State-led globalization
A line in the FT’s recent leader on sovereign wealth funds jumped out at me. The rise of sovereign funds, the FT opined, was an irony in a era of market-led globalization.
The irony, then, is that an era of market-led globalisation is making government-controlled funds more important than ever before.
That argument didn’t ring quite true to me.
The part about the rising importance of government-controlled funds is hard to dispute, especially given their role in the recapitalization of the US financial system. But I would argue that the rise of sovereign wealth funds — and more generally, the rise of what Martin Wolf called "state capitalism" — is the almost inevitable result of the state’s leading role in the current process of globalization, not a irony in a market-led era.
That isn’t the conventional wisdom, I know. But I have a hard time reconciling the enormous role governments now play in the global flow of capital with the idea that the current era is marked by "market" as opposed to "state" led financial globalization. Consider the following graph*, which tries to show the annual increase is government’s cross-border assets. Total government asset growth is now nearly two times the size of the US external deficit.
A set of developments (the rise of China, higher energy prices) and policies (exchange rate management in Asia, fiscal surpluses in the commodity exporters) has concentrated the world’s financial firepower in the hands of states in emerging economies.
State flows, after all, now dominate global capital flows.The IMF’s data makes this crystal clear. The IMF’s WEO data tables suggest that $500b in (net) private capital inflows to the emerging and developing world won’t fund a current account deficit, but rather will combine with a a roughly $700b current account surplus to finance $1200b in official capital outflows. My own work suggests the IMF underestimated official outflows by about $200b.
Private markets want to finance deficits in the emerging world, but emerging market governments won’t let them. The market doesn’t want to finance a large US deficit. But emerging market government do.
That doesn’t strike me as “market-led” globalization. It strikes me as a world where government intervention thwarts market outcomes.
Other examples of the growing role of government in the economy abound:
State banks are now among the world’s largest banks, and rather than shrinking in their home markets, they are expanding globally. China’s state banks are best example: they are expanding abroad even though their home market is tightly regulated (deposit rates are capped, and there is a floor on lending rates) and they are often subject at times severe administrative guidance. The state gives (the juicy interest rate margin) and takes (high reserve requirements, a portion of which have to be met in dollars, lending controls) but it is always present.
Global oil production is increasingly dominated by the national oil companies of the oil-exporting states. They sometime compete with and sometimes cooperate with the state-oil companies of emerging market economies – notably China and India. The privately-owned international oil companies (to be fair, some of which are often viewed outside the US and Europe as proxies for their home countries) are investing enough to sustain their current share of global oil production.
China is now embracing a wave of import-substitution – for chemicals, steel, autos, even aircraft — behind the protective wall created by China’s undervalued exchange rate. Many of the leading players in this process are owned by various parts of China’s state. What might be termed exchange rate protectionism is increasingly shaping the location the “market” chooses for global production.
China’s exchange rate regime has effectively given China’s government a monopoly on outward capital outflows from China. Saudi Aramco’s monopoly on Saudi oil production effectively provides Saudi Arabia’s government the same kind of monopoly, even if some of the outflow comes from “private’ accounts. The same logic applies to a host of other oil-exporting economies.
Private fund managers are scrambling to manage state money, blurring the line between state and private money. And state funds are increasingly acting like private funds, blurring the line in another way.
The enduring legacy of the Asian financial crisis – and the collapse of oil prices that followed, pushing countries like Russia into default – has been the reassertion of the power of the emerging market state.
Those states though like to be market successes. Their presence in global markets has exploded.
And – as Stephen King of HSBC argues – the increasing financial power of emerging market states is likely to trigger a reassertion of the state in advanced economies.
*I fleshed out the IMF’s data on reserves (the COFER data) with an estimate for q4 and an estimate for the funds transfered to sovereign wealth funds. My numbers are are all adjusted for valuation gains and thus should only be compared with IMF numbers that are also adjusted for valuation. My data for emerging Asia and the oil exporters relies comes from the data individual countries release supplemented by IMF data. For sovereign funds in particular I have to make big guesses. My data for oil asset growth is almost certainly an underestimation, largely because I have only focused on the largest oil exporters. Some smaller oil exporters fall into the "other" category. Yet for all its limitations, I will happily stack my data up against anyone else’s data. It reflects the cumulative results of three years of sweat equity — including a fair amount of sweat equity from Dr. Menegatti of RGE – and has been rigorously tested for consistency.
Banking industry should be and always is subject to tight regulation. If the regulators allow private banks make too many off-balance-sheet innovations, we all see where it led us.
When you compile data about the reserve in governments’ pockets, you should always mention the Fed has the deepest pocket in the world. Globalization is state led in the first place Whoelse negotiate those trade treaties and open boarders? Whoelse gives out tax incentives and prepare the infrastructure for private investment?
I confined my analysis to central banks holdings of foreign assets. The fed’s foreign assets are quite small. the Fed’s roughly $725b in holdings of US securities are smaller than China’s total holdings (treasurise + agencies) of US assets and comparable to the likely holdings of Japan and the GCC (tho most GCC holdings are managed by private fund managers). There is a difference between foreign holdings and domestic holdings.
In the United States, the only politically accepted form of state-driven industrial development is in the defense contracting sphere. It is not an accident that the US is the world leader in aviation technology. For instance, the Boeing 747 Jumbo aircraft was a direct offshoot of a defense contract for the C-5A transport aircraft. While Boeing eventually lost the C-5A contract to Lockheed-Martin, the engineering design paid for by the US Airforce was largely incorporated into the civilian Boeing 747 aircraft. The Boeing 767 and MD-11 Aircraft were also financed as aircraft refueling tankers for the F-15 Fighter. Europe’s Airbus can rightly point to the billions of dollars in defense contracts that subsidize Boeing’s R&D technologies. Even Donald Trump flies a luxury civilian version fleet of CH-47 transport helicopters to shuttle high-roller VIP gamblers to his Atlantic City casinos. Today’s internet was initially financed and developed by the US military DARPA agency to connect US universities to US Defense laboratories.
Instead of protesting state-driven industrial development, the United States actually could use some more of it.
I love preaching to the converted
Nevertheless, these additional insights and sources are invaluable. If yuan revaluation continues apace, though, we might not be able to carp about Chinese intervention to the same extent.
Current account deficits have been market-led.
Capital account deficits (current account surpluses) have been government-led.
Markets + Governments = Global Imbalances.
State-owned Saudi Sabic, State-owned China Sinopec sign $1.7 Billion Joint Venture
http://www.bloomberg.com/apps/news?pid=20601089&sid=aVqS1o9Xda3o&refer=china
Jan. 31 (Bloomberg) — Saudi Basic Industries Co., the world’s biggest chemicals maker by market value, signed an initial agreement on a $1.7 billion joint venture with China Petroleum and Chemical Corp. to build a petrochemicals complex.
Saudi Basic, or Sabic, will own half of the ethylene derivatives plant in Tianjin which is expected to have an annual capacity of 1 million metric tons a year, the Riyadh- based company said in a statement today.
“China is a huge market for petrochemicals and this first grassroots investment for us in China will be a valuable supplement to our marketing network there,” Chief Executive Officer Mohamed al-Mady said in a telephone interview from Beijing today.”
Sabic plans to expand in China to tap the nation’s rising demand for products used to make auto-parts, packaging and plastics. The Asian country will account for 25 percent of global chemical demand by 2015.
maintaining a controlled pace of rmb appreciation from a very undervalued level requires enormous intervention, and in nominal terms, the rmb hasn’t really started to appreciate against a g-3 basket.
not quite sure how current account deficits can be market-led if they are financed by government inflows …
“Chinese yuan NOT so undervalued”
http://www.nytimes.com/2008/01/13/business/13view.html?ref=business
REVISING THE CHINESE ECONOMY Many of the prices in China had not been accurately measured since the late 1980s; in 2007, new data indicated that food, rent and other items had become a lot more expensive than had been accounted for in official measurements. Higher prices, of course, mean lower Chinese real wages and a smaller size for the Chinese real economy.
Furthermore, poverty in China remains severe; the data revisions imply that China has 300 million workers — about the size of the entire United States population — earning less than a dollar a day. Given these weaknesses in the Chinese economy, the yuan may not be so undervalued after all.
i can see that the chinese hold down the value of their currency in a tightly controlled manner, but again, the world is not cold war bi-polar. what are they controlling their currency’s rise against ? – a dollar which is held artificially low by depressing interest rates. and who does that ? the fed, which everyone imagines is an organ of the state, but which is in fact, in a complex and non transparent way, privately owned.
from a euro centric viewpoint, both dollar and yuan are unable to stand on their own feet in the global market place. what does it matter whether it is state or private interference ?
these things matter to us. from yesterday’s irish times : a fall of 1% in united states’ g d p causes a 1.75% drop in irish g d p. that’s globalisation for you. it’s belt tightening time for ireland.
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gillies — note that total government intervention in the fx market didn’t fall notably relative to say 02-03 when the fed started rising rates, and also note that the recent surge in global official asset growth predates the fed’s rate cutting cycle. the question you are alluding to but dancing around is whether a big debtor can run a counter-cyclical policy. the answer seems to be yes, but only so long as it gets the needed financing from other governments. the price of counter-cyclical policy is, in some sense, continuation of what i called state-led globalization.
RBC, 31.01.2008, Moscow 14:49:38.Russia’s GDP went up 8.1 percent to nearly RUB 32.989 trillion (approx. USD 1.35 trillion) in 2007, the Russian Federal State Statistics Service reported today on the basis of preliminary calculation of GDP growth.
http://rbcnews.com/free/20080131144938.shtml
last year Russia’s gdp was USD 0,986 trillion, so it grew around 37% in nominal dollar terms
“not quite sure how current account deficits can be market-led if they are financed by government inflows … ”
I believe there’s a private sector element involved when Joe 6-Pack drives down to Wall Mart and buys something made in China.
Do you believe he checks with the oracles to ensuring financing is available from China before doing so?
if joe sixback is buying on credit, his ability to keep buying hinges on the availability and pricing of credit. and that is in no small part a function of chinese state policy.
That is probably debatable. Apart from that, it is a US policy that is still fundamentally anti-trade-protectionism (pro markets) that allows J6P to pay the prices he pays for goods made in China, in the face of Chinese subsidization.
all i see is the big debtor trying to borrow its way out of debt. there is no such escape route.
there is an even bigger and more general question being danced around – what future for unilateralist attitudes in a globalised world ? imagine the current trend taken to absurd extremes, so that the chinese and the arabs are eventually allowed to buy all of the united states economy, except the strategic and military bits that are required to ‘defend’ it. defend it for whom – the chinese and the arabs ?
my language is crude, but you can see that there is a fundamental contradiction in there.
the united states is not in the position of the british empire after the first world war, so much as that of the soviet union after the fall of the berlin wall. run out of room to manoeuvre.
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“if joe sixback is buying on credit, his ability to keep buying hinges on the availability and pricing of credit. and that is in no small part a function of chinese state policy.”
Oh please Brad, that statement is totally absurd. As an Economist, you should know short-term credit availability is primarily a direct function of Federal Reserve monetary policy. And right now, the Bernanke Federal Reserve is out-of-control, printing money like there is no tommorrow. That’s causing huge liquidity to develop in the country, and that’s causing the trouble. The China PBoC doesn’t control the US money supply simply because it does not have any regulatory authority in the United States, and cannot print the fiat US currency; every US Dollar owned by the China PBoC was printed by the US Federal Reserve.
DC makes one point I agree with, which is the dependence of US domestic credit pricing on US Fed policy, as opposed to Chinese bids for US treasuries. Which opens up the same debate I avoided in my 14:28 response.
Gillies,
Since you are from Ireland, this article would concern you. One reason attitudes are souring on Neo-liberalism Economics has to do with how US companies are treating employees in the states and around the world.
Here is just one small example. Consider Allergan, a US pharmaceutical company firing its entire Ireland workforce.
http://news.bbc.co.uk/2/hi/uk_news/northern_ireland/7217704.stm
US pharmaceutical company Allergan will phase out work at its factory in Arklow, south of Dublin Ireland, over two years and outsource operations to Costa Rica.
General manager of the Allergan plant Paul Moody paid tribute to the workers and thanked them for their dedication.
Allergan is “paying tribute to employee dedication” by firing them for a job well done.
More and more companies seem to be saying: Don’t take it personal, it’s just business. Have we now reached the point where everything we do is just a business decision?
DC — Printing money usually produces inflation, not savings; it usually isn’t an effective way to finance a current account deficit. Ask someone from Latin America. Moreover, the fed’s isn’t printing money: check out the fed’s release H4.1. Its balance sheet really hasn’t expanded. Sort of surprising, but true. Moreover, long-term rates haven’t really moved all that much with fed policy; remember the old conundrum. Long-term rates didn’t rise when short-term rates rose, leaving the yield curve inverted.
In any case, I would like to get back on topic –
Am i overstating the growth of state involvement in the global economy?
Pushing my thesis –t hat the state is now driving globalization — too hard?
Did i miss examples of state capitalism?
And is Gillies right, that the era of unilateralism is now over?
and does that apply to China’s argument that its exchange rate is its business and thus no one should complain about its decision to intervene to keep its exchange rate from rising (a quite unilateral policy; the rest of the world didn’t get a vote, and it is a policy that affects them as well)
– and yes, I know, the US has done the exact same thing on many occasions, and even briefly elevated unilateral military intervention into a foreign policy doctrine
Stephen King in the Independent (linked in Brad’s post at the top) notes that capital markets may not be profit maximizers if they are substantially controlled by non-profit-maximizing state entities.
But wouldn’t that provide the arbitrage opportunities for the hedge funds of the 2010’s? And what will states do to prevent having their pockets picked?
It may be necessary to severely regulate derivatives markets worldwide, otherwise the state owners will have to act much like profit maximizers anyway.
Hallo
on the ugly originator of US deficit: either the Buyers or the Savers
a. “According to Mr Greenspan, the deficit was caused by the high savings rate of countries with current account surpluses, combined with their inability to find sufficiently attractive domestic investment opportunities.
…
b. “Here is an alternative view. As globalisation made trade between high-wage and low-wage countries possible, consumers in the US began buying more products made in low-wage countries such as China because those products were cheaper. Meanwhile, people in low-wage countries continued to buy their own products for the same reason. Consequently, the US’s current account went from balance in 1991 to a deficit of $850bn in 2006.
….
In a nutshell, then, we have two competing theories of the causes of the US current account deficit and all the related imbalances created by it.
a. “Mr Greenspan’s explanation is that it is all the result of a savings glut and a decline in “home bias” in the surplus countries. The alternative explanation is that the US trade deficit has been caused by free trade with low-wage countries and financed by paper money creation by the central banks of the surplus countries. You decide which is more plausible.
…
b. “Mr Greenspan has obviously confused cause and effect in claiming that a savings glut in the surplus countries caused the current account deficit.
It is equally obvious that he has drastically underestimated the destabilising consequences of that deficit. In his words: “I would place the US current account far down the list” of imbalances to worry about. It is now clear just how great his misjudgment was.
…
c. “The current account deficit must quickly be brought to the top of the list of things for our current policymakers to worry about – and to resolve. If this imbalance is permitted to grow, or even to persist at current levels, the outcome can only be new and greater credit-induced economic convulsions that will require ever larger government bailouts and ever-increasing government encroachment into the economic sphere.
http://www.ft.com/cms/s/0/a7d7335a-d008-11dc-9309-0000779fd2ac.html
Or was the originator twofold; one thing – two satisfied interest:
-the saver has found his interest in saving
-the buyer has found his interest in free-lunch living
globumedes
bsetser: Am i overstating the growth of state involvement in the global economy?
I think you are overstating the *change* in the amount of state involvement in the global economy.
US state governments have huge pension funds and local investment funds which are used for corporate bond purchases and equity investments. One reason I argue that SWF’s aren’t really a new thing is that Wall Street investment banks that from their point of view, CIC and the Kuwaiti Investment Corporation aren’t that much different from the New York City Teachers Retirement Fund or for that matter from the General Motors Pension Fund or Harvard University’s Endowment.
Also globalization and transnational flows are being driven by technology more than anything else.
bsetser: and does that apply to China’s argument that its exchange rate is its business and thus no one should complain about its decision to intervene to keep its exchange rate from rising
Complain all you want, the Beijing can’t stop you. There is no particular reason that they have to listen to you. It’s not as if they are asking for money. Creditors talk. Debtors listen.
I think its not rational to expect that the Chinese government is going to do anything other than what it happens to think will keep them in power and what makes the people that could throw them out of power (i.e. people in China) happy, regardless of the consequences to the rest of the world.
The US practices state-driven capitalism in the defense sphere which only indirectly produces economic benefits in civilan sector. Fuel Cells, Solar Cells, the Internet are examples of US state-funded technologies.
In the Chinese “socialist market” economy, majority ownership of SOEs doesn’t translate to Chinese state micro-management of these companies. For instance, no one on the State Council instructed CNOOC to bid for California Unocal. That decision was entirely made by the CNOOC Chairman. The State Council isn’t stupid to believe that an entire economy can be centrally managed. CNOOC also has to produce profits and pay dividends to both the Chinese state and minority shareholders in Hong Kong and New York. If the minority shareholders aren’t satisfied, they will dump the stock crashing the market capitalization of the company. In CNOOC, the Chinese government has been more of a passive investor. Minority shareholders successfully revolted against a proposed convertible bond issue by CNOOC with the Chinese government not interfering.
DC: Instead of protesting state-driven industrial development, the United States actually could use some more of it.
Tried in the late-1980’s and early-1990’s with Sematech. Didn’t work too well.
One problem here is that I think it is too simple to think in terms of state versus non-state. There are forms of state-ownership that work, and those that don’t. One reason I think that US state pension funds are worth looking at is that its an example where state ownership of corporations works well. The pension funds are large enough to have some control over management, but not so large to have monopolistic dominance.
I really don’t think that industrial policy works that well. Much of it is looking at SEMATECH.
The modern corporation exists as a tension between shareholders and managers, and my personal opinion is that you get the best results when there is a balance of power between the two. In think it would be rather bad if you have 100% state ownership with no profit incentives, but it is just as bad if you have a million shareholders in which case all the power goes to management.
Brad,
Not every investment in technology works out. Sometimes it works and sometimes it doesn’t work. That is just the nature of investment in the high-technology arena. In the pharmaceutical industry, if just 1 out of 3 promising drugs makes it to market, it is considered a huge success.
I don’t know the in’s and out’s of Sematech, but just remember that the largest contract semiconductor producer in the world is Taiwan Semiconductor which was not established by an enterpreneur but the Taiwan state government. Americans often demand short-term results in industries that require long term investment patience.
Another case in point is Chinese semiconductor manufacturer SMIC. When the Chairman of the company is the son of former Chinese President Jiang Zemin, you know the company has some very high level political and financial backing in Beijing. Just because of some quarterly losses at SMIC, the Chinese government isn’t going to back off its goal of building a world class semiconductor industry. Chinese state banks are financing multi-billion dollar chip fabs in Beijing and Shanghai with leading edge 300mm semiconductor technology.
I would suggest that US government policymakers take a longer term perspective than just reading short term quarterly reports. Some things like raising a child or building an chip industry take longer perspectives.
I’m with gillies and globumedes,
And for you, Brad, why don’t you mention Robert Reich article today in FT:
“America’s middle classes are no longer coping”
http://www.ft.com/cms/s/0/5deb45aa-ce7e-11dc-877a-000077b07658.html
Taking the same medicine that one preaches should be the solution of global imbalances, if properly taken.
This Blog is fast becoming one that is bereft of proper analysis and content. One could call this “Beat China” Blog and wouldn’t be incorrect. The economic analysis, the little I have seen is quasi anecdotal and based on cherry picking of data sets and limited time-series.
Yes, there are problems with China and the other countries, take your pick building up reserves and not deploying them for raising consumption levels, education, infrastructure or whatever is your pet project. That is their call and not yours to make espcecially when your arguments and advice smack of being self-serving and deflecting the blame from some of the other equally guilty parties.
The discussion on SWF’s investments is so patently absurd!
People complain about David C’s responses but they never note the fact is that he is reacting to biased statments and absurd prescriptions!
I read the Blog because I am interested in trying to keep abreast of discussions on the macro economic developments that one will never find in the regular media and i include both the FT and the Economist that people seem to think so highly of1
Both these publications are only marginally better than the so called MSM here in the US.
What is depressing to me is the constant drip-drip of the same arguments repeated ad nasuem.
Please, why don’t you and the other participants discuss what are equally imprtant issues such as the mis-reporting of the major economic statistics/idices, the interest rate policies which have set a whole lot of longer term problems and imbalances. Let the analysis focus closer to home, don’t worry about the Europeans and how china is now somehow eating their lunch! they are pretty good at managing their economies. They dealt with the Japanese in the middle and latter part of the last century!
Sorry, Brad, for my rough words above, and a long comment off-topic, but related in the end.
I was reading criminal deeds by our democratic politicians from the west…
“The nomination of Tony Blair as president of the European Union would be a disaster for Europe as well as for the rest of the world.”
…and collaborating to a petition against it.
“”Petition against the nomination of Tony Blair as President of the European Union.
We, European citizens of all origins and of all political persuasions wish to express our total opposition to the nomination of Tony Blair to the presidency of the European Union.
With the implementation of the Treaty of Lisbon the post of president of the Council of the European Union will be created. The president is elected by the Council for a period of two and a half years, renewable once. Under the terms of the treaty: “The President shall ensure the preparation and continuity of the work of the European Council” and “The President shall chair it and drive forward its work. Additionally, “The President of the European Council shall, at his level and in that capacity, ensure the external representation of the Union on issues concerning its common foreign and security policy.”
(Lisbon Treaty: 6. The President of the European Council:
(a)shall chair it and drive forward its work;
(b)shall ensure the preparation and continuity of the work of the European Council in cooperation with the President of the Commission, and on the basis of the work of the General Affairs Council;
(c)shall endeavour to facilitate cohesion and consensus within the European Council;
(d)shall present a report to the European Parliament after each of the meetings of the European Council.
The President of the European Council shall, at his level and in that capacity, ensure the external representation of the Union on issues concerning its common foreign and security policy, without prejudice to the powers o The President of the European Council shall not hold a national office.’.)
The next president will have a key role in determining the policies of the Union and our relations with the rest of the world. This first presidency will also have a major symbolic weight for both citizens of the European Union and for the image of the Union in the rest of the world. In this perspective, we believe it is essential that the first president embodies the spirit and values of the European project.
For some time now, increasingly insistent rumors speak of the desire some have to make Tony Blair the first president of the European Union. This appointment, were it to happen, would be in total contradiction with the values professed by the European project.
In violation of international law, Tony Blair committed his country in a war to which a large majority of European citizens were opposed. This war has killed hundreds of thousands, helped to destabilize the Middle East and eroded the security of the world. In order to lead his country into war, he made systematic use of lies and the manipulation of information. His role in the war in Iraq would weigh heavily on the image of the Union in the world should he happen to be named its president
The actions taken by the government of Tony Blair, and his complicity with the Bush administration in the illegal program of “extraordinary renditions” have led to an unprecedented decline in civil liberties. This is inconsistent with the terms of the European Convention of Human Rights which is an integral part of the treaty.
The European Charter of Fundamental Rights formalizes the founding values of the European project and is one of the pillars of the new treaty. Tony Blair has fought its integration in the Treaty of Lisbon, and eventually managed to secure an exemption for the UK.
Finally, it seems unthinkable that the first president of the European Union should be the former head of a government that kept its country out of two key elements of the construction of Europe: the Schengen area of free movement of people and the Euro zone.
At a time when one of the priorities of the European institutions is to reconnect with its citizens, we believe it is essential that its president is a person with which a majority of citizens can identify. Therefore, we declare our total opposition to this nomination.
Signatures:”"
This creature of the world, self-called labourist and now catholic christian, had a good role in the island of Diego GarcÃa invoking ancient “royal prerogative” for the expulsion of the islanders.
And now he advises JP Morgan, apart of making speeches for hundreds of thousands of pounds and book deals…
Is this the anglo-saxon model?
Shouldn’t USofA economists be a little bit more critics with the chimps in power?
Any thought about Chalmers Johnson’s article “Going Bankrupt: Why the Debt Crisis Is Now the Greatest Threat to the American Republic”?
http://www.truthout.org/docs_2006/012308E.shtml
PS: “We have met the enemy, and he is us” — Pogo
Anonymous,
why should Brad not talk about other economies than the US? I think at least about half of the readers either are not US citizens or not living in the US.
I think discussion of SWFs is not absurd, though I agree, that Brad mostly does talk about what China should or should not do, instead of what e.g. the US gov should do in response.
Twofish,
yes there was always big involvement in the economy in quite some countries. In France, Spain or Italy there is major protection of companies through the state.
As well before the globalisation in most European countries Telekom, postal, partially banking, railroad, power generation, public transport, water, natural gas were completely gov owned. But this was always in the national market to provide services to their own citizens. I think it makes a difference if the state owns not only companies which have at least their HQ in the country, but completely foreign enterprises.
This is most probably the reason why Brad is at all noticing the increased state role. Countries in which ever the state had played a major role are now buying into US enterprises and it is not absurd to think, that some major US bank might become completely owned by SWFs in some time in the future. However, I hope that Asian SWFs will serve better to the global economy than the oil funds, which have e.g. prohibited car makers, where they had siginifikand shares, to focus on electricial cars.
koteli,
where one can sign the petition?
Hi mheck82,
I agree with your previous post above, with both. Well said!
The petition is a work in progress being done in Eurotribune:
http://www.eurotrib.com/?op=displaystory;sid=2008/1/31/82526/8006
I think that in few days we’ll have a definitive text of this draft, and some way of wide-ditribution will be worked out.
Best wishes!
Excellent objective analysis, but disappointing ideological synthesis.
Too often.
and does that apply to China’s argument that its exchange rate is its business and thus no one should complain about its decision to intervene to keep its exchange rate from rising (a quite unilateral policy; the rest of the world didn’t get a vote, and it is a policy that affects them as well)………
Well when Connolly closed the gold window and told the world that the dollar was “our currency but your problem” I don’t recall his requesting a vote from the nations affected beforehand. In short the US consulted only its own interests when it was in control of the world economy. I suspect that now that it is not, it is much more in favor of “democracy” and voting.
Brad crying secret hallelujahs….
=============================================
from “China Economic Review”
CIC chief feels ‘unwelcome’ in Europe
China Investment Corp (CIC) chairman Lou Jiwei said he wouldn’t invest in some European countries because he felt “extremely unwelcome” there, the Wall Street Journal reported. Lou outlined broad strategies for future the Chinese sovereign wealth fund’s investments during a talk at the World Bank in Washington, saying that CIC would focus on “portfolios” of companies rather than individual companies, though he did not explain if this meant investing in vehicles like mutual funds or spreading investments across different sectors. Both French President Nicholas Sarkozy and German Chancellor Angela Merkel have voiced concerns on allowing CIC to invest in their respective countries.
You are right, I would be much happier if China followed Russia’s go slow approach toward a sovereign wealth fund. And I think it is relatively clear that most European governments would rather not see chinese inflows push the euro up more. Countries whose governments have a long tradition of using state equity investment to influence corporate outcomes domestically also seem reluctant to let another state play the same game on their turf
A series of criticisms have been raised about this blog, including:
a) that I cherry pick data/ use limited time series
b) My choice of topics is one-sided and my analysis is limited and ideological
c) I spend too much time giving advice on what others should or shouldn’t do …
Let me complain a bit too. I was hoping for a bit more of a discussion of whether or not the state’s demise had been overstated, and rather than living in a liberal, market driven world, the global economy is increasingly shaped by state actors. In my post I noted about as many examples from the energy sector as “China-focused” examples. But in general, the discussion fell into a “irresponsible Fed” v “irresponsible exchange rate policy” debate, which wasn’t quite what I was hoping for. I also spent a lot of time producing the graph in the post — which didn’t generate any comment or response. maybe because I cherry picked too much …
I’ll take up the other points in my next comment.
Let me respond to the specific criticism.
The first is that I cherry pick data. That one hurts a bit, since one of the characteristics of this blog is that I often use it to present work based on original data analysis, not just to comment on others commentary. No specific examples are given, but I would note:
a) the usual criticism of my professional work is that i get lost in the weeds and turn an exhaustive treatment of data into an exhausting read. most of my colleagues don’t care what assumptions are needed to flesh out the cofer data, for example …
b) I try to link to specific data sources that I use. I have gotten a bit lazy recently (linking for example to the TIC home page rather than to the page showing short-term Chinese claims) in large-part because I developed a sense that no one clicked through to the actual data, and putting in very specific links to detailed data points takes a lot of time.
c) when I make assumptions to fill in data gaps, i try to be explicit that I am making assumptions and adjustments. for example, I typically add Saudi Arabia’s non-reserve assets (as reported by SAMA) to the COFER data set. THey seem to be pretty much managed like reserves to me.
d) The graph above does have a limited time series — only going back to 1999. that reflects the limited availability of quarterly data from the IMF; the IMF COFER data set doesn’t let me go back further unless I use annual data; i prefer quarterly data (rolling sums) because that way I only have to estimate q4, not all of 2007 and it produces a more continuous series. similar issues arise with other data series I use: SAMA’s monthly data on its non-reserve assets doesn’t go back much before 2000. I would love to see higher frequency data for 2000. I also would love to see data on the fx balance of China’s banks that goes back before 2002, but I haven’t found the data set. the big gulf countries only recently started to allow the imf to release their article IV reports — limiting the data there. The Saudis still don’t allow the imf to publish a full article IV.
I am more than happy to defend the specific assumptions I have in my data analysis. But I get relatively few comments on data issues. I linked to two very meaty analysis that I have recently done — one on the GCC and one on China — and so far have gotten I think one data related question. That is a bit disappointing to me; constructive criticism of the assumptions that I use is central to my ability to improve my analysis over time.
I just lost a long comment explaining my views on the policy response now required, and defending my increased focus on Chinese policy. Probably for the best — it was too long, and I got timed out by RGE.
Suffice to say that I recognize that America’s policy choices (economic policy choices) have long influenced the choices available to the rest of the world. China’s policy choices are now having a similar impact on the US. For example, it is hard for the US to have a flexible exchange rate if its exchange rate v. China isn’t flexible, and it is hard for the US to have a policy of limited government ownership of the means of production if other governments are buying large quantities of assets abroad as consequence of their exchange rate policies.
Summers used to argue that it is difficult to have full national sovereignty, full integration, and economic regulation all at once. Full global integration and full economic regulation is possible, but only if you are willing to give up sovereignty and accept global economic regulation/ governance. Some — typically those on the right — combine integration and sovereignty by giving up national economic regulation (particularly national taxation).
I though put a high value on both sovereignty and regulation.
That applies to my views of the emerging world as well as the US — I am quite sympathetic to Rodrik’s views about giving countries enough policy space to chart their own course. So why doesn’t that imply that I argue that China (and others ) should have the policy space to pick their own exchange rate and pick how they want to invest their government money abroad?
Well, those choices seem to me to have strong external spillovers. They don’t just impact the country in question. If China wants state-owned backs at home, that is its choice. If China’s state owned banks want to buy banks abroad, that is no longer just its choice. China’s exchange rate regime strikes me as something that now has a profound impact now just on China but on the world — Europe and emerging asian economies that compete with China as much as the US, the biggest recipient of Chinese investment.
Others put less emphasis on China’s ongoing peg (which has meant that its appreciation v the $ has largely been offset by the $’s depreciation) than I do, but I think most would agree that the fact that china, an oil and commodity importer, has a growing surplus even with high commodity prices (as does japan) has a meaningful impact on the global balance of payments. I agree with parts of Bernanke’s argument — the fact that china has a large savings surplus now, when the oil exporters have a large surplus, implies larger deficits (and more borrowing, whether by governments or households) in the US and Europe.
Consequently, there is a growing conflict between China’s economic integration with the world (rapidly accelerating) and national economic regulation in the US. And there is also a conflict between Chinese sovereignty and US national economic regulation, as US monetary policy is right now clearly creating problems for China and the Gulf and others who peg to the dollar and are not experiencing the united states slowdown.
I would prefer to see that conflict addressed not by the US giving up its monetary sovereignty and adopting a monetary policy stance less suited to its needs and more suited to the needs of the dollar zone, but rather by china and the gulf putting a higher value on their own monetary sovereignty and giving up on their exchange rate regulation. That means that I am encouraging policy changes in countries and polities that I am not a part of. In return, though, I am advocating policies that imply some loss of the united states exorbitant privilege. The dollar would be more of a national currency and less of a global currency.
Not everyone here in the uS thinks that is a good trade. I do. It would among other things imply a significant adjustment in the US financial sector.
One other thing.
back in 2004 and 2005, Nouriel and I embraced the standard three point approach to addressing imbalances:
a) fiscal consolidation in the us
b) stronger growth in europe. most took this to mean supply side reforms, but I always thought measures to support demand were the real key.
c) asian exchange rate adjustment. v the dollar to be sure, but not just v the dollar. asia also needed to appreciate v the euro — something that was hard if asia pegged to the dollar.
my take is that over the past few years we actually got a and b — the us fiscal deficit came down, and in 07 in particular us domestic demand slowed. European growth clearly picked up. But there was less adjustment that should have been the case. In part that reflects the absence of c). in 2007, most asian countries depreciated v europe and the expansion of asian exports to europe allowed asia’s surplus to rise (notably china’s surplus) even though the US deficit didn’t increase.
as a result, I have put more emphasis on c. it is the missing piece.
the old three pronged tact though also had a big flaw: it left out oil. and higher oil has really driven the expansion of the us deficit relative to say 2004 (i know it will be a bit lower in 07 than in 06, but it is still up v some earlier years). Consequently, I now put a lot more emphasis on US energy policy as a key to adjustment. An energy tax would increase us government savings, and tend to lower global oil prices and thus lower government savings in the oil-exporters. that would clearly facilitate global adjustment.
unilateral steps to cut us demand — notably fiscal tightening — in a context where Asia pegs to the dollar might generate the following chain: slower uS growth, more dollar weakness, more rmb weakness (v other currencies), a wider Chinese current account surplus and more Chinese government financing of the US, financing that holds us rates low and tends to induce more borrowing in the us economy as a result. right now, that doesn’t seem like the optimal global policy response.
“I agree with parts of Bernanke’s argument — the fact that china has a large savings surplus now, when the oil exporters have a large surplus, implies larger deficits (and more borrowing, whether by governments or households) in the US and Europe.”
I think this is the central ideological synthesis and assumption around which most of your work revolves.
For my part, I have no issue with your data analysis, which I think is heroic.
But ideological policy prescription is not the same as idelogical synthesis.
There’s only one direction for policy prescription when the diagnosis is itself ideologically biased.
Brad,
“Did I miss any examples of state capitalism?”
Hard to keep abreast of all that is happening.
NYT’s announces that state-owed Aluminum Corp of China-with Alcoa–is making a serious bid a sizable stake in Rio Tinto.
http://www.nytimes.com/reuters/business/business-rio.html?_r=1&hp&oref=slogin
Unlike the hostile corporate takeovers by US Hedge Funds, please note that investments by China SOE’s are long-term, and supported by the respective corporate managements. A stable capital base is essential for long term growth of any corporation, either private or state owned. – Dave C.
State-owned China Aluminum buys $12B stake in Rio Tinto
http://money.cnn.com/2008/02/01/news/international/alcoa_rio.ap/index.htm?source=yahoo_quote
Purchase is the largest ever foreign investment by a Chinese company, according to Aluminum Corp. of China. The partnership with Aluminum Corp. of China (ACH), also known as Chinalco, as one that would “allow us to mutually benefit from developments in the sector.”
“Consequently, there is a growing conflict between China’s economic integration with the world (rapidly accelerating) and national economic regulation in the US.”
Oh please Brad. The China PBoC officially promised Treasury Secretary Paulson that the Chinese won’t attempt to make any major purchases of any major US Corporation. There will not be any similar China CNOOC purchases of California Unocal. There is no conflict between China and the US Treasury on this issue. And frankly, Chinese acquisitions of companies in other sovereign nations is none of the damn business of the United States. The rest of the world doesn’t need self-serving advice from the US. Brad Setser can complain, but no one is going to listen.
Regarding some of the complaints:
1. Brad cherry picks. The news is all around you; if you wait for the scholarly studies to arrive, you will be behind the curve. Point of fact: Brad is documenting its rise.
2. Brad’s analysis is too ideological. I find this one strange indeed. If the facts on the ground are that the power of state capitalism is expanding, how is that ideological? Better to ask the following questions:
a. Is the power of state capitalism expanding?
b. Can a centrally driven economy be sucessful?
c. Are state purposes being served in the acquisitions? What are those purposes?
d. If its power is growing, how does that shape the path of the world economy?
3. Brad gives advice on what others should or should not do. If he thinks a course of action is unwise, why not give it? If someone does not like the advice, then offer better advice. Engaging the advice is much more profitable than merely complaining that it is given.
Dave,
I find the tenor of responses incredibly anti-intellectual. In the arena of this blog, all economic activity is open for discussion, whether it be American, French, Thai, or Chinese.
Furthermore, all economic activity is interrelated. The lending policies of the U.S. certainly affected the world. You seem to have no problem with that one.
DC — I agree with you on the point that China’s investment in say African companies and African banks are a question between China and Africa, not one where the US has a direct interest.
all — there were some technical difficulties with comments this morning. if anyone had trouble, my apologies.
“Furthermore, all economic activity is interrelated. The lending policies of the U.S. certainly affected the world. You seem to have no problem with that one.”
When Wall Street investment banks sold $10 billion of AAA rated subprime bonds to the Bank of China, of course the Chinese have a legal right to be very concerned about their money. Sure no forced the Chinese to buy the AAA rated bonds, but there was blatant if not criminal deception. Now those AAA rated bonds with an underlining 30% default rate are worth an average of 23 cents on the dollar based on the MBS indexes. The AAA subprime bonds represent the most shoddy and deceptive product ever sold in world history. Why aren’t investment bankers being sent to prison?
there are two ways big deficits and big surpluses can adjust –
one is from policy changes in the deficit country that reduce its demand for global savings.
the other is from policy changes in surplus country that reduce the supply. I think there are connections with the exchange rate regime and macro policies that create surpluses, but many others do not.
either way, it is simple accounting identity that surpluses are equal to deficits.
the mechanics of adjustment led by the deficit country involve a fall in demand, which reduces the external income of the surplus countries and thus their level of savings. a fall in oil demand that reduces the oil price and the fiscal surplus of the oil exporters. or a fall in us demand for Chinese goods from a household spending contraction. or a fiscal contraction in the US that reduces us demand for imports all around.
Now there are no guarantees that policies to reduce demand from one part of the economy will lead to an overall in the external deficit; the recent fall in the us fiscal deficit was offset by a rise in the household deficit in 05 and 06. a smaller fiscal deficit = lower rates as well as less spending, and thus it is easier for others to borrow.
in 08, the us government is planning to increase the fiscal deficit to offset an expected fall in the household deficit, but that is a policy response.
when i look around, i see an enormous increase in the savings surplus of emerging asia (China notably) and the oil exporters (Who get left out of the discussion) — i.e. their levels of investment do not match their savings (which is a function of low levels of consumption v income). I think that is fact — it shows up clearly in the imf global savings data now, far more clearly than in 04. And incidentally, I agree with Duncan’s point that Greenspan equates a rise in EM reserves with a rise in financial globalization.
I consequently do advocate policies to bring about adjustmetn by increasing domestic demand outside the US — knowing full well that a fall in the rest of the world’s savings surplus would tend to push up US rates and make it harder for the us to keep borrowing to keep spending. It is not an argument that the US would not need to adjust. Quite the contrary. With less savings from the rest of the world, any fiscal expansion of the US would be much more costly, as it would push up us rates and crowd out private investment.
Adjustment can happen either way, but right now in particular, with the us stalling, i would prefer policies to increase demand elsewhere.
Mr Setser,
Thank you for keeping your blog open to the public.
If you see or hear from Prof-iteer Roubini, pass along my thanks for his past generosity for sharing his wealth of knowledge. (but as we know, past does not dictate future) So I hope by closing off access to us peons, he doesn’t lose out on the wealth of knowledge we shared back to him. (last time I checked, I never charged him a thing. Let’s not forget the fact that I’ve called 4 consecutive market bottoms with dead on accuracy! (if you want, go check. It’s written in NR’s past blogs that I no longer have access to. Although I still maintain intellectual property rights to my theories I’ve stated. Many posters have taken note of this fact and started dubbing it “the RH shakedown” or “script”)
I actually don’t understand what financial gain he will get from cutting off the blog. His popularity raged due to the open free forum. …but I think he’s lost sight of the forest for the trees. I, like the thousands of others will flock to new pastures like your blog or suddendebt.blogspot.com, rather then cowtow to someone that is now trying to make a buck.
As NR’s popularity fades, so will his public appearances and likewise his credibility.
It’s really too bad, since I actually thought that there was some real good that may have started to come from the blog. Myself along with others are taking some hard looks a potential solutions to our current crisis. …and NR’s sight could’ve been the foundation.
Regards, Rich H
p.s. I read your blogs too, but seldom post because I’m not very well informed on many of your topics. The extent of my knowledge is usually what you or DC post.
Some observations on your 10:19:56:
It strikes me that the demand led adjustment would reduce global GDP and the supply led one would increase it, at least at the margin as the adjustment process gets underway. So favouring the supply side adjustment implies that global GDP is systematically lower than optimal due to the excess saving interpretation. Leaving aside the fact that the global economy is currently undergoing a cyclical slowdown, it seems to me that this conclusion is indeed systematic relative to the excess savings interpretation, whatever phases of the economic cycle we have been though. Why is this valid?
You point out that a demand side adjustment runs the risk of not being 1:1 in terms of transmitting through the external sector as the target. Why would you not point out that the counterpart is also a risk in a supply side adjustment – i.e. that supply side efforts might not reduce external surpluses uniquely and might cause overheating in those economies?
You point out that foreign saving exceeds foreign investment but not that US investment exceeds US saving. Why is the first observation critical to a supply side argument but the second not valid in a demand side argument?
DC: When the Chairman of the company is the son of former Chinese President Jiang Zemin, you know the company has some very high level political and financial backing in Beijing.
Maybe. Maybe not. One problem with counting on political patrons is that things can be unpredictable sometimes. What if you encounter a regulator that really, really hates Jiang Zemin and thinks that there is too much nepotism in the Chinese government.
DC: Just because of some quarterly losses at SMIC, the Chinese government isn’t going to back off its goal of building a world class semiconductor industry.
But what if SMIC is just doing the wrong thing, and *isn’t* helping China build a semiconductor industry. What if turns out that SMIC is doing things that are totally useful? What if it turns out that the next big thing isn’t semiconductors but rather biotech or nanotech, and that the investment in semiconductors is wrong headed.
There is a long sad story of governments making massive investments in the wrong things, spending massive amounts of money and getting nothing out. The important thing about private companies is that you can pull the plug after spending $1 billion.
Chinese SOE’s and corporate law is designed to allow the plug to be pulled. One big piece is that the national government can print money, but many companies are owned by provincial governments which can’t print money to bail out failing companies.
DC: The AAA subprime bonds represent the most shoddy and deceptive product ever sold in world history.
A bit hyperbolic here. There’s lots of worse stuff in history.
DC: Why aren’t investment bankers being sent to prison?
Absence of fraud. When you buy a subprime CDO, you sign a contract. That contract usually has pages and pages of legal language saying what the seller warrants and doesn’t warrant. You can hire a lawyer to go over that contract, and change it if you don’t like it. People that can’t afford lawyers aren’t allowed to buy CDO’s.
In the case of the ratings…. All bond ratings are issued with a disclaimer saying something like “Ratings do not constitute recommendations to buy, sell, or hold any security, nor do they comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of any payments of any security.”
If you make an investment decision on those ratings and lose money, then its your own damn fault.
DC: Unlike the hostile corporate takeovers by US Hedge Funds, please note that investments by China SOE’s are long-term, and supported by the respective corporate managements.
A bit behind the curve here. Hostile takeovers were a thing of the mid-1980’s before the massive expansion of hedge funds. In the late-1980’s and early-1990’s, people came up with defensive strategies (notably the poison pill) that has made hostile takeovers from someone that doesn’t already have shares almost impossible.
US Corporate law is very, very unfriendly to shareholders which is one reason I’m not too worried about Chinese shareholdrers dictating terms to management. Ironically, Chinese corporate law guarantees far more rights to shareholders, especially minority shareholders. than US corporate law does. This has to do with the fact that in China the state is usually the biggest shareholder and it keep its control over the company while at the same time making things attractive to minority investors.
mheck82: Countries in which ever the state had played a major role are now buying into US enterprises and it is not absurd to think, that some major US bank might become completely owned by SWFs in some time in the future.
I think it is implausible. There’s no way I can see that the banking regulators could approve a 100% takeover of a major US bank by a sovereign wealth fund. There is a huge difference between having 5% and having 100% of a company.
The closest thing I can think of with respect to China is some major Chinese bank buying out a small bank so that they can do retail operations in the United States, but we are still at least a decade from that.
I should point out that my statement that CIC will be just another institutional investor in the US is based on US corporate law, and my statement that if the US doesn’t like something they can change the law was more than a statement of rhetoric.
The United States has traditionally had a great fear of concentrations of capital, and US anti-trust and corporate law makes it difficult for *anyone* to control large industrial or banking institutions through ownership. CIC has enough money to buy control of Goldman-Sachs but so does Bill Gates, but there is no way that the government is going to let either of this happen.
One irony of this is that this means that power in those organizations ends up in the hands of upper management, and the big concern since Bearle and Means in the 1930’s is that by making shareholders weak, US law has made managers too strong.
Personally, I think that it would be a bad thing for everyone if CIC owned 100% of Morgan-Stanley, but that is just not going to happen. At 5%, its just another institutional investor.
“But what if SMIC is just doing the wrong thing, and *isn’t* helping China build a semiconductor industry. What if turns out that SMIC is doing things that are totally useful? What if it turns out that the next big thing isn’t semiconductors but rather biotech or nanotech, and that the investment in semiconductors is wrong headed.”
A strong national defense requires a strong industrial base in semiconductor technology. What if there was a war in the Taiwan Straits or a collapse in North Korea with US troops advancing across the border, could China rely on foreign suppliers for replacement electronic components? Even Russia won’t supply their latest weapon technology to China such as the S-400 Air Defense system, the Su-35 Fighters, or the Tu-95 Strategic Bombers. A nation has to be independent in the defense electronics production of semiconductors.
But the Chinese state should also be financing biotech and nanotech to cover all future technology areas. That way if there is a major breakthrough elsewhere in the world in those technologies, the Chinese won’t be too far behind the curve. It is only the government that can finance longterm investment in basic research.
“Absence of fraud. When you buy a subprime CDO, you sign a contract. That contract usually has pages and pages of legal language saying what the seller warrants and doesn’t warrant. You can hire a lawyer to go over that contract, and change it if you don’t like it.”
That just legal BS to justify fraud and corruption. Tell your story to consumer investors of GE Financial which broke the 1 dollar per share rule on their money market fund due to losses on CDOs. The money market fund isn’t insured by the FDIC, and it wasn’t written in stone that GE would cover any losses, so investors were shafted out of their hard earned money that they thought was safe. The US is sure to lose its crown as a world financial center with this type of unscrupulous behavior.
Off topic
@rh
try nbs blog again later, I think there is still a chance that the closure is do to technical problems. Dr. Setsers blog was also closed for a while an got fixed.
Best BMH
anonymous — I assumed it was obvious that us investment exceeds us savings. tis the definition of a current account deficit. us investment isn’t particularly high tho. tis all a reflection of low us savings. the core puzzle to me is what the us hasn’t had to pay a premium to borrow more savings from the rest of the world — something that would lead to either more domestic savings or less investment. the key point that pushed me away from the “demand” side hypothesis is low us int rates (by which i mean low long-term rates, not low policy rates — long-term rates are not under the fed’s control, tho the fed does have some influence) across the economic cycle. that doesn’t suggest “strong” investment in the us (which shoudl put pressure on rates) and it also doesn’t suggest that the us is having difficulty borrowing to finance its (low) level of investment in the face of low savings.
if the us was doing expansionary fiscal at a time when the economy was growing strongly and other components of demand were strong, i would be quite opposed. then it would be clear that the us was using policy to block adjsutment and put pressure on global savings, not trying to use macro policy to slow what otherwise might be a sharp adjustment.
as for the flip of my argument, overheating is a risk, but it is something that would be addressed with a stronger exchange rate — i.e. less of an external contribution to growth. and overheating usually indicates strong domestic demand (see the gulf now) and thus it directionally would reduce imbalances.
the real flip argument though would be if policies that reduced government savings in the oil exporters were offset by a rise in private savings (or in china’s case, if the distribution of SOE profits to china’s population led to higher private savings) not a fall in national savings. tis a possibility. but in that case i wouldn’t have grounds to argue that imbalances are a product of gov policy. they would instead reflect private decisions.
Brad, the majority of Global Imbalances reflect the poor economic judgement decisions of America’s Joe6pack consumers that are overextended on McMansion housing and really can’t afford to spend a $100 to fill-up the gas-guzzler SUV on the driveway. Of course, the more money we waste in cesspool Iraq and the more money we waste attempting to be the global military supercop, the worse off we will be.
http://www.atimes.com/atimes/Global_Economy/JB02Dj04.html
The great economic mega-bubble arose in the late 1990s, when oil was cheap, times were good, and millions of middle-class families aspired to realize the “American dream” by buying a three (or more) bedroom house.
At the same time, cheap oil and changing consumer tastes – pushed along by relentless advertising campaigns – led many of the same Americans to trade in their smaller, lighter cars for heavy SUVs or pickup trucks, which, of course, meant only one thing – a significant increase in oil consumption. According to the Department of Energy, total petroleum use rose from an average of 17 million barrels per day in 1990 to 21 million barrels in 2004, an increase of 24% – most of it being burned up on American roads.
Just couple of points related to this post:
1. I understand the neo-liberal bias in wanting the market to play a bigger role in globalization. (I have that bias too.) However, given the recent rash of scandals in US subprime and SG in France, maybe there’s a role for the state? I’d like to see more discussions on that.
2. Your view that part of the adjustment will require US to give up its exorbitant privileges and make dollar more a country currency. Seems like this prescription is all pain and no gain. Do you see any leader in US willing to put that as a campaign slogan? What will Wall St. think? What will this do to US political system (as currently set up) and what are the risks? I’d like to see more discussion.
3. You seem to view the current pace of RMB appreciaiton as due to faster dollar depreciation, not looser exchange rate controls. How did you arrive at that? Mainly comparing RMB appreciation vs Euro and Dollar?
@Rich H
I agree that NR has made a strange move to restrict access to his blog and it may not be a good move but some of the ‘outsider’ analysis was not favorable to NR’s ‘theories’…so maybe this way he can weed out non-paying detractors.
If you look at how many nations actually have a decent ’surplus’(SWF’s), it’s about 20 nations including oil producing nations mainly and heavy weight manufacturers like China. ‘Globalization’ will involve the fates and destinies of around 200 nations. The debate about SWF’s will be about protectionism or the ‘greater need’ to prevent protectionism.
I think the available transparent evidence may lean to the obvious trend in the decline in the power of state capitalism. Sure the ‘global economy’ is still being shaped by the so-called state actors. Who are the ’state actors’? Are the ‘central’ state actors the private central banks?
If we need to value sovereignity and regulation, how does central banking play a role in ‘globalization’ and loss of sovereignity process. I don’t think the state’s demise has been overstated at all except in much of the mainstream media and some of the major think tanks.
But the power of sovereign wealth funds in the globalization process may be overstated. The largest SWF is Abu Dhabi and the next 20 SWF states don’t come close in reserves I don’t think to the reserves of Abu Dhabi.
Off topic…but does anyone have any info on the reserves and assets held by all of the State Central Banks around the world beginning with the Federal Reserve? Any specific information about Fed stock ownership?
SWFs are relatively new to the economic scene. The loss of state sovereignity has been underway for a while now and may be related to the history of central banking. That would also be the history of capitalist economic cycles or bubble/busts.
SWF’s may add one piece to the research puzzle in the evolution of ‘globalization’.
When the media casts doubt on the trends such as the loss of state sovereignity, then it’s time to look at mass media ownership…another ‘economic’ topic of great interest…
rmb depreciated v euro in 07 — and the moves in 08 are too small to reverse it. I haven’t done the numbers through the end of jan, but rmb has basically been flat v a $/ euro/ yen basket over the past couple of years. there has been a decision to allow faster appreciation v the $. but its global impact is muted if the $ is depreciating v other currencies. most of china’s real apprecition in 07 came from higher inflation.
1 is a fair point — i actually do think that the us state does need to play a bigger role in helping to manage globalization. though I would rather not see the US government investing america’s (limited) savings abroad by setting up a US SWF.
on 2 — the gains would come to the manufacturing sector, the losses to the financial sector. and perhaps someone could campaign on the slogan that great powers bailout their own banks …
my sense is that there is growing unease with the sense that the us has lost economic control over its own destiny and now relies so heavily on foreign government flows to backstop us banks (really global banks with a big us presence) and to support the $.
Hallo Dave Chiang
From where the ‘US(Rest-world)-Against-China’-feeling?
“A strong national defense requires..
.. war in the Taiwan Straits ..
…a collapse in North Korea with US troops advancing across the border…
.. weapon technology …
.. Air Defense system, the Su-35 Fighters, ..
..Strategic Bombers…”
Commentary:
a. We should not think -if all stay cool- that the Taiwan-Question will be solved by bombs. That is irreal.
b. We should not think, that China will solve the “problems” around Spratley Islands and other “little” stuff, by bombs against: Japan, Vietnam, Indonesia(?), Philippins(?), ….
c. We should not think, that China will solve “problems” with Russia by bombs:
China-USSR Border: Eastern Sector 1988 (452K)
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_ussr_e_88.jpg
China-USSR Border: Western Sector
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_ussr_west88.jpg
d. We should not think, that China will solve the “problems” with India by bombs.
China-India Border: Eastern Sector
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_india_e_border_88.jpg
China-India Border: Western Sector
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_indiaw_border_88.jpg
e. We should not think, that the other pending “problems” will be solved by bombs.
e. Or should we?
f. If we should not, then there is no reason to run big military investment programs and to built up a big military machine.
g. If we should not, then there is no reason to speak like -let us say- a Sioux on the war-path.
h. I think, we should stop thinking in categories of enemy, hostility, defens, bombs, aggression, military steel, ..
i. I think, we have only to understand, that we are global, that the guy 10′000miles away is your neigbor.
If you live in the “global village”, you should not dynamit up the house of the neighbor; that makes to much troubles for the others in the village.
k. I hope, the Chinese do not think, that the whole world has an intest, to be hostyl against it.
l. I tell you: in reality there is almost not a single state, that wants overrun any other states.
Till now: there are only two states in ongoing paranoia; I do hope, China will not become the third.
(m. I really don’t understand, what is not understandable or extrem difficult of the word: “we are global”)
globumedes
globumedes,
Chinese relations with Russia are the best overall in history. There has never been as much trade between the two nations.
Chinese relations with the United States are unstable at best in the political sphere, but better in the economic sphere due to corporate business ties. The US military supports Taiwan’s formal separation from China. Until that core issue is resolved, Sino-US political relations will always remain strained.
All it takes is for another US spyplane crash over China to create another diplomatic crisis. The coming Olympics is another flashpoint with US human rights groups, Falun Gong, and Tibet protestors planning to embarrass the Chinese government by fomenting violent protests in Beijing in front of the world’s media. For instance, foreign NGOs paid and organized the storming of foreign embassies in Beijing by North Korean refugees. It was far from a random event. Some Chinese police aren’t the best trained in dealing with organized protestors from Western NGOs.
Please forgive me copypasting this , it is from april 2006 and somewhat prophetic….
Bottom Dollar
by J. Bradford DeLong
J. Bradford DeLongAs more time passes with neither the value of the dollar declining sharply nor market forces beginning to shrink America’s current-account deficit – which may well reach $1 trillion this year – two diametrically opposed reactions are emerging. Most international finance economists are becoming increasingly frightened that a major international financial crisis could erupt. Indeed, they fear that the scale of that potential crisis is becoming larger and larger.
Others – especially managers of financial assets – are becoming increasingly convinced that economists don’t know very much, and that what they do know is of no use to traders like themselves. They see little reason to believe that current asset values and trade flows are not sustainable.
After all, they (or some of them) argue, the real GDP of the United States is growing by $400 billion per year, with about $270 billion going to labor and $130 billion to capital. Even after depreciation, that $130 billion of extra annual income is capitalized at about $1.5 trillion of wealth, so the current-account deficit, even at $1 trillion, is not overwhelmingly large. We Americans can sell off two-thirds of the increment to our wealth to finance imports and still be $500 billion better off this year than we were last year.
Moreover, the annual interest charged on the extra $1 trillion per year that Americans borrow from the rest of the world is about $50 billion – just one-eighth of annual economic growth, while the trade deficit is financed out of the growth of the value of capital. So what’s unsustainable? Why can’t the US current-account deficit remain at its 2006 value indefinitely?
The counterargument hinges on the difference between the current-account deficit and the trade deficit. The current-account deficit is equal to the trade deficit plus the cost of servicing the net international asset position: the net rent, interest, and dividends owed to foreigners who have invested their capital in the US. As time passes, deficits accumulate. As deficits accumulate, the cost of servicing the net international asset position grows.
Thus, in order to keep the current-account deficit stable, the trade deficit must shrink. And the only way for the trade deficit to shrink substantially is for net imports to fall, which requires either a relatively sharp decline in the value of the dollar, thereby raising import prices, or a depression in the US. Both outcomes would weaken demand for foreign goods by making Americans feel that they are too poor to buy them.
As a result, holders of dollar-denominated assets should be looking forward to two alternative scenarios. In one, the value of the dollar will be low; in the other, the US will be in a depression. In neither scenario does it make sense to hold huge amounts of dollar-denominated assets today. Therefore, foreign speculators should, any day now, dump their dollar-denominated assets onto the market, and so bring about the dollar decline that they so fear.
But foreign-currency speculators and international investors are not looking forward to either of these scenarios. They continue to hold very large positions in dollar-denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.
So, what alternative does the market see? And why is it so different from the possible scenarios that international financial economists see?
The answer appears to be that there is nobody in the financial centers of New York, London, Tokyo, Frankfurt, and Hong Kong who thinks it is their business to bet on a future flight from the dollar. Especially in times of crisis – and a sharp fall in US imports would imply a much more severe crisis for Asian and European exporters than it would for the US – the dollar is a currency that you run to, not from.
George Soros can bet on a run on the British pound. Thai import-export firms can bet on a run on the baht by accelerating their dollar receipts and delaying their dollar payouts. Everyone can bet on a run on the Argentine peso – a favorite sport of international financial speculators for a century and a half. But not the dollar. Not yet.
In other words, the market is betting that the dollar will fall gradually in the next five years, and that the US current-account deficit will narrow without a financial crisis. That is what happened in the late 1980’s, and in the late 1970’s, too. After all, God, it is said, protects children, fools, dogs, and the United States of America. But the odds on a soft landing are lengthening with each passing day.
project syndicate
According to the Wen Jiabao (as reported by the People’s Daily), China will invest up to 60-70 billion abroad.
http://english.people.com.cn/90001/90776/90884/6341042.html
Does this put a cap on Chinese SWF’s?
Depends on whether or not the CIC gets another round of funding; china will be adding a lot more than $60b to its foreign assets in 08 — it just isn’t clear who will get the $.
2fish,
“I think it is implausible. There’s no way I can see that the banking regulators could approve a 100% takeover of a major US bank by a sovereign wealth fund. There is a huge difference between having 5% and having 100% of a company. ”
Maybe you are right, but I thought of a case, where a big bank would go bankrupt. As well only in a case of “emergency bailout” I could imagine that.
globumedes,
we are not “global”. A small elite of mostly unsolidarc egomanics is “global”, but most people rely either on solidarity within their society (or when has a county paid unemployment payments to people from another country) or at least a common idea for a good society, e.g. for building public swimming pools or a justice system, which people of their society feel to make justice and not injustice, or secular rituals such as commemoration of historical events, to name just few.
DC: A strong national defense requires a strong industrial base in semiconductor technology.
It also requires about 500 other things. Semiconductors are useless if you don’t have the software to run on them and the soldiers that are tried on the software. The classic military mistake is to focus too much on hardware and not enough on training.
DC: What if there was a war in the Taiwan Straits or a collapse in North Korea with US troops advancing across the border, could China rely on foreign suppliers for replacement electronic components?
In case of a major war, supply chains would be so utterly disrupted, that neither China nor the United States could rely on any production and would have to make do with existing inventory. Also, having reserve industrial capacity is useless if it is a fast intense one that lasts for days or weeks rather than years.
Also if you really want chip production capacity in case of a war, your best strategy is to get Intel to build a factory in China, staff them with local workers, and the seize it if the bullets start flying.
DC: But the Chinese state should also be financing biotech and nanotech to cover all future technology areas.
OK. who gets how much? Who decides who gets how much? How do they decide who gets how much? If the main criteria for funding is which companies have the ex-President’s son on their boards. I doubt that very good decisions will be made.
That way if there is a major breakthrough elsewhere in the world in those technologies, the Chinese won’t be too far behind the curve. It is only the government that can finance longterm investment in basic research.
DC: That just legal BS to justify fraud and corruption.
I write in big bold letters *do not trust what I say because you might lose money*. You trust me, and you lose money. Now it’s my problem that you can’t read.
DC: Tell your story to consumer investors of GE Financial which broke the 1 dollar per share rule on their money market fund due to losses on CDOs. The money market fund isn’t insured by the FDIC, and it wasn’t written in stone that GE would cover any losses, so investors were shafted out of their hard earned money that they thought was safe.
Not only was it not written in stone that GE would cover there losses but it was written all over the place that no one made any guarantees that the money market fund would retain its value. Look at any money market fund and there are pages and pages of “This fund is not insured” “Past performance does not guarantee future results” “This fund may lose value.” It’s often in BOLD CAPITAL LETTERS on page one of the prospectus.
So how did you think that the fund was able to pay better interest than an FDIC insured bank account?
DC: The US is sure to lose its crown as a world financial center with this type of unscrupulous behavior.
Actually this is the reason why the US is the worlds financial center. There are all sorts of laws and regulations that force people to write things in BIG BOLD LETTERS and to warn people about what is safe and what isn’t. Also when things blow up, there are procedures to figure out who owes who what.
bmh: The answer appears to be that there is nobody in the financial centers of New York, London, Tokyo, Frankfurt, and Hong Kong who thinks it is their business to bet on a future flight from the dollar.
Once burned, twice shy. Lots of people bet in 2001-2002 that the dollar would drop, and lots of people lost their shirts.
Timing is everything. I can predict that the dollar will fall, there will be a major world depression, that the Chinese Communist Party will fall, that a major bank will go bankrupt, and that the sun will eventually swallow the earth, however, if I can’t assign dates to them those predictions are useless.
DC: The coming Olympics is another flashpoint with US human rights groups, Falun Gong, and Tibet protestors planning to embarrass the Chinese government by fomenting violent protests in Beijing in front of the world’s media.
Yup, and we’ll see how much the Chinese government has learned about handling the press. There are lots of tricks and techniques big corporations and American politicians use to play up or play down an issue, that I’m sure the Chinese government has learned. If the demonstrators are at point A, but all of the cameras are at point B. You let the story run a when no one is reading, then you what a few days, and do nothing to change the situation. You figure out all of the things that could possibly happen to make you look bad and you have a counterstrategy for each point. Etc. Etc. Etc.
The media is a tool which people use to promote their own interests. Wow!!! What a discovery. People tend to be self-serving, hypocritical, and inconsistent in their arguments. Surprise. Surprise. Surprise.
Rather than complain about it all of the time, the PRC is starting to learn the rules and to play that game. It’s been a while since I’ve actually heard the PRC scream about something.
This is why the more recent PRC accquistions have been quieter than the CNOOC deal. The CNOOC deal was a very important learning experience. What happened with CNOOC is that Chevron-Texaco wanted to make money, so they put out all of their lobbyists and media consultants to make the Chinese government look like crazy devils. In more recent deals, Chinese companies have partnered with US companies and used their lobbyists and media consultants to make things work.
Media spin and public relations is how people with power in the United States keep their power, and the Chinese government is learning how to use media spin, public relation consultants, and lobbyists to mold public opinion to its advantage. Sounds awful…… Candidates selling themselves and using the same techniques to sell politicians that people use to sell soap. Ick…..
Except that if the Communist Party can figure out how to use spin and public relations to stay in power, then maybe it won’t have to toss people in jail or beat them up to do so……