Does the United States need a new dollar policy?
Former Treasury Secretary Lawrence Summers seems to think so.
The vast majority of the US current account deficit is now being funded by central banks accumulating reserves as they seek to avoid appreciation of their home currencies. While the US dollar is usually viewed as a floating rate currency, substantial and critical parts of the world economy operate with currencies pegged to dollar parities or at least managed with them in mind.
This suggests the need for rethinking traditional approaches to dollar policy at a time when the global economy is more vulnerable than it has been since 1998.
The Clinton administration approach of asserting the desirability of a strong dollar based on strong fundamentals while allowing its value to be set on foreign exchange markets was highly successful in its time and has largely been followed by the Bush Treasury. But it is insufficient in the current world, where the dollar’s trade-weighted exchange rate is to an important extent managed abroad. Some means of engagement must be found with those who have yoked their currencies and so their financial policies to that of the US.
I — rather obviously — agree strongly with Dr. Summers' argument that the dollar doesn't really float right now, at least not against most of the rapidly growing emerging world. I also share his sense that a new US administration like will also need to find a new approach to the dollar.
Many have noted the very obvious gap between the United States rhetoric about a strong dollar and the dollar's current weakness against the euro. But the policies internal contradiction — as a "dollar whose value is set in the foreign exchange market" won't necessarily be "a strong dollar" — may be even more important.
Right now, the global economy is adjusting to a US slowdown primarily through a rise in China's surplus and an increase in Chinese financing of the US, not through a fall in the US deficit. US exports are growing at a nice clip, but they are not growing as fast as China's exports. The fall in the US current account deficit in the past few quarters — a fall likely to be offset by the rise in oil prices — has been small relative to the rise in China's surplus. The world economy would be better off if a fall in the US deficit, not a rise in China's already large surplus, led to a fall in the combined Sinoamerican current account deficit.
Summers hints that China may hesitate to allow the RMB to move too much now out of fear that the next US administration will want it to do even more. Better to hold off and do a deal later.
He may well be right. But if the dollar's current decline against the world's freely floating currencies continues (Right now, it takes about 1.44 dollars to buy a euro), it may not be in China's own interest to wait that long.
And for that matter, it also may not be in the Gulf's interest to wait. The Gulf's peg to the dollar would be rather strange in a world where OPEC no longer necessarily wants to price oil in dollars.
Then again, both China and the Gulf may still prefer importing US monetary policy — and risking an asset bubble — to any change. Read Stephen King. The "dollar" block may not need a monetary easing imported from the US, but the effects of an imported easing at a time of strength are easier to bear than the effects of imported tightening at a time of weakness.
Hi Brad,
Summers is at Harvard right?
Anyway, my personal view, I think Clinton did a good job (other than the cigar) then. And Mrs Clinton should be capable of repairing the strained relationships.
Direct confrontation is not ideal, neither is a economy boosting or budget draining (depends on your stand) war on Iran/Syria/any-axis-of-evils good for US and the World’s progress.
Free Trade might be the answer. Protectionism I think will send us all back a good decade or two.
Why the fixation on exchange rates as a cure to present imbalances? A consumption tax in the US (and that is something the US doesn’t need to wheedle out of the Chinese) would do much to start a correction of the imbalances. Instead of constantly whining about other nation’s policies, why not put our own house in better order, first? All we need in order to do that is some will power. Where is our will power?
The United States needs a new fiscal policy, economic policy, monetary policy and governmental policy.
The whole notion that Paulson has to go back and forth to China probably saying ” if you don’t do what we say we’ll start some wars ” and the Chinese are saying ” don’t point any guns at us we will complain to Sam Walton plus we will pollute the planet even more”. —– If wasn’t so pathetic it would be comical.
Brad,
your fx adjustment advocacy may have much bigger implications than we all could imagine. The whole Wall Street structured finance ponzi scheme is about to unravel and Fed-Treasury attempt of reflation is very dangerous. I am getting the impression that they are oblivous to the consequences of their knee jerk Pavlovian responses.
We have not yet started the consider the fact alot of CDS counterparties are hedge funds leveraged tothe tilt.
The US is living in Ideological Fantasyland
http://www.atimes.com/atimes/Middle_East/IJ30Ak01.html
America is drenched in ideology these days, superseding any and all other considerations.
The US is living in Ideological Fantasyland
http://www.atimes.com/atimes/Middle_East/IJ30Ak01.html
America is drenched in ideology these days, superseding any and all other considerations. America has been seduced by ideology’s siren song. Ideology is intoxicating, addictive; it replaces the disconsonant jangle of reality with the simple symphony of a secular theological purity and certainty.
Maybe there is one thing that might bring Americans back to the land of the real. Much like spoiled thirtysomething socialites who have never worked a day in their lives, perhaps America’s choice of believing what it wants to believe over what is real derives from the fact that, for decades upon decades now, America has been allowed to live beyond its means.
If someone else is paying for your reality, it’s easy to live in fantasy. But there are signs that this situation may be changing. The federal government maintains a running monthly ledger, called the Treasury International Capital, or TIC report of how much finance the nation draws in from foreign sources.
The most recent data for August, released on October 16, show a stunning reversal of foreigners’ willingness to pay for US profligacy. Instead of foreign capital interests actually putting money into the US in August, for that month the TIC data actually went negative, indicating that, for that month at least, the net capital inflows into the United States were at minus $163 billion. That includes a minus $35 billion capital flow into long-term US government securities, the principal car park where foreign capital traditionally sits.
This is the worst net TIC data report since the late 1980s, and it is the first time that foreigners have been net sellers of Treasury bonds since 1998.
Lawrence Summers is a managing director at D.E. Shaw
http://en.wikipedia.org/wiki/D._E._Shaw_&_Co.
why is this never mentioned? fascinating firm which survives and thrives on its capacity to profit from this situation.
Guest on 2007-10-29 01:35:00 – with all due respect, you grossly underestimate the complexity of both the situation and solutions!
US policy toward interest rates is much more institutionally interventionist (i.e. fed funds rate targeting) than its policy toward exchange rates (essentially market determined). The definitional wrinkle is that ‘market determined’ includes subjecting the US to the market forces of foreign central banks. This is an awkward but still a technically correct policy definition from a US-centric perspective.
Still, the world cries out for the articulation of US policy. In such a world, given the actual policy, the ‘least meaningless’ and ‘least dysfunctional’ expression of such policy is ‘we believe in a strong dollar’.
It’s fairly harmless as a policy statement, but a lot less damaging to markets than, say, an expressed belief in the tooth fairy.
one of the more annoying aspects of D.C.’s posts, whether submitted as guest or under any other id, is that so much of his parroting echoes Wolf, Roubini et al., which makes me wonder where Brad fits in all this and why i bother commenting here at all…
Wouldn’t it be interesting to see a Congressional hearing in which Citi, BoA, Countrywide and Merrill Lynch would be asked, in front of the American public: “so, what’s in your wallet?” It appears that Bernanke and Paulson are doing everything possible in order for those companies to avoid having to ever answer that question.
Another question worth asking is, why did Ford and GM stop buying forward currency contracts a year ago? Shouldn’t they be hedging?
Should we be paying more attention to this? “…But bite it will. It will affect investment banks, portfolio managers, stock brokers and broker-dealers, corporate finance firms, many futures and options firms and some commodity firms… Will it all have been worth it? As Mifid has progressed, some of the criticism has died down. Commissioner McCreevy has hailed Mifid as “a groundbreaking piece of legislation” that “will transform the landscape of trading securities and introduce much needed competition and efficiency”. It should, he said, “drive down the cost of capital, generate growth and boost competitiveness”. That, at least, is the idea.” http://www.ft.com/cms/s/0/c30f026c-8592-11dc-8170-0000779fd2ac.html
The US has lost control of their currency. It’s been heading this way for a while, but now it has no control whatsover. I think the latest rate cut drove all non central banks out of dollar debt holdings.
China is now in control of the USD. If China changes their peg, Japan and the rest of Asia follow in lockstep since Asia is competing with China for exports. Since Asia is a major purchaser of Oil, if the dollar drops, then demand for oil will go up in Asia until a new price per barrel in dollars is reached. This directly effects how much dollar recycling OPEC has to do to maintain their pegs. If the recycling becomes too onerous, then OPEC will adjust their pegs (Should really be When, not If). A change in the Yuan peg has an amplifying effect on the dollar.
Latest from Bill Fleckenstein,
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TechStocksPainProvesTheyreVulnerableToo.aspx
There are more dark-matter downgrades to come and that some of the insurers of credit may find themselves in serious trouble as credits go bad. He points out that if the insurers get into trouble, then all of the credits they insure obviously will worsen. For those who don’t know, there is an absolute mountain of paper that trades where it does only because it has insurance. Sort of like the paper that traded where it did because it was supposedly AAA, and that rating turned out to be worthless. Any AAA, AA, A or whatever rating that’s based on insurance may not be worth the paper it’s written on.
Barf went the Merrill bull
It’s a lesson that hit Merrill Lynch (MER, news, msgs) hard. Witness the subprime fallout behind the company’s sobering third-quarter earnings report. Merrill wrote down about $5.8 billion of $14.2 billion in what’s known as super-senior subprime assets — the stuff that’s supposedly above AAA and bulletproof.
When asked on the conference call if everything was marked where it could be sold, there was no answer, leaving folks with the idea that there was plenty of stuff still marked to model. And you can be sure that if Merrill Lynch has this problem of potentially mismarked paper, so do all of the brokers and probably some of the big banks. This is a huge deal. (Memo to nonbelievers: The problem is spreading, it has not been discounted and it has not been contained.)
Back to the theme of the original post. If it is time to replace both the Clinton Administration’s strong $ policy (times have changed) and the Bush Administration’s strong $ policy (which no one believes), what should it be replaced with?
Feldstein argues for a competitive dollar policy — but the $ in some sense is already competitive against many floating currencies, and just calling for a more competitive dollar won’t sudden change china’s crawling peg or end low int. rates in japan and yen weakness. A rhetorical shift might put more pressure on the $ peggers, but it hardly seems sufficient.
And for a host of reasons, the US cannot really be for a weak dollar –
Is the right construct to favor a dollar determined in the foreign exchange market?
and going back to summers point, if the dollar doesn’t really float today (and that impedes global adjustment), how should the US respond?
Part of the answer is for the us treasury to recognize that the US $ doesn’t really float, its exchange rate isn’t really market determined and thus the imf’s suggestion that the $ is still overvalued is right (with the overvaluation being v. the emerging world).
Or is all of this playing with fire at a time when the $ is setting new lows and foreign demand for certain US assets (CDOs for example) has dried up? Should the current strong $ policy (which isn’t in practice a strong $ policy) be replaced with a real strong $ policy, one where the US directs its own macro policy choices at XR stability b/c the risks of not doing so are now so high?
thoughts?
The US has no real dollar policy of its own because it has no real reserves to back it up. It has no control over the policies of foreign central banks. China’s policy for the RMB is a policy for the dollar as well as for the RMB. China will not budge from its own long-term policy for the dollar. They’re past that. The only meaningful policy instrument with any teeth that the US has is indirect – Fed interest rate policy. Therefore it has no choice but to muddle through with the status quo and the indirect dollar effects of Fed policy.
The US should neither have a strong nor a weak dollar policy, but a monetary policy based on “hard, sound” money. If the Federal Reserve were really serious about a “sound” money policy, it would not be telegraphing the financial markets its intention to further slash rates by another 0.5%, but would be actually raising interest rates by 0.5% to combat rising inflation from soaring energy, food, and commodity prices. The Federal Reserve has completely made a mess of capitalism by driving “real” interest rates well below the rate of inflation. Under Helicopter Bernanke, estimated M-3 money supply has been growing far too fast resulting in inflationary asset bubbles. The road to redemption is a “sound” monetary policy that would transfer wealth from Wall Street parasites to the “real” industrial wealth producing sector of the US Economy. As Economist Adan Smith remarked, the foundation to any market economy is “sound” money – an economics 101 lession that our corrupted Federal Reserve regulations seem to have forgotten.
(1) For a counterpoint, hear Mundell who is almost as rabid a China booster as Roach.
(2) What is America to do? I’m no genius, but the path looks pretty clear: First, a tighter fiscal ship is called for. Second, industrial policy coordination in the US aimed at export competitiveness with pollution control technologies / stem cell research would help. Mrs. Clinton has said so herself. Third, see below…
(3) I agree with adiemuso that Missus Clinton is the person who’s willing and able to get international cooperation going on global economic imbalances as Summers would like.
Enough of these amateur nite attempts at international monetary cooperation. It’s time to call on Hillary, the 25th toughest guy in America, to get a real man’s job done. At the moment, even Socks the Cat could do better than the wusses currently on the scene who keep yakking about the “strong dollar” which has lost over 50% of its value against the euro since the start of the new decade.
International trade under current currency and trade practices is reckless, myopic and a diplomatic disgrace. Serious thought should be given to Bancors/ICU, Import Certificates, etc. Unilateral currency machinations, neo-mercantilism and beggar they neighbor policies should be universally abandoned in favor of mutually sustainable trade practices regulated through an international mechanism. Everything else is the same careless folly that characterized the pernicious events of the early twentieth century.
Brad asks: “…one where the US directs its own macro policy choices at XR stability b/c the risks of not doing so are now so high?”
How would you propose doing that? With a brutal rise in the interest rate? If you want a stable dollar then something else has to fluctuate to compensate, right? What would you want that to be?
I just read on http://market-ticker.denninger.net/, that last week, some big player borrowed $75,000,000 in Fed Funds at a rate of 15%. How’s that for weak collateral? So, it appears that there’s the advertised Fed Funds rate, as well as an actual Fed Funds rate, and they ain’t the same thing. The advertised rate may be for show, for lowering the dollar, and pumping up bank stock prices. The actual rate may prove to be something else, entirely. Hey, Citigroup, Ford Motors, ect, “What’s in your wallet?”
Brad, hasn’t the US already articulated a new dollar policy? Sure, Paulson still mumbles the boilerplate ’strong dollar’ language. But what he has added to Rubin’s baby is the additional desire for a dollar “set in open competitive markets.” As you allude above, it seems to me that that is in fact the US dollar policy at the moment. And clearly it’s not occuring thanks to oil exporters and mercantilists, though as oft-discussed before the US possesses neither carrot nor stick to make its new policy a reality.
Could a tipping point occur if and when Europe adopts a similar currency policy? For the euro, beneficiary of hundreds of billions of un-asked-for soveriegn investment inflows, can hardly be asid to be a purely market-driven exchange rate. Alas, Europe possesses neither carrot nor stick to encourage reserve managers to cease and desist either.
All the more reason, therefore, for the IMF or whoever to be enlisted as mediator. Sadly, as you observed recently, they seem more intent on publishing internal incosistencies to avoid offending anyone.
What to do?
If the FED continues to cut rates, they’ll have basically sent the signal that the US doesn’t care about the USD and the dollar peggers have gotten what they wanted. Control over the USD. They can continue to fight the ride down all they want, but they’ll eventually lose. A currency can’t hold value as long as the issuer country doesn’t support it. China, Japan, and the Saudi’s will give it a good try, but in the end, the weight of US deficits will have proven too great.
To begin with, I think the FED should stop targeting asset prices. Having policy that’s aimed at boosing stock prices is idiotic. It doesn’t create any wealth. All it does is transfer money from ignorant people who get their news from people like Kramer to people who realize what’s really going on. The FED should concentrate on keeping inflation and the USD at maintainable levels. Regardless of what’s going on in the stock market and the MBS market, the FED should concentrate on keeping inflation and the USD at sustainable levels. From an acedemic viewpoint, the FED should be raising rates, not lowering them. But since the FED is more political than academic, they’ll continue to lower rates. Hoping the stock market doesn’t collpase.
The only way to save the dollar now is for the US gov’t to announce that they plan on raising interest rates in an attempt to reduce deficits and encourage domestic savings. They will also raise taxes and reduce the federal deficit. In conjunction with this, they need to strong arm the dollar peggers. If the dollar pegging isn’t stopped, we’ll really impose import tariffs on them and/or ban imports of certain or all items. The US can’t do this alone; they need cooperation from Asia.
It all boils down to what’s more important? The USD long term? or the stock market short term? They can’t have both.
“Part of the answer is for the us treasury to recognize that the US $ doesn’t really float, its exchange rate isn’t really market determined and thus the imf’s suggestion that the $ is still overvalued is right (with the overvaluation being v. the emerging world).”
I couldnt agree with this statement more. This is a massive government price fixing scheme.
I don’t think the Fed can raise rates enough to help the dollar anytime soon in terms of years. I also don’t think taxes will be raised to make a dent.
I don’t think the savings rate can be turned round either. The government and society need people to consume like there’s no tomorrow to sustain the economy.
There are no practical solutions to save the dollar from this demise. Around the world people don’t even want to exchange dollars anymore.
what should it be replaced with?
the US possesses neither carrot nor stick to make its new policy a reality
If the FED continues to cut rates…
zirp!
“Rather than capitulate to the false logic of Bretton Woods II, we propose a Japan-style zero interest rate policy (ZIRP) for the U.S. in combination with strategic and iterative fiscal tightening as a targeted response to global imbalances, creating a “synthetic” trade tariff for foreign exporters of capital, and effecting a redistribution of wealth from asset-rich savers to debt-laden consumers in the U.S. Along with this, a substantial revaluation of the Asian currencies, led by China is in order. The desired policy objective is to eliminate the U.S. twin deficits and reduce U.S. debt levels without inducing an asset-deflation driven economic recession, explicitly legislating protectionism or encouraging heightened militarism, all of which threaten to reverse the progress of globalization and rising global economic prosperity.”
That PIMCO has been positioned long bonds is no doubt a coincidence….
Goldman Sachs banksters move to control Western Central Banks
Does Goldman Sachs Run the World?
http://www.economicsbriefing.com/2007/10/does-goldman-sachs-run-world.html
Not completely, but it doesn’t mean they aren’t trying. It seems that, literally, only flesh eating bacteria can stop these guys.
The Canadian dollar breaks above parity and, lo and behold, last Thursday, a Goldman managing director, Mark Carney is named governor of the Bank of Canada.
Mario Draghi, governor of the Bank of Italy, is also a former Goldman managing director.
Then, of course, there is U.S. Treasury Secretary, Hank Paulson, who was Chairman and Chief Executive Officer of Goldman.
Goldman did have a man at the Bank of England, but their presence there has gone astray for the time being. Goldman man David Walton was on the Bank of England’s Monetary Policy Committee from July 2005 until June 2006 when he died at the age of 43 from necrotizing fasciitis , i.e., flesh eating bacteria.
Unimpeded here by flesh eating bacteria, Goldman’s presence in United States government financial power circles remains very strong. Prior to Paulson, during Bill Clinton’s second administration, Robert Rubin served as Treasury Secretary. Rubin was Vice Chairman and Co-Chief Operating Officer at Goldman from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner at Goldman. And, Robert Zoellick, new head of the World Bank after Paul Wolfowitz was booted, was a managing director and chairman of the Goldman’s International Advisors department. …
US ZIRP – a moronically foolish idea promoted by shifty bond trading interests
Dave, you are starting to catch on! These guys are allowed to skirt the rules to make huge profits and are allowed to push it off on the tax payer when they are facing huge losses, why? Because they are all intertwined, they are one omnipotent entity out to serve each others best financial interests. Congressmen/women and senetors benefit, heads of these bank/brokerage companies benefit and large shareholders benefit. The rest of us serve them though being taxed to death to cover their frivolity and mistakes. This country is headed tight down the shitter…
Guest on 2007-10-29 12:01:16 – clearly you’ve never traveled outside the U.S…
seriously – what does managing director D.E. Shaw Summers think and how is he postioned to profit? Shaw sounds like it could fix the world’s problems – and make money doing it – along with Ben Stein’s Steven A. Cohen National Debt Retirement Fund Bonds…
Not much foreign investor confidence in the US Dollar today?
New high today for Euro at 1.442
http://money.cnn.com/data/currencies/index.html
New high today for Oil at $92.95 per barrel
http://money.cnn.com/data/commodities/index.html
New high today for Gold at $795 per ounce
http://money.cnn.com/data/commodities/index.html
Stock market pumped to new highs by liquidity blizzard by irresponsible Federal Reserve policy that has inflated estimated M-3 money supply at 15 percent annual growth rate. But measured in “real” purchasing power versus Gold and Oil, the stock market performance is flat at best. Despite the disinformation globalization propaganda, upwards of 70% of corporate sales by the Fortune 500 are still domestic within the United States. When economic reality finally catches up, with the US Consumer essentially bankrupt with the Housing ATM machine broken, the S&P should correct 30 percent or more. The Helicopter Bernanke money printing press is mostly feeding inflation in energy, food, and commodities which is further squeezing the overleveraged US consumer.
Funny how Goldman Sachs alumni Robert Rubin has been involved in some fashion with every major financial corruption scandal in the past two decades.
1. Indonesian economy rape and pillage by Wall Street hedge funds with close political connections to the Clinton-Rubin Administration. Over 100 million impoverished.
2. Enron debacle with Citicorp’s Rubin involved in federal tax evasion shelter scams. Robert Rubin personally pressured S&P and Moody’s not to downgrade Enron bonds even when it was clear the Enron company was having financial problems.
3. Fannie Mae accounting scandal with CEO Franklin Raines closely connected to the the Clinton-Rubin administration. Citicorp earns billions of dollars from the sale of exotic financial derivatives to Fannie Mae and Freddie Mac. Fannie Mae falsified billions of dollars in earnings and revenue relating to financial derivatives.
4. Super SIV bailout scam promoted by Henry Paulson in order to prevent price discovery and marking to market of subprime bond securities held by Citicorp. More of the same Enron-style accounting at Rubin’s Citicorp.
Anyone else involved in such widespread corruption would have faced federal criminal charges.
There’s not much point in the US pusuing ZIRP when China’s pretty much already beaten them to the punch
“…China’s corruption also harms Western economic interests, particularly foreign investors who risk environmental, human rights, and financial liabilities, and must compete against rivals who engage in illegal practices to win business in China. The U.S. government should devote resources to tracking reported cases of corruption in China, increase legal cooperation with China (to prevent illegal immigration by corrupt officials and money laundering), and insist on reforms to China’s law-enforcement practices and legal procedures before tracking Chinese fugitives in the United States and recovering assets they have looted…” http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=19628&prog=zch
My answer to the question in hand is yes….the US needs a new internal dollar policy, and then the external policy can take care of itself.
The Fed’s mandate is dishonest. Economists since at least the 18th century have understood that money is neutral in the long run, which implies not only that the Fed can only affect employment or other real variables in the short run, but also that even this effect has to be repaid later. Inflation must be the Fed’s primary objective, and any secondary real objective stated in variability terms only. Assuming that he has the balls, Bernanke should assert the Fed’s independence, and say “to be frank, Barney, this is how it is….”, refuse to see subprime campaigners like Jesse Jackson, and ignore the financial markets except insofar as they indicate inflation expectations. I believe that this would be better for America in the medium run – the lesson of the 1970s oil shock was that those countries that did least to accommodate it tended to benefit afterwards.
“…property derivatives have emerged as a lucrative way of bolstering returns… “When the market was at the highs…everyone wanted to go long but now we have some participants wanting to go short and that helps to make a market.”… “The launch of the CME platform should encourage growth… “When you consider the size of the underlying market in the US, then this is a product that could really take off…” http://www.ft.com/cms/s/0/da2d4fde-8359-11dc-b042-0000779fd2ac.html
Re RebelEconomist: — Economists since at least the 18th century have understood that money is neutral in the long run, which implies not only that the Fed can only affect employment or other real variables in the short run, but also that even this effect has to be repaid later.
I think Fed is useful in the case of financial crisis. Imagine a person falls off a cliff. He must hit the ground sooner or later. However, with some kind of cushion (neutral in the long run), he may get a “soft landing”, and walk away from a disaster. In the same sense, one of Fed’s mandate is to cushion a crisis.
However, this Fed cut rate when S&P was close to record high and dollar was at record low. The behavior was hardly defendable. It basically gave up the control of the dollar. So it looks like the faith of the PAPER is all hinged on the desire of foreigners.
The fall in the US current account deficit in the past few quarters — a fall likely to be offset by the rise in oil prices
Brad, didn’t you write last week that the dollar value of oil imports was actually DOWN?
“Some means of engagement must be found with those who have yolked their currencies and so their financial policies to that of the US”.
Why does the quote here at RGE say “yolked” where the original has “yoked”?
Nevertheless, “yolked” may be appropriate if we all agree that someone will have egg on their face by the time this all works itself out…
InquiringMind
Gold Climbs, Approaches $800, as Oil Surges, Dollar Tumbles
http://www.bloomberg.com/apps/news?pid=20601012&sid=anHOt9ai2Oxs&refer=commodities
Oct. 29 (Bloomberg) — Gold rose to the highest since 1980, approaching $800 an ounce, as crude oil surged to a record and the dollar fell to the lowest ever against the euro, boosting the appeal of the metal as an investment. Silver also gained.
Gold has rallied 24 percent this year, heading for the seventh straight annual gain, as oil surged 52 percent and the dollar dropped 8.5 percent against the euro. Demand in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, is up 31 percent this year to a record 594 metric tons.
“The Fed is going to drop rates again, but inflation is extremely strong,” said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. “We have excess liquidity here. Investors are buying gold to hedge against the weak dollar and inflation.”
If it is time to replace both the Clinton Administration’s strong $ policy (times have changed) and the Bush Administration’s strong $ policy (which no one believes), what should it be replaced with?
The US should just shut up about the dollar and let it find its own level, as it should have back in the “strong dollar”/decimate-our-manufacturing days of the 1990s.
Good point, Guest. Gold is up 23% in $ terms this year, a pretty clear indication that Fed policy is over-easy. Moreover, that’s nearly 1/4 the rise in the Shanghai Comp and 1/8 of the rally in B-shares so far this year. If PBOC keeps up their prudent policy of tightening, who knows? Maybe China will finally have positive real interest rates in a few quarters.
Level 3 Bullsh!t Creative Accounting by US Investment Banks
http://www.prudentbear.com/index.php?option=com_content&view=article&id=4809&Itemid=53
Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models.
Goldman Sachs has disclosed its Level 3 assets. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman’s capital of $36 billion. In an extreme situation therefore, Goldman’s entire existence rests on the value of its Level 3 assets.
Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital and J.P. Morgan Chase with about $60 billion, 50% of capital. However those figures are almost certainly low; the border between Level 2 and Level 3 is a fuzzy one and it is unquestionably in the interest of banks to classify as many of their assets as possible as Level 2, where analysts won’t worry about them, rather than Level 3, where analyst concern is likely.
Level 3 assets are subject to eccentric valuation by the institution holding them, but the ability to write up their value in good times and get paid bonuses based on their capital uplift brings a temptation that few on Wall Street appear capable of resisting. Both Goldman Sachs and Merrill Lynch are reported to have made profits of more than $1 billion on their holdings of Level 3 assets in the first half of 2007, for example, profits on which bonuses will no doubt be paid at the end of their fiscal years. Given that we have had five good years on Wall Street, years in which nobody has known the amount of Level 3 assets on banks’ balance sheets, and no significant media waves have been made questioning their valuation methodologies, it would not be surprising if many banks’ Level 3 assets had become seriously overstated, even without any downturn having occurred.
When Nomura Securities sold its mortgage portfolio and exited the US mortgage business in this quarter, it took a write-off of 28% of the portfolio’s value, slightly above the 27% of the portfolio that was represented by subprime mortgage assets. Were Goldman Sachs’s Level 3 assets similarly value-impaired, it would result in a $20 billion write-off, more than half Goldman’s capital, leaving the bank severely damaged albeit probably still in existence.
Coming Structured Finance Implosion with Credit Insurers Problems
http://www.prudentbear.com/index.php?option=com_content&view=article&id=4799&Itemid=55
It is worth noting that MBIA and Ambac combine for about $1.9 Trillion of “net debt service outstanding” – the amount of debt securities and Credit instruments they have guaranteed, at least in part, to make scheduled payments in the event of default. Throw in the Trillions of Credit insurance written by the mortgage guarantors and you’re talking real “money.” Importantly, the marketplace is beginning to question the long-term viability of the Credit insurance industry, placing many Trillions of dollars of debt securities in potential market limbo.
The perceived creditworthiness of two of the largest financial guarantors in the US on Thursday plunged to lows not seen since the worst of the credit squeeze in August. MBIA and Ambac are specialist companies that guarantee the repayment of bond principal and interest in the event of an issuer default – including bonds backed by subprime assets. After both companies this week reported third-quarter losses, investors have begun to speculate that the monolines, as they are known, might themselves in default on their outstanding debt.
Ok ok Dave Chiang we get the point Goldman Sachs are the evil puppeteers behind all that is wrong, so you can stop now. We also understand (via previous parroting) China is a victimised force for good who can do no wrong.
C’mon, Guest 15:56! It’s not an official RGE post until the Chianger tells us how much money he’s making on his personal portfolio of Chinese shares! Let’s just hope he continues to provide such diligent updates once they start to crash.
Guest,
At least the state-owned Bank of China came clean with their disclosure of a $10 billion loss in AAA-rated subprime mortgages. So why won’t Goldman Sach’s alumni Hank Paulson demand the same of US Investment Banks for “price discovery” and “marking to market” the value of their subprime bond holdings? The losses revealed by foreign banks don’t come even close to the estimated $400-$500 billion total loss on subprime mortgages held mostly by US financial institutions. Instead of lies and a coverup, the world’s financial investors are entitled to an honest and full disclosure by publicly traded Wall Street investment banks.
you mean those chinese shares that aren´t in a bubble and who´s prices are fully justified by earnings and robust growth in a perfectly harmonious and uncorrupt, ethical Chinese market ?
Until there’s a crisis, I can’t see the requisite measures (such as relieving the fed of its mandate for full employment) going anywhere. The US has made it clear it’s going to inflate and spend its way out of its problems. Works until it doesn’t.
I cut and pasted directly from the FT, so I am not sure where the yolk came from … the mysteries of the internet.
US oil import volumes are down. and the total import bill in august this year was lower than august last year. but i would bet that september, october, and november will be higher. november especially.
Guest,
Chinese shares maybe a “bubble”, but at least they are “marked to market” everyday which is something that Wall Street Investment banks refuse to do with their subprime bond holdings. Everyday on the Hong Kong and New York stock exchanges, the value of large state-owned Chinese corporations are “marked to market”. The Super SIV bailout scam sponsored by Hank Paulson is nothing more than an illegal Enron-style accounting attempt to prevent “price discovery” and “marking to market” for trillions of dollars in subprime and Alt-A mortgage securities held on the books of his bankster buddies at Citibank, Goldman Sachs, etc.
@Dave, as you just mentioned ´the state-owned Bank of China´ is owned and run by the government. US investment banks own and run the US government. Which system works best……….the jury´s out…..
FWIW
Money supply is increasing sharply everywhere in the world, not just in the United States.
“Why the fixation on exchange rates as a cure to present imbalances?”
here’s a guess -
do you notice the dog that does not bark ? the u s officials make all sorts of demands on china – except the big one. when did you hear them call upon china to give up communism ? ? the elephant in the room that does not trumpet is this one – if china was not communist controlled there would be unions in the factories which make all that glut of profits. wages would rise. chinese products would rise in price and more would be sold within china. but profits would fall.
the u s based international corporations are busy making money out of these low level wages, at the expense of not only the chinese workers, but also the american workers whose manufacturing jobs have been exported.
so the chinese elite and the u s elite cannot bring themselves to end these low wage policies that make so much profit. the u s may be in deficit, but the corporations’ c e os’ salaries and share options are definitely not in deficit. the ratio of c e o remuneration to worker remuneration is exponentially obscene.
why the fixation on exchange rates ? it is a smokescreen to hide the woolly mammoth in the debating chamber – chinamerica is screwing the workers east and west. the elite is making this goldrush last as long as it possibly can.
‘chinese intransigence’ is a confetti tiger hiding a hairy mastodon that you are not meant to talk about. bernanke’s helicopters wear the insignia of the chinese airforce, and if they shower confetti, it may be to celebrate the nuptials of uncle sam with his blushing chinese bride.
so they are not fixated on the exchange rate. they are fixing the peoples’ gaze on exchange rates, in case they wake up to the great redistribution of wealth that is still underway, based upon arbitraging between high wage and low wage economies, and benefitting a small elite.
it’s not a savings glut – it’s a profits glut. don’t be fooled by the spin.
.
There is another interesting article from Stephen King which I could have mentioned in the previous threat, since apparently he wrote (dictated?) it while cutting hair or driving a taxi.
http://news.independent.co.uk/business/comment/article3015584.ece
“For the Federal Reserve, rapid rate cuts might eventually have to be the order of the day. Politically, it’s difficult to imagine US policymakers presiding over rising unemployment and shrinking economic activity, whatever the rate of inflation. The story, though, might not end there. Falling US interest rates would make the control of inflation even more difficult within the emerging world, eventually increasing the temptation to “go it alone” and leave the dollar to its own destiny. Might this lead to a dollar collapse, a loss of US monetary credibility and the end of an economic pax Americana?
Perhaps this is a fairy-tale too far. I sense, though, that recent events are not a one-off, a repeat of LTCM. Instead, the story unfolding is one full of sub-plots, geographical intricacies and economic dependencies. It may finish happily ever after. But it might, instead, end up like one of those novels from my namesake, a horrific mixture of weak growth, sticky inflation and, ultimately, a loss of confidence in the dollar’s status as a reserve currency.”
it was “… in the previous threaD…”
Gillies, the only two things the American and Chinese “elete” have in common, is that they both want to keep Chinese citizens working, and they are both corrupt. Don’t forget, that elephant you keep ranting about is the symbol for the Republican Party.
First, to all the Dave Chiang bashers, Dave C. is half the reason I show up here every day. Anyone who can write “It seems that, literally, only flesh eating bacteria can stop these guys” has my loyalty.
Second, gillies has it 100% right. It’s a profits glut, not a savings glut. And though I’m voting for Hillary, I don’t think she will do anything about it.
The Scared White Guys are all frantic because the administration is trashing their savings, but they and middle America deserve everything they get because they are the idiots who elected these people.
My attitude is: Don’t worry, be happy. Get your money out of dollars, bet on commodities and enjoy the show, because there’s nothing else to done at this point.
Brad Setser asked:
“Or is all of this playing with fire at a time when the $ is setting new lows and foreign demand for certain US assets (CDOs for example) has dried up?”
Yes. (BTW, it’s not just CDOs, as commented by Dave Chiang on 2007-10-29 06:27:32)
“Should the current strong $ policy (which isn’t in practice a strong $ policy) be replaced with a real strong $ policy, one where the US directs its own macro policy choices at XR stability b/c the risks of not doing so are now so high?”
Yes.
Guest on 2007-10-29 10:05:25 asked:
“How would you propose doing that? With a brutal rise in the interest rate?”
A key factor that prompts the members of a society (which may be the world) to regard an entity desirable (”strong”) as a currency is ITS PERCEIVED SCARCITY. That’s why gold is rising now, because it cannot be printed. That’s why in the 1980s citizens of countries in Latin America or other areas where governments resorted to reckless printing of pesos, etc. turned to use the dollar as currency, first in the function of store of value and then as medium of exchange, in the well known phenomenon called “dollarization” (although in Eastern European/Balkan countries it actually was “eurization”).
So a real strong dollar policy consists simply of making the dollar more scarce, by targeting (at least indirectly) money supply growth. Specifically M3 because dollars abroad are not in M2. (And it would help if the Fed restarted publishing M3, to send a signal they are targeting the real thing and not a possibly fake perception.)
That money supply growth target can indirectly be achieved in the current US interest rate targeting regime. And the current need for higher taxes can be easily seen from the first graph at
http://www.shadowstats.com/cgi-bin/sgs/data
My wild guess for how high initially: using The Economist’s Big Mac index for the US, in April 2001 it stood at $2.54 while in July 2007 it was $3.41. That implies an effective annual inflation rate of 5% over the 6 years. A slightly positive interest rate would be 5.25%.
“If you want a stable dollar then something else has to fluctuate to compensate, right? What would you want that to be?”
If the Fed sticks to a direct or indirect money supply growth target, it must be willing to refuse to print dollars whoever asks for them. Which includes be willing to:
a. let banks fall if they have a run
b. let the government default if it cannot roll over its debt
c. let foreclosures rise and the housing market implode as more ARM reset their rates.
Comments on each of these:
a. Banks will not fall if they just cut their credit lines to “structured investment vehicles” and “conduits”, honoring their status as “off-balance sheet” entities. (SIVs and conduits would fall, of course.)
b. The US government can prevent this through a fiscal shock, raising taxes while cutting spending. I propose reversing the Bush cuts, instituting a gasoline tax, and withdrawing from Iraq, etc. A long-term solvency shock is also needed, basically ending the entitlement illusion.
c. That could contribute to solve the illegal immigration problem as millions of former construction workers return to their home countries. Anyway, it should be clear by now that I am a Peak Oiler. As such, I think that further suburban and exurban construction whereby even more people become dependent on long commutes for everything (and further arable land is lost) is a real tragedy that must be stopped for its own reasons.
Typo again. It was “…And the current need for higher RATES can be easily seen…”
Bush admin officials have stopped talking about a strong dollar policy. Old news. Feldstien et al are out their saying a weak dollar is good. That’s how those guys operate.
http://www.ft.com/cms/s/0/e682dc5c-7a64-11dc-9bee-0000779fd2ac.html
M3 doesn’t correlate with anything. Goldbugs, it’s useless as an indicator.
Net government expenditures over the tax take is correlated with GDP growth. Neither party will change that (they arrive at it in slightly – very slightly – different ways.) But that’s what keeps GDP growth – and marginal job growth – humming.
Laying a Federal consumption Americans would not be in the interest of any politicians desirous of re-election. It would be worse than taxing football. Consumption is what Americans do.
The drop in housing investment will result in less domestic investment which will allow Bush et al to claim their policies “work” – just as 1) their getting ready to do in Iraq 2) they’ve been doing about the budget deficit by not including the off-budget items. However, the equation calculating GDP simply means a drop in domestic investment will lower the deficit all things being equal.
The debate regarding SWF’s transparency is really a debate about democracy. Norway’s open, the others aren’t. They aren’t because that is their nature, change their nature and the policy would change. When China buys a chuck of the biggest bank in Africa, they’re playing a political game. China’s SWF should simply buy up all the government-owned non-float of the Shanghai and Shenzhen – and other – markets. Then sell themselves off to the investors over time as a massive ETF. After all – remember this GOP canard in 2001 – it’s their money.
I don’t usually double-comment, but the same Summers article attracted few comments at Economist’s View and I’m curious about whether the informed and insightful commenters here have anything to say to this:
“…I might hazard a guess that Summers is suggesting something like the 1987 Louvre Accord (which tried to reverse the Plaza Accord) but with an expanded group of nations involved – notably the inclusion of China. Presumably the aim would be to unwind China’s huge US Dollar holdings in an orderly way. There appear to be no indications of mechanism in the article. Looking at history for clues, we might notice that the US’ part of the Louvre Accord was to reduce the Govt. deficit and reduce the growth of money supply. Japan’s part was to try to stimulate domestic demand. Is this what Summers is fishing for, with China substituted for Japan?”
Really good thread, by the way.
Now there is a doubt whether Bernanke will announce a cut. THE DOLLAR IS A DISASTER AT THIS LEVEL.
I don’t think the dollar should go any lower than this.
Right here stagflation is rearing it’s ugly head and Caterpillar is yelling recession. There are serious retrenchments in many sectors of the economy. Rate cuts will not stimulate the consumption needed to avoid recession.
Moe, there are plenty of us who come here less often than we’d like because of the barrage of one-sided, off-topic, conspiracy theory trolling propagated by DC. While we of course have the prerogative to simply stay away, it is nevertheless a shame that much potentially interesting debate is subhect to frequent interruption from a poster who blatantly ignores his host’s injunctions to remain on-topic. Whatever contributions that DC may legitimately have to offer are, in this lurker’s eyes, lost amongst his absolute unwillingness to engage in legitimate debate and his inevitable link pollution on every thread.
Nicolas, do you see the irony in a poster with an Italian email address complaining about a country engaged in an apparent competitive devaluation?
I find DC’s comments harmless because they’re so easy to ignore – like old wallpaper. Besides, even though he’s repetitive, the content usually includes some sort of analysis, unlike 95 % of the rest, including his detractors.
I happen to have interests within the U.S. even though I live in Europe. Furthermore I realize the importance of a healthy U.S. economy for world capitalism. I also know how a country can turn itself into a banana republic.
In addition, I’m a true conservative unlike what is being exhibited by those in control. As a matter of fact one can argue the lack of patriotism in debasing the currency.
Brad has welcomed and encouraged D.C.’s participation – along with those who believe his commentary “includes some sort of analysis”
“…The fact that house prices in Britain and in several other European countries have risen 40 per cent more than the IMF can explain on the basis of such fundamental factors does not mean that they are likely to fall by this amount. But the IMF figures do show that Britain (along with Ireland, Spain, France, Denmark and many other European countries) is potentially even more vulnerable than America to a property shakeout if the forces stimulating housing demand ever run out of steam. And that is what is happening now…” http://business.timesonline.co.uk/tol/business/columnists/article2709694.ece
From Robert Kiyosaki, an excellent editorial on why a US Recession is inevitable. Nothing at this point can stop an US default to the rest of the world, which is taking place as a monetary devaluation of the US Dollar. The United States can no longer afford a guns and butter economy, threatening China and Russia with military power, but relying on those respective foreign Central Banks to finance US consumer overconsumption of McMansions and gas-guzzler SUVs.
http://finance.yahoo.com/expert/article/richricher/51335;_ylt=At3_VVuIrimFclXAZxN1q7a7YWsA
The other thing about DC’s content is that, whatever its source and ideological bent, it is typically articulate – again unlike most of his detractors. It’s easier to filter out something that’s articulate, rather than wade through a swamp of disconnected gibberish.
speaking of which:
“it’s not a savings glut – it’s a profits glut. don’t be fooled by the spin.”
profits are a source of saving, particularly in China.
I thought that DC’s mention of David Walton was insensitive and out of order. Given the content and authority of this blog, I would not be surprised if there are some readers who knew David Walton and were offended.
The cynical view, of course, is that DC’s contributions are “articulate” largely because they are plagiarized. Regardless, they are more often than not off-topic (which has clearly NOT been condoned by our host) and a pollutant to what would often otherwise be an engaging debate. Sure, I can ignore DC…or I can ignore RGE. If I want fanboy boasting about personal portfolios or off-topic conspiracy theories, I can easily find that on yahoo message boards.
From Washington Post, Helicopter Bernanke telegraphs his intention to bailout Wall Street banks and reckless Hedge Funds with further interest rate cuts and the rapid expansion of the already exploding M-3 money supply. Once more, profits are privatized by the Federal Reserve Banking cartel, financial losses are socialized to the American taxpayer and foreign investors gullible to believe in the integrity of the US financial authorities. The rising inflation rate stoked by irresponsible interest rate cuts are a heavy tax on the poorest Americans with soaring food, energy, and commodity prices. Since assuming the Chairman of the Federal Reserve board, estimated M-3 money supply growth has doubled to a 15 percent annual growth rate that practically assures double-digit “real” inflation into the coming decade. One assumes that Bernanke will print until his printing press can no longer print.
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/26/AR2007102601760.html?hpid=opinionsbox1
We should have let it — and let reckless speculators, subprime lenders and banks finally get what they had coming. But instead, the financial authorities let them off the hook. Rather than simply letting markets be markets, they bailed out both the fools and the knaves. We’ll all live to regret it.
At the moment of truth, the Federal Reserve cut the overnight cost of money in the United States (known as the Fed funds rate) by 0.5 percent. When investors, spooked by the subprime lending crisis, stampeded out, the affiliates ran short of cash. Then, just this month, Treasury Secretary Henry M. Paulson Jr. announced the creation of yet another fund, a piece of folly that was no more than a bailout.
VennDatat — there is something to your transparency is a proxy for democracy. democratic gov’s have to be transparent (at least moslty) about how they manage the people’s money. Autocratic governments not so much.
Gordon — my view is that the world may need something that combines aspects of the plaza (to bring the $ down v the emerging economies in an orderly way) and aspects of the Louvre (to limit the $’s fall v some floating countries that have moved a lot already). Or put differently, the RMB needs to appreciate against both the euro and the dollar, not just against the dollar.
Actually the US does not need a new dollar policy, but the WORLD does need one. From the US point of view the current system is ingenious (too ingenious for any politician to have devised): the US trades worthless paper for goods with intrinsic value. Much like the European settlers traded glass beads to the Native Americans in return for valuable goods.
And the system is all the more ingenious because it is foreign bankers who promote the system, which transfers wealth out of their countries but does provide jobs, albeit lousy ones, to their people.
The US has no interest in changing this system. But one day foreign central bankers will wake up to the fact that they have been giving the store away.
(Thanks to Henry Liu for explaining this in an article that I could not locate at Asia Times.)
The US wants only the Chinese yuan to revalue so an across the board devaluation of US Dollar hegemony can be avoided. Other nations especially India and Mexico would not be required to make an equilvalent currency revaluation. Why should the Chinese agree to castrate their own domestic economy and unemploy millions of workers? China would become even less competitive in labor intensive industries that are already losing significant marketshare to India, Vietnam, Mexico, and Cambodia.
Due to the US military protection racket in the Gulf Arab states, the strategic commodity oil can only be purchased by US dollars. The US dollar is “de facto” backed by the Gulf energy reserves under US military control. Clearly the US government has every intention to deny the Chinese strategic access to the Middle East region. If the Chinese were to revalue, US government would certainly not permit global oil sales to be denominated in Chinese yuan. Therefore the Chinese are clearly justified in maintaining the current policy of gradually revaluing the US dollar and maintaining foreign exchange reserves for the purchase of strategic commodities that remain priced only in US Dollars.
The Washington Consensus cannot have it both ways; demanding US Dollar hegemony but also demanding that the Chinese castrate their mostly labor intensive exports by significantly revaluating their currency. Under US Dollar hegemony, the Chinese economy has already been taxed enough by exporting “real” economic wealth in exchange for fiat US Dollar paper printed in unlimited quantities by the Federal Reserve.
“…what I see is a nightmarish conspiracy between the power of U.S. corporatism and the power of neofascism in China…” http://www.latimes.com/news/opinion/la-op-dustup9oct09,0,4826961,full.story
This isn’t profit, it’s pillage: “The amount of money stolen through corruption scandals has risen exponentially since the 1980s. Corruption in China is concentrated in sectors with extensive state involvement, such as infrastructure projects, real estate, government procurement, and financial services. The absence of competitive political process and free press make these high-risk sectors susceptible to fraud, theft, kickbacks, and bribery. The direct costs of corruption could be as much as $86 billion each year…” http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=19628&prog=zch
Profit is ‘earned’
Although this: “…Last year, fraud and other irregularities in China’s financial institutions amounted to $95.9 billion, a 31 percent increase over 2004…” http://www.iht.com/articles/2006/08/01/bloomberg/sxfraud.php
and this: “…In last year’s annual report, Mr Li revealed that in 2005 only $56 billion of $127 billion allocated to local government projects reached its destinations…” http://www.theaustralian.news.com.au/story/0,20867,21980868-2703,00.html
add up to $166.9 billion in 2005 alone, whether there may be some overlap in these to categories, or others not taken into account…
…doubtless all pilfered by those bastards at Goldman Sachs!
“Washington Hegemony”: a hopelessly inaccurate construct developed and propagated by a stooge of the second directorate of the People’s Liberation Army. It’s Washington’s fault that PBOC is forced to intervene, dammit! Blame Goldman Sachs and Morgan Stanley (ex-Stephen Roach, of course) for the negative real interest rates in China! Nothing to do with Beijing, no sirree!
the dollar is worthless paper, and the only thing that buys you certain strategic commodities. well, which is it ? make your minds up. this is sloppy thinking. can’t be both.
Too bad, Brad.
You do excellent work.
But the quality of the comments on your blog is morphing into toxic waste.
Time for some house cleaning.
“Goldman Sachs banksters move to control Western Central Banks”
“Funny how Goldman Sachs alumni Robert Rubin has been involved in some fashion with every major financial corruption scandal in the past two decades.”
It is utterly outrageous that Brad Setser has allowed the cowardly Chiang with his scurrilous charges against Robert Rubin, his crackpot conspiracy theories and his thinly-veiled anti-Semitism to continue to post here.
In an ideal world, Chiang, this supporter of the most monstrous regime since Adolf Hitler’s would be horsewhipped and then thrown out of the country. We obviously do not live in an ideal world, but the least Dr. Setser could do is ban this despicable individual from posting here.
The Chinese elite have manipulated /controlled their exchange rate to ensure export lead growth. Development of the economy and employment for its citizens is the strategic objective.
The US elite have manipulated, hoodwinked and sold out middle America under the mantra of free trade. profit growth via wage arbitrage and wealth for the wealthy few is the strategic objective.
This complementary arrangement has been win win for the elites on both sides until now. We are at an inflection point as the imbalances caused by this arrangement can now no longer be ignored.
Both sides know this and both sides are realigning both their objectives and strategies. It is obvious the US have opted to weaken the dollar in order to deal with the deficit problem, stimulate exports and revive industry and force the Chinese into their next move.
What the Chinese have in store I´m not sure but its certainly becoming a game of macroeconomic chess with Europe stuck in the middle and perhaps wishing they could flip the board.
May the best man win although it doesn´t really matter as I think we´ll all be screwed in the end.
Something for you to think about, Brad:
Something for me to think about
Nicholas Carr offers me advice:
Because blogging is such a personal pursuit, with strong and immediate ego-rewards, it can be irrationally seductive, particularly to highly competitive overachievers. The hazard – and this applies as well to disciplines beyond economics – is that extraordinarily talented individuals may end up, like lab mice drinking sugar water, spending more time blogging than they should, even though their comparative advantage is smaller in blogging than it is elsewhere. Distorted by noneconomic but nonetheless powerful rewards, the idea market would become less efficient than it should be, and we’d all suffer as a result. The real danger, in other words, may not be that the “lemons” – the “tolerable bloggers” – will take over as the mainstays of the blogosphere but that they won’t.
Please stop blogging, Greg Mankiw. You have better things to do.
Guest on 2007-10-29 10:05:25
“Brad asks: “…one where the US directs its own macro policy choices at XR stability b/c the risks of not doing so are now so high?”
“How would you propose doing that? With a brutal rise in the interest rate? If you want a stable dollar then something else has to fluctuate to compensate, right? What would you want that to be?”
That’s what I am wondering too. What macro policy choices are available?
“The world economy would be better off if a fall in the US deficit, not a rise in China’s already large surplus, led to a fall in the combined Sinoamerican current account deficit.”
Yes, but how could a fall in the US deficit come about? What could the US export in large enough quantities to make a difference? Outsourcing cannot be reversed overnight. Industries cannot be rebuilt overnight (assuming anybody in Washington even thinks in those terms).
DC – “Why should the Chinese agree to castrate their own domestic economy and unemploy millions of workers?”
Firstly, “castrate” is the wrong word Dav-o. In fact, untethering the RmB from the USD is metaphorically the opposite, freeing the chinese currency unit to grow to its full and glorious size. Secondly, because flawed as it is, the international monetary system as it exists currently – that is a system predicated upon market forces of currency and exchange rates along with more or less internationally-civic-minded fiscal, monetary and trade policies together working against divergent imbalances to promote adustment convergence – it is the only one we have. So unless China has an alternative, I suggest that China (and Japan, and the GCCs, and the US Admin and Congress) not trash the current one until they’ve agreed to something better to put in its place.
Rather than a policy change, a more interesting question would be does the US need to rename its currency to perhaps “New Dollar = N$” like Taiwan did with its “New Taiwan = NT” currency?
Re Q of what to do … re-focus on manufacturing of tangible goods,
including infrastructure projects. Abundant need. Tangible economy
is being neglected, has been for long time, while financial economy
bloats. Too much time/talent/capital chasing multi-layered financial
concepts. My bet is on the currently unloved activity, making stuff
that is built to last. Weapons do not count .. they are throw-away.
Housing surplus not a bad thing, just financial structure is too weak
to sustain the build-out and distribution to those needing housing.