Are Americans still Anglo-Saxons?
So asks Arthur Goldhammer, who somehow manages to find time to track the latest US polling data as well as Nicholas Sarkozy’s latest romance and the latest French debate on the euro’s global role.
The US and France, it seems, are not as quite as different as most economic commentary assumes. Not after France banned smoking in cafes. And not when nearly 60% of the US population, according to a recent Wall Street Journal/ NBC news poll, thinks an increasingly global US economy is a bad thing. Only about 30% thinks it is good thing.
Even if Huckabee fades, his rise underscores one of the more surprising outcomes of recent polling — namely that a majority of Republicans now has doubts about trade. There are more low-income Christian evangelicals in the modern Republican party who fret about competition from China than private equity barons who fret that they won’t be able to sell to the government of China.
I suspect that some — though not all — of America’s angst about globalization reflects the fact that the US now sells far more financial assets to emerging market governments than goods to emerging market citizens. Over the last four quarters, the US sold about $75b in goods and services to China and, according to the US data which almost certainly understates the real total, nearly $210b in financial assets.
China’s economic growth was supposed to be good for the US because it created new markets for American goods and services — not because it allows China to supply even more subsidized financing to the American households or allows American residents to sell their companies to the Chinese government (in all of its guises) for a higher price than anyone else is willing to pay.
The data assembled by the polling report surprised me in a lot of ways. I would not have guessed that two times as many Americans think globalization has been bad for the US economy as think it has been good for the US economy. I would have expected globalization to lose, but not by quite that margin..
But I also was surprised that in April 2006, an LA Times/ Bloomberg poll found that far more Americans favored allowing China to “reform its exchange rate at its own pace in order to maintain good economic relations” than “forcing China to move to a market-based currency that will help reduce the trade deficit.”
My guess is that the wording of the question shaped the answer - the emphasis of the question was on forcing the China to change rather than on say “offsetting the subsidy from China’s undervalued currency.” An NBC news/ WSJ poll (link here) at about the same time found that only 22% of Americans thought the US had been too tough or tough enough on China, and nearly 60% thought the US had not been tough enough in “economic and business negotiations with China.”
And only 15% of Americans favored letting China but Unocal; 73% were opposed. Yet if China “reforms” its currency at its own pace, all signs suggest that China’s government would either need to buy an awful lot of bonds or a series of Unocal sized companies to control the pace of RMB appreciation.
Far more Americans (31%) would not allow Arab countries to invest in the US at all than would allow Arab countries to invest in all parts of the US economy (8%). A majority though favors Arab investment in some parts of the US economy. Vegas, apparently.
A majority also thinks that “Restrictions on foreign companies are more important than the job creation that these companies could bring to the United States.” (from an April 2006 LA Times/ Bloomberg poll).
That doesn’t sound very Anglo-Saxon, or very neo-liberal.
Most of the questions on foreign investment implicitly assumed that the investment was coming from private firms not from foreign governments. I would be interested in seeing how selling say majority control of a large US bank to the government of China polls. That isn’t an entirely hypothetical question. Suppose the Morgan Stanley needs more money, and it the recently recapitalized China Development Bank (CDB) is willing to provide the funds. The combined investment of the CDB (itself owned by the CIC) and the CIC would likely trigger a CFIUS review.
Somehow I doubt the sale of iconic US companies to the government of China would reduce Americans concerns about globalization. At the same time, I doubt most Americans are all that keen to see the government of China use its huge dollar holdings to support the outward expansion of Chinese state firms.
The current pattern of globalization is sustained by the accumulation of over a trillion dollars of financial assets by emerging market governments - with the majority of the asset growth concentrated in non-democratic governments.
Yet I am not sure that a majority of the citizens of the main creditor countries would vote to invest so much in the US, particularly on terms that almost guarantee large financial losses.
The market currently expects the RMB to appreciate by 9% this year. The CIC raises funds in RMB at between 4-5%. If the CIC gets 13% on its dollar investments, it could still end up losing money. SAFE is guaranteed to lose money if it doesn’t take a few risks.
At the same time, I would bet that there is not a majority in the US that favors selling half a trillion dollars worth of US companies - let alone more - to emerging market governments.
Talk about political risk.
—Does have in USA any meaning who gets elected or who gets most votes?
Ask it to Al Gore.
—Do US people make any relevant decision, out of consuming?
—Why in US elections just about 35% people vote? Do they believe in democracy or more precisely in Gvt?
—Should we believe in Murdoch’s pools?
—It was long time ago that I enjoyed “People have the power” song by a nice girl.
—Maybe, The USA is not so different from the Saudi sheikdoms.
Etc., etc.
“Restrictions on foreign companies are more important than the job creation that these companies could bring to the United States”
Why would China buy a US company and keep jobs in the US when there are millions of unemployed in China?
The average Joe understands this more than the coddled economist theorist who couldn’t survive running a lemonade stand if his living depended on it.
I suspect that some — though not all — of America’s angst about globalization reflects the fact that the US now sells far more financial assets to emerging market governments than goods to emerging market citizens.
China’s economic growth was supposed to be good for the US because it created new markets for American goods and services — not because it allows China to supply even more subsidized financing to the American households or allows American residents to sell their companies to the Chinese government (in all of its guises) for a higher price than anyone else is willing to pay.
Somehow I doubt the sale of iconic US companies to the government of China would reduce Americans concerns about globalization. At the same time, I doubt most Americans are all that keen to see the government of china use its huge dollar holdings to support the outward expansion of Chinese state firms.
I am not sure that a form of globalization that is sustained by the accumulation of over a trillion dollars of financial assets by emerging market governments - with the majority of the asset growth concentrated in non-democratic governments - is all that politically sustainable.
…I would bet that there is not a majority in the US that favors selling half a trillion dollars worth of US companies - let alone more - to emerging market governments.
Too much pessimism and not enough of the old neoliberal rah rah rah. Watch it Brad. Keep posting wisdom like this and you may be kicked out of the Holy Neoliberal Econochurch.
The Econoauto De Fe is coming. Repent, recant, and be assured you place in econoheaven. And your won’t be burnt at the stake either!
Like that other stupid overarching ideology communism did a decade or so ago, neoliberalism is dying. I’m sure years from now some withered old investment bankers and idiotically useful economists will be crying. But that’s about it.
bsetser: There are more low-income Christian evangelicals in the modern Republican party who fret about competition from China than private equity barons who fret that they won’t be able to sell to the government of China.
Having grown up in the deep Southern Bible belt, I don’t think so. First of Christian evangelicals aren’t particularly low income or uneducated. There are actually a lot of Christian fundamentalist computer programmers since computer programming is a skill that allows you to support a large family.
Second of all, they care a lot less about economic issue than social issues, so their main issue with the Chinese government is concerning the freedom to spread Christianity and opposition to the one child policy. (Note here that Christian evangelicals really don’t care if the Chinese government stomps on Falugong or Muslims as long as they leave Christians alone.) The main thing that China needs to do with Christian evangelicals is to convince them that China is not the anti-Christ (literally). A lot of opposition to Communism in the Bible belt was based on the premise that the Soviets were the agent of the anti-Christ as foretold in the book of Revelations.
bsetser: I am not sure that a form of globalization that is sustained by the accumulation of over a trillion dollars of financial assets by emerging market governments - with the majority of the asset growth concentrated in non-democratic governments - is all that politically sustainable.
Who is going to oppose it? I just don’t see the coalition gelling against globalization. People generally don’t care about something unless they feel that somehow money is being taken from *their* pocket.
No doubt, Brad, that there is a socio-political aspect to the SWF phenomena, but aren’t there legitimate market clearing concerns? I.E. What would financial equity values be right now w/out foreign gov’t capital injections?
So many seem to assume that foreign CB capital is ’smart money’ when in fact there is no evidence (Blackstone anyone??) to support such claims. What seems to cause so much excitement is that they appear to be bottomless pools of capital that may support our financial markets. A thought no doubt championed by biased PM’s.
In a way I think it can be argued that practically what is taking place is a form, though not systemically intended, of 21st century official asset price targeting. Foreign CB’s print their currency to buy USD, which in turn is used to inject capital directly into the financial system. I obviously caveat some of the oil flows, but still, some of their reserves too come from pegged FX policy. This aspect, sadly, has been totally absent in all the ink that has so far been spilled concerning SWF’s; Why, I cannot fathom.
Brad has, almost alone, raised some of this re-nationalization meme (albeit on a global scale), and rightly questioned how positive an aspect this is to the efficient functioning of markets. To me, as a market participant, it is undoubtedly a nuisance. I already have to deal with the Bernanke put/helicopter, now the SWF put.
R
PS. I must add that I have absolutely no problems with cross border flows of private capital, but official flows are an entirely different animal. As has been noted before, official flows have contributed to our present mess, through the ‘conundrum’ & the ‘savings glut’.
Also, I think that the idea of “Anglo-Saxon capitalism” is a myth describing an economic system that never existed. My question is when *were* Americans “Anglo-Saxon capitalists” or “neo-liberals”. I assert that they never were. The whole idea of an American form of capitalism was to justify some of the economic policies of the 1980’s.
So if its not politically sustainable, then what? not selling the stakes doesn’t seem very sustainable either.
and is there a point where even the non-democratic government actors get tired of investing in the US - if it means losses?
just sounds pretty painful either way
The answers given to these questions show merely that the typical American is ignorant about the world, about economics and many many other things. They answer with a kind of knee-jerk jingoism that explains why when bad things happen they have no idea why. Most Americans would probably endorse Pat Buchanan’s economic nationalism as well as his anti-immigration stance, etc., etc. The world is a-changing and most of the changes are going to make typical Americans feel very angry, confused and sour.
Just wait until rising inflation collides with a Fed trying to lower interest rates to avoid a recession. Sparks, to say the least.
2fish — no doubt you are right to note that the evangelical community is quite diverse. At least in Kansas though it doesn’t tend to draw heavily from much of the business community, which tends to embrace a more “moderate” brand of republicanism, at least when it comes to little things like teaching evolution in the public schools. My sense is that Thomas Frank (what’s the matter with KS) got the demographics of the shift in the working class vote away from dems toward reps right in places like Wichita.
And I would bet that that evangelicals are over-represented in the lower part of the income distribution inside the republican coalition, and slightly under-represented at the upper end. But that is a guess. Once there is bit more polling data on Huckabee v Romney in Iowa it should be clear whether the pro-Huckabee vote differed in socioeconomic terms from the pro-Romney vote.
HI
The average Joe understands this more than the coddled economist theorist who couldn’t survive running a lemonade stand if his living depended on it.
The answer is yes, I some times wonder if the group from 10 year have ever lived in reality. This going to be a slump in the US like the 30s. May the gods of kindness be amongs us.
jo6pac
Thanks Brad.
I think anon is right about nationalization. Its just more hidden. Dirty currencies, CB interventions by the US are really just efforts to protect industries that the elite deem important. Now we just use the markets to maniupulate what we want. A true flexible exchange rate system which was the idea 50 years ago no longer even remotely exists. Balance is a pipe dream. Therefore this system is going to continue until out the blue something causes it to collapse. A Black Swan that will hit everyone very hard.
for what it is worth, i don’t think we are looking at a slump like the 30s. profound risks, yes. but nothing quite that dire.
anonymous pm –
it is relatively clear that the prospect of a bottom less pool that supports the equity market has attracted the excitement of equity pms. I am not as sure that the bond world is as thrilled about the impact of sov. money on their market, tho by now they are used to it - and its knock on effects (lower yields in treasuries/ agencies prompted a search for yield).
and it is equally clear that a shift in the way a big chunk in sovereign funds is managed from what amounts to a low fee strategy (CB reserves) to a potentially high fee strategy (SWFs/ especially those doing deals) has gotten the attention of the broker-dealer community — even setting aside their short-term need for cash.
I agree that the evidence that SWFs are “smart” money is pretty thin at this stage, tho I suspect that if ADIA disclosed its returns, it would strengthen the case. ADIA supposed got into EM equities early. historically tho sov. money hasn’t necessarily been smart money, in part b/c it has been more concerned about losses than gains. that may change — some of the GCC money for now has been managed more like private money than sov money in part b/c the GCCs are not democracies.
and I think that is part of what bothers me a bit - namely that the interests of the street are for more aggressive management of sov. money (both for the equity bid and the fees), and such aggressive management is I suspect far easier in non-democratic governments that are not subject to the kinds of pressures that historically have made sov. investors rather risk adverse.
and then there are the set of issues about how such large inflows impact the market, impact corp governance, impact regulation (will CIC-owned financial firms be considered too chinese too fail as Russia was once — incorrectly — considered too nuclear to fail?), and so on. it is fairly clear that the CIC is subject too far more domestic political pressure than the gulf funds, and has a much broader mandate: it may well care more about supporting chinese state firms than supporting US equity market valuations.
So it does feel like the street has embraced SWFs a bit too easily, without asking enough hard questions. at the same time, there are arguments for SWFs that are hard to easily dismiss –
the el-erian argument that swfs buying a broad range of assets will end the distortions in the bond market;
the plender style argument that in effect that w/o demand for cheap assets the us would be in much more trouble — as there really are a set of institutions that are short on capital and beggars cannot be choosers. plender of the FT notes that asia set aside some of its concerns about certain kinds of us investors — notably distressed funds — and used them to help recapitalize asian financial institutions after the asian crisis.
(two differences tho — asian post crisis had already experienced a brutal current account adjustment and thus didn’t need ongoing flows, while the US still does, and asian governments put even more money into asian financial institutions than any western banks/ funds)
and then there is general argument that the us has to get used to a world where globalization isn’t going to be synonymous with americanization and thus has to adapt — and part of that adaption may been accepting a larger government role in the market. that in effect seems to be the argument the street is making, tho they emphasize the upside of a bigger gov role (a new bid, one uncorrelated with other players) now and in the past the emphasis was far more on the downside.
Slowly but surely the United States is morphing into a larger size twin of Mexico. A small elite ruling class controls politics and enjoys wealth on a scale that is multiples of the average citizen. While the average person is able to enjoy an increase in their quality of life if measured in consumer goods, currency devaluations accomplished no significant increase in prosperity. If it wasn’t for Mexican law that made 100% foreign ownership difficult, Mexico today would be totally owned by U.S. based entities.
The next presidential election will be the line in the stand to stabilize the U.S. ship of state. That stabilization must tax the wealthy elite, regardless of political affiliation, end the Roman empire like military base expansion globally, and turn our fighting ability to a war on energy with a real solution in the very short term.
The U.S. needs a “dark horse” candidate to win and that individual faces the prospect of being a one term candidate if the measures enacted early in the new term do not show meaningful progress.
Failure to elect a agent of change will surely see this decade as the turn in the “American Empire” no different than the turn of the British Empire many years ago.
A visit to Mexico spent with the ruling elite (as I have) will open any doubters eyes to the future of the U.S.
In conclusion, I must add that I am a lifelong Republican aged 63 who enjoyed a wonderful career on Wall Street and can do whatever I want. Sadly, I don’t see the U.S. as a wonderful environment for my grandson age eight unless changes occur very fast. This election as evidenced in a tiny way last night in Iowa (and some may say that basing forecasts on Iowa is laughable) offers a glimmer of hope. Not because of the stature of the candidates but because of the outpouring of voters who are demanding change.
I’ve read those opinions Brad, but I still don’t buy it. Ray Dalio has some good quotes in an article by Michael R. Sesit today on Bloomberg (http://www.bloomberg.com/apps/news?pid=20601039&sid=a6iHo4wg_Kak&refer=ho ), which I am in total agreement with.
I think it is hard to argue that there is a paucity of private capital where SWF’s are needed to fill in. The capital is there, but at the right price, all SWF’s are doing, in my view, is preventing the smooth functioning of market processes.
R
Off-Topic:
China’s rapid growth is not hugely dependent on exports
Jan 3rd 2008
From The Economist print edition
http://www.economist.com/displayStory.cfm?story_id=10429271
Once adjustments are made, Mr Anderson reckons that the “true” export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets). Indeed, China’s economic performance during the global IT slump in 2001 showed that a collapse in exports is not the end of the world. The annual rate of growth in its exports fell by a massive 35 percentage points from peak to trough during 2000-01, yet China’s overall GDP growth slowed by less than one percentage point. Employment figures also confirm that exports’ share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.
China’s economy is driven not by exports but by investment, which accounts for over 40% of GDP. An American downturn will cause China’s economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China’s growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing’s worries about the economy overheating, it would be welcome.
The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America’s total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China’s growth than it is of America’s.
One has to ask where the risk capital is now. Global imbalances are striking, not just because of the nominal amounts involved, but because of the even larger differences when viewed in “risk-adjusted capital” terms. If the Chinese NFA position were viewed as a bank from a risk perspective, it would be seen as having a relatively tiny risk-adjusted asset position and a huge risk-adjusted capital surplus. This arises from having invested so much in very low risk or risk-free assets such as treasuries and agencies. The actual US banking system is now the other way around - massively long risky assets and low on risk-adjusted capital. So the force now driving foreign low risk capital into risky US assets is like a bursting dam. It really can’t be stopped. The foreign exchange risk is a separate issue. What’s more important is a natural force in resolving the global imbalance in risk-adjusted US dollar capital distribution.
“Ray Dalio has some good quotes in an article by Michael R. Sesit today on Bloomber “
I am no fan of the banks, however, Dalio is almost certainly talking his book. Perhaps as punters, there are better, but it neither makes them irrelevant nor even ultimately responsible the mess. If you’re looking for the root cause, it is somewhat recursive for the same “great hedge fund investors” Dalio puts on the pedestal (the alpha seekers, ‘en masse’) are the one and same (whether fundamentally or by rote system) as the ones he emulates, the result which pressures the companies and banks “to deliver” or else, whether by direct threat or by shorting shares over wafer-thin deviations in quarter-to-quarter results such that the over-riding mentality of not just banks but nearly all listed public companies is towards short-termism (MS $5bn cap call to pay bonusses) asymmetrically incenting them to fail conventionally rather than risk failing idiosyncratically. I recall Prince or Dimon speaking in early 2006 about how they [the banks] are compelled to pursue the [sub-prime] opportunities that the market is pursuing or else investors will punish them. Banks and their management are certainly culpable to their shareholders for losses, and stupid IS stupid, but it must be seen in the context of the real problem which begins with myopic shareholder-only capitalism, of the type derided by Rappaport, aided and abetted by similar short-term and demagogic pressures in the political realm.
I was reading some Depression era history yesterday and discovered that a large proportion of the economists and policy makers targeted for investigation and public grilling by the House UnAmerican Activities Committee were FDR’s New Deal craftsmen, particularly those responsible for transferring Fed open market authority from New York to the Washington Board of Governors and FOMC, and those responsible for social security and other reforms aimed at income redistribution. Despite any evidence to link them to Communism directly, they were often destroyed publicly. There seems to have been a pattern of vengeance by Wall Street connected intelligence types who assumed huge power in Washington from Truman onwards (think Dulles, Bush, Rockefeller and remember that Nixon was a protege of the Nazi-financier and later senator Prescott Bush).
Neoclassical economics has almost become a religion in US policy circles, but how much of that is a well disciplined machine aimed at concentrating wealth and political power back into the same hands that lost it after Hoover?
After reading some of the scary history of the 1950s, I’m really not sure. Perhaps neoclassical economics should be re-evaluated with some scepticism, along with ill-transparent securitisation and derivatives. There may be an agenda just as ill-transparent behind the neoclassical cabal.
C,
Not only is Dalio talking his book, but mine as well!
I’m in agreement with what you write, but I think the point, which I’d surmise you’d agree with, is the SWF’s, far from being welcome providers of capital or ’smart’ money, are preventing market clearing prices for those of us in the private sector who have been prudent. These foreign CB pools of capital are not the result of productive advances in their respective economies (caveat reserves accrued through resource sales, though I wonder the effect of BWII on the commod complex) but rather come through monetary manipulation, i.e. printing money to buy money.
R
brad,
In fact Americans are majority Latino. It’s been like that for a few hundred years. Seems you and Arthur misunderstand the word “American”.
Bad habits, huh?
Brad, if chinese yuan revalues by 9%, it will be test for chinese productivity. Let’s see if they can handle such appreciation, especially the labour intensive industries. Even high tech and service economies like japan, taiwan can’t handle such an appreciation.
Re: “an increasingly global US economy” - America is becoming increasingly insular, to the detriment of it’s competitiveness. For example, the H1B visa cap is causing a lot of workers (at least in financial services) to work in London instead of NY. Foot, gun, America.
Satish,
If the Chinese yuan revalues a gradual 9% over the next two years, China’s economy can handle it. A sharp 9% over night revaluation of the yuan isn’t in the cards precisely because the Chinese economy can’t handle it.
By the way, I wonder, can Hank Paulson look at himself in the mirror every evening after mindlessly repeating the mantra, “We believe in a strong dollar”, then telling the Chinese to massively revalue the yuan versus the US Dollar.
The horse was out of the barn when the US accomodated its own trade deficit by paying for it in dollars.
Dave,
Paulson wants china to revalue its yuan and at the same time wants china to increase its dollar reserves. That’s his motive. He wants all pigeons in
one hole. He can’t have that.
But i also believe china can never handle 9% appreciation per annum nor any other east asian economy. Those with highest currency appreciation are countries that have trade deficit or follow import substitution model or both.
Brad, Mitt Romney’s problem is that he is a Mormon, not because he is in private equity.
Also, “So it does feel like the street has embraced SWFs a bit too easily, without asking enough hard questions.”
What can they do without the cash injection? Going out of business? You can ask others to commit suicide.
*cannot others to commit suicide.
Satish ,
If China finds out it cannot handle 9% appreciation. It will just deppeciate 10% to correct the course.
Satish — Korea, Thailand and India have all appreciated by more than 10% against the dollar in a year at least once in the past three years. China appreciated by more than 10% v the euro in 2005.
DC — the economist article drove me ballistic. net exports have contributed over 7.5% to China’s growth over the past three years, pushing the current account surplus up from a modest level to something like 10-12% of GDP (I need to look at the numbers) and the economist writes that net exports aren’t important? the anderson argument is harder to dismiss, but I am not quite sure how it fits with the trade data.
anonymous — absolutely right that China overweight safe assets/ under weight risk assets. the challenge to the system comes from the fact that the current exchange rate regime concentrates almost all of China’s external assets in the hands of its gov (the only entity willing to take the exchange rate risk) and government management of risk assets on the scale needed to balance china’s portfolio raises a host of issues, political as well as economic.
anonymous pm –thanks for your comments. I deeply appreciate them. I have been a bit worried about how much more skeptical I have been than the street on SWFs.
but i think there is a fair question now about how capable the US is of handling a sudden adjustment to the market clearing price. It certainly seems like the banks haven’t wanted to adjust their books to the current price their assets could actually be sold at the market, partially b/c very few market can easily absorb a big surge in net sales and most balance sheets aren’t as liquid as market to market accounting implies in a stress scenario (I find the number limited redemptions or redemption in kind with the assets policies that have been instituted intriguing), and partially b/c a realistic write down would cut into capital too quickly. and there is certainly a lot of fear about what would happen if the $/ key emerging currencies exchange rate was allowed to clear in the market.
Mark — aren’t a majority of Americans supposed to be bolivarians? very fair point. I went for alliteration over accuracy. I was even tempted to try my french — les americains ne sont plus anglo-saxon or something.
Brad,
Korea had the most proactive policy of all east asian
countries. Thus they can handle few higher % appreciation. Thailand has a small trade deficit and
India enormous 10% of gdp as trade deficit.
Dr. Setser: Good stuff as usual, especially the polling results.
(1) This shouldn’t surprise anyone for the Anglo-Saxon project was always an elite one. Hence, there is little surprise that John Q. Public is opposed. With average US incomes lower than they were at the start of the decade, you can’t expect folks to be happy. Equating free trade with stagnant incomes is easy to do and a good vote-getter besides. Blame the furriners is a standard political ploy that is usually effective during hard times. Ask Obama:
“I’m in this race to take those tax breaks away from companies that are moving jobs overseas and put them in the pockets of hard working Americans who deserve it. And I won’t raise the minimum wage every ten years — I will raise it to keep pace so that workers don’t fall behind. That is why I am in it. To protect the American worker. To fight for the American worker.”
(2) The yuan has already appreciated by 12% since July 2005. If it appreciates another 9% as pundits expect this year, yuan bashing would become harder to justify as the Chinese appear to be making a good faith effort to gradually revalue as they wont to are say.
R -
We are indeed on the same page, big picture. I was focused more narrowly in terms of RD’s slagging off of banks in favor ummm … errr … himself. There are many good reasons why theoretically banks/fincls might be in better positions to speculate, allocate capital, with the bloated cost structure argument merely obfuscating the fact that they are involved in many business from agent, to TPA to principal risk taker. Of course not ALL co’s occupy privileged positions in food chain, but the one’s he’s dissing certainly do, and so his comments are rather self-serving for my liking.
Boat 52,
Good post. Could not agree more…..
bsetser: DC — the economist article drove me ballistic. net exports have contributed over 7.5%.
However export numbers are gross numbers and GDP numbers are value added numbers. If you put two 50 cent widgets together to make a $1.10 sprocket, the export value is $1.10 but the contribution to GDP is $0.10. There are economies (Hong Kong) in which the export turnover is larger than the GDP.
bsetser: but i think there is a fair question now about how capable the US is of handling a sudden adjustment to the market clearing price
There is a deep philosophical issue here of what is the market clearing price when no one is buying?
Another point is that I don’t think it is correct to talk about “Anglo-Saxon economic models” and much more accurate to talk about “Reagan-Thatcher economic models.”
Bond market has got no reason to rally. It’s all speculators that drive the market up with inflation running so high. Once fed starts to fear about inflation, bond market rally is certainly almost over
with speculators fleeing out for cover. Will china come and catch the falling knife is a big question?
‘ It certainly seems like the banks haven’t wanted to adjust their books to the current price their assets could actually be sold at the market, partially b/c very few market can easily absorb a big surge in net sales and most balance sheets aren’t as liquid as market to market accounting implies in a stress scenario ‘
There is much more to this issue than meets the eye. It isn’t much acknowledged, but the range of issues around securitization (transparency, accountability, etc.) should be considered in the context of marked to market accounting for banks, a gradually increasing trend over the past decade or more. It is generally accepted that such marked to market accounting is a good thing - because it gets closer to the truth in the value of various types of assets.
Perhaps. But truthiness as much as truth. The implication of this ‘truth’ is that everyone should want to liquidate their assets as once and want to see the price of doing so now. But the estimates of this value are based on the projection of events that haven’t happened yet - e.g. mortgages that have yet to reset and yet to default, if they do. No one ‘knows’ the truth of the future regarding the eventual actual default experience of these mortgages. And no one ‘knows’ the truth of bank capital positions being able to withstand the unfolding of that experience as it happens - instead of building in the ‘present value’ of an unknown future into today’s asset valuations and today’s capital positions.
The result is that the same type of uncertainty that underlies implied volatility option pricing begins to drive the pricing of all assets - whether or not they are marketable and whether or not their marketing is a normal business practice. Is this the truth of capital positions and the ability of capital to withstand uncertainty over time, or a gambler’s wild and wildly implausible assumption of instantaneous global liquidation of all assets - marketable or not?
China overweight safe assets/ under weight risk assets…
You regard depreciating dollars and dollar securities “safe” assets? I would think they were the opposite of safe; guaranteed to produce losses.
The Neo-liberalism Anglo-Saxon Finance Capitalism model is Broken
http://seekingalpha.com/article/58888-pedaling-prosperity-propaganda-rhetoric-of-depression
The propaganda that the subprime debacle is not enough to derail an otherwise healthy economy fades into the distance when we see all the kings’ men, the Treasury, the Office of the President and the Federal Reserve banding together.
The embarrassment is that the (government sponsored) American citizens’ mandate seems to be to consume, regardless of increasing debt levels or ability to pay. Businesses have grown to believe that expanding credit will always get them through tough times. Their new game plan is to offset all the bad credit by loading up the more creditworthy to carry the load; in much the same way Citi diluted its junk.
The U.S economy has been made into a voracious credit pyramid desperately needing bigger bubbles just to stay afloat. This is the consequence of the illusion we have been sold - perpetual prosperity. Propping up asset bubbles with more fiat money ultimately threatens not more just inflation but a rapid deflation when the music stops. The dollar retracing the past 40 years’ growth is mainly due to the realization that financial engineering was accepted as organic growth. It wasn’t and the jig is up.
The mindless creation of credit bubble after credit bubble, and subsequent debasement of our currency, has willingly ceded our global economic position. The recent fire sale on our assets (to other countries no less) might someday become a liquidation sale if this practice remains unchecked. The Federal Reserve directly oversaw each and every credit bubble and the bad loan policies that bore them.
Low risk dollar assets are safe in the context of dollar assets. FX is a separate risk.
Scary thought - Bush, Paulson, and Bernanke meeting to plot strategy today
the problem for china and the world is that the $ has fallen by more than 12% against a host of currencies since 2005, so the rmb is not going up very much in real terms.
but if the rmb appreciates by 9% and if the chinese inflation tops us inflation by several %, I’ll give China full credit in 2008 for at least moving in the right direction, albeit far too late.
remember in real terms China’s currency appreciated far more in 2005 than in either 2006 or 2007 (the $’s rally overwhelmed everything else in 05)
2fish — wait for my next post!
anonymous — interesting; i need to think some more.
stormy and boat 52. count me in too.
Are Australians still Anglo-Saxons?
China-Australia Economic Axis Turns on Resources, PM’s Fluent Mandarin
http://www.bloomberg.com/apps/news?pid=20601085&sid=aRdqwWeYzvyM&refer=europe
“There’s a feeding frenzy going on over Australian resources,” says David Parker, 42, director of the Chamber of Minerals and Energy in the state of Western Australia. The country’s economy has been soaring along with the global commodities boom. Emerging giants, led by China, are battling one another for a share of Australia’s natural resources to fuel their continuing economic expansion.
Australia is the world’s No. 1 exporter of iron ore, coal and alumina, which is derived from bauxite. It ranks second in zinc and lead; third in gold, nickel and manganese; fourth in copper; and fifth in liquefied natural gas (LNG), according to the Australian Bureau of Agricultural and Resource Economics, a government agency. It also has the world’s biggest known uranium reserves and is the No. 1 producer of diamonds by volume.
Australia may be riding a commodities super cycle in which prices will rise for decades, says Alan Heap, Sydney-based director of commodities analysis at Citigroup Inc. Per-capita steel consumption in China, with 1.3 billion people, is less than half that of other developing countries. That means it could take decades for the country’s commodities demand to slacken, he says.
“Early polling of voting intentions in the presidential election suggests that Mayor Bloomberg would stand a better chance of taking the White House if Michael Huckabee and Senator Obama were chosen as competing candidates from the main parties…” http://www.nysun.com/article/68771
Satish wrote:
“Paulson wants china to revalue its yuan and at the same time wants china to increase its dollar reserves. That’s his motive.”
Paulson and US multinationals operating in China don’t want a revaluation- their profits margins go down. Why do you think Treasury has not, thus far, labelled China a currency manipulator ?
The Chinese get their nominal 5% scrap paper (probably will end up with negative total return with slow FX depreciation), while Paulson/US multinationals laugh all the way to the bank (and start planning on setting up operations in Vietnam/Thailand/Laos etc once their artificial currency arb goes away).
“A majority though favors Arab investment in some parts of the US economy. Vegas, apparently.”
and Kentucky? “…a market for racehorses that has been breaking sales records for the past four years. In their trading niche… average returns are beating those of hedge funds. Among the reasons: More oil money is flowing in from Dubai…” http://www.bloomberg.com/apps/news?pid=20601109&sid=aLX6QSdqolLE&refer=home
I am open-minded.
Racehorses are certainly one of the sectors of the US economy where i would welcome Chinese and Gulf SWF investment, no questions asked!
I would like to see China invests in high tech in US. Hongkong has its own racehorse market and pretty big.
Dave,
Quoting from The Economist article you linked in:
“But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.”
So does that mean, that the actual factory building in which export goods are produced, the roads leading there, the utilities (power, water, telephone) serving the factory, the office buildings of the management, all this is unrelated to exports, and even if exports stall, and there will be no more need for enhancing export related capacity, there will still be demand to build office spaces, power plants, utilities, roads and factory buildings?
Where is this pent up demand coming from?
Brad-
It finally appears from voter turnout (at least in Iowa) and from your cited polls that folks are ‘Mad as Hell and not going to take it anymore’. It doesn’t take a genius to see that the goods producing side of things have been hit hard to the point the nation has likely lost goods producing infrastructure and folks healthcare and pensions. So the reaction/backlash will be populist.
The titans of industry under the guise of shareholder value make incredibly tempting targets (who I predict will be remembered most for maximizing their stock options) as they have opted to outsource (is that really productivity?) and take excessive profits to manipulate the stock price rather than share the proceeds as dividends, job stability or raises. The whole street is run for quarterly short term earnings and for a quick buck. Then if you suddenly have to write-off two or three years of earnings a golden parachute with pension and healthcare awaits you.
De-regulation (think energy) was a scam worthy of the french view of anglo-saxon finance when it was responsible!! People use electricity produced from coal and pay as if natural gas was used. Could there be anything more corrupt then buying your power from JP Morgan?
The populace, in term, almost reminiscent of ‘The Jungle’ now realizes, correctly, that the money advanced them (and many of them couldn’t pay a phone bill regularly) wasn’t part of home owenership but really a cold fatally flawed model that said if they don’t pay, HPA will let the lender/structured deal investor recover and make more money from the next family to go after a nice house. I guess, alas, all was built on a house of cards (credit that is).
We in reality were at the blackjack table going on family vacations in Vegas and while spending the kids college fund (Thanks David Brennar)…
So taxes will go up, politicians will blame the mess on the ‘wealthy’ and the poor hard working immigrants who subsidize social security! I’m waiting for someone to say you need to learn more, spend less and work hard TOGETHER with a plan (energy independence, new drugs, healthcare (stop firing researchers to pay for Iraq), etc.
Until then those nearing retirement might think twice about deferring income; better to pay taxes now!
Mind you I started my career in manufacturing and moved to financial services. The financial services business is the ONLY one who doesn’t know where the assets are and at what risk (think size and color for a retailer) let alone the value of its inventory! Although in this case off-balance sheet WAS the same as off-rack
HAPPY NEW YEAR EVERYONE AND HAVE A GREAT WEEKEND!
Sigh. Those polling questions and the title of this post reflects such a mercantilist attitude toward trade…. If this trend continues, we are all in big trouble.
LC
I am absolutely not a follower of mercantile doctrine. I do believe China is, in its own way, much closer to it than we are (joint venture requirements in cars, limits on foreign ownership, etc.).
Our nation competes with others that have a plan. We should have the same. That is my main point.
As for the rise of populism, that is a cost of our way of doing business the last several years which should have been factored in when making decisions. No where did I seek tariffs.
I do agree that, Sigh, we are in BIG trouble. Ingenuity seems to be the only way out. Let immigrants and the best brains come here to help us!
I suspect the idea that the US has lost vast amounts of manufacturing infrastructure is a vast exaggeration. Our exports, now that the $ has fallen, are rising quite briskly. Those exports must be by and large manufactured goods. Some of our biggest exporters are GE and CAT and chemical caompanies. Those goods are produced in factories.
Guest
What manufacturing we have left is indeed well maintained and employment, because of automation, had to be reduced. However if you really dig into supply chain, take a look at advanced electronics the capability is gone.
Name one LCD/Plasma TV made in the US, cell phone or LCD panel please. Corning does make the glass. That’s about all we do. Where we do have special niche capabilities exports are indeed up quite a bit - no argument there. The Boeing 787 is a hollowed out plane with Japan supplying a large percentage of its airframe.
The USD could fall another 30pc or more and the capability still will not be back. Also look at why the USD has declined and you’ll see global demand making up for a weak internal US market.
So, I don’t know what figures you look at, but we are not in good shape for a weak dollar to pull us out of where we now are. Historically I would be in complete agreement with you. That was then.
The manufacturing infrastructure is still in US and will be in US for a while. People concern their wage. The wage is not going up. Of course, it makes sense since hundreds of people can do the same thing and they will accept a much lower wage to do it.
(joint venture requirements in cars, limits on foreign ownership, etc) in China?
Even a less than 10% stake in MS makes a moderate like Brad Bsetser whine for almost 2 weeks…
I’ll be whining for at least two months, if not two years …
Until China stops using its government banks for below market sterilization and hiding the extent of its reserve growth, I would rather it steer clear of the rest of the world’s financial sector. It has not demonstrated any real commitment to allowing its fully-owned banks to operate commercially.
Gabor,
Contrary to US popular perception, not everything produced in China is destined for Walmart store shelves. The Chinese government has done a superb job diversifying exports to other regions of the world especially Europe and the Middle East. Actually, medium technology Chinese manufactured products a more appropriate for developing nation consumer markets than high-tech products from the United States. Of course, China won’t completely decouple from a severe US Recession, but Western pundits predicting a China economic crash in 2008 will surely be disappointed. Maybe the Chinese economy will slow from a 11-12% annual growth rate to a 9-10% growth rate. The same Western pundits who predicted a China crash during the Asian Economic Crisis in the late 1990’s were flat wrong then, and will be proven totally wrong again in 2008! LOL
“It has not demonstrated any real commitment to allowing its fully-owned banks to operate commercially.”
Brad, the lack of regulatory legal oversight of the US banking system is a total joke around the world. That Citicorp could create off-the-books “special entities” to hide billions of dollars of losses at Enron reeks of systemic corruption. Then Vice Chairman Robert Rubin was deeply personally involved in the Enron corruption and fraud, but escaped any federal criminal investigation with his high level Clinton Administration political connections and a $2 billion Citicorp settlement with the SEC to drop federal criminal charges against its employees.
Now we have hundreds of billions of dollars of looted funds from the subprime derivative fiasco. Bonds rated AAA are today worth pennies on the dollar. Why isn’t Hank Paulson who marketed the AAA subprime toxic waste at Goldman Sachs under investigation? Wall Street owes the Bank of China $10 billion for the losses incurred on those AAA rated mortgage bonds.
Does this ease your fear, Brad?
http://www.iht.com/articles/2008/01/04/business/safe.php
“Firms were invited in December to apply for the chance to invest CIC assets in stocks on the MSCI All Country index, the MSCI EAFE index, the MSCI Emerging Markets index and in Asia ex-Japan equities, with an application deadline of Jan. 15, Bloomberg reported. The agency said Friday that CIC has received more than 100 applications from money managers to help it invest in global equity markets, quoting a person involved in the selection process.”
CIC’s web site is up
http://www.china-inv.com/
you can go there for the RFP…….
[quote]
Until China stops using its government banks for below market sterilization and hiding the extent of its reserve growth, I would rather it steer clear of the rest of the world’s financial sector. It has not demonstrated any real commitment to allowing its fully-owned banks to operate commercially.
[/quote]
This is a bit confused……
The PBC has legal authority to force banks in the PRC to hold reserves and it also has legal authority to put caps on interest rates on loans. This authority has *nothing* to do with the fact that the banks are mostly state owned, and the PBC sterilization requirements also apply to foreign and private banks. The PBC *doesn’t* have authority to force a bank to direct loans.
We can debate whether or not the PBC’s monetary policy is wise or not, but I don’t see what any of this has to do with the PBC forcing the banks to act non-commercially. As far as I can see the PBC’s authority in this case isn’t any different or “non-commercial” than the authority that the Federal Reserve has to set reserve requirements or to set interest rates.
Also, there is a bureaucracy that exercises state ownership of the banks, but it is a separate bunch of people than then People’s Bank of China. If the PBC orders a bank to hold sterilization bonds as part of its reserve requirement, the bank has no choice in the matter because the law very clearly states that the PBC can do this.
If the PBC orders a bank to direct lending to an unprofitable factory, the bank managers will say no since they will lose money on the deal and the law doesn’t give the People’s Bank of China this authority and actually specifically *denies* the PBC this authority.
So the bottom line here is that in undertaking sterilization, the PBC is just executing monetary policy. Whether it is good or bad monetary policy is another issue, but my point here is that it has nothing to do with the fact that the banks are state owned. If the banks were 100% private the PBC could and likely would do exactly the same thing.
2fish — there are a ton of stories to the effect that the pboc occasionally calls up the head of the state banks and says more or less we are issuing a ton of sterilization bonds at 3% and we expect that you will buy a big chunk of them. that is one way in holds its sterilization costs down.
tis true that reserve requirements are part of monetary policy. tis also true that they fit the interests of the banks v the interest of the pboc. the pboc wants cheap financing. the banks want to make money. the more reserves, the less money the banks make. the fact that the big banks are stated owned means that they don’t really have many options for protesting policies that undercut their profitability in order to cut the gov’s sterilization costs. and the fact that the commerical banks (and foreign banks) need the support of the pboc/ regulators in ton of different ways is they are going to expand means that they too have incentives to go along.
I assure you that the folks i spoke with in beijing were crystal clear that the banks had absolutely zero interest in buying the minfin bonds the pboc has bought to finance the cic at par in an environment where the pboc is raising rates (the bonds have a long duration, the last thing the banks want in a rate raising environment). they were equally clear though that they fully expected to be told that they would be “expected” to buy those bonds when the time came.
sterilization is part of monetary policy — but i stand by my claim that in an open market, the cost of “sterilization” would be much, much higher. price matters.
[quote]ere are a ton of stories to the effect that the pboc occasionally calls up the head of the state banks and says more or less we are issuing a ton of sterilization bonds at 3% and we expect that you will buy a big chunk of them. that is one way in holds its sterilization costs down. [/quote]
Absolutely.
However my point the reason the PBC can do this is that it has specific legal authority to do this, and this legal authority is independent of the bank ownership. This means two things. First, it means that the dynamics wouldn’t change that much if the bank were privately owned. Second, it means that the PBC can’t do certain other things. The PBC can call up a bank and force it to buy treasury bills. It can’t call up the head of the bank and force it to direct lending to an unprofitable factory.
[quote]the fact that the big banks are stated owned means that they don’t really have many options for protesting policies that undercut their profitability in order to cut the gov’s sterilization costs.[/quote]
Difficult to say. Sometimes having political firepower on your board is useful. For example, if a bank wanted to push back at the PBC, then it could call up CIC which would call up the Ministry of Finance, and if the PBC was pushing for something that would sink the bank, the MoF and the PBC would be screaming at each other for a while.
The “Chinese state” isn’t a monolithic entity, and a lot of the reason that the Chinese economic system work is precisely that the state isn’t a monolithic entity and you have checks and balances between different agencies that want different things.
[quote]The fact that the commerical banks (and foreign banks) need the support of the pboc/ regulators in ton of different ways is they are going to expand means that they too have incentives to go along.[/quote]
For a bank to disobey a direct, lawful order from a government agency with bank regulatory power, is generally not a very good idea. Part of the reason for this is that there is a “if you do a favor for me, I’ll do a favor for you” aspect with working with central banks.
[quote]sterilization is part of monetary policy — but i stand by my claim that in an open market, the cost of “sterilization” would be much, much higher. price matters.[/quote]
Which may be an argument against open markets, I suppose.
One thing to point out there is that I take a “Dengist” view toward economic policy. I tend to support markets because markets seem to work better than their alternatives, but I’m not ideological that markets are a good thing. If someone were able to demonstrate that state central planning works, then I’d be in favor of state central planning. It usually doesn’t, by the way. One problem with central planning is that people are good at hiding costs, so the cost of below market sterlization is going to be paid in some other way.
The reason this is useful is that in the real world, things are really messy and a black and white view of things are rarely useful. One of the amusing things, for example, is that major US corporations are mini-centrally planned states, and the Federal Reserve does from time to time get on the phone with the head of a big banks and quietly ask politely (or not so politely) that they should or shouldn’t do certain things. The head of the big bank then calls the trading floor and tells people that they should or shouldn’t do certain things.
Personally, I don’t see anything wrong with this since, in hindsight, there usually is a damn good reason that the Fed asked for what it did.
I should point out that this is the basis behind my statement that Chinese and US banks really are more similar than most people realize. One reason is financial consolidation in the United States. If you have 500 small banks, you just can’t get on the phone with all of them. If you have about 10 big banks, you can.
and if China’s government ends up owing the big ten us banks as well as the big chinese banks, they really will be more similar than most realize
Brad,
You say that: “I am not sure that a majority of the citizens of the main creditor countries would vote to invest so much in the US, particularly on terms that almost guarantee large financial losses”.
I have questioned before whether China really is almost guaranteed to take a loss on its dollar reserves over a more meaningful time period, and can now present some evidence here:
http://reservedplace.blogspot.com/2008/01/it-is-often-asserted-eg-in-brad-setsers.html
Maybe the Americans are going to become more like the Anglo-Saxons, or the British at least.
RE-
There is no use of dollar reserves if the monetize them. They are atleast getting some sort of junk. Something is better than nothing.
Satish,
I am not sure what you mean by “monetise” in this context. Reserves are always invested in some asset, but the domestic currency used to buy them may or may not be sterilised.
RE-
They are sitting with lot of bond, bill and note assets.
When these bonds, notes and bills matures they will get
them back in paper or digital dollars. If they spend them it’s going to be inflationary. Thus dollar value erodes. Given the size of the reserves, If they utilize these dollars, dollar will collapse. Given the fed credibility of fighting inflation, i gave hope in the wake of cutting rates with inflation so high.Inflation benefit whom credit reaches first. Being ahead of curve by investing them to get some stake in any sort of Physical assets or financial asset, they get something in return before fed inflates the system to such a high level even the financial assets becomes overpriced that 1.4 trillion US dollars will not be enough to buy even small stake in these assets.
Sure if they give credit in chinese yuan in equivalent amount of dollars for these financial companies without sterlizing, inflation will run away in the own economy, forcing PBoC to raise interest rates creating their own hard landing given the size
of debt they have created in defending the dollar peg.
Even if manufacturing inflation is kept in check, inflation in services will take place in the form of higher costs for plumbing and similar sort of low end services to higher costs for doctor fees, medication and other high end services.
Stocks cannot sustain high valuation for long ie more than 5 years at maximum or do real estate as seen in japan. Wage inflation is a vicious circle which will eventually fall in manufacturing in the long run( Fortunately for japan, the money they printed fled the country creating carry trade.World is too small to accumulate the size of money chinese are going to create)
Satish,
It does not have to be inflationary when China spends its reserves; that depends on US policy. Basically, China and the US are cooperating so that China is postponing consumption while America maintains or even increases its current consumption - notably of Chinese manufactured goods. If America is honest, and the real value of the dollar does not depreciate more than the Fed promise (eg consistent with core inflation at 2% or less), then sometime later, when it suits China to consume its savings, the US ought to either cut its consumption, or borrow from elsewhere.
The problem is, as perhaps you are saying, that the US may not be honest, and that they will allow an increase in inflation to cheat the Chinese, and any other holder of dollar debt, rather than repay the expected real value of what they have borrowed. It does seem to me that the signs are that this is what the Americans will do. In any democracy, especially one of insular optimists like the US, it is political suicide to be honest with voters about their relative decline, and take measures to deal with it. Things have to get bad before they face up to their position.
The trouble is, as my analysis (on the link) and my own experience of the UK’s decline suggest, that denying the problem does not help other than in the short term, because the markets make you pay in the end.
RE-
I am just expressing my views and not arguing with you.
Question arises who will provide lending to US if china withdraws lending( Only big nation that can provide is India but they are pursuing import substitution economy and need huge capital inflows to maintain their BoP) or will US manufacturing rise to repay the debt( which to view is impossible given china has overcapacity in all sectors of manufacturing and wages in US are too high to accomplish them either).
I dont see US reducing consumption without seeing massive recession which would further complicate the role of dollar as reserve currency.
Only way I see problem can be minimized is large immigration or population growth which could help stabilize asset prices and create collatrel for banks to continue lending(i think politically not feasible)
Satish,
I agree, it is going to be tough for the US to consume less, but I think that they must try - it will be difficult to accommodate the rise of China (not to mention India, etc) without the developed countries consuming less, because it appears that the world is hitting the capacity limits for various natural resources and pollution. I would suggest increasing gasoline tax and introducing some kind of wealth tax, but immigration is another option. As the dollar and American house prices decline, the US looks an increasingly attractive place to live.
RE-
I believe in human innovation that they can be effiecient in resource optimization. Currently mechanical effieciency of an automobile is 15% which can be increased to 30%. If middle east,africa, russia don’t waste crude oil producing electricity, west stop heating home with electricity, more diesel vehicles we can reduce consumption of oil by 50% producing same economic well being. Other resource are plentiful apart from oil and food( GM crops can deal with it).
Obviously none of them will happen without a crisis.
Humans react to sticks rather than carrots. Economic crisis will be rather an outcome of financial imbalances in the long run rather than resource induced recession.
Note: If brazil cultivates 3.5 million square km( 40% of area), brazil can produce 50-60 million barrels/day of oil equivalent at 50 tonne/hectare yield of sugarcane.
Satish,
So the US should persue mass immigration to maintain the asset bubble? Ponzi would be proud of you. Of course, Bush obviously regarded Ponzi as an inspiration as do serveral “mainstream” economists (G. Peri) who regard immigration inflated asset prices (mostly houses) as a “virtue”. Alas, bubbles end badly as Bush has sadly discovered.
RebelEconomist,
So the US has to consume less because “the world is hitting the capacity limits for various natural resources and pollution”. Let’s assume you are correct. Now doesn’t immigration into the US make the problem vastly worse? Immigrants don’t come to consume less after all.
Peter-
Immigration or population growth will give the buffer time to solve the problem of imbalances. Impact pain is severe than slowly induced pain.
First generation immigrants tend to save more if granted Permanent resident as PR would be an impairment for remittance outflow. Thus saving could be increased which could be diverted towards investment and at the same time preserving construction jobs as immigrants seek homes. Apart from that US has a huge area to accommodate immigrants
Satish,
The history of financial crisis’s shows that a fast resolution works better than a slow one. Compare the quick financial restructuring in the US after the real estate bubble in 1980s with Japan’s decade+ of stagnation.
To be direct, putting off the day of reckoning or stretching out the pain doesn’t work. Reprising assets to real market values and moving on does.
I have never seen any evidence (even a unsubstantiated claim) that immigrants have conspicuously higher saving rates versus native. That applies with or without permanent residence status. In any case, even in they did, the numbers are too small to make a difference.
Your idea about saving construction jobs via immigration sounds like another scheme to reflate the bubble. In any case, losing construction jobs won’t hurt the American people that much. It looks like most them were done by illegal aliens anyway.
As for America have a huge area. Two points, First, if America really has such a large area, then immigration won’t raise asset prices. Second, as economists such as Brad De Long and others have noted, the US ran out of land within a reasonable commute starting around 1970.
Peter,
I was thinking of a simplistic answer to the US overseas debt - bring in some people with savings! That might help the existing population a little if they paid more taxes on their income than the state spent on them. They might also pay the existing population to be allowed to come - for example, I have seen it proposed that the US auction its citizenship!
Schaeffer: The history of financial crisis’s shows that a fast resolution works better than a slow one.
The history of structural economic reform could argue the opposite (China versus Russia).
There is also a bias here.
If the “fast resolution” doesn’t work, then you have a “slow resolution.” In the case of Japan, asset prices fell really quickly in 1990, but that was just the beginning of the problems.
I don’t think that “fast” versus “slow” is the determining factor. There are places where “fast economic reform” has worked (Poland and Vietnam). There are places were “slow economic reform” has worked (China). There are places were “fast economic reform” hasn’t worked (Indonesia and Mexico).
When doing comparative analysis, it’s always dangerous to have two samples, since you could end up looking at the wrong variable.
Gabor: there will still be demand to build office spaces, power plants, utilities, roads and factory buildings? Where is this pent up demand coming from?
1.2 billion consumers. If exports dry up and the factories start turning idle, then the government will drop money from the sky to create demand.
Twofish,
I agree that the jury is still out on major economic transitions (from communism to capitalism). However, I was referring to economic crisises within advanced market economies.
The RTC approach worked well in the US. Japanese banks were still burdened with non-performing loans many years after the crash over there.
Certainly Argentina turned around quite quickly when it massively defaulted / devalued… After the slow torture approach had been tried for years. Same for Korea (without the sovereign default).
The history of the Great Depression is that the countries that went off gold soonest did best. The gradual approach didn’t work anywhere (to the best of my knowledge).