The new global norm
The Washington Post on India, a couple of weeks ago:
Surjit Bhalla, who heads Oxus Fund Management, an economic research firm in the capital, New Delhi, said that the Indian government should manipulate the rupee the way that China keeps the yuan undervalued.
"By intervening, the government will keep the Indian rupee competitive. That is what the whole world does," Bhalla said. "Why should India try to be a hero on a white horse and let our currency appreciate? It is a body blow to our economy, and we end up helping China. The government has created a monster, and I hope they fix it soon." [Emphasis added]
Judging from the pace of Indian reserve growth over the past few months, I would say India already has a “competitive” rupee policy, not a strong rupee policy. It has joined the "world." It certainly is spending a fair amount of money trying to limit the rupee’s pace of appreciation. India's reserves have increased by $40b or so since the end of August. They are up by over $90b for the year-to-date. Some of the increase comes from the rising dollar value of India's euros and pounds, but most of it comes from actual intervention in the market.
Comments like these also illustrate why China matters so much for global adjustment; China’s policy choices impact the entire world. Right now, fear of appreciating against China is a major constraint on the appreciation of other currencies. After experimenting with a bit of exchange rate flexibility earlier in the year, both India and Thailand look to me to have effectively repegged (though at a somewhat stronger exchange rate).
They thought they had exited Bretton Woods 2. But countries who compete with China have generally found it far harder to get out that they expected; the price of appreciation is too high. Alas, the price of (foreign exchange market) intervention is also rising …
Thanks Brad. The competitive Catch-22 is rather glaring, as is the eventual denoument given self-interested neglect by all participants. All the more reason why, for the system’s sake, it has IMHO always been incumbent upon the largest deficit nation(s) to do what they can unilaterally (assuming they are “the dog” & not “the tail”), or threaten to undertake such unilateral action upon the large surplus and mercantile partners in the absence of mercantilist policy change. For US, this was as simple as prudent fiscal policy and ANY reasonably pro-active energy policy. Both critics and apologists of this view would argue this is 20/20 hindsight, and I might even agree were it not for the fact that almost every non-administration, non-partisan, non-American international economist, and most American economists working internationally, could – even then – see where shameful US fiscal + loose US monetary policy would lead. The US has acted like a victim, or rather hid behind the victim-syndrome for the past six years, when the power to swear-off victimization has always been within their grasp. I reckon the world (and certainly the US) will look back and regret the dollop of GDP growth that were traded for massive economic dislocation, by a willful conspiracy of neglect and sheer bozo-headed policy mix.
India has a special problem because the rupee faces domestic currency competition.
I don’t think these coins have any nontrivial circulation. But what matters in currency competition is reservation demand, not exchange circulation. Demand is driven by relative return. If Indians learn to expect better returns from the moldosphere than the rupeesphere, demand for the former will rise and demand for the latter fall. Since India is already a significant demander of mold, changes in Indian demand have significant effects on the mold-dollar rate.
This is not a self-stabilizing game. And the political cost of losing it is “inflation,” ie, aggregate consumer price appreciation. Allowing the rupee to appreciate against the dollar addresses the consumer price problem from many angles, but one of them is to reduce the returns of those Indians who hold mold rather than rupees.
Of course, as the above illustrates, rupee appreciation causes its own problems. If Scylla gets too close to Charybdis, one thing India might try is repegging the rupee to mold, instantly and without warning, at a much lower rupee/mold rate than the present market rate.
(The rate would have to be much lower, because otherwise it would be quite impossible to scare up enough mold to back the outstanding rupee supply. You don’t want to repeat the post-WWI or BWI mistake of returning to mold at an indefensible exchange rate. There is plenty of mold in the world – the price is just wrong.)
The result? An instant devaluation boom in export industries, followed by considerable consumer-price appreciation in rupee terms. (And depreciation in mold terms.) However, unlike most inflationary booms, a devaluation boom caused by a return to inelastic currency cannot create a self-sustaining cycle of hyperinflation a la Zimbabwe, because the endpoint is stable.
This is obviously a drastic step, and realistically only worth considering if the rupee is already threatened by runaway currency competition. India is nowhere near this point. However, if it is printing rupees to buy dollars, using those dollars to strengthen its mold reserves strikes me as a fine way to maximize India’s future ability to manage the mold-rupee exchange rate.
Why should US policy makers want to stop China here?
It looks to me like the US got cheap goods from China, record levels of homeownership and when all is said in done the group holding the bag is the People’s Bank of China who bought a bunch of US treasuries that will be worth significantly less when the dollar ultimately depreciates against the renminbi.
For which country here was this really a policy mistake?
Thanks, Brad, for today and yesterday blogs, and congratulations for having Paul Krugman keeping an eye on your thoughts!
Great posts.
Off-topic,
I have a question for Cassandra, because today I haven’t been able to read her blog or MM blog, neither any blogspot.com from EU.
After a search in Yahoo, I’ve been able to read some info in Calculated Risk in RSS, but otherwise, I get a google message of we can’t find the page “www.macro-man.blogspot.com”.
Has someone else the same problem?
Thanks!
I tend to think that China’s policy will have great costs to it beyond the benefits they seem to see. That said, it’s not an unmitigated benefit for the rest of the world. We get cheap toys. We get more houses. That’s good. But these are temporary benefits that have distorted our economy from where it would be otherwise and it means we’ll have to go through a transition to get back to a more balanced current account situation which will require moving backed to a more balanced economy. It is not efficient to close our factories so that all the workers can build houses for 8 years, then stop building houses and reopen factories.
Somebody tell China that if it revalues that it will be able to buy oil and wheat for less money. That’s not so bad.
Dr. Setser, Surjit Bhalla is comparing apples and oranges with China and India. The latter is not quite as well placed to start sending capital uphill. China runs a hefty CA surplus while India runs a CA deficit. Also, India is rather more reliant on “hot money” flows that can easily reverse course unlike FDI. It would not be so wise to start piling up Treasuries against hot money flows–temporal mismatch and all that.
The current Economist has more–the accompanying chart showing how India tops large LDCs in economic risk is a must-see…
The nature of capital inflows also matters. Foreign direct investment is much safer than speculative capital. But according to Chetan Ahya, an economist at Morgan Stanley, 85% of India’s capital inflows this year have been in the form of debt or portfolio investment, much of which has gone into the stockmarket. India shows dangerous signs of irrational exuberance. It was swept by euphoria last month as the Sensex, India’s benchmarket index, hit 20,000 for the first time. India’s Economic Times declared, “The first 10,000 took over 20 years. The next came in just 20 months…Superpower 2020?” Instead, India’s poor risk-rating should ring alarm bells.
China’s economy looks less risky thanks to a small official budget deficit (many reckon that it really has a surplus) and its vast current-account surplus and reserves.
The US is a victim like a fox. The world’s largest economy gets to fund itself by shorting its own currency. That’s the cost of admission for those who play. The inflation pass-through to the US is minimal. The foreign capital supply is captive – it has nowhere else to go. Those end holders of dollars who choose to be long at their price also choose by definition to invest in US assets and have no reason to short those assets – so US asset prices are fundamentally not at risk due to dollar weakness per se. This is the great misunderstanding. Treasury yields will stay low accordingly.
The US Fed should stick it to China and drop rates substantially. The Treasury curve is begging for it. There’s no inflation expectation in the treasury curve. The Fed is too tight.
China can get off its peg as soon as it wises up, and then India can take its turn.
Sorry!
I changed the DNS of my computer to another cable operator and now I get everywhere again.
Sorry!
US Dollar hegemony has even earned a citation in Wikipedia
http://en.wikipedia.org/wiki/Dollar_hegemony
The term describes a geopolitical phenomenon of the 1990s in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally. Three developments allowed dollar hegemony to emerge over a span of two decades. The Bretton Woods regime established in 1945 a fixed exchange rate regime based on a gold-backed dollar.
In 1971, President Richard Nixon abandoned the Bretton Woods regime and suspended the dollar’s peg to gold as U.S. fiscal deficits from overseas spending caused a massive drain in U.S. gold holdings.
The second development was the denomination of oil in dollars after the 1973 Middle East oil crisis.
The third development was the emergence of deregulated global financial markets after the Cold War that made cross-border flow of funds routine.
A general relaxation of capital and foreign exchange control in the context of free-floating exchange rates made speculative attacks on the exchange rates of currencies a regular occurrence. These three developments permitted the emergence of dollar hegemony in the 1990s.
All central banks have since been forced to hold more US dollar reserves than they otherwise need to ward off sudden US Hedge Fund speculative attacks on their currencies in financial markets.
Thus “dollar hegemony” prevents the exporting nations from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. economy.
It is for the most part undisputed that the US dollar is the most important reserve currency in the world.
“Surjit Bhalla, who heads Oxus Fund Management, an economic research firm in the capital, New Delhi, said that the Indian government should manipulate the rupee the way that China keeps the yuan undervalued.”
Hey Goldilocks, meet the three hungry bears. Bears, meet Goldilocks ** locks the door **.
Shangai below 5000. US Markets are going to bottom out too. Its looking too bad guys !!!
EXIT ALL BEFORE FALL ?
@ Brad
I thought you’d like to know that the Gulf is really shifting fast on the dollar pegs now. They are no longer saying that depegging is impossible, but instead discussing how to do it to minimise the damage to the dollar. Inflation is putting huge pressures on the governments there, and they know that domestic inflation is a much bigger threat to political stablity than the US military. The one thing that will unite a political majority in opposition against the existing regimes is rising food and living costs.
The Saudi decision to put the dollar pricing of OPEC oil “under review” rather than outright rejection has helped make it possible to speak openly about depegging.
It is recognised that America will go to war for oil priced in dollars because it needs to borrow infinitely in dollars as a perpetual debtor nation. The lesson of the occupation of Iraq after Saddam tried to price in euros is lost on no one in the Gulf. Nonetheless, there is hope that so long as a deal enables the US to borrow in dollars to finance its oil habit, some flexible accommodation can be reached on oil for pricing in other currencies.
The centre of economic gravity has shifted eastwards this past week. These are interesting times.
@ Guest
I’m assuming that racist tirade was directed at me. It says so much about (some) Yanks that any bad news is met with a barrage at the messenger rather than a mature consideration of empirical facts and objective weighing of policy options.
I’m not of eastern origin, nor am I Muslim. I am someone who has observed international banking and economic development for the past quarter century from the vantage of several financial capitals and recognise an inflection point in history when it arrives.
London Banker: the issue is not whether oil is “priced” in dollars since it is paid for in any currency with the dollar price as a guide (Japan would pay enough yen for a barrel to amount to say $98). The issue is the accumulation of dollar reserves. If the Gulf states stop accumulating dollars or begin to sell their dollars, then problems arise. But using the dollar as a international price guide to oil is of no particular import.
editor’s note: I removed an earlier comment I judged inappropriate (it certainly didn’t contribute to the discussion)
@ Guest
Actually, OPEC oil is not just “priced” in dollars, but paid for in dollars too. This was the basis of an agreement between OPEC/King Al Faisal/the Shah and Nixon/Kissinger in 1973, that OPEC would be conceded the power to set prices so long as all OPEC sales of oil were denominated in dollars. Combined with Bretton Woods II, the dollar pricing agreement ensured that US would never have to borrow in any foreign currency to finance its oil imports.
It was for this reason that Saddam’s resolution to sell only for euros in 2001 was such a challenge to continued US dollar and oil hegemony. Similar moves by Iran this year, and potentially by Venezuela, are piling on the pressure.
Naturally, buyers of oil must exchange their currencies to dollars to buy OPEC oil in dollars. They are otherwise free to hold other reserve currencies, and OPEC members may elect to exchange oil revenues from dollars into other reserve currencies. Nonetheless, the symbolic and practical effect of abandoning the 1973 dollar pricing of OPEC oil would be non-trivial.
@ Guest
Actually, OPEC oil is not just “priced” in dollars, but paid for in dollars too. This was the basis of an agreement between OPEC/King Al Faisal/the Shah and Nixon/Kissinger in 1973, that OPEC would be conceded the power to set prices so long as all OPEC sales of oil were denominated in dollars. Combined with Bretton Woods II, the dollar pricing agreement ensured that US would never have to borrow in any foreign currency to finance its oil imports.
It was for this reason that Saddam’s resolution to sell only for euros in 2001 was such a challenge to continued US dollar and oil hegemony. Similar moves by Iran this year, and potentially by Venezuela, are piling on the pressure.
Naturally, buyers of oil must exchange their currencies to dollars to buy OPEC oil in dollars. They are otherwise free to hold other reserve currencies, and OPEC members may elect to exchange oil revenues from dollars into other reserve currencies. Nonetheless, the symbolic and practical effect of abandoning the 1973 dollar pricing of OPEC oil would be non-trivial.
@ Brad
Many thanks for removing the off topic insults. I appreciate this forum, even when it gets a bit raw.
Sorry about the duplicate post above.
Bill: Somebody tell China that if it revalues that it will be able to buy oil and wheat for less money. That’s not so bad.
That’s not true. The fundamental value of oil and wheat don’t change if you play games with currency exchange rates. What’s driving oil and wheat prices is that China and India are starting to soak up a lot more energy and food.
Also about this dollar-oil hegemony non-sense…..
I’ll go in and change the wikipedia article at some point. One big inaccuracy is that the dollar has been the world’s currency since the 1940’s. Also, the fact that oil is denominated in dollars attracts a huge amount of weird attention. Just because something is marked in dollars doesn’t mean that the seller will accept only dollars. Iran, for example, buys most of its oil in euros even though it quotes in dollars.
The reason that people don’t quote in multiple currencies is not because of any US economic power. It’s because if you quote in multiple currencies then you have to make sure that the quotes are consistent and this adds all sorts of unnecessary complications.
Hello
Please post the address for the below.
I have a question for Cassandra, because today I haven’t been able to read her blog or MM blog,
Thanks Brad and Dr. for all the info you provide for free.
jo6pac
Testimony by Congressman Ron Paul (R-Texas) on US Dollar Hegemony
http://www.house.gov/paul/congrec/congrec2006/cr021506.htm
After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.
Elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.
In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein– though there was no evidence whatsoever he posed a threat to us.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony– it’s dominance as the world reserve currency– is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.
China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.
http://globaleconomicanalysis.blogspot.com/2007/11/slamming-on-brakes-in-china.html
Brad,
Have a good Thanksgiving Day, and try to have a very happy day and rest!
Forgive me this long post. It’s a bit off-topic, but with goes to the root of the big thing or the begining of it all.
An Eurozone deconstruction, of an article of the Financial Times:
Now that things are turning sour, worries are being increasingly expressed about the “great unwinding,” and one sees increasingly frantic attempts to rewrite the economic history of the past few years. While the column by Martin Wolf linked to above mostly notes that the US should expect a long period of lower than average growth (which, he states, may be worse than a sharp but short recession), and that overall growth will depend on the ability of other countries to boost their internal demand, other commentators are a lot more partisan in their outlook, such as Wolf’s collegue John Plender, who indulges in Anglo chest thumping on a grand scale. His article, “The pitfalls of financial globalisation grow clearer” is worth looking at it a bit closer.
“Conventional wisdom has it that globalisation and the spread of deregulation have been an economic boon for the English-speaking countries. Having run down their manufacturing as a percentage of gross domestic product in the 1980s and 1990s, the US and the UK have been less vulnerable to Chinese competition in this cycle than the big economies of continental Europe. And with disproportionately large financial sectors, these two countries have also enjoyed a financial windfall from the rise of China and other emerging markets.”
A first note: globalisation and deregulation are presented as exogenous factors that we all have to live with, and not as an ideological model that has been imposed on all by its initiators … who happen to be the ruling elites of the US and the UK. Reagan anyone? Thatcher? Deregulation? Privatisation? The Big Bang?
All these policies were designed exclusively with the goals of investors in mind – ie a singleminded focus on return on capital and ever-increasing (and preferably untaxed) profits. They caused the growth of the financial sector everywhere, the dominance of economists and financial analysts in public discourse, the relentless focus on efficiency, “rightsizing”, flexibility and profitability, and the corresponding squeeze of manufacturing and other similarly old-fashioned activities.
This is not something that came out of nowhere and that London and New York, in a stroke of good luck, just happened to capture. It was made to happen. Trying to ignore or deny that underlying purpose shows incompetence or wilful dissimulation on a grand scale.
“New York and London have played a central and lucrative role in recycling the glut of savings in Asia and in the petro-economies. Much financial innovation in wholesale markets was spurred by this phenomenon.”
Ah, again, the savings glut theory (much publicized by Ben Bernanke before he took over the Fed) – which claims that the US is consuming more than it produces because emerging countries are not consuming enough, ie that it is providing a valuable service to the global economy. The reality, of course, is the exact opposite: the US is consuming more than it produces because it can get away with it, by borrowing increasing amounts of money from other countries, and making them manufacture (or dig up) stuff in exchange for IOUs denominated in the US’s own currency. And the widespread use of debt has been encouraged, let’s never forget it, to hide to Americans (other than a very small minority) the reality of their stagnating incomes by allowing them to continue on buying stuff.
Oh sure, the countries exporting to the US are happy to piggyback on that trend, and have benefitted to some extent from the transfer of manufacturing activity and the buid up of their own economy (as long as the cost to the environment is ignored, anyway), and they are doing all they can to not rock the boat. But they certainly did not originate it.
“At the same time equity markets have thrived as profits have risen to a record share of gross domestic product. Among other things this reflects the greater exposure of corporations to global market discipline and the benign disinflationary impact of millions of Asians coming into the global workforce.”
“benign disinflationary impact” = lower wages for Western workers, fewer perks and less protection for their jobs. This is not a bug, it’s a feature, and the very words used show that the goal is to hide what it means, and present the result (money going to profits rather than to workers) as a positive thing. Hey, profits are up and the stock markets are doing great – thus, says the subtext, the economy is doing just fine.
Again: “global market discipline” = the financial world imposing on other sectors the requirement for the kind of returns it manages to generate for itself by squeezing money today out of future activity. Manufacturing can only generate this by squeezing workers and other costs – which means polluting China rather than paying to follow our more stringent rules in the West.
“Meanwhile, retail financial markets have hummed as cheap credit powered housing booms in the Anglo (and other) economies.”
Again, this is an integral, vital part of the Anglo economic model: with wages squeezed, the only way to avoid those pesky voters to complain too loudly was to buy them off by offering them the possibility to continue on buying, via very real debt, underpinned to a large extent by (partly virtual) real estate appreciation. It was highly profitable for the financial world too: more business, and a general increase in the value of assets. When your livelihood depends on fees proportional to the value of things traded, it’s all good.
“But as the suddenly crisis-prone financial sectors of the US and UK now confront a second round of tightening in the inter-bank market, it is worth asking whether this financial bias could be too much of a good thing.
There is a risk of exaggerating the economic impact of the debacle in asset-backed paper markets in relation to large and diverse financial sectors.”
Yeah, because it’s not the whole model based on a gigantic one time squeeze of the middle classes that is flawed, it’s just a few excesses here and there that can be corrected. Right. Dream on, John.
“Yet systemic trouble in finance can have wider indirect consequences. With housing markets going into reverse in both countries, there is every likelihood that households will rebuild very low savings ratios. The consequences for demand could be nasty. With a much less diversified economy than the US and much greater debt as a percentage of household wealth, the UK looks the more vulnerable. Sterling has a looming problem.”
Nothing to squeeze left. It was a feature, John, not a bug.
“In the longer run there is a risk that financial activity will be damped by rising inflation. While Chinese demand continues to put pressure on energy and raw material prices, it is no longer exerting such downward pressure on the price of global labour.”
Nothing to squeeze left. Even that wonderfully extensible resource, Chinese labor, is coming to the end of its practical use. And that tells us more than anything what “inflation” means: anything that may cut into profits, and what “growth” means: increasing profits. Anything that lets things seep away from profits – to pay for regulation, to pay for wages, to pay for resources, is inflation – and evil. Inflation is the enemy of the Anglo model – it’s value not being captured and being wasted instead for useless purposes.
“A more fundamental point is that China and other emerging market countries are unilaterally rolling back the high tide of liberalisation. Thanks to their rise, more of the world economy operates under mercantilist pegged exchange rate regimes.”
This is such a disingenuous comment… the peg is precisely what allowed “inflation” to be avoided in the West, by keeping Chinese costs artificially low. In other circumstances, the investment boom in China, and its massive trade surplus should have caused its currency to appreciate, and its costs to increase. By preventing this, the Chinese authorities were fully complicit in the big squeeze and helped to make it last as long as it did.
The mercantilist exchange rate setting was, again, a feature, not a bug.
“By investing their official reserves in developed world government debt, they reduce the cost of public sector borrowing, making a return of big government easier.”
John, John, John. Did you not notice that it was the other way round? It’s the combination of massive new spending by the Republican US government (spending focused on the militaro-industrial complex, and pork, ie going to friends, not to plebeians), tax cuts (again, going to the rich) and lower Fed rates that created the bubble that caused the imbalances that in turn made foreigners such huge creditors of the US, got them to buy up US securities and bring long term interest rates down. It was called a virtuous circle while it lasted, but it was really wealth capture on a grand scale, transferring future tax payments by Americans to today’s wealthy. Whatever happens to today’s wealth (more junk, bigger, farther off McMansions, more fuel-wasting FUVs), the future debt will remain – unless, of course, in Bush’s final shafting of the world community, the dollar is left to crash, devaluing the claims on the US economy.
Either way, “big government” – the corrupt, wasteful, cronyism-prone, and ineffective kind favored by conservatives was at the heart of the loot – again, a feature, not a bug.
“As co-conspirators with the US Federal Reserve in creating the credit bubble, the same countries have contributed to a boom and bust cycle in housing and finance which will lead to a political backlash, soon to be followed by cumbersome regulation.”
Yeah, blame other countries (which, for the most part, were only trying to imitate the model endlessly peddled by US authorities and their trophy pundits). Fine. They are indeed complicit – a bit – for buying your scam.
And of course, when your scheme fails, as it is doing now (again, “bust” is a feature of “boom and bust”), go concern trolling about “cumbersome” regulation. When the adults have to come and clean up the mess, it is not called “cumbersome”, it is called “saving your sorry irresponsible ass.” But make no mistake, we can expect the whiny calls from never discreditable hacks and supporting pundits for more liberalisation as the previous attempt was “insufficient” and “not given time to prove itself”.
“Meanwhile, sovereign wealth funds are indirectly reversing the privatisation trend that began in the 1980s through a re-expansion of state ownership, but on a cross-border basis. That in turn will spawn an illiberal political reaction that will inhibit global capital flows.”
Bwahahahaha. So the game should only be played by our kind of people, from New York and London, but not from elsewhere. Dirty foreigners can obviously not be trusted with so much money and should be prevented form doing things that might actually give them a say in how companies are run. Imagine that – people with money not focused only on short term profits! What a horrible crime.
Sadly, John, it is, again, a feature of the big loot, given how much of the wealth grab depends on borrowing money from, well, dirty foreigners, and handing them over financial assets – future claims on our economies. Did you really expect them not to want to be paid, or not to want to set terms when you comes asking for more?
Yes, the grand wealth capture plan was a one-time thing, and now the bill is due – both in the form of “inflation”, and in the form of claims on our real wealth. Of course, the goal was always to let the plebes bear that burden, but your loot has been so effective that the plebes cannot really be squeezed anymore – and that leaves you to talk to Messrs Putin, Abdullah, Hu et al…
Almost makes me sorry…
“On the face of it, continental Europe ought now to be better placed to cope. Yet this is no time for schadenfreude. Two German banks that dabbled in subprime structured products have had to be rescued. The dabbling arose from an urgent need to raise returns in an over-politicised, over-regulated, but under-profitable German banking system.”
You bet it’s time for schadenfreude. And it’s going to be for quite a while. Sure, you’ve managed to corrupt a big chunk of our elites and our financial systems, given how you’ve taken them over or coopted them, but the loot has not been as extensive, nor as successful, and given how you try to keep all the financial fun concentrated in the City and Wall Street, the rest of Europe still had to focus on other, actually wealth creating activities. And these will remain even as the financial world crashes down.
“With globalisation, no economic model provides protection from the excesses of someone else’s model.”
Excesses? what excesses? Are you admitting to anything, finally? Or are you just trying to get us to bail you out, once more? You’ve just picked our pockets ! Twice, given that you’ve also picked our future pockets already!
“As conditions in the US mortgage market worsen next year, the waning ability of the US consumer to absorb the rest of the world’s goods will hurt everybody, including continental Europeans.”
Again, for the past 2 years at least, the real economic locomotive of the world has been Europe – because wages are still growing over here, and there was no need to create funny money to spend.
Oh sure, European stock markets will crash along with Wall Street. But housing prices are unlikely to crash in places like Germany where they have stagnated for the past decade, or in France where banks are kept lending standards mostly in check, or even in Spain where the very real housing boom was underpinned by the very real catching up of Spain’s economy to the rest of Europe.
“There is no question that smart, global finance has been a good thing.”
Yeah, don’t ask questions, it might be painful to hear the answers.
“Without the recycling of capital, excess savings in Asia would have been profoundly deflationary. Yet from today’s global vantage point, we have undoubtedly all had too much of this good thing. Whether it is ever possible to have just the right amount is another question.”
Without the Anglo bubble, there would have been no need for the capture of Asian savings, and no hangover today.
Go into detox, John. Please.
More Japan investors are ‘quitting America’
http://www.iht.com/articles/2007/11/22/business/yen.php?WT.mc_id=rssbusiness
People say the engine of the global economy is shifting from the United States to emerging countries,” he said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”
Legions of Japanese investors like Okudaira have emerged as a global financial force to be reckoned with, sending almost half a trillion dollars of their nation’s $14 trillion in personal savings overseas in search of higher returns. Until recently, much of this huge outflow of cash, known as the yen-carry trade, had gone into U.S. stocks, bonds or currency, propping up the dollar’s value.
But Japanese individuals are now diverting more of that money away from the United States and the dollar and into higher-yielding overseas investments like high-interest Australian government bonds and shares in fast-growing Indian construction companies.
They thought they had exited Bretton Woods 2.
Silvio Dante (imitating Michael Corleone): “Just when I thought I was out — they pull me back in!”
@euro
Im reading this blog regularily for about half a year, and I have to say that this by far the best formulated and most insightful piece I’ve read here so far, which means a lot regarding the high overall quality of comments here. And it eloquently exposes the despicable self pity of those who got us into this mess in the first place.
As a brief addendum, a classic example of the kind of devaluation-peg I suggested for India was FDR’s devaluation of the dollar to $35/oz (from $20) and offer to buy arbitrary amounts of gold at this price.
FDR was hardly a sage of economic policy, but this one was a keeper – it created a devaluation stimulus, and also sucked massive quantities of the yellow stuff across the Atlantic. Of course the $35 was not a real two-way peg, but it could have been. Imagine if Nixon had done the same in 1971, repegging to gold at a rate well above the current market price – say, $200. Would we be having these problems now? There’s no way to know, but…
A 20-30 percent revaluation of GCC currencies is now being openly discussed, even making this week’s Economist: Countdown to lift-off.
Brad also gets a mention!
“Benchmarking to any rich-world interest rate is unlikely to suit the Gulf, since high crude prices depress income for oil importers but boost it for oil exporters. Brad Setser of the Council on Foreign Relations suggests one way around this problem is to have oil as one of the prices targeted in the basket.”
“or in France where banks are kept lending standards mostly in check,”
I’m french and I think that a collapse of house price is not very far.
But the difference with USA, Ireland, UK, Australia, Spain is that the rate of private debt is twice lower, and rate of saving higher too.
Moreover there is few loans with variables rates, and there is a limit of rate hike for variables loans, there is no exotic loan like in USA.
2fish — wouldn’t a stronger RMB (v the $) reduce the need to increase the RMB price of oil. Oil up in $ terms. RMB up in $ terms. RMB oil might be closer to flat …
As I stated before, a mild US recession would have only a very limited impact on China’s economy. China’s Central Bank governor supports my earlier conclusion. – Dave C.
Chinese PBoC Central Bank “Not Worried” about US Economic Recession
http://www.forbes.com/feeds/ap/2007/11/22/ap4366579.html
BEIJING – China’s chief central banker says the world economy may slow next year but that is should have only a “mild effect” on Chinese growth, a state news agency reported Thursday.
Problems in the U.S. mortgage market may dampen American consumer spending, People’s Bank (nasdaq: PBCT – news – people ) of China Gov. Zhou Xiaochuan said during a visit to Johannesburg, according to the Xinhua News Agency.
Even if exports to the United States suffer, Zhou said “that can somewhat sort out the imbalances in bilateral trade, and is likely to have only mild effect on China’s economic growth,” according to the report.
Zhou recommended Chinese exporters explore other markets rather than focusing on the United States, Xinhua said.
Hong Kong Inflation Accelerates to Nine-Year High. Since HK Dollar is pegged to the US Dollar, wouldn’t you think that US Inflation rate would be also rising. But Bernanke stated in Congressional testimony last week that there was “Absolutely No Inflation in the United States”. Just the excuse that Helicopter Ben needs to bailout reckless Hedge Funds by slashing interest rates to “zero”. More Cheap Money. Moral Hazard be damned.
Hong Kong’s Inflation Accelerates to Nine-Year High
http://www.bloomberg.com/apps/news?pid=20601089&sid=ajQNUP59FCI4&refer=china
“This is nowhere near the peak,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “The weak U.S. dollar and appreciating Chinese yuan have created this imported inflation dynamic in Hong Kong. With higher oil and food prices, inflation will accelerate.”
i am a simple minded person, and i ask simple questions.
imagine two coutries, call them ‘north and south korea’. this is an imaginary world, not the present world. ‘north korea’ begins to counterfeit dollars that prove indistinguishable from the real thing – especially to those who never encounter many actual dollars that are not pixels on a dealing screen . . .
’south korea’ adopts peppermint sweets as the national currency, and pegs convincingly – (one peppermint sweet = one dollar.)
counterfeiting is “cheating” – in the words of DC, north korea exchanges “worthless bits of paper” for real manufactured goods and valuable commodities.
but the peppermit peg is only ‘mercantilism’ or something.
now suppose that ‘north korea’ stops counterfeiting dollars and turns out perfect peppermint sweets instead ? what the hell is the difference now ? ?
the great global scam run by london and new york is not defeated, but it is surely diluted. the fed’s monopolistic power has been shared out to bothcountries ? as the contributors to this blog keep repeating – you can buy oil with peppermint sweets, because the peg holds and is trusted. convert to dollars on the day.
thus – if the peppermint peg is trusted, the power of the fed is busted. you cannot flee the reserve currency ‘for safety.’ the reserve currency i s safety, or it’s not the reserve.
to change the image – when the lifeguard screams to the drowning men to save him – who are the lifeguards now ?
i say that reserve status will only survive by the dollar strengthening. volker would have the guts to do it. raise the interest rates until you have split the world into bankrupts and savers, and decimated the legions of parasitical speculation.
otherwise prepare for the peppermint standard – the logical result of multilateral pegging to the reserve unit. the dollar lives – the fed monopoly folds. the global fiat peppermint rules.
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“Zhou recommended Chinese exporters explore other markets rather than focusing on the United States, Xinhua said.”
Yeah .. how about exploring the domestic chinese market for once.
Another simple complaint here:
How come the recent oil profit hasn’t lead to increased credit on offer, in USD (assuming that’s the common currency being accumulated)?
I would have thought the oil exporters would be desperate to lend some of their profit dollars!
Ignatius, thanks for the compliment, but I just copied and pasted it!
I recommend you to visit eurotrib point com, where brave people comment MSM in an unconventional way, the news on economics, energy and ecology.
You’ll see that the author of this deconstruction is a french banker, not a communist.
As he says, quoting Keynes: In the long run, we’re all dead.
Let’s try so survive longer!
Off-topic, but we are in black friday!
Aldous Huxley said long time ago:
“The last thirty years have witnessed the promotion of innkeeping and shownmanship to the rank of major commercial enterprises. Major commercial enterprises spend money on advertising. Therefore, newspapers are always suggesting that a good time can be enjoyed only by those who take what is offered them by entertainment manufacturers. The Dickensian Christmas-at-Home recieves only perfunctory lip-service from a press which draws a steady income from the catering and amusement trades. Home-made fun is gratuitous, and gratuitousness is something which an industrialized world cannot afford to tolerate.”