A missed opportunity …
China is growing incredibly fast. No doubt net exports are contributing significantly to China's current growth. But net exports are equally clearly not the only reason for China's current growth. If net exports contributed 3% — that is just a guess, but one consistent with the data from q1 — to China's 12% growth in q2, China would have grown by a very respectable 9% even if its trade surplus didn't grow.
That is the missed opportunity. This is a time when the global economy should be adjusting.
Sure oil prices are high, but the Middle East is investing more of its oil revenues at home, supporting global demand. I don't really buy the argument that the Gulf's boom is totally different this time around. Most oil revenue is in government hands, government sponsored-investment is still the norm (and no doubt will generate some white elephants) and with the Gulf's ill-conceived dollar pegs generating negative real interest rates, government policy is creating very strong incentives for private-sector investment (and quite possibly over-investment). No matter. An oil-boom is still and oil-boom. Growing domestic spending and investment in most oil and commodity-exporting economies are contributing to global demand growth and likely offsetting most of the impact of the recent rise in oil prices.
After all, most analysis suggested that the key condition for global adjustment was an acceleration in global growth relative to US growth. That has happened. Big time. The world economy has decoupled from the US-housing slump. Yet at best the US current account deficit has stabilized in nominal terms — and it may even start to rise once $75 a barrel oil is reflected in the US import data. It should be falling.
I would be a lot happier if the combination of strong global growth — South America, Western Europe, Eastern Europe, the Middle East, India and China are all humming — and a weak dollar was leading the US current account deficit to fall by $100b a year, not pushing China's current account surplus up by $100b a year.
If the global economy doesn't adjust now, when will it adjust?
The irony is that right now, China is at a stage in its domestic economic cycle where it doesn't need the stimulus from net exports, while the US does. Yet with the dollar at a multi-year low — and with the RMB still effectively pegged to the dollar — China ends up getting a stimulus from the external side precisely when it doesn't need external stimulus. Right now, China's authorities want less growth, not more. China's premier famously called China's current pattern of growth unstable, unbalanced, uncoordinated, and unsustainable …
The latest data suggests China's economy is now even more unbalanced.
Right now, China — like the Gulf — could use a somewhat stronger exchange rate. The latest data suggests that Chinese inflation now tops 4%. A stronger RMB would help contain inflation (see Brazil, India) and could substitute for various policy steps to curb domestic demand.
I was listening to the BBC last night, and I heard a lot of talk about how China's central government has only limited control over China's economy. Business Week has sounded a similar theme. And that story no doubt has a great deal of truth — the provinces don't necessarily do what Beijing wants.
At the same time, I don't think anyone doubts that China's central government — not the provinces — has total control over the exchange rate. And to me the striking thing about the past few years is that the central government hasn't been willing to use the one tool of macroeconomic control that it clearly controls …
Update: The Econocator nicely summarizes the reaction from various sell-side shops to the latest China data.
It seems to me that if the Chinese government can’t really get the provinces under control via administrative edict, then the most effective (only?) macro tool they have is the CNY/USD exchange rate. Which in the absence of $500 bn of yearly intervention, would surely be much, much higher.
From the Central Intelligence Agency (CIA) website,
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
On a purchasing power parity basis (a measure that applies the same set of prices to goods and services in all countries), China’s GDP is now more than $11 trillion, based on the CIA Factbook’s estimate of $10.1 trillion for 2006. This makes it close to 80 percent of the size of the U.S. economy.
China produces far more steel than the United States. It graduates more people with science and technical degrees each year than the United States. It has a navy that has almost as many ships and planes as the U.S. navy. Would this be possible for an economy that is one-fifth the size of the U.S. economy?
It should recognize that China is a near rival and likely to soon pass the U.S. in absolute GDP size. Of course, since it has four times the population, it is still a much poorer per capita income country.
Asia: In China, a great leap forward with research into science, technology
http://www.asahi.com/english/Herald-asahi/TKY200707190081.html
BEIJING–With more than two decades of market reforms under its belt, China has transformed into a trading powerhouse and the world’s “factory.” It is also making its presence felt in the worlds of science and technology.
China’s expenditure, in terms of purchasing power parity, along with its army of researchers, has already surpassed Japan’s. In some fields, China is now the leading authority. And that has caused some concern in Europe and the United States.
As part of its industrialization, China has been pouring money and human resources into basic scientific research for technological advancement. In February 2006, China created a science and technology plan which listed eight fields in which China deemed it possible to achieve its own technological innovations. Of the eight, bio-research ranked No. 1.
All of those very interesting statistics (and I mean that!) beg the question, Dave, of when China will allow its currency to go to PPP- which, if my sums are correct, is implied at 2.15 RMB per USD by the figures you quoted above (which seems low to me.)
But you cannot have it both ways, claiming China’s economy is almost as big as that of the US or Eurozone when the currency is fairly valued while simulataneously bashing the US for requesting that….the currency be fairly valued.
Dave Chiang, its time for you to launch a blog, preferably one set up as a macroman-DC debate.
Dear Brad,
Do I sense anguish in your post?
Make no mistake, this will end badly. Very likely, it will be worse for the US than for either China or the Middle East. Who knows when it will end? Did you think that it would go on for as long as it has continued? So, we could start to rebalance in three months, or perhaps three years, but rebalance we will.
Just hang on tight.
A Chinese government study recently estimated that a 5% to 10% appreciation of the yuan from present levels would eliminate 3.5 million export jobs and hurt 10 million farmers, that is critical for social and political stability. The United States is not the only market for China’s exports and not even the largest, so just forget about a large currency revaluation that would damage Chinese economic interests in third party regions of the world. Given the 50-1 and 10-1 salary differential in China and the US for textile workers and engineers respectively, any Chinese yuan revaluation will never be enough to satisfy Western pundits. Instead of always attempting to dictate to the Chinese and everyone else in the world on how to manage their nations, the Neo-liberal US Economist community should concentrate on better management of their own nation. In other words, mind your own damn business.
yes, there is a bit of anguish in the post. i never thought it would last this long (see my work from 2004 — it is filled with predictions about imminent adjustment that haven’t happened). and i think part of my anguish comes from what might be called the growing no adjustment caucus in the us. cheap imports and cheap chinese financing are considered good things — not distortions, and the policy recommendation that follows is to try to defer adjustment as long as possible (and certainly don’t push china to change).
Not precisely on topic, but a contrary view of the corresponding capital side of global risk and required global adjustment, expressed in a recent Hoisington (HIMCO) letter:
” … the global slowdown that is expected over the next year or so will inevitably elicit financial strains. Included in the discussion of the potential difficulties are the large U.S. trade deficit and the $16.3 trillion of U.S. assets owned by the rest of the world [June 2006 data]. Some suggest this large indebtedness leaves the U.S. financially dependent on conditions in those countries that hold our debt. If their interest rates rise, the U.S. rates must also increase or the claims against the U.S. will be liquidated. This analysis, however, is flawed.
First, the U.S. position is not so dire. The United States holds $13.8 trillion in claims against the rest of the world, resulting in a net indebtedness of $2.5 trillion. Relative to GDP, this sum is about 19%, a somewhat lower figure than the typical family mortgage expressed as a percentage of family income. This net debt has been virtually unchanged since 2001.
More important to the dollar and cross border interest rates, U.S. income on its $13.8 trillion of assets exceeded the payments on the $16.3 trillion in U.S. liabilities, something that has happened every year since 1960. Last year, the income on U.S. assets yielded 4.7%, a full percentage point higher than the yield on our liabilities and similar to the differences since 1976 (Chart 4). Therefore, cash flow from U.S. assets more than funded the cash requirements for U.S. liabilities.
Second, to whom would the foreign dollar assets be sold? The system is closed. If one set of foreigners sold, then another set of foreigners would be the buyers.
The United States is still the world’s marketplace. Even if it were not, domestic inflation and interest rates will continue to be determined within the confines of the U.S. monetary and growth models, as is documented in macroeconomics …
in the under five-year portion of the market there are two major players: the Fed and foreign official entities (including the Chinese), with the Fed dominating …
the longer end of the Treasury market will continue to be dominated by private investors, both domestic and foreign. In mid-2006, foreign official institutions only held 3.1% of their portfolios in Treasury maturities of ten years and longer, or about $38 billion of their total holdings of $1.213 trillion. As such, foreign official institutions held a paltry 8.6% of the $439 billion of ten year and longer-term Treasury bonds outstanding at mid-2006. Long maturities will continue to be controlled by the Fisher equation, which says the risk-free, nominal bond yield is equal to the real rate plus expected inflation. Econometric research, including our own, indicates that the bond yield is determined over time by inflationary expectations. A host of considerations can cause yields to gyrate wildly over the near term, but these considerations are unimportant over time. Rational investors, whether domestic or foreign, will determine inflationary expectations and invest accordingly… ”
Some of your readers will be familiar with the extensive work you’ve done on the risk to the income component of the current account, as well as the shortcomings of FDI accounting for reinvested earnings in the US. This calls into question the rather complacent interpretation of risk to the US NIIP as described above.
I suppose ‘complacency’ on the requirement for capital account adjustment (including reserve accumulation), is also a catalyst for deferring the urgency of adjustment on the current account side.
At the same time I like the references to the system being ‘closed’, and the Fisher equation, which call into question the real influence of CB reserve accumulation per se on treasury yields.
(HIMCO are ‘super-cycle’ bond bulls.)
the key fudge in this data is “ten years and longer” — central banks hold a decent number of ten years, judging from the survey, but next to no zero coupon “long bonds” — but they clearly matter out to ten years (the last coupon bearing note). and they have been buying agency guaranteed mbs with some duration as well.
as for the income balance, the BEA just published their explanation for their revisions, so i need to spend some time updating my calculations. but my core assumption remains that there is a lot of deterioration in the income balance that is baked in as the average int. rate on us ext. debt rises toward 5% (it currently is well under …), and that this deterioration won’t be offset by improvements in the int. income from us lending abroad.
but i really need to plug the revised data into my spreadsheet
Macro Man says that China should let the yuan to appreciate to the PPP level. I am sure that they will. But why is it absolutely necessary to do it at once? Maybe they will do it in an orderly way, for example in 20 years. Why can’t we just wait it out? At least China is going the right way. It could be a lot worse: they could depreciate the yuan 5%/year instead of appreciating. What could the US do? China has recently shown what it can do: buy a little less US debt than it used to do, and Wall Street starts to worry. A country in debt to its neck does not have that many choices.
Brad — China exports a lot. But that means that there must be someone who buys those goods. Who said that the american people must buy everything that China makes. If China were to export 1000 dollars worth of goods next moth, whould that mean that the US consumer must buy 10 times of everything they usually buy. The US could make a big step toward rebalancing: consume less. As I read the other day, even the toilet paper usage per capita is twice as much in the US than in the similar highly developed countries. The overconsumption is of course a natural consequence of the current economic system: if 2/3rd of the GDP comes from domestic consumption and the GDP must increase all the time, then sooner or later you must overconsume to sustain an forever-increasing GDP.
1000 dollar = 1000 billion dollar
Brad:
Good posts the last 2 days. I do have a couple of questions:
1. What do you make of Chinese statements that consumption as % of GDP is starting to go up? I find it odd that they’d make that statement along with GDP figures.
2. Suppose the reval happens, won’t the Chinese economy grow just as fast because now there might be a flood of imports, given the previous consumption statements?
DC, I don’t think China needs to worry about loss of export jobs. As Brad pointed out, even if 3% is deducted from growth figures, 9% growth still looks very respectable and above Chinese government growth targets of 7-8% per year.
AC, the US does have a few choices.
It should levy punitive tariffs for China’s behavior, create a VAT, and use the receipts to fund health care.
A trade war with China would generate more benefits than losses for the US, and the inverse for China, because the trade is so distorted as it is.
Penny Goldberg — OK, let’s assume that you are right. Then the US should start to do those things you mention immediately. You say that they would benefit the US. Then why don’t they do it instead of waiting for China to appreciate its currency? A rebalancing and a stronger US in better financial shape would be good not just for the american people but for the whole world. So why don’t they start it today?
AC, nowhere did I say that China should let its exchange rate go to PPP. I certainly think it would be a mistake for China to let USD/RMB to go anywhere near the levels implied above,
I merely wished to point out the inherent inconsistency of a certain poster’s playground-style boasting about the “real” size of China’s GDP (dependent as that “real size” is on a sizable exchange rate adjustment) with his histrionic rants about the Western desire for a much more modest exchange rate adjustment in the real world.
For the record, I really couldn’t care less where USD/RMB is. I do care, however, when in the maintenance of a domestic policy objective China projects massive (and, I believe, negative) externalities upon other countries: market interest rates that are much too low in the US, thus helping to promote excess borrowing and thus consumption, and a quasi-pegged EUR/USD rate where volatility is too low and the euro is too high.
A common US Economist criticism of China is that the nation has an “over reliance on exports” (ie. it produces goods domestically that people around the world really want to buy with their hard earned money - don’t US Economists just wish).
The Chinese have “a weak domestic economy” according to the US Economist consensus (ie. they live within a budget without 7 credit cards in the wallet, and $4000 of high interest charge card debt).
Federal Reserve Bernanke derides the Chinese with “a primitive financial system” (ie. their Banking system works too well by actually finances productive investment in new factories, infrastructure, jobs and technology).
Well the root of the answer, I believe, is, who are “they”?
Happily the US is not administered by an authoritarian government as China is.
The entity with the power to enact such policy is the Congress with the assent of the President. As we’ve seen recently, the Congress is nearly hopeless when it comes to enacting major policy. And after 6 years and 1 veto, all of a sudden the President’s threatening to veto everything that comes through his door.
Further, after passing such a bill, a senator can’t go home to her constituency and explain, “I know much of what you buy is now a third more expensive, but trust me, it’s ok, because aggregate savings is rising, and that’s the healthiest way to reverse the horrible current account deficit situation the US faces.”
I follow Brad’s blog with interest, and agree with him that a currency adjustment sooner is better for all parties than almost any other solution later.
DC:
If the exports aren’t such a big part of China’s growth story, and I believe the latest stats bear that out, then a reval shouldn’t be much of a problem then?
I do think Bernanke and economists have a valid point on Chinese banking system. Last time I stepped into one, I was struck by the inefficiencies, the spurious and redundant checks and balances needed and the amazng patience of the customers in waiting. In my opinion, that’s the key element holding Chinese government back from a major reval. If CNY suddenly went up, the amount of business would overwhelm these banks.
AC, Asian Man, DC, Penny Goldberg (and others)…
Let’s focus on the economics side of the story and stay on subject. It’s very easy to get distracted into useless debates about politics or culture and start bashing each other needlessly. The system is complicated and involves many agents and variables, so simple minds like me can’t fathom all that’s going on, but that doesn’t give me the right to arbitrarily bash any party for supposed slights, prejudices etc. Let’s respect the effort Brad has put into here to produce his posts and have an intelligent discussion, not a shouting match.
Thanks
It is possible that China remembers what happened to the Japanese domestic economy after it acquiesced to the US at the Plaza Accord. Plus, it will not resuscitate our mortgage market, which is already on life support, if the Chinese stop buying our debt. I’m not sure that the US has enough power to push any of its major creditor nations into changing their monetary policies. No one seems to be talking about Japan’s heavy purchases of US Treasury Notes. If the Chinese currency is under-valued, how would one classify the yen?
LC, this issues are very much on topic.
I am with LC on this. Please let us just focus on the economics.
Brad, I do appreciate your commentary and your blog is one of the few I read on a regular basis.
LC,
With the exception of the Agricultural Bank that serves more rural regions, the Chinese Banking system is now profitable with the other majority state-owned banks issuing IPO shares on the Hong Kong and Shanghai stock exchanges. The only entirely privately owned Chinese bank, Minsheng Banking Corporation, is also very profitable. The very fact that the Chinese PBoC requires domestic banks to hold an increasing level of banking reserves in low yielding Chinese government bonds is an indication of Bank financial profitability. And contrary to Western pundits who claim US financial superiority, even if Citicorp is granted a banking license in China, it will never match the scale and scope of the Bank of China with 12,000 branches and 150 million retail customers. Bank of America recently disposed of its Hong Kong Banking operations to Industrial Bank of China.
Penny Goldberg - Don’t singled out China since you forgot to mention: Latin America, Middle East, Russia, etc.
Perhaps, US could have enacted the policies you prescribed, but unfortunately thanks to the Irag-Afghan War no remedies so far — blame the President and Congress and the people whose blind devotions for continuting to vote for those “over 65 years old” Senators in office (no wonder new young braves can’t do the tough jobs that need to be done) for taking the easy route and doing a disservice to us Americans.
LC - well said, however, I would not use or “mention” the word “bashing” at all (it’s has negative tone and righteous and judgemental) here — it’s only bashing if you singled out someone or a country when you are not even the native or nationl of that country, so why bother since it will get you into hot water.
Also economics is about individual behaviors, culture, and attitude.
LC — Of course the Chinese banking system is not as good as the US. They started from absolute zero a few decades ago. It is amazing where they have got by now. Give them 20 more years and they will have a financial system as good as the one in the US. Maybe even better.
I don’t understand this urgency which comes up again and again. Why should they appreciate, has a perfect banking system, has a good health care system, increase domestic consumption to the 2/3 of the GDP, etc., immediately. They have time. If the rest of the world does not, than that’s mainly their problem.
“In other words, mind your own damn business.”
Sure thing, if Congress ever gets their head out of their backside and approves tariffs on China, we can move on to another low cost supplier with fewer delusions of granduer and y’all can mind our own damn business and sell those wonderful goods to each other. I’d just as soon the US not finance its enemies (which is why we need a gas tax/carbon tax/tariff on Foreign Oil/whatever you want to call it).
AC, Asian Man:
You raise good issues about China’s fragile banking system etc, but as the most recent Chinese economic figure show, inflation is creeping up. As the past interest moves haven’t helped to slow inflation, a currency move in conjunction with an interest hike might solve the problem. Many economists both inside and oustide of China have suggested such a course and with passage of time, that’s making more sense.
With regard to minding your business comment, I think you’re missing a key point. We, as a globe, are all in this together so it’s no longer just our or your business. I think it is in US and Chinese interests to make sure China continues to grow successfully and become a fully developed nation. I think past divisons such as West vs East, Communism vs Democracy no longer makes sense in this age of global equity market.
Asianman,
Unfortunately, as Investor Jim Rogers writes, there are many in the West that would rather not like China to succeed. They would rather see China as a failed state like Iraq or Afghanistan. Iraq will be eventually be raped of its energy reserves, the world’s second largest. Within the Washington Consensus, there is a deep seated, xenophobia against any Asian economic progress. The Asian Economic Crisis during the 1997-1998 period was a deliberate economic assault on the Asian Economic Model. Directed by the US Treasury officials in the Clinton-Rubin administration, the Wall Street Hedge Fund attacks on the monetary stability of the Hong Kong economy, represented the de facto declaration of economic war against the Chinese government. The Asian Economic Model of state-driven Industrial Capitalism has been under continual intellectual assault by the US government and corporate media cronies with Japan, Malaysia, and today the Chinese portrayed as the bogeyman.
Why are we surprised there is no adjustment?
Free global labor markets imply that adjustment can only be complete when all workers everywhere are paid the same for their work. In other words, quality of life in China and USA would have to converge somewhere. Otherwise cheap labor countries would tend to slide into trade surplus.
Since there are so many more people in China, the adjustment will likely result in Chinese living only slightly better than now and american standard of living dropping by maybe 80%.
Of course it would be crazy for US government to want this adjustment. US population is not mentally prepared for such a change, and who knows what social event would erupt if quick adjustment was attempted. The longer US can delay the adjustment, the better, and the slower this adjustment happens, the better.
DC:
Wow! I think that post is a bit extreme. A single individual’s view point doesn’t mean it’s right or it’s backed up by facts. Please consider some other view points prior to making such inflammatory statements. BTW, I don’t think the media in general has tried to paint China as the bogeyman or the Chinese in general have thought of US as enemy. The real bad guys are a small fringe of people within Pakistan/Afghanistan who are now killing Chinese and threatening Americans. Let’s not lose sight of that.
Missed Information: The so called down ward spirl hypothesis hasn’t been proven by facts. Please checkout Martin Wolf’s excelent “Why Globalization Works”.
Oh by the way, Businessweek in the latest magazine issue is once again predicting the imminent collapse of the Chinese economic model and economy. Haven’t we heard the same story told repeatedly after the SARS epidemic, the Asian Economic Crisis, etc. Do the editors of Businessweek simply regurgitate the same story and editorial every few years? Any crisis will pass with Chinese civilization lasting longer than any other in world history. Naturally, US magazine editors aren’t responsible for anything they write. Lots of Luck to Businessweek economic credibility in the new century.
Dave Chiang - I hear you and I’m with you!!
The “dirty truth” about any species, humans on Earth is that “I can be nice to you but first I have to be the boss” — so says the motto!
LC - Dave Chiang has every right to say “US - Mind your own damn damn business!!” And I will say US - Enforce your damn damn borders!!
I don’t want to say this but here goes “US is not really a “county but a Big Marketplace” with global ethnic groups coming here growing and changing the population and future “wealth” owners of good old USA.
So, I would advise anyone to think twice before singled out any foreign nationals.
black swan — the bis argues, and I agree, that China is making the exact same mistake japan made, namely, allowing rapid money growth to fuel a stock market bubble. japan let its money supply grow rapidly to offset the impact of yen appreciation; china is letting its money supply grow rapidly to keep the yuan weak. no matter — both ended up following excessively expansionary monetary policies.
there is more than one lesson that can be taken from the plaza — and there are plenty of examples of countries that have let their XRs appreciate (including japan in 70s) that didn’t experience a burst bubble and a lost decade. Europe now for example.
I also second Macroman’s point about PPP. I think China should let the rMB appreciate, clearly. But i certainly woudln’t expect it to go to anything like PPP in the near term. poor countries XRs usually come in at a discount to PPP, and china is still a poor country. It is just that the discount to PPP in China’s case is unusually large even for a poor country.
While I am sympathetic to China’s desire to improve their lot, and their willingness to make sacrifices to do so, it is incorrect to say that China’s currency peg to the dollar is none of America’s business. Maintaining the peg depends on the US leaving their capital account open to China when China’s capital account is restricted. If the US is not happy, an appropriate response would be to impose selective capital control on inflows from China.
LC:
I am not sure what you are trying to say. Of course globalization works in that it allows economies to grow faster. But what about the actual people? What I see around me is that american standard of living has probably declined by 20-30% since the start of globalization. Once consumer debt is washed out of the system (and that will happen eventually) look for another 10% drop.
At the same time Chinese quality of life is up quite a bit during the same period. So the real wages _are_ moving toward equalizing. Unless you can make world economy grow faster than
wealth is getting transfered from US to Asia (fat chance of that), US workers are going to learn to live on a lot less.
Asian Man:
I have not contested DC’s right to post or tried to single him out. I merely wished some of the posts to move beyond the childish shouting match style in defense of one country or the other.
Missed Information:
I am sorry to hear about declining standards for Americans. This is contrary to what I have seen and observed in my travels around the country and the world. I have seen areas devasted by loss of manufacturing or real estate debacle but 20-30% decline is hard to take. Nor do I necessarily think globalization or China is at fault for this. I recommended Martin Wolf’s book because he is much more eloquent and smarter than I am.
Bottom line: I agree with Brad that world has started to decouple from US for growth, but I disagree with Brad slightly that a currency revaluation will stop the Chinese economy from overheating. I think that economy has so much momentum now that a revaluation will cause a flood of imports and drive up activity even more. I have every expecation that the Chinese government will successfully slow down the economy through a combination of interst rate hikes, administrative controls on lending, forced plant shut downs and even some modest currency appreciation but I don’t expect big moves.
I also wish my own country, the US, would stop obsessing about Iraq and focus more on the world growth and get on board the growth train for the benefit of its own people.
LC - I went back to read your earlier post and I guess I was way too quick of myself, so I “concur” that you did not contest to DC’s right to post!
Also, the “single out foreign nationals” message was not directed at you but specifically, at Penny Goldberg, et al who should really focus their “energy and attention” on its own country’s serious problems and less about “constant repeating” of “negative evil” things about other countries or even “how much or how fast” they should or change their policies.
It’s been nice to acknowledge your presence here and as a fellow American — I’m done for the day.
Greetings!
Written by Guest on 2007-07-19 18:47:12
Ooops!
LC - above Guest post is mine!
Hi Brad –
I think your posts are excellent, and I’ve made good profits using them (I think).
But I’m always trying to connect the current a/c situation with other macroeconomic processes…….
Query — do you think it’s right to say, from a broad macro viewpoint, that the current a/c represents a pent up condition which at some point in the future must be expressed in some (unknown) combination of US inflation, falling dollar and higher interest rates? If so, has anyone tried to quantify the effect, say if it was diluted among all three areas equally?
Brad, don’t feel bad about missing predictions. Economics can only describe what forces are in play and where things *would* move in a purely economically rational world.
The problem is that our understanding of economic rationality suffers from limitations. Paul Krugman has admitted that he did not anticipate the destructive side of globalization (though, as I told him, if he’d read the footnotes in Samuelson, he would have). It seems perfectly economically rational to let Chinese workers take on jobs that relatively few Americans want… until one calculates the full cost of losing those jobs. The political system is wiser in sensing externalities.
Just so, economics predicts that the US dollar should be much lower than it is, and that US markets should have been punished accordingly. There is good reason to think that economic statistics are being cooked. But economics does not incorporate the fear of change that a humbling of the United States would involve. It is that fear of change, I would guess, that lets the economically irrational system of letting the United States spend itself into oblivion continue.
I’m not arguing all the blame is on China. US has more than its fair share of the responsiblity.
A carefully drawn tariff would apportion incentives on both sides to change behavior.
In fact, the negative effect on the US consumer would probably be greater than the effect on the Chinese worker, given that China has plenty of reserves to use to help there if it wishes. There are a lot of ways it could do this.
Hello
China will have to keep the US alive until the Summer of 2008 and when the games are over then the gsmes begin. Just get ready. The EU could care less if we aren’t in the way. As an old worker in the US I can only hope I can get out in time.Nothing owed, nothing gained except watch it melt down. We were the leaders of the world, but with war being the only product, we don’t stand a chance.
jo6pac
” Sure oil prices are high, but the Middle East is investing more of its oil revenues at home, supporting global demand. ”
Seems to imply that oil revenues are not building up as excess domestic saving, and that domestic investment is dragging in more imports as well?
Anonymous — well, glad you have made money off my crazed writings, that is a skill i lack.
In the narrow sense, the current account deficit (actually the trade deficit — a current account deficit of 5% of gdp can be sustained for some time, a trade deficit of 5% of GDP cannot b/c it implies an ever growing current account deficit) represents a pent up condition that requires us income — i.e. production — to grow faster than US consumption for a period, and that requires the us savings and investment rates converge, whether through higher savings or less investment.
A falling $ is likely part of the process b/c it supports export growth, and exports are part of us income but obviously not part of US consumption — and thus it would help to offset a process that likely requires some slowdown in consumption growth.
there are a lot of different studies that have tried to quantify the scale of the needed dollar move. rogoff and obstfeld did one in 04, the imf has done various studies — look at past issues of the weo, and the iie just put out a policy brief based on a conference that included a lot of papers looking at this question (including one by martin baily).
higher rates are also likely, tho perhaps for a different reason — the trigger for adjustment is likely to be a fall in net demand for us assets, which implies higher rates. and higher rates would help bring savings and investment into balance. here though there is a bit of tension - as higher rates at some point would also make the us more attractive to foreign savings, and thus allow a larger deficit to be financed. I don’t know of any study that has quantified this — there are several studies that have tried to quantify the impact of foreign and specifically central bank demand — on us rates. the best comes from Francis warnock in my view.
as for inflation, there are offsetting effects. a weaker dollar would push inflation up, b/c of higher import prices. slower consumption growth would push inflation down. if a slowdown in us demand growth slows the world, that too would put downward pressure on inflation, notably by putting downward pressure on commodity prices. and higher int. rates would slow the economy and thus tend to lower inflation, all else equal. A lot depends on the scenario that leads the US to need to start to adjust.
Penny:
I agree with your position on targeted tariffs, though tariffs tend to sour the tone in an important trading relationship and put off the needed adjustment even longer. I think there are lots of opportunities for US to export more to China, e.g. the health and safety sectors, environment clean up, renewable energies etc. I just wish our leaders won’t get so hung up on Iraq and pay a little more attention to everytying else to move us along.
LC, Penny,
Restricting Chinese capital inflows would minimise problems in individual trading relationships. Targeted tariffs require the government to choose winners (which is probably one reason why politicians like them; the other is that politicians would prefer to distance themselves from the rise in interest rates that any reduction in capital inflow would involve). A restriction on Chinese capital inflow would target precisely the source of the problem for the US, and would counteract an existing distortion of the market mechanism.
re: “just wish our leaders won’t get so hung up on Iraq and pay a little more attention to everytying else”
“…Referring to the recent attacks on Chinese citizens in Pakistan, Chinese Defense Minister Cao Gangchuan on Tuesday urged his Pakistani counterpart to “take measures to further ensure the safety of Chinese people” in the country…” http://www.forbes.com/feeds/ap/2007/07/19/ap3929503.html
“…What did people expect the U.S.’s creditors to do with their dollars? Let them waste away in demand deposits at Citigroup Inc.? And for their part, do countries with large reserve holdings expect Western governments to idly sit and let their corporations be taken over by foreign interests, especially governments?… The Europeans are no sterling examples of free-market capitalism… The big-reserve countries are no innocents… “A person who pretends to be what he or she is not; one who pretends to be better than is really so, or to be pious, virtuous, etc. without really being so.” That’s the definition of hypocrite, according to the fourth edition of Webster’s New World College Dictionary. Remember it. You’re going to be hearing a lot more about hypocrisy…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aQJqvIYYz4_Y&refer=home
“…The two countries agreed last year to cooperate on the construction of an oil refinery and storage plant in Pakistan to help China gain access to oil and gas from Central Asia and the Middle East… China last month called for protection of its citizens working in Pakistan after students from the Red Mosque kidnapped seven Chinese… On July 8, three Chinese workers were shot dead by unidentified gunmen in Pakistan’s northwestern city of Peshawar…” http://www.bloomberg.com/apps/news?pid=20601080&sid=akIrw37y04.4&refer=asia
Actually, China just removed export VAT rebates on a large number of items, so they are doing something about the trade surplus. Personally, I think that tax increases and negotiated tariffs are a far better way of dealing with trade issues than adjusting the currency since there is less likelihood of unexpected knock-on effects.
[q]It seems perfectly economically rational to let Chinese workers take on jobs that relatively few Americans want… until one calculates the full cost of losing those jobs. The political system is wiser in sensing externalities.[/q]
The full costs of losing the jobs is huge to the person who loses them. However, the problem with using the political process to deal with this is that the US Congress is going to be very concerned over US workers who lose jobs, whereas it really won’t care about the Chinese workers that gains jobs and it also won’t care about American workers that will get jobs that don’t exist right now.
In the case of China and the United States, the solution I think is a bilateral framework which I think is working well. China and the US can negotiate as equals. This isn’t the case with the United States and Ecuador or the United States and Uganda, and that causes problems.
Instead of always blaming others, U.S. manufacturers better start learning how to compete in the rest of the world. Motorola’s problem with Nokia is no different than General Motors problem with Toyota and Honda.
Why Nokia Is Leaving Motorola in the Dust
http://www.businessweek.com/globalbiz/content/jul2007/gb20070719_088898.htm?campaign_id=yhoo
Phones for high- and low-end consumers, a great supply chain, and lots of cash—the Finnish company has it all (except the iPhone).
Nokia’s supply-chain management may be the best of any company in the world. It has a big head start in fast-growing markets such as China and India. And it has $9.5 billion in cash and practically no debt, so it can invest far more than rivals on developing new products or conquering new markets—and thus build even more intimidating economies of scale.
As a result, it’s the No. 1 handset supplier in China and India and is growing fast in Africa, the industry’s next frontier.
The primary way that the Chinese government does macroeconomic policy is by issuing orders to the state-owned enterprises. I call this the “third lever” which is used instead of fiscal and monetary policy.
The “get it all done now” attitude is an interesting American quirk. It’s useful sometimes, but it sometimes causes big problems when you apply it to situations were you can’t “get it all done now” (i.e. Iraq and China).
From Businessweek, Fannie Mae and Freddie Mae in danger of possible collapse from “toxic waste” subprime loans
http://www.businessweek.com/magazine/content/07_31/b4044051.htm
Like the big private- sector players, these government- sponsored companies, which own or guarantee 45% of all residential mortgages, have taken on more risk in recent years. Now they hold a sizable piece of subprime and other potentially toxic debt–securities and largely illiquid loans that could take a hit after the recent fire sale prompted by two Bear Stearns hedge funds. And given the state of the broader housing market, more trouble may lie ahead. That would be bad news for shareholders and investors who own their mortgage-backed securities. “We don’t know how much trash is on their balance sheet,” says Josh Rosner of researcher Graham Fisher & Co. “It seems they’ve shot themselves in the foot.”
“…Asian investors have been the “most important” buyers of mortgage-backed securities…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alEWd0NKxUKM
So BusinessWeek is worthy of scorn when questioning Chinese economic sustainability but a beacon of truth when talking about subprime.
Ladies and gentlemen, Dave Chiang… an (oxy)moron, wrapped in an inconsistency, inside a hypocrisy.
re: “the US Congress is going to be very concerned over US workers who lose jobs”
“In 2005, the Chinese American population numbered approximately 3.4 million” http://en.wikipedia.org/wiki/Chinese_American
To Guest,
Everyone has their biases, especially the US corporate media. Why was it that the supposedly impartial Thomas Friedman at New York Times always goes pumping and pimping for the Clinton-Rubin Administration, and now Hillary Clinton. Why doesn’t S&P owned Businessweek investigate the multi-trillion dollar bond rating industry for criminal fraud relating to how “AA” and “AAA” sub-prime bonds simply implode to a worthless valuation? Why hasn’t Businessweek or Time investigated Robert Rubin for his deep personal involvement in the Enron criminal fraud, federal tax evasion, and insider trading of Enron stock based on deceptive information released to the general public by S&P and Moody’s.
But unquestionably, the Chinese are the number one smear target by the US corporate media. For all its faults, the current Chinese government has eliminated more absolute poverty than ever before in world history. The latest media compaign by the US Corporate media on Chinese products ignores the fact that 70% of Chinese exports to the US are imported by American multinational corporations including Walmart, General Electric, Apple computer, IBM, etc. Out of the hundreds of millions of products shipped to the United States monthly, how many Chinese products are really defective?
re: “…Asian investors have been the “most important” buyers of mortgage-backed securities…”
“Macau’s c*s**o sector has rocketed since a law passed in 2001 ended tycoon Stanley Ho’s 40-year monopoly on c*s**o operations in the city. That boost spurred new… openings, including Las V*g*s giants Sands, the Wynn Macau, owned by American g****g mogul Steve Wynn, and the Hong Kong-owned Galaxy StarWorld. The latest figures were buoyed by mainland Chinese and Hong Kong visitors who made up 86 percent of a record 22 million visitors… “Asians love gambling.”…” http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/288748/1/.html
sorry
“Mac**’s c*s**o sector has rocketed since a law passed in 2001 ended tycoon Stanley Ho’s 40-year monopoly on c*s**o operations in the city. That boost spurred new… openings, including Las V*g*s giants Sands, the Wynn Mac**, owned by American g****g mogul Steve Wynn, and the Hong Kong-owned Galaxy StarWorld. The latest figures were buoyed by mainland Chinese and Hong Kong visitors who made up 86 percent of a record 22 million visitors… “Asians love g**b***g.”…” http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/288748/1/.html
Happy Friday Morning Brad!
I find the post by: Written by Guest on 2007-07-20 09:22:26 very “unprofessional, offesinve and uncalled for” labeling Dave Chiang’s character and individualism, so therefore, I “Motion” that you take immediate action and remove that post.
Guest - if you just want to pick a fight here, perhaps you should just return posting all day long in Nouriel Roubini’s blog since you seem to be the “only lonely poster” there.
Respectfully,
Asian Man
RebelEconomist, I wish I could have expressed as well as you did.
Look at the waste in the US Economy.
Something is wrong with the way we understand and characterize capitalism.
Loose money + low regulation = waste, waste, waste
What happened to the invisible hand? What happened to the all-knowing market?
The only thing that gives me comfort is the knowledge that the money is made in market inefficiencies … and there are a hell of a lot of them right now, and I’m a pretty smart person when it comes to numbers and reality checks.
But it’s cold comfort when I see the mess that we’ve made of the landscape building oversized ticky-tacky houses for buyers who have yet to materialize. It’s cold comfort when I’m surrounded by crumbling infrastructure-the kind of infrastructure that sustains the economy, like factories and railroads.
This isn’t a rallying cry to communism, because that system sucked a$$. If I had to look at what worked, mid-century US socialism worked pretty darn well. Too bad we’ve forgotten how to do it. But this is a digression. The real issue is, what is wrong with capitalism that we get these IRRATIONAL booms? Is economics-as I suspected as a college frosh-more about psychology than mathematics?
re: negative chinese externalities
if as much as 1/3 of air pollution on the US’ west coast comes from china, how bad is it in china itself? i’ve read some estimates that there are half-a-million premature deaths in china everyyear as a result of air pollution; yes employing everybody in china should be a priority for the gov’t, but shouldn’t that also be balanced with environmental considerations, particularly in regard to not killing its citizens?
the summer olympics, i predict, rather than a triumphant (carefully-scripted) unveiling of china’s progress since it’s (anything but) ‘great leap forward’ since mao, i think will only unfortunately serve to highlight its ongoing deficiencies — just as the year of the pig has ushered in blue ear disease…
Mr. Knollenberg as Catalyst for Yen Strength
A potential catalyst to reverse the yen’s extreme weakness is emerging. Just as criticism of the weak yen is beginning to rise inside Japan, criticism in the US Congress is rising, most recently a bill introduced by Congressman Knollenberg. The bill, HR 2886, seeks to pressure Japan to sell excess forex reserves.
The more debate concerning the issue, the harder it is for investors to take long dollar-short yen positions. Thus, there is a higher the likelihood of a yen/dollar correction from current extreme levels. In view of (a) this turn in the debate and (b) the current cheapness of taking derivative positions, yen-call option strategies may be attractive.
[...]
Regardless of the motivations, defects (HR 2886 omits important parts of the picture, such as the importance of interest rate differentials on exchange rate levels and the potential impact of Japanese official dollar sales on US interest rate levels and the US economy), and prospects of HR 2886 itself, the focus on levels of foreign reserves as a factor in determining misalignments is likely to rise in importance.
For investors, therefore, a new dynamic has emerged: Total levels of reserves are well known. If reserve levels are benchmarked against an agreed global standard, then it will be easy to predict sales of excess reserves. Markets would likely jump quickly, even before such sales actually occur. On this logic, a sharp movement of yen/dollar becomes more likely.
In addition, new rules concerning excess reserve levels may also prevent misalignments. When investors see reserves for a country approaching excess levels, there will be a high level of confidence that intervention will stop, and even be reversed. Hence, the penchant for overshooting in forex markets will wane.
“as much as 1/3 of air pollution on the US’ west coast comes from china” - Guest
That the West Coast of the United States is importing “weather conditions” from China is the biggest, total “Bullshit” propaganda that the US Corporate media has ever heaped on to the ignorant US general public. Beijing is not a smokey inferno causing smog clouds over Los Angeles. Period.
DC:
I find that latest post rather inflammatory. I am no weather pattern expert, but it is conceivable that some air pollution from China could drift westward. I think the Guest has a point about ongoing deficiencies in China that needs to be exposed and fixed.
Guest, as for pollution within China itself, I find it pretty bad in industrial center, bad (as in comparable to Milan) in Shanghai and pretty good in western China. My friends in Shanghai tell me the quality is improving so I will take their word for it.
There’s Dave Chiang’s world, and then there’s the real world:
China’s Growing Pollution Reaches US
“The U.S. Environmental Protection Agency estimates that on certain days nearly 25 percent of the particulate matter in the skies above Los Angeles can be traced to China. Some experts predict China could one day account for a third of all California’s air pollution.”
http://abcnews.go.com/Technology/wireStory?id=2250133
I find the post by: Written by Dave Chiang on 2007-07-20 13:43:41 very “unprofessional, offesinve and uncalled for” labeling Guest 13:28:46 , so therefore, I “Motion” that you take immediate action and remove that post.
Dave Chiang - if you just want to pick a fight here, perhaps you should just return posting all day long in Nouriel Roubini’s blog since you seem to be the “only lonely poster” there.
Respectfully,
Guest
Imagine boys and girls, those terrible Chinese, they’re damaging our environment! Imagine, Santa Barbara getting weather effects from China, rather than smog from LA. Imagine.
The same tree huggers that complain about greenhouse CO2 gas emissions from those Chinese, Al Gore who flies around in his personal corporate jet, previously vetoed any World Bank funding of Chinese hydropower projects, banned the export of any US built Nuclear Power plants for electricity specifically to the Chinese.
So hydropower is no good because it damages the scenery, nuclear power is dangerous to export to the Chinese, and the Chinese should be prohibited from burning coal or oil for electricity because of too much greenhouse gas, according to the U.S. government EPA. The best development for the Chinese must be no development.
DC:
I think you’re reaching and jumping too far to conclusions here. I don’t think anyone has said we should deny the Chinese people the benefits of a developed economy. I think Guest has said (and I agree) that we should expose some of the deficiencies in Chinese development and fix them.
Guest - By responding and copying (plagiarizing) my post and replacing your moniker with Dave Chiang is an “admission of your guilt, animosity and bad behavior” toward DC, so you just did a “self-entrapment” and truly convinces me that you do live and post daily in Nouriel Roubini’s blog.
Peggy - you forgot “Peggy Sue Got Married” Hollywood World!
Please, let’s keep it down people, I think Brad is still sleeping and probably a bit exhausted of the “8″ items long posting a day ago and reading our raucous as I sensed in his previous post.
Have a nice weekend Brad and to all!
Asian Man:
I think Peggy has good posts and hasn’t offended anyone. I sincerely hope that we don’t get some random rants from anyone that perceives a slight and go totally off topic. Let’s be more mature and have intelligent discussions please.
LC - What happened to you today, it’s Friday you know! You were a trooper (Asian maybe?) yesterday. It seems you’ve become the new sheriff in this blog — okay I’ll sit on the sideline for a few days because you just been deputized!
It’s not my style to offend anyone (it’s a habit of writing that rhymes).
I believe Guest is the number “1″ culprit who started and I didn’t or I’m still waiting for you to counsel him.
i am not going to remove any posts. but do please try to be more civil toward each other. otherwise i suspect you lose a broader audience, not just me.
DC one request — i would prefer that you not continue to post the argument that rubin et al conspired to destabilize Asia in 97-98. I was at the Treasury at the time and know that isn’t the case. not everything worked out as the Treasury hoped (certainly in indonesia), but the goal was to stabilize, not to destablilize — and in some cases (the korean rollover agreement in late 97/ jan 98 is the most important example), the treasury was instrumental in a successful stabilization. your are attacking my old colleagues — in some cases, people who i know personally — for things that I know they didn’t do, and i don’t think you have ever really responded to my various arguments against your initial hypothesis of one vast treasury/ h. fund conspiracy. you undermine your own credibility by repeating false accusations.
this is something i do feel strongly about. Otherwise, i prefer to exercise as light a hand as is possible.
cheers
Sorry you all, but there is too much “The sound and the Fury” in this excellent post by Brad.
It seems to be funny (though it should be very sad) that citizens from the the most polluting country in planet earth are complaining of pollution L.A. making guilty the people in China.
I never thought that USamerican miss-information could reach so far. I supposed that people in this blog were quite sensitive to energy and pollution problems.
A month ago I put a comment about coal-burning in China (the only reason explaining why the oil barrel is lower than one hundred bucks today).
You, US people deceive the rest of the world quite often (it doesn’t matter asians, europeans, south-americans or japanese; let’s Africa appart) because you think that the US media say and explain what’s happening in the world and you beleive it.
It’s amazing that in the only one world made by Internet with all the tools it gives us, along with all serious people like Brad showing and teaching us their best, some people could be so blind about the worldwide reality.
I’ve been very surprised even by LC (I generally appreciate your comments!) accusing of an inflammatory post to DC for his defense on air pollution in L.A.
Let’s take a bit of common sense, the most needed commodity of our brains now a days, and have a good discussion, without policemen and bashing out anyone, and arguing with a bit of information.
I understand that the lack of control of USA about energy consumption and monetary police, makes you nervous, but DC and Asian Man write their opinions as anybody else.
The consequences of an Armageddon would be very bad for everybody, and eventually, everybody will take his blame!
Some info about CO2 emissions (not in LA):
http://en.wikipedia.org/wiki/Image:CO2-by-country–1990-2025.png
About Chinese coal production:
http://www.dailykos.com/story/2007/5/13/151248/673
It would be good that USA would reduce his energy demand and incease savings. Don’t blame to China for all your sins. Take some of the blame, please!
Best regards
I’ll say it again, there are a myriad of sins to go around, and the US is guilty of some of the worst, both currently and throughout history.
That does not mean China is guiltless of currency manipulation and terrible pollution.
The China defenders would gain some legitimacy if they’d admit to certain sins as well as attacking the US, justifiably, for its.
I find this debate interesting, for if the debates at the policy-making level are as un-understanding and unsympathetic as this one, we’re all in big trouble.
Asian Man:
I don’t fancy myself as sheriff. I just wanted some intelligent and civil discussion. Note I didn’t single out any paritcular individual but just pleaded for some rationality.
koteli (and DC):
I am sorry if my post offended you. I was objecting to the use of obscenities and the general tone of the post. I was not questioning DC’s right to post but I think it could be done in a more civil tone. I actually agree with some of your statements about US media, but I don’t think the media is out to get anyone or smear any particular individual or country. I believe most people miss a key point about US media and that is they’re for profit businesses, so they will sensationalize when they can, cut costs by regurgitating stories when they can and anyone can be labeled an expert for convenience. They have to make a buck too and they have to lower their costs too. So next time before we assign any ulterior motive to any media report, let’s remember that simple fact and not get all riled by it.
China’s Dust Plumes Cause Climate Changes
One tainted export from China can’t be avoided in North America — air. An outpouring of dust layered with man-made sulfates, smog, industrial fumes, and nitrates is crossing the Pacific Ocean from booming Asian economies in plumes so vast they alter the climate.
Since Brad has defended Treasury, let me say something about Wall Street. Wall Street is one of the biggest China-boosters in the United States. Everyone I know wants China to make lots of money so that they can make lots of money. Also, the big banks are not “American” institutions rather they are global ones. Among the people I work with on a day to day basis, about a quarter are Chinese, and there are lots of Chinese people in positions of authority in Wall Street, and so the idea that there is some great Wall Street conspiracy to keep China poor is just out of touch with the realities of the situation.
Personally, what worries me is that there will be a disconnect between Wall Street and Main Street and there will be a US populist backlash against “Wall Street millionaires” and that will adversely affect China. I’m not the only one that is worried about this, and if you notice, this is probably why contributions from Wall Street for this presidental year has gone more to Democrats than Republicans. Things like universal health care and cheap student loans are good things.
The problem with conspiracy theorists is that they miss the real conspiracy. There are political forces in the United States that could be dangerous to China, but they don’t come from Wall Street.
We need something to trigger global economy to adjust.
A Iraq Pullout Could Give Global Market an Anxiety Attack,a Panic. It is one of the way to correct everything.Global economy should be adjusting.It is really amazing it can last so long. The outcome will not look nice.
To David Chiang re:
“But unquestionably, the Chinese are the number one smear target by the US corporate media.”
David I like some of your posts but you harangue about the US “Media” hating or bashing China is getting old. I suspect there has been more coverage on Brittany Spears, Paris Hilton, and Anna Nicole Smith in the past year in US media than negative press about the Chinese government. For that matter I don’t think one would too hard pressed to find more articles bashing, one person, George Bush (not that I like Bush..) than negative articles about China.
“The latest media campaign by the US Corporate media on Chinese products ignores the fact that 70% of Chinese exports to the US are imported by American multinational corporations including Walmart, General Electric, Apple computer, IBM, etc.”
I have seen numerous booster articles about China which describe in detail how many “American” brands are actually made in China. What or who are you reading..?
like many chinese, DC is just sensitive, or sensitised, so he tends to be reactionary when defending china
A lot depends on the scenario that leads the US to need to start to adjust.
Written by bsetser on 2007-07-19 22:15:23
Brad,
What are the risks that the declining dollar will entail concurrent rising costs for foreign components and/or commodities embedded in US product pricing? Could these rising costs offset newfound domestic competitiveness in export markets based on the declining dollar?
What are the risks that the proposed appreciation of the Yaun and the attendant appreciation in US interest rates and inflation, coupled with faltering economic growth, will significantly impede investments in US domestic production capacity required to serve export markets?
Should US policy makers depend on investments in US manufacturing competitiveness to serve export markets while the US is in the midst of an economic recession brought on by rising interest rates and dried up puddles of liquidity?
If you had the cash, or even the credit, wouldn’t you rather invest somewhere with a better recent track record and a stronger currency?
That is unless you are awash in US dollars…
Could be the principles in the proposed Multilateral Agreement on Investments are coming home to roost in more ways than one.
To David Chiang,
I’m glad Mr. Setser has thrown his weight against your assertions about Robert Rubin. It should be pointed out also that 5 years (1992) before the Asian financial crisis Hedge Funds (with George Soros in the lead.. also a man who quite a bit of money on the Asian financial crisis..) “Broke the Bank of England:
http://en.wikipedia.org/wiki/Black_Wednesday
In British politics and economics, Black Wednesday refers to 16 September 1992 when the Conservative government was forced to withdraw the Pound from the European Exchange Rate Mechanism (ERM) due to pressure by currency speculators—most notably George Soros who made over US$1 billion from this speculation. In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.4 billion:
The trading losses in August and September were estimated at £800m, but the main loss to taxpayers arose because the devaluation could have made them a profit. The papers show that if the government had maintained $24bn foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling’s devaluation (Financial Times 10 February 2005). The papers also show that the Treasury spent £27bn of reserves in propping up the pound; the Treasury calculates the ultimate loss was only £3.4bn.
Hedge funds can and will run currencies up or down based upon financial conditions without regard to race or ethnicity. The aftermath of the Asian financial crises was also the downfall of LTCM:
http://en.wikipedia.org/wiki/LTCM
1997 downturn
Although success within the financial markets arises from immediate-short term turbulence, and the ability of fund managers to identify informational asymmetries, factors giving rise to the downfall of the fund were established prior to the 1997 East Asian financial crisis. However, in May and June 1998, net returns from the fund in May and June 1998 fell 6.42% and 10.14% respectively,reducing LTCM’s capital by $461 million. This was further aggravated by the exit of Salomon Brothers from the arbitrage business in July 1998. Such losses were accentuated through the Russian Financial Crises in the August and September of 1998, when the Russian Government defaulted on their government bonds. Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur as the value of these bonds converged became huge losses as the value of the bonds diverged, a quintessential Black Swan Event. By the end of August the fund had lost $1.85 billion in capital.
The company, which was providing annual returns of almost 40% up to this point, experienced a Flight-to-Liquidity. In the first 3 weeks of September LTCM’s equity tumbled from $2.3 billion to $600 million without shrinking the portfolio, leading to a significant elevation of the already high leverage. Goldman Sachs, AIG and Berkshire Hathaway offered then to buy out the fund’s partners for $250 million, to inject $4 billion and to operate LTCM within Goldman Sachs’s own trading. The offer was rejected and the same day the Federal Reserve Bank of New York organized a bail-out of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows: [2] [3]
* $300 million: Bankers Trust, Barclays, Chase, Deutsche Bank, UBS, Salomon Brothers,Smith Barney, J.P.Morgan, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Morgan Stanley
* $125 million: Société Générale
* $100 million: Crédit Agricole, Paribas
* Lehman Brothers and Bear Stearns declined to participate.
Hedge funds guys are notorious for go after their own kind.