Brad Setser

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Trading up – Peking University’s Michael Pettis will be guest blogging here for a few days

by Brad Setser
September 20, 2007

There is an awful lot of interest going on in the world — whether today's rise in long-term treasury yields, the dollar's new lows v the euro and Canadian dollar, the rise in Chinese money market rates or the Saudis' seemingly inconsistent desire to maintain their dollar peg without importing US monetary policy.  

But I can still take a hint.  I intend to take the next few days — indeed, almost all of next week — off.  

Internet addicts don't need to worry.  Michael Pettis, a professor of Finance at Peking University's Guanghua School of Management, has generously agreed to fill in for a few days.   

Needless to say, I am thrilled.  Mr. Pettis is true emerging markets guru.   His book – the Volatility Machine – shaped my own thinking about emerging economies more than any other single book.   

In the past few years, he has turned his attention from the emerging world in general to China in particular — and even more recently, he started his own blog: China Financial Markets.

I hope he will share his insights about China's spectacular recent growth, the perhaps equally spectacular risks that may be lurking under the surface of China's financial system and, if he so desires, developments in global markets.    


  • Posted by Guest

    that rumbling you feel beneath your feet is not an earthquake, it’s BWII’s foundations crumbling away.

  • Posted by OldVet

    There’s some talk that China is so worried about inflation that they’re declaring price controls on certain goods produced by gvt owned factories. Any info relevant to that? Doesn’t sound like a fruitful policy given experience elsewhere.

  • Posted by London Banker

    Have a great holiday, Brad! Welcome, Michael!

    I’ve added “The Volatility Machine” to my Amazon wishlist. Perhaps Santa will take the hint.

  • Posted by isaac

    I feel the FED easing will not solve the huge systemic risks in asset based US economy, what they are doing is shifting risks around, from credit crunch to inflation/US dollar.

    1. Though run on the bank type credit market meltdown are avoided, the recessionary consequences of housing bubble bust will continue pressure employment, consumption growth. Globally growth outlook should peaked, even for China.

    2. Expected return of US asset ( property, equity, bond / cash)all look very unfavorable, US dollar is plunging like stone while GOLD/OIL surging.

    3. FED influence on Long term rates are slipping. Long term rates are rising post Fed cut amid Dollar plunge, global investors are demanding higher inflation/FX risk premium to fund US current account.

    This is very different from 1998 n 2001 when US dollar surge more than 20% . The implications are stark, FED is pushing at a string in near term, higher credit premium/rising inflation/plunging US dollar will offset FED cut impact on long term rates.

    4. The Inflationary implications of plunging dollar/rising oil put FED between a rock n hard places, how aggressive they could ease in 2007 amid plunging US dollar n rising oil prices??

    Though Asian market tends to negative correlated with US dollar index since 1995( financial crisis & latest Asian boom show strong negative relationsihp), However in last US recession in 1990, weak dollar is not supportive for Asian equity at all.

    I think market is probably too optimistic, macro conditions 2007 are very different from 1998 n 2001 when Strong dollar, weak oil allow for aggressive FED easing.

  • Posted by Guest

    “What is collapsing today, is not an economy, but a vast financial bubble, a bubble whose chief economic expression is the U.S. financial system’s role as ‘The Importer of Last Resort’ for the world at large….

    “Look at the resort to virtual slave-labor operations, abroad, to export productive employment from the United States (and also western Europe) into regions where the price of labor is relatively the cheapest, and relative skills most marginal. Look at the U.S. industrial corporations, so-called; what portion of the total income of those entities has been a reflection of pure financial speculation, such as that associated with New York Bankers pivoted mergers and acquisitions?

    “In effect, the world has been supporting, until about now, a vast U.S. dollar-denominated financial bubble, all largely for the purpose of propping up an inflated, intrinsically bankrupt U.S. economy’s role as ‘importer of last resort’ for much of the world.

    “What happens, when that financial bubble moves into its inevitable chain-reaction-collapse phase?”

  • Posted by Twofish

    Then again maybe not….

    I try not to say “this is what is going to happen.” The most that I can say is “given these assumptions about the way that the world works, I can expect this to happen.” If it doesn’t happen, the my model was wrong and I need to go back and see why…. Looking back, I can point to several iterations where I got something seriously wrong.

    One reason I’m optimistic about the US economy now, is that this is not the first time that people have declared the US doomed. Look at the end of the Carter administration or around 1988 with the “Japan is going to rule the world.” I got caught up in that, and part of the lesson that I learned when the US *didn’t* collapse is that there are a lot of aspects to the US economy which people marked as dysfunctional which are really functional. People on Wall Street making deals for example. The total lack of industrial policy.

    The hope is not that you are going to be 100% correct. You never are 100% correct. The hope is that your errors are not going to cause really serious harm.

    Now. Personally, I think that the US economy has a few problems here and there, but that it is basically solid. I also think that what people deride as “financial speculation” adds value to the system rather than removes value. I happen to think that getting mergers and acquisitions right can add huge value to the economy.

    So we have someone that thinks that the entire US economy and world economy is on the verge of collapse. Maybe they are right, and a year from now I’ll be trying to figure out what I got wrong and why….

    But suppose a year from now, the world hasn’t ended…. What then….. I really wonder if the people who talk about gloom and doom now are going to rethink their assumptions if the apocalypse doesn’t happen…..

    Look up “Millerites” and the “Great Disappointment”

  • Posted by Guest

    so you’re saying you think you’re right, but you could be wrong; gee…

  • Posted by Dave Chiang

    Even admits Neo-con ROBERT D. KAPLAN, the US is on a slow and steady relative decline with the Coming Asian Century. And most surprising, Kaplan admits that the ultimate strategic effect of Iraq War fiasco which he earlier supported is hastening in the Asian Century. Truly ironic.

    THE ultimate strategic effect of the Iraq war has been to hasten the arrival of the Asian Century.

    While the American government has been occupied in Mesopotamia, and our European allies continue to starve their defense programs, Asian militaries — in particular those of China, India, Japan and South Korea — have been quietly modernizing and in some cases enlarging. Asian dynamism is now military as well as economic.

  • Posted by Dave Chiang

    Japan’s economy may not be booming like in the 1970’s, but you have to take the “Japan is in a terminal depression” theory with a grain of salt. There was a real estate bubble that was intentionally punctured by the Japan MOF that resulted in a few property speculators going bankrupt, but the typical Japanese middle class was never drastically impacted. During trade tensions with the US during the 1980’s, with the Clinton Asdministration imposing trade sanctions on Toyota’s Lexus luxury automobiles, the Japan’s MOF and MITI through the Japanese media and government spokesmen intentionally spread disinformation that Japan was really in serious economic trouble and headed for collapse. At the time, most Western news reporters thinking the American Neo-liberal model superior, swallowed the Japanese MOF disinformation story line, hook and sinker. Well two decades later, anyone who visits Japan today will tell you that the shopping malls are packed, infrastructure is state-of-the art, and new skyscrapers are being constructed everywhere across Tokyo.

  • Posted by gillies

    every time someone refers to the ‘asian century’, or chinese power rising as american power declines – i get this picture of the ‘titanic’ with the stern rising as the bow goes under. . .

    the players in the unfolding endgame are no longer nations, and will not be unless nationalism and national trade protectionism are allowed to rear their ugly heads again . . .

    the players in the game are borrowers and savers. leveraged bets and mortgages and every kind predicated upon ever rising asset values have been ‘spun’ so that debts seemed like securities, and people consuming the world’s abundance most recklessly have been ‘spun’ as its guarantors and ‘consumers of last resort.’

    the bubble that has burst is a bubble of ‘spin.’

    the late 20th century was the century of the financial genius – the borrower with a short memory in a rising market.

    the 21st century now unfolding will be the century of the new financial prudence – the saver with a long memory in a contracting global economy.

  • Posted by Twofish

    The US is on a relative decline, but that is largely because the US started from such an overwhelmingly high position that there is no place to go but down in relative terms. Same thing happened with respect to Europe after WWII.

    I don’t think that there will be an “Asian century.” The three big continental powers in Asia, China, India, and Russia are just too different to be considered a single bloc, especially one that exists in permanent opposition to the United States or the EU. What is likely to happen is that you will have a fluid set of alliances, and on every single issue, the fault lines will be different.

    Also I don’t think that globalization will be the end of nationalism or of nation-states. It might be the end of exclusive nationalism, but that is a different issue. I’ve ended being able to be both a strong Chinese nationalist and a strong American nationalist, and as long as both the United States and China are in a semi-workable system of trade and globalization, this will work out.

    It’s partly because both the US and China have ended up with very inclusive notions of what the “nation” is I think both will do well in a globalized world. I do suspect that nations that have more exclusive notions of nationhood will do poorly. I sometimes wonder if it would be even possible for someone to balance Japanese and American political and social identities in the way that I’ve balanced Chinese and American ones.

  • Posted by Guest

    Fed must beware the dollar danger
    A dollar slump is only one of a number of possible scenarios. But the danger to the greenback is an important concern and further cuts to US interest rates should be measured

    Beijing Sets Price Freeze
    The Chinese government froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.

  • Posted by Ponzi Q. Globalization

    the players in the unfolding endgame are no longer nations, and will not be unless nationalism and national trade protectionism are allowed to rear their ugly heads again . . .

    Nationalism has it’s ugliness. Millions have been slaughtered on the altar of ‘the nation’. But let’s not pretend that nations don’t provide any good things. The rule of law, social safety nets, access to clean water and electricity for all, worker protection, regulations on food safety and pollution, and much more that is good has arisen or been strengthened under the institution of the nation-state.

    To imply that the passing of the nation would be a good thing when all you have to replace it is some sort of global neoliberal system that is beholden to nothing but those with capital is wrongheaded.

    What does this neoliberal globalization bereft of any countervailing power promise us? The total rule of capital and the global labor arbitrage forever and ever and ever? No democracy? Or a toothless democracy that is powerless in the face of almighty capital flows? If it walks like a disutopia, swims like a disutopia, and quacks like a disutopia, then it’s probably a disutopia.

  • Posted by claus vistesen

    A hint others should take too :)?

    Have a good one Brad and we will be sure to welcome Michael in good spirit.


  • Posted by Anonymous

    Dave Chiang:
    Robert Kaplan is not a neo-conservative, far from it. He is an uber-realist.

  • Posted by Twofish

    Oh, that explains a lot…. Robert Kaplan belongs with the same school as John Mearsheimer who think that US conflict with China is inevitable not because China is some evil power trying to take over the world, but because the international structure is one of anarchy in which global powers must assert their powers or die.

    I disagree with them, but I find them less dangerous and annoying than the “democracy uber alles” folks like Bill Kristol and Bill Gertz. Part of it is that I agree with their premise that if the international system is one of anarchy *then* conflict between the US and China is inevitable. So the solution is to change the international system so that it *isn’t* one of anarchy, and one in which there are powerful forces attempting to keep nations at peace with each other.

    That’s where the multi-national corporations come in……

    Also one very important concept that influences my thinking is one of “checks and balances.” One frequent pattern in history is that we say that group A is evil and group B is good, so that we force group A out of power and group B has absolute power. Once group B gets into power, then absolute power corrupts absolutely, so then you see the good people in group C, so you overthrow evil group B, and group C comes into power and then surprise, surprise group C becomes evil.

    So a world in which multinational corporations hold absolute power would likely be hellish, but the solution is not to destroy the multinational and create a system in which the national governments hold absolute power, because that would be equally hellish.

  • Posted by gillies

    what i see is a mismatch between the units over which national governments operate, and the spheres in which international companies operate. the area where your u s government can enforce by law (as opposed to enforce by military threat or military action) is much smaller than the area where u s companies’ business and financial activity operates.

    funds can be transferred, transparency denied, and accountability frustrated by financial outlaws beyond the ‘frontier.’

    the linked (more or less, still) dollar/yuan currency area is bigger than the areas controlled by the chinese or u s governments individually. this is giving rise to impossible tensions –

    i am guessing that there are two extremes to what can happen (limiting it to america / china for the moment :

    either 1 in a horrible unwanted financial trainwreck the u s and china revert to protectionism, nationalism, isolationism, and war. the economic areas split and contract.

    or 2 the area governed by law expands, and freely negotiated ground rules for trade, for currency exchange values, and for the issuing of currency units that are a fair and dependable store of value, – replace the current frustrating stand off.

    america is badly in need of a globalist political party (dems ?) and an isolationist political party (g o p ?) and an open and democratic debate between the two – until a course can be set between the extremes.

  • Posted by Guest

    Hey Chiang. China can’t fight. Never had, never will.

    Read a bit of history. The Brits conquered China with what, 2 boats that would have been laughed out of the Mediterranean. So military spending is no relation to how people can fight.

  • Posted by RebelEconomist

    Guest on 2007-09-22 21:26:58:

    You mean that “we only have to kick in the door and the whole rotten structure will come crashing down”? A dangerous idea!

  • Posted by Ponzi Q. Globalization

    america is badly in need of a globalist political party (dems ?) and an isolationist political party (g o p ?) and an open and democratic debate between the two – until a course can be set between the extremes.

    America is badly in need of a political party that isn’t controlled to a great degree by big financial interests. When it comes to economics policy, all we seem to get from the two parties are Wall Street entities like Hank Paulson or Robert Rubin, two neoliberal bankers who couldn’t give a rat’s ass about the plight of the American worker. Why we assume that such uber-wealthy financiers would care more about the great unwashed American masses than the rich people they work with, live with, and love is beyond me!

    And, Guest, leave David Chiang alone! He turned me on to that Henry C. K. Liu fellow. Now there is an interesting writer that gets one thinking in different directions!

  • Posted by adiemuso

    Hi Guest
    “Read a bit of history. The Brits conquered China with what, 2 boats that would have been laughed out of the Mediterranean. So military spending is no relation to how people can fight. ”

    I think you need to do a bit more history and analytical classes. If you had been familiar with the Chinese History or had been able to cipher the finer prints or been able to understand the bigger picture at that point in time. Im sure you would have restrained yourself.

    FYI, Chinese were already in an age of decline in the 1800-1900s, much owing to the internal strife and the relative backwardness in terms of technology,economy, etc etc…. (think you can check it out in the library, much have been written and debated on the exact causes)

    And so, the European “boats” (not only British) were not the causalities per se. It is a whole culmination of many factors. And if you think this historical episode is a good indication of China’s current and future political and military stance, I seriously think you are absolutely flawed in your analysis!

  • Posted by Twofish

    Ponzi: America is badly in need of a political party that isn’t controlled to a great degree by big financial interests

    Meanwhile on planet Earth…… There is the golden rule, people who rule will get the gold, people with the gold will rule. The important thing here is not to make sure that the ruling elites have some divisions among themselves, so that its not rich people versus everyone else. It’s rich people and group A versus rich people and group B.

    The nice thing about the US is that there is a rough division of power between different industries and locations with different rich people who don’t agree with each other.

    Ponzi: Why we assume that such uber-wealthy financiers would care more about the great unwashed American masses than the rich people they work with, live with, and love is beyond me!

    Self interest…..

    The power and influence of the rich and powerful is based on more or less tacit support by the great masses, especially the upper middle classes. As long as the upper middle class can see themselves in the upper class, the middle middle class can see themselves in the upper middle class, the lower middle class can see themselves in the middle middle class, etc. etc., there ain’t going to be a revolution.

  • Posted by Ponzi Q. Globalization

    ..there ain’t going to be a revolution.

    I don’t know about revolution. There sure won’t be any improvements if everybody adopts a position of Twofishian resignation.