Category Archives: Economic fundamentals

Michael Pettis: Is it time for the US to disengage the world from the dollar?

By Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. Cross posted from China Financial Markets

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.

Does CIA Assassination of Bin Laden Make Obama a Shoo-In for 2012?

As readers know, I’m not fan of the Obama Administration, but its success in killing Osama bin Laden, just announced on multiple news services and the subject of an imminent Presidential announcement, would seem to be a major positive for the beleagured chief executive. At this juncture, the Washington Post headline, “Source: Al-Qaida head bin Laden dead, US in possession of body; Obama to speak Sunday night,” says more than the article:

Al-Qaida mastermind Osama bin Laden is dead and the United States has his body, a person familiar with the developments says.

President Barack Obama is expected to make that announcement from the White House late Sunday night.

The person spoke on the condition of anonymity in order to speak ahead of the president.

How does this development change the election dynamics for 2012? Does this, as some correspondents have suggested, give Obama a lock for 2012, or could a flagging economy undo the boost he will get from this success? How does this change the prospects for various Republican presidential candidates?

Earth to Libertarians: Private Parties Have Coercive Power Too

I’m sick of the free pass given the libertarian blather, “The state is the only source of coercive power.” I doubt that many non-libertarians buy that assetion, but they too often remain silent because most libertarians are rabid on that issue and arguing with them is like talking to a wall. But since that bogus assertion has been showing up increasingly in comments here as right-wing plants are becoming more common, I might as well do a quick shred, since it does not take much effort to show this claim is nonsense.

Let’s look at some simple empirical examples of why this pet argument just ain’t so.

Guest Post: China is Different

Cross posted from MacroBusiness

We need a new framework for understanding and interpreting what is happening in China. As a friend recently commented to me, there should be three categories of economies: developed, developing and China. China may struggle, but it will struggle in a uniquely Chinese way, and inevitably pose deep questions about the future of capitalism. Pundits, especially of the bearish persuasion, are fond of deriding the comment that “this time it is different”. But are things always the same? Analytics should match the subject matter (methodology should match ontology), and what has happened in China already is very different to anything yet seen. It has been the most sustained wealth creation in history, largely unpredicted. Two recent comments reported on MacroBusiness, one by Michael Pettis and the other by Nouriel Roubini reveal the problem.

Both pundits focus on China’s extremely high levels of investment, which is about half GDP, instead of about a tenth in most developed economies. Viewing China through the lens of a developed economy, they argue there is trouble ahead. But Pettis also sees the frameworks used for developed economies start to fail:

Thomas Palley on How to Fix the Fed

The Roosevelt Institute hosted a conference yesterday on the future of the Federal Reserve, with the speakers including Joe Stiglitz, Jeff Madrick, Matt Yglesias, Joe Gagnon, Dennis Kelleher, Mike Konczal and Matt Stoller. Yours truly broke her Linda Evangelista rule to attend.

The discussion included the contradictions in the central bank’s various roles, its neglect of its duty to promote full employment, and its overly accommodative stance as a regulator, which has been enlarged thanks to Dodd Frank.

You can visit the Roosevelt site to view each of the three panels in full (they include the Q&A, which were very useful), the introductory remarks by Joe Stiglitz, or the presentations by each speaker separately. I encourage you to watch some of the panels, and to entice you, I’ve included videos from two talks I particularly liked below.

Marshall Auerback: QE2 – The Slogan Masquarading as a Serious Policy

By Marshall Auerback, a portfolio strategist and hedge fund manager Cross posted from New Deal 2.0.

Bernanke’s QE2 program has hurt savers, done nothing for banks, and eviscerated middle class living standards.

The U.S. Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned. And not a moment too soon.

Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!

You heard it first in the blogopshere. From the New York Times:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small….

Latest “New Normal” Sighting: Divorce Rebound

A Financial Times article discusses an unlikely indicator of recovery: divorce rates have risen. One divorce attorney commented, “There is huge pent up demand.” Another lawyer, who was apparently a decent representative, said her business had increased 25% compared to the same period last year.

But the post crisis economy has led to some changes in tactics:

Guest Post: Too Much Finance?

Yves here. I managed to miss this post last week, but since it did not get the notice it deserved, I thought I’d feature it.

One of the recent disturbing indicators of the triumph of the doomsday machine known as modern finance is Timothy Geithner’s vision that banks will continue to grow via increased penetration of emerging economies. From a recent interview by Noam Scheiber in The New Republic:

He told me he subscribes to the view that the world is on the cusp of a major “financial deepening”: As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. If that’s true, then we should want U.S. banks positioned to compete abroad.

“I don’t have any enthusiasm for … trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world,” he said. “It’s the same thing for Microsoft or anything else. We want U.S. firms to benefit from that.” He continued: “Now financial firms are different because of the risk, but you can contain that through regulation.”

As anyone one with an operating brain cell realizes, “can contain” is not the same as “have contained” or “have a snowball’s chance in hell of containing”. Simon Johnson was also not happy with the Geithner vision of US financial firms occupying even bigger swathes of the world economy.

This post is important because it tackles a very basic question: when does the financial sector become so large as to be unproductive? And the answer is at levels of GDP that the US passed shortly after 1980.

Satyajit Das: Deflating Inflation/ Inflating Deflation

By Satyajit Das, author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming in Q3 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Quantitative easing (“QE”), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.

The underlying driver is to generate growth and inflation to enable the problems of excessive debt in the economy to be dealt with painlessly. It is far from clear whether it will work

Satyajit Das: Economic Uppers & Downers

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming in Q3 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Quantitative easing (“QE”) is the currently fashionable form of voodoo economics favoured by policymakers in the US.

QE, loosely “printing money”, entails central banks buying government bonds, which are held on the central bank’s balance sheet to inject money into the banking system thatcan be exchanged by banks for higher return assets, such as loans to clients. The purchases also increase the price of governments bonds, reducing interest rates.

Advocates of QE believe that it will lower interest rates promoting expenditure, growth, reduce unemployment and increase the supply of credit to underpin a strong economic recovery. In reality, QE is primarily directed at boosting asset values, subsidising banks, weakening the currency, helping the government finance its deficits and creating inflation.

Satyajit Das: Voodoo Economics Redux

n the film Ferris Bueller’s Day Off, an economics teacher, played by Ben Stein, launches into an improvised soliloquy: “… Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. “Voodoo” economics.”

In the late twentieth century, US President Ronald Reagan discovered voodoo economics. In framing policy responses to the global financial crisis, central bankers and governments have increasingly embraced more exotic forms of voodoo.

More Journalists Dignifying “TARP Was a Success” Propaganda

I hope NC readers don’t mind my belaboring the issue of the TARP’s phony success, but every time I see the Administration’s propaganda parroted I feel compelled to weigh in.

The trigger was an effort at a balanced assessment by Annie Lowrey at Slate, to which I have some objections, followed by some shameless and misguided cheerleading by Andrew Sullivan:

But two years ago, I sure didn’t expect the government to make a profit from TARP. And I sure didn’t expect the auto bailouts to become such huge successes.

What’s surprising to me is how pallid is the Obama administration’s spin has been on this. I never hear them bragging about how they managed to pull us out of the economic nose-dive we were facing. I know why: the recession isn’t over, even if TARP was a success, no one wants to hear about it, etc. But it’s one of the strongest and least valued part of Obama’s record – along with the cost control innovations in health insurance reform.

At some point, you have to stand up and defend your record. No doubt Obama is biding his time on this. But count me as surprised as I am impressed.

Roubini Calls for Hard Landing in China (After 2013)

During the financial crisis, pronouncements by Nouriel Roubini would move markets. Even though he still commands attention, in a investment environment driven by blind faith in the munificence of central banks, being focused on the real economy isn’t as relevant as it once was. And Roubini may have erred in trying to maintain his high profile when the trajectory of the economy was hard to discern (recall the seemingly unending debates over V versus U versus W shaped recoveries? The net result is the new normal has been designated a recovery when it it looks more to be a sideways waffle).

By contrast, China has trends underway that simply cannot be sustained, but a command economy can keep that sort of thing going well past its sell by date.

Debunking the Idea That Labor Productivity is the Cause of Euro Periphery Woes

“Periphery” seems to be the new euphemism for the Countries Formerly Knows As PIIGS (which sometimes confusingly includes Belgium, since its finances aren’t so hot either).

The stereotype about these Whatever You Want to Call Them countries is that they are less productive than export powerhouse Germany, ergo they need to Work Harder and Accept Lower Wages (liberal use of capitals due to the force which which these pronouncements are typically made).

But this thinking does not stand up well to analysis, as a VoxEu post by Jesus Felipe and Utsav Kumar demonstrates. They contend that conventional wisdom relies on unit labor costs, which is a flawed metric: