I do wonder if there is an “escalator effect” going on here, in that real median wages are flat whereas people are moving up. Something that is a bit surprising is the question of why people haven’t been complaining more than they are if things are so stagnant, and thinking in terms of wages as an escalator might explain things.

bsetser: the gains have been captured by a relatively narrow segment of the population. so the current edifice doesn’t really command strong democratic support in the US and Europe.

Walking on the street and looking around, I really don’t think that the gains have been captured by a relatively narrow segment of the population. I’m sure that this is because I spend my time in Texas and New York rather than Ohio and Michigan, but there are areas were globalization has lifted the standard of living of just about everyone in those areas.

Again, the fact that none of the major candidates have have made globalization an issue is pretty significant. It may be that the power elite has got everyone brainwashed, but that doesn’t explain why that brainwashing was more effective in 1992 than in 2008. I think it is more likely that people are looking at their own lives and their own wages, and aren’t seeing things badly impacted by globalization.

bsetser: But i am not sure that a system based on investing a decent chunk of china’s savings in money losing assets (domestically, through the misallocation of capital and NPLs and extenrally by buying depreciating $) really would command majority support in China.

Most people don’t care about the details. They just care that they get their stuff. If you see a 10% drop in wages or if their bank account disappears, people notice that really quick. If people are seeing a 10% rise in wages, the fact that another 10% is going elsewhere is irrelevant. Same with bank accounts. Very few people care about whether the PBC loses $300 billion in currency reserves. However misplace $1 in someone’s bank account and they notice.

and the current edifice hasn’t generated large benefits for a majority of the US and European participants in the system — real median wages are flat, and i don’t really think you are better off in real terms if the market value of your home goes up. you are still living in the same space and realizing the gains requires downsizing and living in a smaller space. the gains have been captured by a relatively narrow segment of the population. so the current edifice doesn’t really command strong democratic support in the US and Europe.

Chinese real wages are certainly rising — tho labor’s share of total national income is falling, as wage growth has lagged GDP growth. But i am not sure that a system based on investing a decent chunk of china’s savings in money losing assets (domestically, through the misallocation of capital and NPLs and extenrally by buying depreciating $) really would command majority support in China.

This all suggests to me that the current edifice is has been built on very shaky ground. that is what worries me.

Yes, Argentina shows the risk. The problem for the US, and I think the UK, is when the majority of people expect an easy ride. Then, in a democracy it becomes politically impossible to align incentives and expenditure to productivity. I see the latest Fed cut as part of this pattern. It becomes numerically, if not politically, difficult to take enough immigrants to maintain properity.

But all is not lost yet. My response to this threat would be to make public childcare and education the clear priority for expenditure, to help the existing population to become as productive as possible and to break the link between poverty and opportunity, and in the longer run, create a more informed electorate. To raise the money, I would tax oil consumption in the US, and property in the UK.

What happens is that you have this bad cycle. The economy goes bad. People are more willing to shut the gates. This makes it impossible for new people to get in. This makes the economy worse. The gates shut tighter. Eventually this thing spirals completely down hill, and if anything kills the United States, it will be this.

The US trade deficit is still a few percentage of GDP. Also if it is one thing that people should have learned from the 1980′s, is that deficit=bad, surplus=good is wrong. There are cases in which surpluses reflect defects in the underlying economy, which was the case in Japan-1980 and it is the case in China today. China is generating massive amounts of wealth which its financial system cannot invest well internally, and this is why there is such pressure to export money from China.

vorpal: The US has racked up a huge bill, and is dependent on more credit to get by.

And the reason people are willing to extend the US so much credit is that people still believe (I think correctly) that their money is better put in the US than anywhere else.

vorpal: Moreover, the cost of living is set to increase more rapidly as the price of scarce resources increases (Jeffrey Sachs has a recent article on this.)

Jeffrey Sachs has been wrong before (disastrously wrong in the case of his plans Russia). Personally, I think that technology will cause standards of living to go up faster than resources cause standards of living to go down. If this is correct, then the nations that will do well are those which have a track record of being able to develop technology rapidly, and the United States leads the world in this.

But it is not this country versus that country. The US is very good at coming up with new ideas. It’s much less good at implementing those ideas on industrial scales. Japan is better at that. It’s also much less good at actually producing the final widget using cheap labor. China is better at that. But asking what country is “better” is the wrong question. You set up your systems so that you put different functions in different countries, all playing to that countries strengths.

A lot of that involves finance and social organization. It’s not that US engineers are smarter or more creative than Japanese or Chinese ones, it’s that there are linkages between private equity, venture capital, and the research universities that exist in the United States that don’t quite exist elsewhere. (And even in the US, they exist only in a few cities.) China is trying to replicate Silicon Valley, but that will take about two or three decades.

vorpal: The US is most vulnerable. Because it depends on imports while it’s ability to pay for them has eroded. The true cost of the imports has been depressed, but it is impossible for this to continue forever.

But the US has some core strengths, which become more obvious if you look in the past and try to figure out why all of the previous the “US is doomed” predictions failed.

One is the structure of US university admissions. In the US, you are more likely to get admitted to a high ranking university if you are captain of the football team or president of the debating society whereas in Japan and China, it’s all about how well you score on tests. People who are football team captains tend to have the social and management skills necessary to start and run small/mid sized companies more so than someone that spends 100% of the time on tests.

The other is the way that the US sees itself. Part of the strength of the US university system is that it takes the brightest people from around the world and turns them into Americans. So China and India are producing upteen million engineers. The US can go through those upteen million engineers, and set things up so that the brightest, most motivated end up in the US.

This actually contributes to the American character. If you are quiet, obedient, and do what you are told, you are just not going to make it past the US immigration system. The people who get into the US, whether legally or illegally, are motivated passionate people who want to get rich. These are people who tend to start small businesses.

People say that the US is doomed because Americans are lazy and people are borrowing lots of money to buy useless stuff like McMansions and HDTV’s, but they are not looking at the big picture. This is how the US works.

You find an empty spot of land. Build a huge giant house with a pool and SUV. You fill it with HDTV’s, credit cards, citizenship papers, and a job that pays a huge amount of money for little work. You surround it with some immigration checkpoints, you broadcast it to the rest of the world and say “come and get this!!!!!” So what happens is that among the millions of scientists, engineers, shopkeepers, farmers etc., etc., all start running through loops to get the prize. They learn English, they figure out all of immigration tricks, etc. etc. Some of them make it. They enjoy the big house and the SUV, and you end up with some of the most motivated people in the world, ending up in the US, who then start the companies and come up with the ideas that pay for the house and SUV.

Of course, their grandkids and great grandkids are going to end up fat and lazy because they grew up in the nice house rather than having to fight their way in. No problem. Lots of empty space….. Build another house……

America, the world’s biggest reality game show…..

One of the reason that China has developed “rule of law” is that it protects leaders if they get in trouble. I don’t think that Chen Liangyu will be shot because he hasn’t done anything that would allow for a capital crime.

To DC: Anyone that losing unacceptably large amounts of money because of an interest rate or currency shift simply is not managing their finances prudently. In fixed income investing, interest rate risk is *the* biggest thing that you have to worry about, since interest rates have a far bigger impact on returns than credit risk. In forex, currency risk is also something you constantly have to think about. If someone is making bets about the direction of interest rates or currencies a year from now, they are making a bet, which is fine, but they don’t really have much room to portray themselves as “prudent” if the bet doesn’t work out. They are speculating……..

The libor is hard to move it’s not very helpful for the ARMs resets too.

Now what is interesting is that Libor US$ hasn’t budged since the Fed cut: http://www.cbonds.info/index/index_detail/group_id/8/
So cost of money for banks has not really come down at the wholesale level.