSBC can put them in touch with a member of the HSBC Group in that country to arrange a local mortgage in the local currency. Alternatively, HSBC Bank International, based in Jersey, Channel Islands, provides personal loans in most major currencies (including euros) to help its customers pay for their property…
In countries such as Turkey and Russia, new mortgage laws, where none existed previously, are expected to provide a long-awaited boom in housing lending for customers and those institutions providing viable mortgage products. In western Europe, huge potential also exists in housing. The size of residential mortgage lending in the EU12 has tripled from €1500bn in 1990 to €4700bn in 2004, equal to 45% of EU GDP and 6% annual growth, according to Francesco Burelli, principal consultant at London-based Capco. This figure is expected to reach €6000bn by 2010. Capco research indicates that mortgage markets in France, Greece and Ireland are expected to grow at double digit rates while Germany, Italy, Netherlands, Spain and the UK are expected to grow at smaller rates…”
http://www.thebanker.com/news/fullstory.php/aid/4010
“The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country’s central bank. A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve…
According to his central analysis, “the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds”… Experts have calculated that the country’s long-term “fiscal gap” between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.
Prof Kotlikoff said: “This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc.”
Prof Kotlikoff said: “The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century.” The scenario has serious implications for the dollar. If investors lose confidence in the US’s future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/14/cnusa14.xml&menuId=242&sSheet=/money/2006/07/14/ixcity.html
A couple of points:
1/ Yes, I do think the US should adjust. But I also recognize that the adjustment is better if gradual, and that even gradual adjustment will be somewhat disruptive for both the US and for its creditors, since most creditors do export to the US and protecting the financial value of their claims on the US (i.e. demanding adjustment) hurts the current income stream that comes from their export sector (since adjustment = US exports growing faster than US imports).
2/ Oil exporter pegs to the $ are a continued mystery to me as well.
3/ I disagree a bit with J. Wang. CNOOC didn’t get outbid, it got out-politic’ed. And i think CNOOC saw clearly that if it upped its bid, it wasn’t going to win — the politics on this on the Hill were clear. It subsequently has changed its tune and stopped arguing that it is “different” from the rest of the Chinese state oilcos and instead emphasized its Chinese state ownership and sought assets directly from countries that have oil and gas, rather than prospecting for oil/ gas on the NY stock exchange. At least that is my take.
4/ The argument that Turkish mortgages are poised to boom on the back of a new mortgage law is about two months out of date. The Turkish banks were lending like mad to the housing sector from early 2005 on, but presumably cut back sharply now. Lending for 10 years at 13% (what Turkish banks were doing at the end of 05/ early 06) when your cost of funds is over 20% isn’t a great business.
“Roads and bridges built by U.S. taxpayers are starting to be sold off, and so far foreign-owned companies are doing the buying…” http://www.washingtonpost.com/wp-dyn/content/article/2006/07/15/AR2006071500420.html
I am actually not a big fan of the Kotlikoff style analysis.
That isn’t to say that he doesn’t have a point — meeting the United States pension commitments likely implies higher taxes. But the obvious solution for some of the fiscal gap identified is higher taxes. The Kotlikoff style calculations of the NPV of future pension promises assume that current revenues don’t adjust.
Apply this technique to Social security and its finances look bad — since there is a 1.5 to 2% of GDP fiscal gap between dedicated social security revenues and likely promises (tho a lot depends on demographics/ immigration) from say 2050 to eternity. That isn’t great — but I also don’t think there is any fundamental reason why social security taxes couldn’t be increased to 6% of GDP (from @4.5% now) to cover future costs.
Particularly since social security is by far the united states most effective program of wage insurance (just retirement wage insurance) and best way of insuring many folks against the down side risks from globalization.
Medical program finances are in worse shape. But as lots of folks have noted, that is also true of private medical programs. There is a much bigger issue here. And having spent a little bit of time w/o health insurance, I can say that there are a range of problems in the health system — problems with access as well as problems with rapid cost growth and the gov’s unfunded commitment to pay future medical expenses.
what I dislike about this style of analysis is that is implicitly tends to downplay current cash flow gaps at the expense of future cash flow gaps, and it prioritizes fiscal gaps rather than external payments gaps.
i assure you that if you did this kind of analysis with a trade revenue stream from exports of 10.5% of GDP and an import bill of 16.5% and project that out from now til eternity, you have a much bigger problem than social security’s 1.5 to 2% of GDP cash flow gap after 2050. (remember soc security still has a cash flow surplus). Yet the Kotlikoff style analysis — and the political priorities that follow from it — put a premium on fixing entititlements by scaling back future promises — while often ignoring what strikes me as a far bigger problem. The huge cash flow gap between US external revenues (exports and perhaps income payments on FDI) and US external spending (imports, payments onFDI in the US, increasingly interest payments). The external side of the US looks to me to be far more bankrupt than anything on the domestic side it you assume unchanged exports and imports and don’t believe in dark matter so interest payments will rise over time, and it has a far bigger cash flow gap.
And remember that the rest of the US gov is actually more unfunded in lots of ways than the entitlements side — it is just harder to project those costs out because they aren’t mandates and don’t depend as directly on demographics. but the cash flow gap ex social security right now is far larger than the projected social security cash flow gap in 2050. It just is a lot harder to forecast out the rest of the gov, so lots of analysis ignores it and just hits at entitlements.
Sorry – i had to get that off my chest. And I haven’t yet read kotlikoff’s latest — so i am basing my critique of the general methodology of all those who calculate the NPV of future US commitments 9mostly entitlements) and compare them v. expected revenues.
Apologies if I’m completely off base, but thinking about the trillions in the tax havens, wondering if the global custody industry may have a role to play.
CNOOC reached the end of its credit limit, and couldn’t bid any more.
In any case, the key problem was that the CNOOC CEO had huge problems getting support of the bid from his Board of Directors, which delayed the bid until Chevron-Texaco had a bid in play, at which point they were fighting Chevron’s lobbyists. It was an interesting cultural clash since Chinese CEO’s aren’t used to strong Board of Directors, but the external members of the CNOOC BoD were. Having the CEO try to convince his Board that the bid was a good idea ate up a few months.
CNOOC would have been in a much better position, if it laid the ground work for the bid earlier, or if it had partnered with an American oil company. If the latter were the case, it would have had Chevron’s lobbyists fighting for the bid and essentially no one fighting against, and the outcome would have been very different. (Much closer to the Lenovo deal.)
I’ve heard someone speculate that the latter is the *real* reason that Chinese banks are encouraging foreign investment. The ultimate goal of the Chinese government is clearly to transform the big-four (or at least three of the four) into global financial institutions, and at some point they are going to need political allies to convince regulators to let them do business in the US.
My assessment of the strength of the people that oppose Chinese investment is that they don’t have the political strength to oppose that investment on their own, and only have the strength to block with there is someone else who is opposed to that investment.
OFF TOPIC: The M&A balance
The M&A balance is the difference in a given country between purchases of foreign companies by domestic groups and acquisitions of local companies by foreign groups.
Studies reveal that:
- The USA is the top destination for acquisitions as this market is large, dynamic, and relatively open. Consequently many non US groups have acquired large market shares in many sectors such as retail banking, automotive, cement, etc.
- In the UK, every company is potentially for sale provided the suggested price is deemed more than fair by shareholders who, most of the time, are very financially minded
- Activity on the Japanese M&A market is low compared to the size of the country
- France is the country where the difference between outflows and inflows is the largest. Some may think it is due to “economic patriotism”, other will link this fact to the dynamism of its groups.
Table here : http://www.vernimmen.com/letter/html/letter_17.html#actualite
Raphael Kahan
“the United States’ current creditors cannot saction the US without hurting themselves — or at least their export sectors”
yes
these aren’t just hi fi bankers
their cb’s backing up their own
commodity and industrial exporters
in effect
these are just trade credits
as a result these iou lineshave no constraints
beyond policy
and since unlike a pure bank loan
these buggers don’t stand or fall on their own merits…..
add to this
brains enough
to try more or less
to collectively
hold the line
against
any one of them
breaking ranks ….
since any one outfits bail out attempt
could lead
to a spec storming of the exits
a chargeif the rest of the cb’s follow
leads only
to a pile up
where no one gets out of alive
or to the remaining cb’s aborbing the run
with their reserves
of euros and yen
and thus increasing their exposure
to the dollar
btw
one thing folks over look
that’s another safety net
neither the euro bankers nor the boj
want a dollar bargain basement
to compete against in the real world of trade
they also would sell
euros and yen
level to avoid a dollar crash
and they obviously have an unlimited ability
to do so
if not consequence free
all these dreams of catastrophe
play into uncle’s hand
like a donald trump deal
without a fore closure right
the art of the deal uncle style
is too much debt to be written off
and always room for more sales no mattter how shakey the marginal sales credit
I know this will not seem to be directly related with the subject but it is to some extent.
The Japanese Domestic Debt or JGBs
They try to keep interest rates as low as possible because of their hefty domestic debt created to overcome deflation. However, this will also direct Japanese instutions and people to put their investments abroad. A big contribution for US deficits
The question is how long can this situation be sustained. My suspicion arises not because of the US but Japan itself. At some point the Japanese government will need to persuade its own people to put their investments into domestic assets. Simply because Japan also has to roll over its domestic debt exceeding its GDP more than 1.5 times.
If this will be the case the US economy will have to face another obstacle arising from the outside world.
Brad–I am sure that oil producers, notoriously undisciplined, will soon defect from the dollar, diversifying their reserve holdings, though Saudi will continue to stick to the dollar. And China will continue the virtual dollar pegging and concentration of their reserves in the dollar. Japan is slightly different; its government has not intervened in the currency market for more than two years, but its private investers appear to continue to invest in the dollar assets despite the recent (small) increase in BOJ policy interest rates.
Therefore, now the Bretton Woods 2 is supported largely by the two countries, Saudi and China. If both of them stop the dollar peg and/or diversify reserve holdings, the BW2 will unravel. At this stage, I assume, the US government is not really serious in unravelling the BW2, right?
think–It is true that Japan’s gross public debt is 1.5 times of GDP, but its net debt is only half oh that. Currently, the government is expected to reduce its gross debt substantially by selling its assets. Any real improvement in its net debt (and so any real impact on the US) is likely to come only after 2009, when the government may raise tax burden.
“”At some point I suspect, the world’s true creditor countries will band together to try to protect their interests. Or at least try. I am not sure if Russia, Saudi Arabia and China will find it any easier to coordinate among themselves than say the US and France. “”
It is not clear to me that these marriages of convenience are anything more than ‘today’s common interests’ on some very narrow issues?
Certainly, France was in favor of ever closer EU integration when it felt itself at the center and able to influence policy via Germany as the pay master, and now that the EU has enlarged and France’s own voice has diminished, as Germany has become slightly more aggressive in pursuing its own policy goals, that France is no longer so keen on further integration or expansion?
How effective has OPEC been at setting quotas, enforcing them and controlling prices? Some members openly break their supply quotas, while others are unable to meet their commitments, and we all know who the hawks and the doves are, so it usually comes down to Saudi as the supplier of last resort more than an iron clad group of producing nations who stick together out of ideology or economic necessity?
Ditto for Russia and China. They certainly have wielded their vetos in the Security Council, but each out of their own fear of setting precident of intervening other sovereign states internal affairs should they find it necessary to do the same themselves (Taiwan or the Caucuses for example).
And although it is true that there is more economic integration now between Russia and China with oil & gas as well as base metals etc. flowing to China, I am not sure China is going to take marching orders from Russia or vice versa should their common interests diverge?
So although the US’ creditor nations have a common interest in either maintaining the status quo or managing an unwinding of these imbalances, I think it is mainly out of purely national self-interest, and should those self-interests diverge, so would any marriage of convenience dissolve along with it.
Large countries who see themselves rightly or wrongly as powers in their own right are only going to coooperate so long as it is mutually beneficial, and only on those issues where they are not competitors.
And just as the US in unwilling to let state-owned companies buy strategic assets, EU members are also not keen on state-backed Gazprom buying downstream assets in Europe either. Perhaps they have already noted the benefits of Russian energy asset ownership in the Ukraine? But then again it is hard to buy real assets in China, Russia or Saudi without the government’s permission either! ; – )
re: “But then again it is hard to buy real assets in China, Russia or Saudi without the government’s permission either!”
Need to define what is being purchased. Controlling interest impossible in – most? – cases, whether or not that is clearly stated. ‘Government’ may also need clarification – thinking of your Russia-Ukraine example. I’m sure you’ve been following the PCCW story. Chinese securities, real estate markets quite different from U.S. as you know.
Very difficult to get a clear sense of ‘foreign’ ownership in Canada – and I assume other nations – in part because of constant innovations in the ways investment is structured.
As Putin says, it all comes down to the mechanism of control.
Stephen Roach on Irresponsible Federal Reserve monetary policy
http://www.morganstanley.com/GEFdata/digests/20060714-fri.html#anchor0
” The real problem with Fed independence has come from its unwillingness to cope with asset bubbles — very much an outgrowth of the politicization of Alan Greenspan in the late 1990s. Once the equity bubble burst, the Fed was forced into a post-bubble, liquidity-generating defense that gave rise to one bubble after another (see my 25 April 2005 essay, “Original Sin”). Through a debt-intensive process of equity extraction, this string of bubbles then became the sustenance of America’s excess consumption binge. This gave rise to a record overhang of household sector indebtedness — thereby injecting a new element of systemic risk into the US economy. At the same time, asset-dependent consumers have taken income-based saving rates into negative territory — forcing the US to import surplus saving from abroad and spawn massive global imbalances in doing so. This has created the moral hazard of an American consumer that is “too big to fail.” Ever mindful of these risks, as real short-term interest rates have hit the neutrality threshold, Fed policy choices have become increasingly constrained.”
- Stephen Roach
Chief Economist, Morgan Stanley
The US CAD cannot continue on it’s current trajectory. Something will have to eventually give. The only way for this to correct, IMO, is for the USD to substantially drop in value relative to asian currencies. The only long term way for the dollar to maintain value is for the US to substantially reduce it’s deficits and the only way the US can substantially reduce it’s deficits is for the USD to drop. I don’t see any way the USD can maintain it’s current value relative to other currencies.
Dependence on oil is another thing that must give. Eventually, supply and demand models will make the price of oil too high to continue using it as it currently being used. New technologies that use alternative sustainable sources of energy will need to be developed and implemented.
These two things are perfectly clear to me. The sooner we start working on a solution, the better.
The biggest obstacle is the current republican controlled governments. The republicans took control and they’ve been acting as if they had a mandate to do whatever they wanted. The patriot act allows the president to sidestep whatever bothersome laws he wants in the name of national security. Fast tracking construction projects allows governements to skip over bothersome things like environmental analysis when building things like highways. Who cares if there’s a better way to build something that keeps our water clean or keeps our rivers from flooding and causing levee breakages. They don’t want to hear it. They want to start building as quickly as they can without thinking things through. These same irrational people don’t think deficits matter and the solution to our oil problem is to secure the persian gulf and drill for oil, regardless of the environmental impact. They believe things are fine the way they are. I guess if you’re like Dick Cheney and you’re looking at maybe 5 more years of life, tops, deficits really don’t matter.
Until we get a decent government in place, none of our current problems will be solved. They don’t want to listen to reason.
Might be interesting to see comparisons with other nations, including Russia, Saudi Arabia, China, if only to get a better sense of who the most influential savers, investors and consumers are:
“… Much of the pressure to raise interest rates came from households, according to Dr Schultz… But a study by the Dai-ichi Life Research Institute suggests only the rich and the elderly will really benefit from this very small rise… Japan used to be a nation of savers, but now one in four people here has no savings at all. And 12% of households hold more than half of all the money kept in savings and deposits…” http://news.bbc.co.uk/2/hi/business/5179586.stm
“Geust” writes far above, “Cannot they use the dollars to buy up hard assets in Latin America, in Asia, in Australia, in Europe?”
But then what do the Latin Americans / Asians / Australians / Europeans do with the dollars they got?
Perhaps I’m wrong — Brad, please correct me if I am — but I believe it’s fundamental, right down at or near the “accounting identity” level, that the current account has to balance somehow, if not by trade, then by foreign lending or buying of assets. In the end, the dollars have to come back to the US somehow — unless a Scrooge McDuck somewhere decides to demand payment in specie and build a huge “money bin” to hold it.
re: “current republican controlled governments”
It would be interesting to hear a bit more about what the Democrats would, or plan to do, or at least what “decent government” would look like and how it would operate. I’m hearing everything you are saying, but if the republicans are in full control, they might be expected to do something about their approval ratings.
Not so sure what is meant by saying the world’s reserve currency, USDs, all have to come back to the ‘U.S.’ somehow. Might some of the USD money bins be in the tax havens, ibanks, tncs?
“…The world’s major central banks — namely those in the US, Europe, Japan, and China — all face serious constraints that limit their scope for action. …China does not even pretend to have a politically independent central bank. Governor Zhou Xiaochuan is one of China’s leading macro thinkers, but he is very much beholden to China’s political leadership — namely the State Council — in setting monetary policy. Such constraints on the People’s Bank of China are largely an outgrowth of the relatively limited progress China has made on the road to banking reform. With China’s banking system still highly fragmented — its four major banks had a combined total of over 75,000 local branches as of year-end 2004 — policy traction by the PBOC would be limited even if the central bank were operating independently of Chinese political considerations. The autonomy of local branches — a major force behind the micro dynamic of China’s runaway investment boom — only complicates the problem. Nor is there a willingness on the part of the Chinese leadership to turn the screws on monetary policy in order to rein in the excesses of this overheated economy. The 27 bp increase in lending rates in late April, together with the mid-June announcement of a 50 bp increase in bank reserve requirements, has done nothing to slow an ever-frothy lending cycle…”
http://www.morganstanley.com/GEFdata/digests/20060714-fri.html#anchor0
jm — you basically are right. Suppose there is an influx of Chinese money into Brazil. Brazil has a current account surplus, it doesn’t need the money. It either has to accept a series of changes in basic financial variables — higher exchange rate, lower int. rates, etc — that induce a current account deficit by lowering savings/ raising investment. Or it has to add to its reserves/ use the inflow to finance the purchase of foreign assest by private Brazilians. Those reserves don’t have to flow to the US, but they have to flow somewhere — and that region faces the same set of choices Brazil does. Right now the country most willing to allow an expansion of its current account deficit in the face of such inflows is the US. Europe has used inflows from the emerging world’s central banks, in aggregate, to buy foreign assest — whether in the US or back in the emerging world.
Kotlikoff has been getting his rocks off for a long time on “the generational conflict.” It is his personal bread and butter. Brad S. is right that there are problems in the medical financing system generally, but there is no crisis in social security. The projections saying there is are based on very pessimistic assumptions, such as US growth falling to half its current rate soon and staying there. Under considerably worse conditions than we have seen, the social security trust fund continues to run a surplus forever. Everyone should keep this in mind when we hear hysterics like Kotlikoff selling their phoney baloney.
a country that has had enough of the dollar accumulating game need not necessarily rush for the back exits – it can take enough steps in the direction of the front door to attract attentiion, and then say to its fellow creditors – ‘unless a joint policy is agreed on regulating u s future direction i am prepared to leave, without giving further notice.’ in the prisoners’ dilemma the prisoners are held incommunicado. that is not the case here. the creditors can talk, covertly or openly. u s unilateralism has created unlikely bedfellows geopolitically – so why not geofinancially ?
“”jm — you basically are right. Suppose there is an influx of Chinese money into Brazil. Brazil has a current account surplus, it doesn’t need the money. It either has to accept a series of changes in basic financial variables — higher exchange rate, lower int. rates, etc — that induce a current account deficit by lowering savings/ raising investment. Or it has to add to its reserves/ use the inflow to finance the purchase of foreign assest by private Brazilians. Those reserves don’t have to flow to the US, but they have to flow somewhere — and that region faces the same set of choices Brazil does.”"
Or they invest the money into needed infrastructure projects that eliminate economic bottlenecks and help the economy grow faster. It is hard to imagine ‘a have-have not country’, where many slum dwellers do not have access to clean water and sanitation NOT being able to employ investment with a positive ROI, and if I am not mistaken access to clean water & sanitation is high on the Millenium Project Goals, so there is little controversy that these projects do have positive multiplier effects? Roads, ports and eletricity grids would also reduce regional differences I am sure, so perhaps finding worthwhile investments is not the problem, but how to design and allocate private FDI versus governments running budget deficits to fund infrastructure projects themselves?
that club of oiler and east asian
trade surplus creditors
oughta become
a club of big spenders
a club spending their surpluses
on the building
of lots and lots
of productive
real and new stuff
not just buying whats
already out there
not just
providing liquidity
for asset markets
that
hardly “require”
these oafs direct participation
to function smoothly
their portfolio and property buys
just raise asset prices
if that induces real investment
fine
but
it surely doesn’t do it
as much as directly
making the real investment itself does