Weekend extra-credit -
Weekend reading for all those waiting for the US current account and TIC data on Monday.
Time for a strong rupee policy? This weeks’ Economics focus column intelligently discusses the policy dilemmas facing India in general and the Reserve bank in particular. India is on track to “spend” close to $100b keeping the rupee from rising this year (reserves, counting gold, are up $96b through the first week of December, a bit less if adjustments are made for valuation gains). Affeciondanos of this blog though know that the “cost’ of borrowing rupee to buy dollars, euros and pounds reserves (India has a VERY diversified portfolio, currency wise) that India doesn’t need is the gap between domestic interest rates (high, in India’s case) and the return on its reserve portfolio, together with the expected appreciation or depreciation of the rupee against its currency basket.
If Abu Dhabi can backstop Citi, why shouldn’t it also backstop Dubai? Chip Cummins of the Wall Street Journal picks up on an under-reported story – the role of debt in financing Dubai’s boom and its large foreign acquisitions. Dubai is going through the biggest boom in the Middle East, and it actually doesn’t have much oil … If Dubai were a separate country, not an emirate bundled together with the richest oil exporter of them all (neighboring Abu Dhabi) it would be running a large current account deficit. Several state-owned Dubai companies are quite leveraged. No worries though – Abu Dhabi has way more cash than the IMF and it may only lend to US companies, not its neighbor, at a penalty rate …
New York: global discount mall. It sure seems like a weak dollar is encouraging Europeans to come to the US to buy (Asian-made?) goods. Floyd Norris’ charts also show that the US export growth took off after the dollar depreciated in 2003.
Charles Wolf isn’t convinced that the absence of more dollar depreciation against the RMB makes difference, largely because he doesn’t see any link between changes in the exchange rate and changes in the savings and investment balance. I personally see two links for China – profit margins on exports contribute to high business savings, and China’s government has reigned domestic spending/ investment to keep the Chinese economy from overheating during the export boom.
Europe, like the US, but with a lag. At least when it comes to the debate on China. The rise in political heat is generating pushback from “liberal” (in the European sense) economists. Patrick Messerlin – who supervised my Sciences-Po dissertation –and Razeen Sally argue in the FT that the cheap Chinese goods are good for Europe (or at least European consumers) and that the RMB’s depreciation against the euro isn’t the reason for China’s soaring surplus, as it simply reflects a sight in the final location of Asian production.
"The EU imports more from China, but correspondingly less from other east Asian countries: the EU’s trade deficits have simply shifted from the latter to China. That is because China has become the final-assembly hub for goods exported to the rest of the world. Its corollary is increasing Chinese imports of parts and components from the west and east Asia."
That sounds familiar. I am not convinced by argument for either the US or Europe. Recent work from the IMF (and others) suggests that China is importing, relatively, speaking, fewer components. European data suggests Europe’s deficit with Asia as a whole is growing, so the rise in the deficit with China hasn't been offset by a fall in Europe's deficit with rest of Asia. The eurozone's deficit will all of Asia rose from roughly 80b euros in 2004 to around 140b euros in 2006 — and looks on track to be around 160b euros in 2007 (eurozone data here, on p. 13; I am confident the EU-27 data would show something similar)
China and the Gulf today are not quite Japan in the 80s. Floyd Norris notes something that the Street – which now seems convinced that sovereign wealth funds will provide permanent support for equities — has opted to downplay: selling stakes in private US companies to foreign governments isn’t quite the same as selling stakes in private US companies to private firms. Capital outflows from China are overwhelmingly from the government; most private companies and individuals don’t want to take the risk that the dollar (or euro) will depreciate against the RMB.
Back to preparing my rebuttal to Richard Iley!
Update: The FT — like the big banks — has warmed up to sovereign wealth funds. An FT leader argues that the biggest risk now is too little investment from sovereign wealth funds, not too much. Who would have expected a leading financial newspaper to call for more state-ownership a few years back?
Brad, Much of what I read here seems related to the decline in the USA’s dominance as the world’s economic superpower. You and Richard are having a fun and entertaining dance, but it brings to mind rearranging the deck chairs on the Titanic. Critical to me is how will the USA respond to its declining power, and how will our dance partner react? China has its appetite set on world dominance, so what is their plan for moving away from the USD? Isn’t the primary issue how the world works its way through this transition?
to the last poster…
China does not have the political infrastructure (i.e. some sort of functioning democracy) to allow it to become the world’s economic superpower, i.e the incentives (and the safety nets) for the vast majority of the population are simply not there to make the jump to “world class performance”. The world is not the same place it was 200 years ago when GB ruled the waves. You can’t become the biggest economy in the world by manufacturing Mc.toys.
Hence we will see China hitting the growth wall long before they achieve German, Japanese or American levels of income.
normansdog
What it takes to become or cease to be the world’s economic superpower is debatable, but it is not debatable that China will surpass the US if present trends continue. So far democracy is not serving well in dealing with stuff like debt and Medicare, but it is poised to bring us fair trade.
@ normansdog
Octavio Richetta on NR’s latest blog posted an interview with Jim Rogers that contained the following: “Nobody quite understood in 1907 that the U.S. was the next great country in the world. The U.S. was a debtor nation, we were lawless, we had a huge Civil War and presidents were assassinated. We didn’t have human rights. We had massacres, people would demonstrate and they would call the army and the Pinkertons. As recently as 1945, the British still thought they were the greatest country in the world and they could prevent America from growing.”
In 1907 the USA didn’t have the Federal Reserve System, it didn’t have the welfare state, it didn’t have securities regulation. All of those things came as it grew in strength and importance and confidence. I wouldn’t underestimate China and India, because they have a model to follow so can accelerate much faster than America circa 1907.
Dubai is a case in point. Dubai took its development model from Singapore and has thrived on it.
thinking about the future of the world is fascinating, but contributors are still taking global economic growth for granted. it seems more likely to me that we face into a period in which the decline of oil production causes a decline in overall global industrial activity, at least for a decade or two, until alternative sources of energy come on stream.
even then, the global economy faces other limits - most notably declining topsoil and declining groundwater reserves. it may be that ’superpowers’ are to be a dinosaur category, and their successors will not be new superpowers, but shifting alliances of smaller and more diverse factions.
i say ‘factions’ because every time i read the words ‘the united states’ and ‘china’ on this blog i am struck by the fact that in some sense these are inaccurate descriptions of the players in the global economy. war between america and china (whether military or economic) would - even at the present stage of history - have elements of civil war about it, in that the two parties are beyond the stage of being able to disengage from each other economically.
the future may be a return to a mediaeval scenario - where the ‘nobles’ and ‘peasants’ in each country have more in common with their counterparts in the other country, than with their own countrymen.
.
I keep scratching my head over the SWF phenomenon. Around 3/4 of them belong to oil exporting countries, which is probably logical, and possibly 75% of the sovereign wealth which is available to these funds is USD denominated -give or take 5%.
My question is: do these funds have a sound alternative to investing a sizable chunk in US based economic entities?
Directly or indirectly these dollars must be destined to return to the US. They can’t remain hidden in the oil world’s underwear drawer forever, can they?
Even if the Chinese economy gets bigger than that of the US, doesn’t necessarily mean that the RMB will automatically replace the dollar as world currency number one. I can’t see how that could happen without the US $/economy imploding first, and probably some major armed conflict as well, before world trade will need a new bench-mark currency.
@London Banker
OK, but remember that the USA had some very big advantages back in 1907, i.e. it was the store of a vast amount of oil, coal, wood, water and any other natureal resource you care to mention. People tend to forget that up until the early 70’s the USA was producing 12 million barrels of oil per day, i.e. 33% more than Saudi Arabia does today.
The USA didn’t become the worlds biggest power because of social security reform, rather because it was sitting on a large portion of the worlds natural resources, and China most certainly is not; I also doubt very much whether the Singaporian model is scalable to a nation of billions of people.
to Steve:
You presume China wants world power status. Why?
What has the US gotten in exchange for being the world’s super power and holding a reserve currency?
De-industrialization? Finance based economics? Huge trade deficits? A population with tremendous income and wealth inequalities? An endless war in the Middle East?
Why in the world would Chinese leaders want these things?
As long as China is supplied with oil, or more accurately, as long as the US maintains open shipping lanes for China to access raw materials and markets; there is no reason I see for Chinese leaders to want to rock the boat. They get everything they want, while not having to maintain a bloated and inefficient defense sector.
If the US was ever dumb enough to rock the boat itself (by say, cutting off oil supplies, or maybe attacking Iran), well, that may change China’s mind about what it really wants.
But for now the interests of China are being served by the United State’s position in the world.
No reason for either side to want that to change for a long time to come. IMO at least.
To normansdog:
While you can make the case that China will hit a growth wall, I disagree with that too. There is no reason to believe that China cannot follow the examples of South Korea, Taiwan or Japan to have much higher income levels. While there are structural problems in China, and now a tremendous equity bubble, reality is, China is increasing real economic capacity at an astounding clip.
We will have to wait and see if China manages to build world class brands. That will really propel them or stall them. It may happen soon or slowly. So far, China has not managed to do it. But to say they cannot ever do it would be a bit too early. Again. IMO.
“…the oil market has been the one where the bubble is easiest to identify…” http://www.moscowtimes.ru/stories/2007/12/17/007.html
http://ftalphaville.ft.com/blog/2007/12/17/9661/tony-jackson-dont-look-to-the-swfs-to-fix-the-mess/
re: “We will have to wait and see if China manages to build world class brands.”
their strength seems to be in anonymity
“…a large cache of counterfeit drugs from Euro Gulf’s warehouse deep inside a sprawling free trade zone… reveals its link to a complex supply chain of fake drugs that ran from China through Hong Kong, the United Arab Emirates, Britain and the Bahamas, ultimately leading to an Internet pharmacy… “counterfeiters are using it as a way to hide where their products are originally sourced.”…” http://www.nytimes.com/2007/12/17/world/middleeast/17freezone.html?ref=business
re: “the future may be a return to a mediaeval scenario”
We are all Belgians
“…for more than a half-year Belgium has been unable to form a government because its 10.4 million citizens can’t decide what the state is for…” http://www.nytimes.com/2007/12/17/opinion/17cohen.html?ref=opinion
“Many have turned into dollar-bulls” http://www.bloomberg.com/apps/news?pid=20601087&sid=aD8eMkbB.FbE&refer=home
Sure it is always politically correct to blame China, but the “real” culprit for the global economic imbalances is “irresponsible” monetary policies under the Greenspan-Bernanke Federal Reserve. - Dave C.
The Latest from Stephen Roach,
http://www.nytimes.com/2007/12/16/opinion/16roach.html?_r=1&oref=slogin
America’s central bank has mismanaged the biggest risk of our times. Ever since the equity bubble began forming in the late 1990s, the Federal Reserve has been ignoring, if not condoning, excesses in asset markets. That negligence has allowed the United States to lurch from bubble to bubble.
Fixated on the narrow “core inflation” rate, which excludes the necessities of food and energy, the Fed has ignored new and powerful linkages that have developed between economic activity and increasingly risky financial markets.
Over time, America’s bubbles have gotten bigger, as have the segments of the real economy they have infected. The Fed needs to rethink its reckless, bubble-prone policy. Once the current crisis subsides, the economy will require the tight money of higher interest rates — the only hope America has for breaking the lethal chain of endless asset bubbles.
— Stephen S. Roach, the chairman of Morgan Stanley Asia.
normansdog says there is no reason for China and the US to want to change the dance. Perhaps, but the dance floor is in the early stages of collapse. The world of BW2 no longer exists, and the longer we try to keep BW2 working the more disruptive the transition will be. China has to know that its ambitions and BW2 are not compatible, so what is their plan? A recession would be a big boost for fair trade, and fair trade will sour the dance music. The world economy is one big ship with no captain.
Steven,
The Chinese have no ambitions to be the “Global Supercop” like the United States. The China PLA doesn’t have Aircraft Carriers for even regional military power projection. If the Chinese wanted an Aircraft Carrier, they could have easily purchased several of them from Russia as the Indian Navy has. Rarely does the China PLA Navy venture far into the blue water Pacific, its primary tasking is to deter US military intervention in the Taiwan straits. The Republic of China, Taiwan, is an unfinished Chinese civil war, and none of the US damn business.
In the long term, the global economy would be far better off with a multi-polar world order without US interference in the internal affairs of other sovereign nations. US Dollar hegemony is distorted the globalization process with a race to the bottom for living standards across the world. Most of the developing world will laud the day when the planet is finally free from US gunboat diplomacy, Neo-liberalism economics, Neo-imperialism democracy in Iraq, 30 second television sound bites on foreign policy, and insipid Thomas Friedman’s latest theory in market globalization for every unique culture on the planet.
Bill Fleckenstein’s latest on “bailout nation” already has a 4.65 approval rating. Here’s a small taste:
Another Fed gift to Wall Street
The bulls thought last week’s quarter-point interest-rate cut wasn’t enough. So the central bank found another way to lift the spirits of our bailout nation.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/AnotherFedGiftToWallStreet.aspx
By Bill Fleckenstein
Hours before the Federal Reserve announced its liquidity plan Wednesday, I wrote in my daily column on my Web site: “I suppose now the bulls will start chanting ‘inter-meeting rate cut’ or some other battle cry.”
Little did I know how swiftly and dramatically their prayers would be answered.
Wednesday’s party in the stock market — at least for much of the day — actually started the afternoon before, when, as several e-mails from my daily readers noted, a talking head on Bubblevision said the Fed was disappointed by the stock market’s reaction to its quarter-point cut (that being the comment of a Fed governor who’d supposedly contacted him).
The Fed tends its flock
Then, shortly before the market’s opening, the Fed announced its new term-auction-facility plan, whereby banks can borrow (pledging collateral to be determined) and receive funds at the prevailing rate that day. Thus, those who believe that markets should go up 1% or more a day — but that the risks should be borne by the government — won another round.
We are where we are today because then-Fed Chairman Alan Greenspan’s policies created a massive stock bubble that was bailed out by an even more massive real-estate bubble, and because of the deregulation of financial institutions, under which we saw the unsupervised renunciation of lending standards in this country. That process continued for several years, creating mortgage-related collateral that varied between marginally OK and totally worthless. (As to the “genius” responsible, I’ll have more comments…)
That problem reared its head throughout 2007 but was deemed to be contained. Then we had a surprise rate cut. Then we had the “SIV Mae” bailout plan (SIV is short for structured investment vehicle). Then we had a couple of more planned rate cuts. Then we had Treasury chief Hank Paulson’s mortgage-bailout nonplan plan. Then we had another rate cut. And Wednesday, we had the post-rate-cut liquidity vehicle.
It’s beginning to look a lot like Christmas
That the Fed and the government are catering to Wall Street is obvious. They’ve created such a moral hazard that even if you could make an argument that, on the liquidity front, the Fed is simply attempting to do its original job, the way it is carrying out the mission is making matters worse…
And the rest of Fleckenstein’s article just get worse… I mean better.
Well, the numbers are out.
Goods The deficit on goods increased to $218.6 billion in the third quarter from $210.6 billion
in the second.
Goods exports increased to $262.1 billion from $252.8 billion. The increase resulted from
increases in all major commodity categories
http://www.bea.gov/bea/newsrelarchive/2006/trans306.pdf
Interesting, I thought the story was lower imports, but really, gap between import and export growth in Dollar terms isnt that great. I guess everything now hinges on oil and natural gas prices. The trade gap in goods terms still grows.
Oh, that and how well investments overseas perform.
rather than friedman’s market led globalization for every unique culture, we know have have (almost) every unique culture (aside from Europe) piling dollars onto their already large dollar reserves. you know, dave, if China (or the Gulf) ever wanted to end dollar hegemony, it actually would not be that hard! the dollar’s status right now isn’t being supported by the us, but by other countries — and I have consistently argued that there is no good reason for china/ the gulf to import loose monetary policy from the fed if they don’t want to. just unpeg.