My recap of the past week
Oil stayed high — but not high enough to worry Peter Fritsch and Kelly Evans of the Wall Street Journal.
The dollar fell against the euro and loonie — but probably not by enough for the dollar to displace the RMB on the G-7’s agenda. Alas, the value of the RMB — at least against the dollar — is determined almost entirely by the policy choices of a country that isn’t a part of the G-7. That is part of the G-7's current problem: the key G-7 countries tend to agree far more on things that they don't control than on those things where they might have an impact.
And the GCC countries – led by the Saudis — reaffirmed their commitment to their dollar pegs and in all probability their commitment to high domestic inflation and negative real rates as well.
Pegging to the depreciating dollar is producing a significant nominal depreciation of the Gulf countries’ currencies at a time when commodity price appreciation calls for a real appreciation of all commodity currencies (not just the Canadian dollar). But unless the Gulf states are willing to save the entire commodity windfall, the pressure for real appreciation won’t go away. Higher spending and more domestic investment will lead to higher inflation. High inflation together with falling nominal rates will push real rates down – and they are already quite negative in some parts of the Gulf. The excesses fueled by negative rates, in turn, are likely the biggest future risk to Gulf – not excessive government spending.
Yet even though nothing changed on the surface – the Gulf still insists on pegging to the dollar, Chinese economic policy is on hold prior to the Party Congress – it still seems that the dollar zone is beginning to fray around the edges. In an interesting post on the dollar, Knzn notes that:
“there are obvious cracks developing in the structure that has supported the overvalued dollar”
My friend from our Treasury days and the blogosphere's leading Fed Watcher Tim Duy notes:
The Fed is dumping additional liquidity into the system at a time when most central banks are attempting to turn off the faucet. The Fed is implicitly, if not explicitly, relying on countries with fixed exchange rates to absorb that additional liquidity at the cost of inflation in those economies …. In my darker moments, I fear that the Fed is forcing their foreign counterparts down one of two paths - either central banks with appreciating currencies throw in the towel and match Fed rate cuts, thereby unleashing a fresh wave of global liquidity, or central banks with fixed exchange rate finally decide that they can no longer bear the inflationary cost of supporting the US current account deficit.
Even long-time defenders of the dollar zone do not seem quite as convinced as they used to be.
Stephen Jen highlighted the Gulf’s difficulties holding inflation down so long as it pegs to the dollar. This week’s Economist story on China didn’t try to argue that China’s currency is fairly valued even with China’s large and growing current account surplus. Indeed, it makes the opposite case – the main current risks to China’s economy stem directly from its reluctance to allow RMB appreciation and the resulting need to run to an expansionary monetary policy. The Economist writes:
Many in China have concluded that the blame for Japan's economic malaise in the 1990s lay largely with the appreciation of the yen. Beijing has therefore allowed the yuan to rise by only 10% since July 2005. But Japan's real mistake was its loose monetary policy to offset the impact of the rising yen—which further inflated the bubble—and then its failure to ease policy once the bust had happened. By holding down the value of the yuan and allowing a consequent build-up of excess liquidity, China risks repeating the same error.
Well said.
The graph highlighting how Chinese wage growth hasn’t kept up with the increase in labor productivity is stunning. Unit labor costs are falling in RMB terms. Try looking at the evolution of Chinese unit labor costs in euro terms. It isn’t that hard to figure out why Chinese exports to Europe are growing so fast (they are up 40% y/y according to the Chinese data, while exports to the US are up only 15%) .
The Economist still argues that the roughly 3% contribution of net exports to overall growth is small relative to the 9% contribution from domestic demand. I by contrast would hesitate to downplay the close-to-record contribution net exports are making to China’s growth, even if (as is almost always the case) domestic demand contributes more.
So long as net exports continue to stimulate China’s economy, China’s ability to grow solely on the back of domestic demand hasn’t been tested. Indeed, there is a decent argument that the recent strong growth in domestic demand is linked to a surge in investment in the tradables sector and the financial boom generated by very low real interest rates – both of which stem from the same factor (the peg) that has supported net exports. So long as China has been able to substitute offset slower growth in its exports to the US with more rapid growth in its exports to Europe and the Middle East, the extent of the correlation between domestic demand growth and export growth hasn’t really been tested.
Finally the IMF released its COFER data on global reserve growth. The financial press, alas, was far more interested in a few relatively small investments by sovereign wealth funds – purchases that struggle to add up to China’s likely average monthly purchases of dollar bonds — than taking a fresh look at the backward looking data on reserve growth. The limited coverage of the IMF’s new data of the size of world’s reserves — and the currency composition of a fraction of those reserves — focused on an insignificant 0.1% fall in the dollar’s share of total reserves rather than the much more important increase in total reserves.
Indeed, if you make a few reasonable assumptions about the currency composition of the reserves of the countries that don’t report data to the IMF (I have a pretty good of who they are by now), emerging market dollar reserve growth likely matched the US current account deficit over the past two quarters.
That is new as well as big and important.
More wonky details later. I wouldn’t want to disappoint Felix.
But first a big thanks to Michael Pettis for filling in over the past week.
Who is to blame for the Global Credit crisis?
http://www.atimes.com/atimes/Global_Economy/IJ02Dj10.html
Greenspan reportedly said, “People believed [the credit rating agencies] knew what they were doing. And they don’t.” Greenspan was speaking about the agencies’ claim that packages of risky securities such as subprime mortgages were effectively risk-free, when they weren’t. The ratings agencies, as any casual reader of the financial pages knows by now, caused such damage only because Greenspan and his fellow regulators allowed them to.
As US Senator Jim Bunning said last week, “Numerous groups contributed to the mess, though some contributed more than others. At the top of the list is the former Federal Reserve chief … and now author, Alan Greenspan.” The Securities and Exchange Commission is investigating the big banks to determine whether they bribed the rating agencies, in effect, to bias their judgment in order to help the banks peddle a tainted product.
The ratings agencies pronounced riskless a trillion and a half dollars’ worth of derivatives that turned out risky after all. The banks sold it, and the Federal Reserve and other regulators let the world apply vast amounts of leverage to it. That leaves the rest of us waiting to see whether the house of cards will come down.
What could they have been thinking? The housing bubble in the United States and many other parts of the world could not continue forever, and could not forever permit Americans to save none of their income, as has been the case for the past decade. If Americans have to learn the hard way that they cannot surf the wave of the world’s savings forever, it will be a painful but beneficial lesson.
Very good summary.
In fact, the present exchange rate-monetary situation that you summarize is fascinating. In my view, fixed exchange rates have been put upside down in the last 4 years. Usually, authorities peg a currency to anchor the monetary policy -that is, to discipline the central bank- in order to foster price stability and commerce (that also benefits by a predictable exchange rate). The anchor needs to have a good reputation as a store of value and be liquid. However, today the sliding dollar anchor is making the pegged countries’ currencies sink, while flooding their economies with cash.
Someday they will drop the anchor.
It is somewhat similar to the role that gold played in the Spanish ‘price revolution’ of the XVIth century: A previously reliable anchor, quite well respected by the pegging country, turned into an inflationary device. Only gold was more difficult to discover and extract than today it is to create ‘liquidity’.
I would ask Brad whether he considers the situation with long-term T-Bond yields significant enough to be analysed?
interesting comparison to gold after Spain struck gold (so to speak) — or at least silver — in the new world. agree that the $ is no longer serving as an effective anchor in the classic sense, and pegging to the $ now is a mechanism for (excessive) reflation rather than a check on inflation.
any specific aspect of the situation with long-term bond yields?
I was thinking about all the talking about the rise -or relative rise- in the T-bonds interest curve “slope” (due to long-term yields) after the interest rate cut by the Fed. I don’t know whether it has reversed lately.
Do you think it is significant enough to signal some incipient worries in the bond market about the credibility of the Fed? (Along with the falling dollar and the rising price of commodities)
That move was interesting — especially as it coincided with a bout of dollar weakness and thus hinted that foreigners might not be willing to buy long-term treasuries no matter what. I would need to spend a bit of time with a Bloomberg though to feel comfortable writing about it …
Labor productivity is up. Not all of it going into wages. Where is it going into is corporate profits. Chinese state-owned enterprises are making huge amounts of money, and that money gets recycled back into the economy in the form of capital investment which will cause labor productivity to shoot up even more.
The big difference between China and Japan is that Japan was a developed country whereas China is a massively undeveloped one. Japan didn’t have a need for massive capital investment whereas China does. The liquidity issues that China have are not due to the amount of money into the system, but rather due to a lack of efficient systems to direct capital where it is needed.
Chinese state-owned enterprises are making huge amounts of money. Supplemental dividend checks to shareholders amounting to as much as 30% of the regular dividend of New York listed ADR’s have been issued by China Mobile, PetroChina, and CNOOC. Within a year of their IPO listings, I purchased a large basket of Chinese ADR shares which I thought were somewhat undervalued given the constant stream of negative press by the US media, but frankly even I am simply astonished at the price appreciation over the past few years. PetroChina up 900%, CNOOC up 600%, China Mobile up 600%, Aluminum Corp of China up 400%, Sinopec up 600%, Shanghai PetroChemical up 400%, China Telecom up 250%, Guangshen Railway up 500%, China Oil Services up 450%, China Life Insurance up 450%, etc. Although I personally believe there is a stock market bubble in Chinese shares so I am no longer acquiring additional shares, I still plan to retain my current holdings for the long term. No one can afford not to miss out on the biggest economic boom in Chinese history and perhaps even world history. Just my 2 cents.
My mistake that I forgot to take in account the earlier 1-2.66 stock split on China Life Insurance. My original shares purchased at $20 are now worth $234 as of today for almost a 1100% price appreciation.
For the record, I entirely donate my Chinese ADR dividends to various non-profit environment and edication charities in the United States and China on a 50-50 basis.
brad,
Could you speak to the domestic demand in China? How much of that demand is being met by imports? In other words, becasue of the peg, US companies are set to get zero benefit from currency and profit only from volume growth, no?
So much is made of the declining dollar trade opportunity for the US. Looking at the data reveals that the major deficits for the US globally beyond China are the commodity exoporters which are set to worsen? At the dollar nadir in past cycles it has led to marginal 10% or so improvement in trade balance? That is not much considering the 7-8 trillion consumer at risk?
Also on trade, perhaps the US “all-in” on services is looking a little shaky at the moment. Seems the BRICs aren’t so willing afterall to make the straight up manufacturing for services trade sold the American people? recent developments in the financial and airline sectors seem to confirm this? China has made clear that the banks will be Chinese which effectivily shuts the US banks out from the very opportunities the manufacturing sector was traded away? Likewise with airlines if you believe the rhetoric coming from chinese executives?
American’s appear unwilling to stop building battleships in the age of aircraft carriers. At some point the intellectually hionest thing to do is take a look at the playbook. Marginal free trade agreemeents and paltitudes from economically illiterate legislators does little to adress the core issues..
Aooks like it is time to rewritew the playbook.
Despite lower Chinese labor costs, US Airlines have 59% of passenger marketshare for China-US flights.
http://www.atimes.com/atimes/China_Business/II29Cb01.html
Controversy surrounds the awarding of additional air-service rights to US airlines because Chinese airlines have yet to use all of their allotted frequencies. According to the agreement signed in July, Chinese airlines are currently allowed 10 frequencies to the US but as of this month only have six scheduled flights. US airlines operate all 10 frequencies and continue to demand more.
Last year 842,694 passengers traveled between the US and China, a 25% increase over 2005 according to the US Bureau of Transportation Statistics. US airlines carried 59% of passengers between the US and China.
“For now, the US-China routes are among the system stars for the American carriers, who are getting most of the high-yield traffic,” said Richard Pinkham, a Singapore-based consultant for the Center for Asia-Pacific. “The Chinese carriers have so far underperformed, which is one reason they have lobbied to keep tight capacity restrictions in place.
Shorter Fed:
Money on table? Taken.
“Greenspan maintained the global economy was just as linked as ever, disagreeing that there had been a decoupling between the fate of the U.S. economy and that of the rest of the world. ‘The critical variable in this judgement is the price of homes in the United States,’ said Greenspan, who ran the U.S. central bank for more than 18 years until he stepped down in 2006.”
One thing is for sure — U.S. stock prices have clearly decoupled from the price of homes in the U.S. — unless you consider strong negative correlation a ‘coupling.’
US housing market in freefall dive
By Ambrose Evans-Pritchard
Last Updated: 9:42pm BST 28/09/2007
US housing market in freefall dive
Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession.
Total sales dropped 8.3pc on the month and are now down 21.2pc during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people. JP Morgan now expects sales to fall by more than half from their peak before touching bottom well into next year.
Median house prices fell 7.5pc to $225,700 (£111,400) as distressed builders tried to clear the glut of homes.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/28/cnushouse128.xml
Dr. Setser–I don’t mean to be a curmudgeon (I can’t help it but I am
but the 0.1% fall in the proportion of $ reserves is, to me, not the real story in the COFER data. Rather, it’s that the share of “unallocated reserves” keeps growing over time. From a 22.6% share at the start of the new millennium, it’s gone up to 36.02% as of Q2 2007.
As the countries that don’t report on reserve composition are the big ‘uns like a certain Asian country and key GCCs, this lacuna in the COFER data is expanding. The IMF bean counters probably do their best to compile this data, but it’s sort of like casting Les Miserables without Valjean AND Javert: there is a big hole in the story. (Consequently, we can’t really say that it was only a 0.1% fall in the proportion of $ reserves.)
Emmanuel — you are right. But there isn’t much evidence that China is actually trying to reduce the $ share of its very rapidly growing reserves (though there really isn’t much good data on what China had done over the past year either — the only good data point is the us survey). And the Bank of NY reported that the UAE still has something like 95% of its reserves (formal reserves that is) in dollars.
the big changes likely aren’t coming even among the reserves of those countries that don’t report to the IMF. The big changes have likely come in the portfolio allocation of some gulf investment funds (Kuwait for one) that aren’t even in the IMF COFER data, and perhaps in the allocation of SAMA’s non-reserve foreign assets as well, though I am less confident there.
look at Menzie Chinn’s graphs showing what the global data would look like if the countries that don’t report have 2/3s of their reserves in $. I would bet he isn’t far off.
Domestic demand growth in China is quite strong - and mechanically, imports are growing faster than domestic demand, so China’s import to GDP ratio is rising. The hard part though is disaggregating the data in a way that gets at the real question, which is is Chinese demand for non-commodity imports for purposes other than reexport rising in a way that supports global growth?
there I am a bit skeptical ….
Clearly Chinese import growth is much slower than Chinese export growth, and a lot of the growth in imports comes from an increase in commodity import prices and volumes, not an increase in non-commodity imports. That really helps the commodity exporting parts of the global economy, but it isn’t much help for the US.
Indeed, it is quite clear that — setting Boeing and a couple of other firms aside — US based production is capturing a fairly small share of the overall increase in Chinese domestic demand. US exports to China are up, but not by all that much relative to the size of either China’s economy or the US economy.
Off-topic
Vote for Jenny Bowen to Carry the Beijing 2008 Olympic Torch
http://pub1.chinadaily.com.cn/olympics/torch/members.shtml?mid=212
I want to run for the children of China.
Mother to two girls adopted from Chinese welfare institutions, in 1998 I founded Half the Sky Foundation, in order to enrich the lives and enhance the prospects of orphaned children in China. 2008 is our 10th anniversary!
My family moved to Beijing in 2004 to be closer to the work that has become the passion of our lives. Half the Sky (www.halfthesky.org) offers its four nurture and enrichment programs to children living in 36 orphanages across China. We have served close to 15,000 infants, toddlers, young children and teens.
This year, as part of China’s Blue Sky Plan, Half the Sky was invited by the Ministry of Civil Affairs to introduce its life-changing programs to welfare institutions in every province in China. We are so honored!
If I were selected to carry the torch, I would run with the children—8 lovely children from our programs in 8 different provinces. What an amazing experience that would be for them!
Guest: China has made clear that the banks will be Chinese which effectivily shuts the US banks out from the very opportunities the manufacturing sector was traded away?
I don’t think so. It’s unlikely that the government will allow majority non-Chinese ownership in a functioning bank, but at the same time the central government is encouraging foreign banks to set up partnerships and take minority stakes in local banks. The politics is that the banking regulators want to use foreign banks to pressure local banks to improve themselves and to bring over technology and expertise.
I don’t know if this is going to help US balance of payments but it certainly does help US employment. Suppose someone is sitting in NYC but is writing a piece of financial software that is running on computer based in Hong Kong. This isn’t counted at all in balance of payments, but it is helping US employment.
As far as I know, China Minsheng Bank based in Beijing is the only majority privately owned, national banking institution across China. Minsheng Bank is 20% owned by America’s Citicorp, the majority 80% is Chinese-owned by several wealthy tycoons. Unlike the Big 4 state-owned banks, the Chinese Central government doesn’t retain any ownership in Minsheng Bank. But Bank of America is retreating from China, selling its entire retail Hong Kong banking operations to Construction Bank of China. Currently, Bank of China has retail operations in San Francisco and New York, primarily serving the ethnic Chinese communities. Recently, the US Treasury Department is blocking mainland Chinese banks from expanding further into US retail banking operations.
From the Australian Sidney Times,
http://www.smh.com.au/news/opinion/counting-the-losses-of-frugality/2007/09/30/1191090936570.html?page=2
Tibet in 1959:
Life expectancy was 35.
Literacy was 10 per cent.
Infant mortality was 43 per cent.
Per capita income was less than $40.
Tibet in 2007:
Life expectancy has almost doubled to 68. Literacy is more than 90 per cent.
Infant mortality is 2.4 per cent.
Per capita income is about $1500.
2fish — the sale of software should register in the trade data as the export of a service (software is considered a service). whether or not this happens — especially if a us based firm buys or develops software in the us used by all parts of its global business empire — is another question.
re: “Labor productivity is up” …but not in the US where productivity growth is in decline… why would you want to peg to USD again?
The Bretton Woods II Fiction
http://www.pimco.com/LeftNav/Viewpoints/2007/Renegade+Economics+-+Executive+Summary.htm
The world economy is on the threshold of significant upheaval because of the substantial structural change in the global financial architecture, now popularly known as “Bretton Woods II.” Proponents of this so-called “Bretton Woods II” system argue that there is nothing inherently unsustainable about it. It simply represents the reemergence of a new Bretton Woods regime of global fixed exchange rates, based on structural current account deficits in the U.S. and structural current account surpluses in Asia, with the Asian current account surpluses recycled to provide cheap financing for the U.S. current account deficits. The U.S. gets to consume more than it produces and finance budget deficits cheaply, while strong export growth drives East Asian growth rates and rapid industrialization absorbs the labor surplus created by China’s underemployed rural population. In this view, this new BWII regime will allow the U.S. to finance its large current account deficit at a low cost for a long time; consequently, the United States’ growing external indebtedness poses few immediate concerns. In the paper below, we disagree.
In contrast to its forebear, BWII is not global in scope; nor does it retain any vestigial linkage to gold, nor any contractual obligations. It is less a monetary “system” and more monetary fiction, articulated to rationalize the dollar’s perverse resilience in the face of America’s increasingly parlous debt build-up and America’s seeming immunity to Third World style debt-trap dynamics. It artificially distorts risk premiums and encourages destabilizing financial practices such as the so-called “yen carry trade.” A misleading snapshot, it ignores the harmful impact of today’s exchange rate anomalies, rather than seeing them for what they are: the roots of a convoluted financial architecture, which have—and continue to create—great imbalances that ultimately threaten global stability and freedom.
China’s trillion-dollar state investment fund is ready for Business
http://www.atimes.com/atimes/China_Business/IJ02Cb01.html
BEIJING - China Investment Corp (CIC), the country’s long-awaited gigantic state investment arm set up to make use of its huge and ever-growing foreign exchange reserve for overseas investment, was inaugurated over the weekend.
The CIC, with a registered capital of US$200 billion, is a solely state-owned company, according to company sources. The state-owned Central Huijin Investment Corporation was merged into the new company as a wholly-owned subsidiary company, the sources said.
The Ministry of Finance (MOF) will keep pouring foreign exchange into the new company following issuances of special treasury bonds, according to company sources. China’s legislature approved the special issuance of 1.55 trillion yuan in treasury bonds (US$200 billion) for the new investment company in June.
So far, the MOF has issued more than 700 billion yuan in special treasury bonds, with 600 billion yuan to the central bank and 100 billion yuan targeting the general public. It will issue another 100 billion yuan in treasury bonds by the end of this year.
To DC:
China Merchants is also “civilly owned” (which is the term used in the PRC). The Central Government also doesn’t own any of the joint-stock cooperative banks, which are owned by local governments. Bank of America isn’t retreating, they are expanding through CCB. They have a nine percent stake in China Construction Bank and a guaranteed seat on the board of directors. Even under Mao, BoC always had some overseas presence. The other interesting bank is Guangdong Development Bank which was taken over by Knightsbridge.
Treasury wouldn’t be the people regulating expansion, that would be the Federal Reserve. Right now, none of the big banks in China are ready for massive expansion into the United States. They still need to get their own house in order. However, it’s likely that they will be ready to expand in about a decade or so, and I’ve heard speculation that this is the main reason that the PRC was trying to get a lot of foreign investment in its banks. When CCB expands into the US, it will probably do so in some joint CCB-Bank of America deal. Again, the key to doing business in the US, is “guanxi.”
The marketing aspects of CCB expansion will be interesting, and I’m sure that they’ll do what the BoA did in China. Instead of getting your loan from the China Construction Bank, you’ll get your loan from “Thomas Jefferson National Bank.”
To brad: There is no sale. Someone is typing in NYC. The computer that they are typing into is located in Hong Kong (or quite possibly in some data center in India). While they are typing, they are instant messaging and on the phone with people in London This is all happening real time, and I’d be curious how this gets reflected in the trade data.
My guess is that it doesn’t, and where is where “dark matter” comes in. This also explains a lot about why I don’t think that there is such a anti-globalization backlash. When you get to work, and you start e-mailing and IM’ing people around the world as part of your daily routine, the idea of anti-globalization seems rather quaint…….
As far as fear of job losses…… Well you can move an individual programmer from NYC to India. You can’t easily move Columbia University, NYU, about a hundred skyscrapers in midtown, all of the computers, all of the support staff, all of the headhunters, etc. etc. to India. It’s easier and a lot cheaper to move someone from India to NYC. A tree you can move easily. An entire ecosystem is hard to move. Even convincing people to move thirty blocks from midtown Manhattan to downtown Manhattan is proving to be a challenge.
When Doctor Roubini’s ‘interest-rate channel’ fizzles out, the big warning sign should be vol of vol resulting from the capital market’s pipe dreams about Fed rate cuts and the ensuing realignment with reality. SG was all set for that, delta-hedged but short volatility, but they anticipated an adjustment to unexpectedly small rate cuts, not to the surprisingly ineffectual cuts we wound up with, with LIBOR breaking down and big banks opting out. This way, with or without extra Fed accommodation, that nice heteroscedasticity zigs just when you want it to zag, so we hope that our cheese-loving confreres can close out their straddles & strangles in time!! Too much of that and you could propagate commercial-paper sadness out the yield curve. So if that was to happen some Friday next month, jerking bonds around, let us not jump to conclusions and blame our hapless sovereign creditors, all the more if it’s still Ramadan and everybody’s hungry and crabby and you could see them getting extra annoyed at our holy-rolling human rights Pecksniffery, presumably excepting ICCPR Articles 2, 4, 6, 7, 9, 14, 16, 17, 19, 20, 21, 25, & 26 which we daily wipe our bums with but anyway, don’t blame the malign and monolithic world Caliphate. Blame the French.
Re software and trade data
It’s a matter of transfer pricing. If a global firm wants to boost foreign profits, it can charge global costs to the US home office as feasible. I don’t see how this affects trade or income accounts except for ancilliary effects such as taxes.
The Big Geo-political picture
http://www.atimes.com/atimes/Middle_East/IJ03Ak02.html
One does not need to be the invaluable Immanuel Wallerstein, professor emeritus at Yale and director of the Fernand Braudel Center in New York, to read the writing on the wall. Wallerstein argues that the Bush administration’s endless-war ethos has not only exposed all the limits of US bombs-and-bullets power but has also laid bare to the world US political impotence.
This is the real talk of the town in western Europe, Latin America, the Middle East, Asia and Africa: US global hegemony coming to an irreversible end, revealing, Wallerstein would say, “multiple poles of geopolitical power”. We are entering “a situation of structural crisis towards the construction of a new world system” - with no hegemonic power.
The multiple poles include the US, western Europe, Russia, China, Japan, India, South Africa, Iran, Brazil and the southern cone and, Wallerstein would add, “maybe South America as a regional bloc”.
New research from the Niels Bohr Institute presents new information that adds another piece of knowledge to the jigsaw puzzle of the dark mystery of the universe - dark matter. The research has just been published in the scientific journal Physical Review Letters.
The universe consists not just of visible celestial bodies, stars, planets and galaxies. It also has a mystical fellow player - dark matter. The astronomers can measure that the dark matter exists in big quantities but no one knows what it is, nobody has seen it. It does not emit light and it does not reflect light. It is invisible. It is a mystery and the researchers have many theories…
… When the dark matter does not emit significant x-ray it is possible to calculate an upper limit to how quickly the particles decay and thus calculate their lifetime. The result is that if axions are to be the dark matter they must have a life span that is longer that 3.000.000 billion years. In that case there is not very much dark matter that has decayed yet if it was formed 13.7 billion years ago. The conclusion is that dark matter has a very, very long lifetime.
- best of luck with the international financial version of this
I think talk of the collapse of US power is waaayyyyy too premature. It’s likely that in *relative* terms US power is going to decrease, but that is only because the US is so much more powerful than everyone else that there is nowhere to go but down.
The US revealed the limits of US power, but it also revealed how high those limits are. As it is, the US has more military might in Iraq than any other nation can even think of putting together. Also the main limitations on US power in Iraq are domestic.
Also, don’t think for a second that a multi-polar world is going to be nicer or more pleasant than a unipolar world. As a great power, the United States has tended to be rather benign. As the US declines in relative terms, the rising nations are going to find that their interests are going to collide. If you don’t have the US Navy patrolling the Persian Gulf and the Straits of Malucca, whose navy will you have doing those patrols?
reading the PIMCO paper; something for everyone
for moldbug: “…Per Webster’s dictionary, a system is defined as “a complex unity formed of many often diverse parts subject to a common plan or serving a common purpose.” It would be charitable in the extreme to confer this definition on BWII, which is to the gold standard what a five-year old finger-painting child is to Monet. The hallmark of the classical gold standard was the prompt adjustment of international payments imbalances. The hallmark of the pure paper standard is the indefinite postponement of international payments imbalances, all the more so when its major violator possesses sufficient military “currency” to prevent its creditors from punishing it for ongoing prfligacy. Under the gold standard, a deficit country, if it persisted in its deficit, would eventually run out of gold. Under Bretton Woods II, a deficit country, if it is the U.S., can keep right on printing money, especially if its creditors on the other side are equally determined to perpetuate the poor economic policies that enable them avoid obligations otherwise imposed on them by an externally imposed and neutral system like the gold standard. The gold standard prohibited consuming more than the stock of gold in the Treasury and since it was beyond the control of any one nation, it made serial abuse of the system virtually impossible…”
for DC: “…Japan has largely managed to avoid being the focus of policy pressures to revalue the yen in part because Wall Street has made copious use of Japanese cheap short-term financing through the so-called “yen carry trade.” This monetary laxity on the part of the Bank of Japan (facilitated by the Ministry of Finance’s somewhat contractionary fiscal policy, which enabled the BOJ’s monetary policy to remain more accommodative than it might have otherwise been possible) has served to boost U.S. asset prices and lower risk spreads, thereby helping to facilitate America’s “guns AND butter” foreign policy. In the absence of the Bank of Japan acting as “dollar sub-underwriter of last resort,” it is hard to envisage a chronic debtor country like the U.S. mounting successive wars with little financial strain and an absence of the kinds of tax increases, which might otherwise politically constrain the country. Indeed, part of Japan’s own national debt is itself a product of its efforts to help prop up America’s global imperial stance. Great Britain is sometimes called America’s “51st state.” If so, then Japan is most certainly the 52nd. Both Tokyo and Washington view their monetary/military alliance as the best means of forestalling Beijing’s dominance of Asia and beyond…”
for BS: “…Although today’s focus on China tends to highlight its huge and growing bilateral trade surpluses with the U.S. (and to a lesser extent, the Euro bloc), less appreciated is the degree to which its exchange rate policies have historically impacted on its Asian neighbors and continue to do so to this day. As recently as 1994, Beijing precipitously devalued the renminbi against the greenback, taking it from 5 to 8.4, a 60%+ devaluation. Even this action understates the magnitude of the change, since it was preceded by a period during which the country’s monetary and financial authorities embraced a policy in which the yuan declined some 60 percent against the dollar (see Appendix). So much for the need for policy incrementalism, as the Chinese persistently argue today when confronted with the need of a substantial yuan revaluation. The devaluations engendered minimal disruption domestically. On the contrary, the ultimate impact was to “export” economic dislocation to East Asia and Japan; the cost advantage it conferred on China’s exporters signficantly eroded the trade competitiveness of other East Asian and Japanese exporters, thereby throwing their collective current accounts into substantial deficits by the mid-1990s, and setting the stage for the Asian financial crisis of 1997 and Japan’s “lost decade” …
“Although not initially apparent, China’s “beggar thy neighbor” devaluation policies sustained throughout the early part of the 1990s ultimately played a significant role in destabilizing and devastating East Asia’s populations… Whilst many have lauded Beijing’s “statesmanlike” actions in holding the line against the wave of competitive currency devaluations that swept across East Asia in 1997 (thereby preventing a worsening of the financial contagion), such praise ignores China’s earlier role in initiating the crisis in the first place… But this factor has been virtually ignored in the economic literature assessing the period. Therefore, most analysis tends to miss the key lesson to be learned from the crisis—namely, how economic misdiagnosis can lead to the wrong set of policies being adopted and the calamitous after-effects…”
for twofish: “…The lessons for present day policy makers are stark. A perpetuation of existing exchange rate policies, based on flawed economic analysis, is creating broadly similar conditions to those that prevailed before the Great Depression. History suggests great economic hardship will follow and that it will be proportionately borne by the debtor nations. Today’s largest debtor nation is the U.S., which is showing itself increasingly prone to using military options to enforce its objectives, given the precarious state of its national finances and corresponding loss of economic leverage… as it has gradually militarized its energy policy. If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost. Since these countries also indirectly compete with the U.S. for the same energy resources, we have a paradoxical situation in which they are in effect “feeding the hand that bites it.” This is inherently unstable as the foreigner eventually realizes that the provision of capital to a country engaged in war enables the country to invest more in military equipment—equipment that can ultimately be used against them. In such circumstances, America’s external creditors will decide that they would rather invest the accumulated current account proceeds in their own military jets and equipment for themselves. That is to say, they would prefer to own the jet rather than financie it for the U.S. Then the “magic” of Bretton Woods II disappears…
“Faced with the inability to resolve its problems economically, the U.S. is likely to be increasingly tempted to embrace the military option for the resolution of its debt crisis. A successful military option enables the victorious country to reap the spoils of the loser. Military victories allow for the confiscation of foreign assets and/or forgiveness of prior debts. The realization of the futility of an internally generated solution leads to hope for and support of an externally war driven solution.
“The war solution, as seductive as it appears, has tremendous costs, which will be borne most fully by future generations… By now, the country’s acute and growing debt build-up has led to a significant privatization of military and intelligence functions, well beyond any form of congressional oversight and, hence, impossible to control. It is also incredibly lucractive for the owners and operators of so-called private military companies—and the money to pay for their activities ultimately comes from taxpayers through government contracts. Any accounting of these funds, largely distributed to crony companies with insider connections, is chaotic at best. Jeremy Scahill, author of Blackwater: The Rise of the World’s Most Powerful Mercenary Army, estimates that there are 126,000 private military contractors in Iraq, more than enough to keep the war going, even if most official U.S. troops were withdrawn. “From the beginning,” Scahill writes, “these contractors have been a major hidden story of the war, almost uncovered in the mainstream media and absolutely central to maintaining the U.S. occupation of Iraq.” … military spending today consumes 40 percent of every tax dollar. The Pentagon always tries to minimize the size of its budget by representing it as a declining percentage of the gross national product. What it never reveals is that total military spending is actually many times larger than the official appropriation for the Defense Department, due to “black budgets,” increased outsourcing and the fact that many costs associated for the military are accounted for under “civilian” applications, such as health care costs for the soldiers… War is the natural outcome of the pursuit of renegade economics: a “read my lips, no new taxes” fiscal policy entails the ongoing importation of capital. So the true costs of the country’s increasingly militarized foreign policy is not simply the rapidly growing Pentagon budgets, but also the broader costs associated with the current account imbalance…”
cheers!
Guest: As recently as 1994, Beijing precipitously devalued the renminbi against the greenback, taking it from 5 to 8.4, a 60%+ devaluation.
Actually no…..
Before 1994, the currency exchange rate was set by administrative order and was nowhere near the market value of the currency. All Beijing did in 1994 was to get rid of the administrative non-market rate, and set the currency value at the market rate. There was no actual devaluation.
And currency policy in this case “was” incremental. The 1994 reset to market rates was the last step of a process that started in the early-1980’s.
re: “policy in this case “was” incremental” come again?
http://federalreserve.gov/releases/h10/Hist/dat96_ch.txt
31-Dec-93 5.8145
3-Jan-94 8.7217
Yes it was incremental
http://www.cato.org/pubs/journal/cj25n1/cj25n1-6.pdf
The created a secondary market for RMB in 1986 with a “market rate” that was different and much higher than the “official rate”. On 1/1/1994 then abolished the official rate.
There was no actual devaluation……
Guest: This is inherently unstable as the foreigner eventually realizes that the provision of capital to a country engaged in war enables the country to invest more in military equipment—equipment that can ultimately be used against them.
1) This makes it sound as if one day Hu Jintao is going to wake up and have a sudden realization that the treasury bonds that the PBC is buying are *gasp* being used for the US military.
2) The hardware the the US uses in Iraq can’t be used against China. Tanks don’t float. Every dollar that the US spends on a main-battle tank is one less dollar that can be used on a submarine.
3) Finally, the key to war is ideas and ideals. By spending money helping Americans to buy McMansions and HDTV’s, you are making it less likely that you will get the political will to fight China over something important.
The US has military contractors because it has a lot of cash, and not that many young men willing to fight and die in the army. The military contractors serve in a role like the French foreign legion. If someone dies in combat, that kid’s parents are going to ask if the war really is worth it. If a contractor dies, then there aren’t as many difficult questions asked.
The US military budget is much larger than the official budget, but it isn’t in secret accounts. The wars in Iraq and Afghanistan are funded through supplemental appropriations.
Also the war in Iraq isn’t a “natural consequence of renegade economics”. Seeing it as such isn’t a good idea since it hides the ****SHEER HUMAN STUPIDITY**** of the people who got us in this mess.
re: “There was no actual devaluation…”
according to the CATO paper there were a series of “incremental” devaluations, in which case that doesn’t change PIMCO’s contention that “China’s ‘beggar thy neighbor’ devaluation policies… [set] the stage for the Asian financial crisis of 1997 and Japan’s ‘lost decade’” just that “China’s ‘beggar thy neighbor’ devaluation policies” were more gradual than claimed, which doesn’t refute their larger point: that “the degree to which [China's] exchange rate policies have historically impacted on its Asian neighbors and continue to do so to this day” is underappreciated…
i have no doubt that hu knows where his money is being spent, but i think it’s absurd to think that he’s comfortable indirectly financing US military expenditure/adventure; why not just let US spy planes over china then? and “why, pray tell, is China building up such a vast military establishment?” as another guest aks in the next thread, e.g. the ability to shoot down US spy satellites…
also btw you’re right “the war in Iraq isn’t a ‘natural consequence of renegade economics’” [em added] but that’s not what they were arguing; they were saying “[w]ar is the natural outcome of the pursuit of renegade economics,” which i think is worrying and that (someone at) PIMCO takes this view i find, i dunno, even more alarming? refreshing? interesting? worth discussing at any rate
cheers!
Dianlysis (noit sure on spelling) is, I suspect, a bit out of the PIMCO mainstream, so his views should probably be attributed not to PIMCO but to a person at PIMCO.
2fish — I don’t always agree with you, but i found your analogy between military contractors (blackwater or whatever) and the french foreign legion spot on. and I agree with your assessment of how we ended up where we are — the stupidity and lack of judgement of those in charge was fundamental.
a bit perhaps, and definitely off the core gross/mcculley (and now el-erian) orbit, but i wouldn’t dismiss him as marginal; i think he’s pretty influential in shaping their ’secular’ outlook.
btw, what’s your take on china’s (series of incremental) devaluations in the (pre-)early-90s? like do you think they helped contribute to the late-90s crises?
I would put more emphasis on the shift from trend $ depreciation to trend $ appreciation circa 1995 — which hurt all the $ peggers. China added to that by emerging — post devaluation/ stabilization/ reform — as an additional competitor. but i think china was comparatively speaking less important then than now — remember, total chinese exports were only $200b @ 2000.
and china in turn certainly helped by holding to its peg (and letting the rest of asia devalue v both the $ and rmb) in 1997/98.
thanks!
btw, i was just thinking it’d be great if china took a (non-voting) private equity stake in blackwater; something twofish might actually believe is a good idea
that is a little unfair to twofish, but very, very funny.