My last blog entry inspired an old Brazilian friend of mine, with whom I hadn’t had any contact for years, to comment on this section of the interview:
It seems to me that the US is becoming increasingly isolationist, largely because it is increasingly uncertain that the benefits to the US of a US-dominated world order still exceed the costs. When the US comprised a much larger share of the “globalized” part of the world, it retained a greater share of the benefits of a stable trading environment and it cost less to maintain that environment. As the US becomes a declining share of the globalized world, the costs of imposing stability (and I have no illusions that this is done for charity) rise, and its share of the benefits decline. It is only a matter of arithmetic that at some point the costs will exceed the benefits.
My friend is a very thoughtful economist who writes often about global governance and trade, and I really enjoyed and learned from the subsequent discussion, which quickly became a three-way conversation with one of his friends. In the conversation I tried to explain why I think the break-up of the current monetary and trading regime that governs much of the world, and an American turn inward towards isolation, are very likely over the next few years, and indeed almost inevitable.
As always it helps to understand the historical context. A potted history of the current regime under which we live actually begins in the chaos of the 1920s and 1930s. The Great War, whose centennial was marked this year, had thoroughly undermined a fragile, rotted through, but still functional global economic and monetary regime with relatively clear rules. It left in its wake a system with few mechanisms with which to address the trade and capital imbalances that were all but inevitable consequence of the war.[1]
In 1944, the Allies, determined to prevent a repetition of the chaos they believed had led to war, met at Bretton Woods in New Hampshire to design and implement for the first time in history a global monetary and trade system. With a few modifications, most notably the Nixon shock of 1971, which eliminated the pretence that the global monetary system was still underpinned by gold, this is the system under which we have operated ever since.
From its inception the system was unsustainable. Backed by the unassailable power of the US, and perhaps a twinge of jealousy, Harry Dexter White, the American representative who turned out all along to have been a Soviet operative, was able to reject the alternative proposed by John Maynard Keynes in favor of his own. Keynes understood that individual countries might have great difficulty in reconciling domestic balance and external balance, and because policymakers tend to prioritize the domestic needs of the economy, the system had to be protected from the tendency for large countries to create the kinds of external imbalances that had proven so destabilizing in the 1920s and 1930s.[2]
Keynes therefore wanted mechanisms that constrained the ability of countries to create large external imbalances, whether these were in the form of large current account surpluses or of large current account deficits. White, on the other hand, believed only deficit countries needed to be disciplined, perhaps because the fact that the US had been running large surpluses for over two decades had convinced him that surpluses were an indication of moral superiority.
What kinds of imbalances are healthy?
It may make sense to stop for a moment to distinguish the advantages and disadvantages of net capital exports and imports, which of course are simply the obverse of current account surpluses and deficits. For simplicity’s sake we will assume that the world consists of two countries (relaxing the constraint does not change the analysis). If Country X begins to export large amounts of capital to Country Y on a net basis, Country X must begin to run large current account surpluses equal to the amount of its net capital exports, and Country Y will run the corresponding current account deficit. The impact of this net capital export on Country X can vary:
- If Country X is an advanced economy with easy access both to domestic and foreign savings, like Germany today, or if it is an undeveloped country whose policies have forced up the savings rate above domestic investment needs, like China today, the impact of capital exports is usually positive for growth and employment because they fund foreign purchases of domestically produced tradable goods. This is the case of a “healthy” current account surplus.
- If Country X is a developing country with insufficient domestic savings to fund domestic investment, net capital exports are probably caused either by flight capital or by the net repayment of external debt. Brazil the 1980s suffered from both, and its large current account surplus was an “unhealthy” one.
Similarly, the impact of this net capital import on Country Y can also vary:
- If Country Y is an advanced economy with easy access both to domestic and foreign savings, like the US, the impact of capital imports depends on whether it is “pulled in” because of a large amount of productive investment that needs financing (in which case investment in infrastructure and manufacturing would rise and real interest rates would also rise to attract foreign savings) or “pushed in” as Country X tries to balance excess production at home with insufficient domestic demand by exporting excess savings to Country Y (in which case debt-funded speculative investment and debt-funded consumption would rise, and real interest rates would drop). The former case is quite rare. Advanced economies whose capital imports are simply the obverse of capital exports elsewhere must respond with either an increase in debt or an increase in unemployment. These are “unhealthy” current account deficits.[3]
- If Country Y is a developing country without enough domestic savings to fund domestic investment, like the United States for much of the 19th Century, capital imports permit an increase in domestic productive investment. In that case growth will pick up and unemployment decline. Its current account deficit is “healthy”.
As should be obvious, current account surpluses or deficits are implicitly neither good nor bad. Depending on what caused them surpluses were as likely to be destabilizing to the system as deficits, and so Keynes argued that the institutions that regulated global trade and capital flows should include constraints on policies that resolved domestic imbalances (mainly high unemployment), by exporting capital. Without such constraints, it was always likely that the costs for the institution responsible for enforcing stability (and from the start White ensured that this role would be played by the United States) would at some point exceed the benefits of participating in the global trading regime. If not corrected these costs could destabilize the global trading system.
The Nixon shock
As Keynes would have predicted, destabilizing imbalances began to emerge fairly soon. In the 1950s in response to a global “dollar shortage” that had impeded the return of international trade in the late 1940s and 1950s, Germany and other countries implemented policies, including sharply undervalued currencies, aimed at acquiring dollars by running large trade surpluses. At first the US supported these policies, with the Marshall Pan contributing to the foreign accumulation of dollars from 1948 to 1952.
By the 1960s, however, there was no longer a dollar shortage. By this time, however, the policies designed to accumulate dollar had succeeded so well that the world experienced a dollar glut, but as is often the case, these policies, including undervalued currencies and export subsidies, were too firmly entrenched among powerful local manufacturers to be easily reversed. This was when a number of countries, led by France, began to game the system in a way even unanticipated by Keynes, taking advantage of the dollar overvaluation to acquire as much American gold as possible, at the price agree upon within the Bretton Woods framework.
The US response was not especially helpful. Forced to choose between unemployment (in the form of higher interest rates) and continued deficits, the US responded to German imbalances and French gold purchases in the worst way possible, by accelerating fiscal expenditures on social welfare and stepping up the war in Vietnam. They tried to reduce balance of payments pressures by imposing in 1963 a “temporary” tax (which was not withdrawn until 1974) that probably only worsened the imbalances by restricting US outflows. Given its double commitments, it was irresponsible for Washington to fund the full increase in fiscal expenditures by borrowing, but the unpopularity of the Vietnam war made Congress and presidents Johnson and Nixon reluctant to fund higher fiscal expenditures with higher taxes.
At that point the global trading and capital flows system nearly collapsed. It was clear that the cost to the United States of maintaining the regime exceeded the benefits. Rather than opt out of the system, however, the US was able to “resolve” the crisis in August 1971 by reneging on its Bretton Woods commitment to convert dollars into gold, following this up with a series of agreements in 1972 and 1973 in which Japan and Europe took steps to reduce their external imbalances by adjusting their currencies. Because there was no automatic adjustment mechanism, it was wholly up to the US to decide whether to abandon its role altogether and allow the system to collapse, or to improvise a negotiated resolution in which other counties agreed to take on part of the adjustment cost.
The “Nixon shock” in 1971, by severing the link with gold, eliminated one of the few formal constraints left within Harry Dexter White’s system, although because the gold link only existed to the extent that no one tested it, it was a fairly meaningless constraint. Since then the system has continued to function erratically and continues to be hostage to American domestic priorities. Periods of stability have been followed by periods during which one or more countries, including the US, has resolved domestic imbalances by generating large external imbalances that were themselves resolved only when they caused or threatened to cause financial crises, and then only in the painful and uncertain form of negotiated ad hoc agreements (e.g. the 1985 Plaza Accord).
These imbalances must continue to occur, and as I will show, they will become larger and increasingly difficult to resolve. It is not an accident that the deepest set of trade imbalances, followed by worst crisis since the establishment of the Bretton Woods system, was the 2007-08 crisis. Even if the US had been determined to manage its economy prudently so as to minimize the cost of its having to absorb global imbalances – and it has often chosen instead reckless monetary and fiscal policies that convert external imbalances into domestic asset bubbles – the burden placed on the United States made the global trading system unsustainable, especially as other large economies also chose reckless monetary and fiscal policies to resolve their own domestic imbalances, thereby creating or exacerbating large external imbalances.
What is the cost of stability?
How should we think about the benefits the US derives from a stable and regulated system of global trade and capital flows, the costs it must pay to maintain that system, and the stability of the relationship between the two? As I see it this question has a pretty uncomplicated calculus. Increases in global trade raises total global productivity in at least three ways.
- Specialization increases productivity in the ways Adam Smith described, and in many industries there are economies of scale, so presumably the larger the market, the easier it is for production to be concentrated in scale and separated into its components. Given the size of the US and European markets, there is some evidence that the marginal benefits of additional specialization are quite low but of course this depends on specific sectors of the economy.
- David Ricardo showed that as regions increasingly specialize in comparative advantage, total output will rise. There is a great deal of controversy over the idea that regions should specialize in comparative advantage, but the controversy tends to be about either the unequal distribution of the increase in output or about whether or not comparative advantage is static. There is little disagreement even among the strongest proponents of protection that specializing in comparative advantage increases total output.
- Higher levels of trade and capital flows spread the diffusion of technology and institutions more rapidly and efficiently and increase the speed of economic convergence.
It is notoriously difficult to capture the real economic value of the increase in global output created by globalization, but the tendencies that enhance the value of increased trade – specialization, comparative advantage, and the diffusion of more productive technology and institutions – are probably not linear. Increases in global trade integration, in other words, probably increase the value of the global production of goods and services at a declining rate. This suggests that the really big increases in total global output probably occur when a large economy that was previously not part of the global trading system is suddenly and quickly integrated into that system – the most obvious case is that of China in the 1990s and 2000s, and it may also be the last such case, although of course India may or may not be another such case.
Although there is no good way to determine what share of the total increase in global output the US captures (nor even a way to determine what that increase is), it is probably proportional to the US share of the relevant part of global GDP. This number has clearly been declining, both because the world has growing faster than the US and because the relevant part of the world has expanded. By the end of the 1940s and into the 1950s the US comprised, if I remember correctly, about a third of global GDP.
Because the world then really consisted of three separate groups, for my purposes the relevant US share was actually much higher. The global trading system consisted not of the entire world but rather of North America, Australia, Western Europe, and parts of Latin America, Asia and northern Africa. Communist countries were largely excluded from this system, as were countries, or parts of countries, that were too poor and too backwards to have much of an impact on global trade.
As a result the US GDP share of the relevant “global economy” was probably more than one third, and perhaps even close to one half. Whether the US captured a disproportionately large or disproportionately small share of the total benefits, and arguments can be made in either direction, it is probably safe to say that the US share of total benefits has declined since the 1940s and 1950s in line with the decline of the US share of the global trading system. As the world has grown faster than the US, and especially as countries that were once excluded fro the global trading system have joined – Russia, China, and large parts of Africa and Asia – the US share of the relevant world has declined very sharply.
But there are substantial costs to maintaining this system, and these have risen sharply. As the creator of the rules, and as by far the largest player within the system, the US is not able to game the system in the way other countries can. And other countries do often game the system – among the most obvious examples being cases that I discussed above, for example Germany and France (in two very different ways) in the 1960s, Japan in the 1980s, and China in the 2000s – not for evil intent but simply because policymakers everywhere always prioritize the resolution of domestic imbalances over external imbalances, and domestic and external balances are often difficult to manage simultaneously.
Put differently, the world economy is necessarily volatile, and to the extent that the US tries to limit destabilizing volatility, it can only do so by finding a way to absorb that volatility itself. The most obvious way the US absorbs external volatility is by absorbing trade and capital flow distortions, and the associated cost is likely to be higher to the extent that other countries try to game the system to generate more growth at home.
As I showed earlier in my potted history of the global financial system, whenever a country uses external demand to increase domestic employment and domestic production, it effectively does so by exporting capital, and in most cases the capital exports take the form of central bank purchases of foreign government bonds. Although there is a widely-held view that reserve currency status creates tremendous economic value (the “exorbitant privilege” of the US dollar), in fact most countries act as if reserve currency status conveys prestige, but at a huge cost.
Foreign capital go home!
Most countries with reserve currencies, for example, actively discourage large purchases by foreign central banks of their government bonds except in very specific cases – mainly cases in which low credibility and a declining currency creates financial or inflationary pressure. Large-scale foreign purchases of local currency assets tend to push up the value of their currency and to cause domestic demand to flow abroad. As a result, and as I showed in my example of capital flows between to countries, except for countries whose domestic investment needs are constrained by insufficient savings, or for whom foreign investment helps diffuse more efficient technology and institutions (in both cases these are mainly undeveloped countries), foreign investment is likely to lead either to higher unemployment or higher debt.
This to me is the main cost associated with enforcing a global trading and capital flow regime (I have excluded military expenses as being separate, if there are others I would be glad to hear them), and it seems to me that whether or not there are it leaves us with two relevant points here. First, there are significant costs associated with implementing and enforcing a global trade and capital flow regime. If there were not, the chaos that we saw in the 1920s and 1930s would probably have not occurred and the role of enforcer would have been voluntarily taken up, then and now, by international organizations. Second, these costs are likely to be a function of the number of players in the system and the extent to which they design policies at least in part to use external demand to generate domestic growth.
The main measure of that cost is the US current account deficit. Growth in the global economy should naturally require that the rest of the world accumulate dollar reserves, and so it is natural that the US run current account deficits as the world accumulates dollars. This permanent exchange of a small amount of dollars for real goods is the total extent of the exorbitant privilege.
But this privilege comes at an enormous risk, one which no other country wants to take. As the rest of the global trading system grows relative to the US, the need for a rising US current account deficit poses the problem identified by Robert Triffin.
The Triffin Dilemma, as this problem is known, points out that if foreign growth is high enough relative to US growth that the need for US dollar reserves grows faster than the US economy, the resulting US current account deficit will require that the US sell assets fast enough, or that US obligations to foreigners grow fast enough, eventually to put the US economy at risk. What is more, when large countries, like Japan in the 1980s or China in the 2000s, try to generate very rapid domestic growth by repressing domestic interest rates and undervaluing the currency, because of the resulting surge in their reserve accumulation, their soaring current account deficit must be balanced by a soaring US current account surplus, which exacerbates the Triffin Dilemma significantly.
This leaves us with two important points:
- As the US economy becomes a smaller share not so much of the global economy but of the parts of the global economy that participate in international trade, its share of the total benefits must decline, and because so many new countries and regions have joined the relevant “world” in the past three decades, the US share of total benefits has declined very rapidly. As trade impediments are further gradually reduced, the growth in benefits overall is likely to decelerate, so the US retains a declining share of a more slowly growing number.
- The costs it bears, however, are likely to grow inversely with its share of the relevant global economy. What is more, as more players with increasingly varied agenda join the system, the costs are unlikely to decelerate and may in fact accelerate. The costs include, but are probably not limited to, the risks identified as the Triffin Dilemma.
It seems to me then purely a matter of logic that as the world grows, as there is convergence in income disparities between rich and poor countries, and as more countries choose to join the global trading system, at some point the two lines – the higher line representing a declining share of total benefits, whose slope is likely to be slightly positive tending towards flat, and the lower line, representing rising costs, whose slope is steeply positive and becoming more so – must cross, after which point the costs exceed the benefits.
I would argue that we have probably already passed that point, and that the US would be better off today by significantly modifying the way it participates in the global trading system. The longer it waits to do so, the riskier it will be, and either the more debt or the more unemployment it will have to accept. Among other things, the US must address the role of the US dollar as the world’s reserve currency and the way this role forces the US into absorbing volatility and shortfalls in demand that originate abroad.
What is unsustainable eventually stops
Many economists may disagree with me that the costs of the current role the US plays in the global trade regime exceeds the benefits, but the point of this essay is to show that even if I am wrong, as long as the world grows faster than the US, more of the world is incorporated into the global trading system, and more countries design growth models that suppress domestic consumption in order to subsidize domestic growth, there must of necessity be a point at which it makes sense for the US to opt out of its role as shock absorber, and – by raising tariffs, intervening actively in the currency, restricting foreign purchases of US assets and especially US government bonds, or otherwise reducing capital inflows – become simply one more member of a system with no automatic adjustment process.
The current system, in other words, is inherently unstable and will sooner or later force the US economy into a position of choosing either to take on excessive risk or to abdicate its role as shock absorber. In my email exchange with my Brazilian friends, we discussed and speculated on a number of other geopolitical implications, but this is about as far as I want to go on the subject. By the way I am not making the argument, which perhaps was a little more popular a few years ago but remains popular today, of the decline of the US or of the rise of Asia. I have never really believed in either, except in the sense that in the aggregate the Asian share of the world economy is likely to rise (although not nearly as fast as some of the more intoxicated proponents of the Asian Century suggest), mainly at the “expense” of Europe and Russia, whose demographic profiles make it almost impossible for them to maintain their current share of global GDP (Japan and China too have very ugly demographic profiles that will limit the growth of their relative sizes, but of course they are part of Asia).
It seems to me however that this rise in the Asian share of global GDP will be accompanied by an even faster rise in destabilizing geopolitical tendencies within the region, so that overall the relative rise in Asian GDP will not be matched by its political rise. As most of the readers of my blog know, I expect that over the next decade we will see a number of Asian countries undergo very difficult adjustments, and I would imagine that unless handled much more carefully than it has in the past, this adjustment process is likely to increase these tensions.
But my argument does not need the 21st Century to be an American century, an Asian one, or a multi-polar one. All it requires is that the “globalized” world experience faster economic growth than the US. If this happens, to the extent that more countries with a wider range of political goals and institutions join the system created by the Bretton Woods conference, and to the extent that geopolitical tensions rise in Eurasia, it seems to me that the flat or mildly upward sloping line that represents the benefits to the US of the global trading system and the steep upward sloping line that represents the costs, if they haven’t already crossed, must cross soon. And if the recent changes in high-tech manufacturing and in the distribution of energy resources favor the US, as a lot of excited talk seems to suggest although I am an expert in neither manufacturing, high tech, nor energy), it seems to me that this would cause the flattish curve that represents the benefits to the US of stabilizing the global trading system actually to turn downwards.
If I am right, and a resurgence of some kind or other of US isolationism is simply a matter of time, the US and the world should be considering, and perhaps even already designing, the alternative sooner rather than later. Otherwise, and because this regime was created very specifically to avoid the economic chaos of the 1920s and 1930s, the reversal of this regime could very easily return us to that chaos.
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[1] I am often asked for book recommendations, and while I have read more books than I can possibly count on the economic, political and cultural history of the first three decades of the 20th Century, when it comes to political economy there are two books that, in my opinion, stand above all others. For an understanding of how the Great War undermined the global system, not just Europe and the US, the focus of most histories, but throughout the world, the best book I have read by far is The Deluge: The Great War and the Remaking of the Global Order by Adam Tooze (I also strongly recommend his book on the German economy in the 1930s, The Wages of Destruction: the Making and Breaking of the Nazi Economy). When it comes to understanding the monetary and financial forces that buffeted the US and Europe, I have long considered Barry Eichengreen’s book, Golden Fetters: the Gold Standard and the Great Depression 1919-1939, as the best book on a topic about which many great books have been written.
[2] One of the clearest descriptions of the difficulty policymakers have in managing both internal and external balance is Peter Temin and David Vines, The Leaderless Economy (Princeton University Press, 2013
[3] I explain how this works in more detail in chapters 7 and 8 of my book The Great Rebalancing, (Princeton 2013)
«Even if the US had been determined to manage its economy prudently so as to minimize the cost of its having to absorb global imbalances – and it has often chosen instead reckless monetary and fiscal policies that convert external imbalances into domestic asset bubbles – the burden placed on the United States made the global trading system unsustainable, especially as other large economies also chose reckless monetary and fiscal policies to resolve their own domestic imbalances, thereby creating or exacerbating large external imbalances.»
In other words, politics as «domestic imbalances» now just as Dexter’s White times do trump what would a “philosopher-king” do, not a huge surprise.
So let’s look at the politics, because they are key to decoding the past and perhaps the future.
The overall theme is that this article is ostensibly extremely naively written in talking of «the US» or «other large economies» were single subjects, and not diverse coations of group often in sharp distributional conflict.
In understanding the politics of the global trade system is therefore absurd to evaluate it in terms of the average distributional impact among “countries”, but it should be evaluated as to the specific distributional impact *within* countries.
The first and biggest point is that «the US» have «chosen instead reckless monetary and fiscal policies that convert external imbalances into domestic asset bubbles» because there is a large and politically powerful set of constituencies that benefit from tax-free or low-tax capital gains, which cover most of the Republican and a large part of the Democrat donors and voters: small real estate owners, big business and property owners, Wall Street.
Even more important asset bubbles are a great incentive for voters to do whatever to get into the property speculation game, and it is a well established fact that property owners tend to vote Republican far more than Democrat, as Norquist eloquently wrote:
«The growth of the investor class–those 70 per cent of voters who own stock and are more opposed to taxes and regulations on business as a result — is strengthening the conservative movement.
More gun owners, fewer labor union members, more homeschoolers, more property owners and a dwindling number of FDR-era Democrats all strengthen the conservative movement versus the Democrats.»
Also the same property interests in the USA have been working hard to offshore well paid union jobs to India and China to destroy the industries that gave unions their power, and to encourage immigration of desperately poor immigrants to drive down wages and further discourage unionization in the USA.
Also, the enormous influx of capital buying USA government debt have funded enormous tax cuts for the same property interests, and two huge foreign wars have been sources of gigantic cost-plus sale contracts benefiting insider interests, mostly funded again by Chinese and Saudi purchases, at collector’s prices, of USA government debt again, in a repetition of what you allude to as to the Vietname war.
BTW this has led me to the joke that the Bush wars have been the first wars in history funded with massive tax cuts instead of massive tax increases.
«the flat or mildly upward sloping line that represents the benefits to the US of the global trading system and the steep upward sloping line that represents the costs, if they haven’t already crossed, must cross soon.»
Therefore the current system of massive capital exports to the USA to boost asset prices, cut taxes, fund expensive wars, and destroy well paid union jobs and also create less well paid third world jobs must not be evaluated as to «the benefits to the US» but as to the benefit to the factions in USA politics that profit from it, just as different policies were used to benefit the same factions in the 1980s by way of international accords:
http://www.globalresearch.ca/global-markets-in-turmoil-financial-warfare-against-labor-and-industry/10695
«This policy – announced in the Plaza Accord of 1985 – led economist David Hale to joke that the Bank of Japan was acting as the Thirteenth Federal Reserve District and the Japanese government as the Republican Re-election Committee.»
BTW that article is an alternate view of largely the same events with a less euphemistic bent than yours, which is however very interesting too.
The problem with globalresearch, if my mind remembers correctly, one cannot post to such. Beware of these venues, and the ideas they espouse.
I am not sure why, you say, Blissex, that “the overall theme is that this article is ostensibly extremely naively written in talking of «the US» or «other large economies» were single subjects, and not diverse coalitions of group often in sharp distributional conflict.”
The idea that the global trading system may be defined as consisting of countries whose polices are inconsistent is not at all incompatible with the idea that it may also be defined as consisting of a different set of entities that may also behave inconsistently. In fact this is a basic assumption for any systems approach to economics (or any other of the social sciences, I assume).
What matters, I think, is the purpose of the argument. When I discussed the debt imbalances within Europe (the system) there are times when I find it more useful to define it as consisting of countries, especially when discussing the generation of the imbalances, and other times when I find it more useful to define it in terms (to use that dreaded word) of classes, in this case defining them as bankers and producers/workers, especially when discussing the reasons why I think unemployment is likely to remain high for many years.
I think it is helpful the keep the distinctions clear and to explain why they matter in any particular argument. For example the US itself can be subdivided different — by regions with different interests in global trade (New York, New England, the Midwest, the South, etc), right?
Blissex, if what you believe is true, why have Republicans not overwhelmed Democrats, even when the latter are supported by a fawning press, a deeply entrenched educational establishment, massively increased welfare spending, and a young army fresh from America’s southern border? Anyway, this is I think an international economic forum. We should, therefore, confine our musings to the points brought by the estimable Mr. Pettis.
I actually talk about this in one of my posts too. Here it is if anyone’s interested.
http://suvysthoughts.blogspot.com/2014/06/the-case-for-new-international-monetary.html
As it looks right now, I think we could end up seeing an elimination of the Federal Reserve. This is why a guy like Rand Paul will probably end up being (and currently is, IMO) the frontrunner for the Republican party.
I’d like to add that the populace is just as much fed up with the foreign policy as much as it is the economic policy. To the average person in this country, they feel as if the country has been run by crooks for crooks and the only solution that we get to problems that come from naive interventionism (both economic and geopolitical) is more naive interventionism which worsens the underlying fundamentals, both economically and geopolitically.
«To the average person in this country, they feel as if the country has been run by crooks for crooks»
The may be a great demonstration of the power of democracy, because the famous historian Newt Gingrich perhaps pointed out that average persons in the USA are greedy petty crooks too:
«For most Americans speed limit is a benchmark of opportunity. This is not a light insight. If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter-murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?
The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!”
Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him.
America is the most incentive-driven society on the planet.»
Consider this: over the past 30-40 years the policies of the dominant USA factions have destroyed the livelihoods of a large part of the country, the part that happened to have a high percentage of unionized workers. Who has protested? Certainly not all those middle class people riding with glee the boom in house prices and in stock prices. Grover again:
«And that is, in 2002, on the investor class stuff … you could have said, just drop $7 trillion in stock market value with the collapse of the bubble … $7 trillion, trillions with a T … Americans had $7 trillion less than they used to have, you can expect them to be very irritated and in trouble. [ … ]
They were mad at having lower stock prices and 401(k)s, but they didn’t say Bush did this and that caused this. Secondly, the Democratic solution was to sic the trial lawyers on Enron and finish it off. No no no no no.
We want our market caps to go back up, not low. The 1930s rhetoric was bash business — only a handful of bankers thought that meant them.
Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher.
And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.»
Most of the USA is made of people who celebrate “winners who do whatever it takes”. Honesty is widely considered a way to be a loser.
To be honest, unionization in the Midwest needed to go. The US is a post-industrial economy, so having large scale 19th and early 20th century manufacturing doesn’t really make any sense. The key capital input in the industrial world was fixed capital. They key capital input in the post-industrial world is human capital. The main economic problem currently plauging the US is just a simple demand problem.
I actually don’t have a problem with the cultural aspects you’re talking about because we’re one of the few cultures in the world that actually praise failure. Any system like that is long volatility and antifragile. That’s a good thing. We shouldn’t want everyone to be some little puppet that does everything they’re told.
What we really need to do is get rid of these bullshit concepts like equality, which end up leading to overtly authoritarian regimes to enforce these ideas. What kind of sucker actually believes that people are equal? It’s an advantage of the US that you end up getting a large divergence between winners and losers. That’s how it should be. It means you’ve got an uneven distribution of skill, talent, and luck (which makes perfect sense).
We need to get rid of these concepts of equality and democracy. First off, the US isn’t a democratic government (it’s a government with SOME democratic institutions and mostly consists of undemocratic ones). Secondly, it’s an advantage that the US is a factional government. The problem is that we’ve got too much centralization and top-down control. In other words, the federal government has too much power.
We’ve effectively got corporations that’ve bought out the government. In other words, the federal government is too big. We need to massively downsize the level of centralization in our system. Let’s start by removing the Fed.
it is a confusing mass, Suvy, so it seems that you have bought into some of the human relation literature’s notions to decentralization, while for the opposite ends they posit, interesting (with what seems a neo-darwinian strain, libertarian? Ah the ramblings of Rockwell).
Decentralized systems are definitely more robust. It’s actually pretty easy to show mathematically. I’ll use a simple example.
Suppose you have each state with a 10% chance of failure. If you have a one state system, the failure of the system is 10%. If you have a 10 state system, the failure rate drops from 10% to 1-((.1)^10).
Decentralization negates the impact of the left tail. It’s really that simple.
Why do you bring up all of this stuff that has nothing to do with anything? “Neo-darwinism”? Rockwell?
By the way, I’m actually not philosophically a libertarian and I think Lew Rockwell is an idiot. Why are you coming to conclusions so quickly about ideas that you don’t quite seem to understand? Look, you may have read all of these books and seen all this art and all of this stuff I don’t care about, but you seem to not grasp basic probability or the dynamics of nonlinearity (ex. the advantages of decentralization). Decentralizing a system by an order of a number x increases the expected time of survival by an order that’s greater than the exponential of x. It’s basic probability. So why would you mock me for advocating decentralization. The real reason centralized government exists is really for scenarios of war, but it comes with a cost (it makes the system much less robust).
If you’re looking for me to respond to your fancy stuff with more fancy stuff, I have nothing fancy. What I offer is something very basic and fundamental. I’m not a very sophisticated person and I don’t know why you seem to be so derogatory towards because I don’t have the same sophistication that you do.
Did I ever dispute the advantages of centralization? I specifically stated what the main advantages were: war! The entire drive for what’s called “progress” is really driven by war IMO.
Suvy
While the suggestion, the main advantage is war is suspect, on too many grounds, not least history, you did not state as advantage, but as reason (which of course is more wrong, naive, and inevitably bound up within frames of ideologies as a primary assumption, of some, especially those supportive of conspiracies).
So if I note that there are Westphalian territorialists who support a strong soveriegn state with limited intereference (non-interference).
Or I list therre are Liberal cosmpolitans (Those who support multi-lateral redistribution at the global level or those who prefer the market, the economy, where economy has to due with flourishing, and definitionally the rule of the sovereing affairs of a man to himself, enabling such flourishing).
Or if i talk of how too many Ideas today influenced by the Kantian Imperative; only do that which heightened to a law for all.
Or the Age of Revolution (which gave us anarchist thought, and supported notions of Nationalism, while yielding Authoritarianism, communism and Fascism).
Or the age of Nationalism (which saw the creation of the notion of national culture (Garbaldi, Bismarck)
Or discuss the Age of Romance (which taught post-modernist today, but enlightenment thinkers previously, that nothing of the mind is useful, but only feeling, feeling is everything). And so on and so forth.
Each of these still influencing us today.
While science may use math to test models today, they still use the deeply considered frames, developed on a foundation of extreme application of logic, of past and present philosophy to construct questions, assumptions necessarily bound up within questions, as posed and considered, etc….
You will excuse me, if none to quickly, i could assume that governments exist because of war. In the rather over-assumptive vein of liberal cosmopolitanism, married to much revolutionary thought, that is inevitably pushed by the spiritual if not physical application of Kant’s imperative, merely because you can so easily state it. .
Isn’t it both a reason and an advantage? Centralized systems have a larger pool of resources (more people, more ideas, more natural resources, more weapons, etc.) to draw from. If I’ve got more people, more weaponry, and more natural resources, I’ve already got a huge edge on you in war.
Keep dreaming Suvy, Paul, never, for any worthy of mention, his 2003 meetings with bow-tie young Republicans, ensured he would go nowhere. the FED is and will be where it is, thankfully.
Who would you rather have? These war-mongering retards who have no clue what they’re doing about anything. Their only solutions are to bomb more and more places. They think you wipe out terrorism by killing terrorists without realizing it’s the poor and uneducated kid who sees his family or neighborhood getting bombed that takes up such ideologies. Why are we supporting the Saudis and Qataris? We spend more on the military than the next 10 countries combined. The CIA is the most rogue organization on the planet and I’m pretty sure the CIA helped create ISIS.
The current guys running the show have ZERO understanding about feedback loops or complex systems. They think that everything works in a linear manner. They’re idiots.
Once again, guys, I like these bracing disagreements, and what you are discussing is intrinsically interesting, but please don’t let it break down into nastiness.
On that note I have often heard people say that a country’s “worth” should be determined by how well it treats the weakest members of its society. This seems plausible, almost a truism, until the skeptic in me reminds me that the whenever I think back on what I believe were the “great” periods in history – whether these were great “eras” (like Athens in the 4ht Century BC, Florence or Italy more generally in the 16th century, or the second century of the Tang Dynasty, etc.) or great “decades” (like New York, Paris and Shanghai in the 1920s, the US in the 1770s and1780s, etc.) – I have no idea of how relatively well or poorly society treated its weakest members.
One regular debate in modern societies is the debate that can be summarized, very superficially and unfairly, no doubt, as the European criticism of the US and the US criticism of Europe. “Europe” is horrified at how badly Americas treat their weakest members and sneer at the sheer stupidity (and loudness) of much American culture, while Americans in their turn proudly point to the disproportionately high share Americans claim of all that is best in art, science, technology, education, business, pop culture, movies, etc, and sneer at the fact that the most highly talented young people in the world are more likely to move to the US than to Europe ,or any other place in the world.
It seems as if both sides are talking at cross-purposes, but maybe they are not. Suppose two different countries have developed institutions that tend in one case to encourage people towards common standards and “good taste”, and disdain “failures”, and in the other case to push them away from common standards and towards either vulgarity or brilliance while wearing certain kinds of “failure” almost as a badge of honor. The first country can be thought of as statistically as the country with a fat middle, and the second as a country with fat tails.
This sounds a little like the clichés about Europe and the US, doesn’t it? Whenever you see an extra-stupid politician pontificating on some topic or the other, or hear an especially loud and obnoxious person in a bar, chances are that he or she is American. On the other hand, however, the brightest people in the room, whether pop stars, social scientists, or what-have-you, are also likely to be either American or living in the US. And the fact that the Europeans most likely to bristle at this comment and disagree with me are probably Brits actually reinforces my point, I think. British institutions are more like American ones (indeed the latter descend from the former), and just as the British seem to be disproportionately represented at the right extreme of whatever the scale you prefer while, at the same time, if the incredibly annoying loudmouth at the bar isn’t American he is probably British.
I wonder if to a certain extent your argument isn’t also in some way about fat-tailed versus fat-middle societies. But I’ll bow out here because this is far from the topic of my essay and I have probably managed to offend an awful lot of people.
Michael
It is interesting as you say, Fukuyama, in his latest book, poses the differences as to the applications of socio-economic approaches and philosophical stances, on the checks and balance system in the US, which inhibits rapid movement on issues of contention. Thus, many Europeans were able to implement universal health care in the early 1900’s, Prussia, UK were able to create a non-patronage civil service in the matter of 20 years, where the US followed Uk example, but took a longer time to do so. Interestingly, he blames populist President Andrew Jackson, who instituted a patronage system after he was to become the first popularly elected President, of universal white male suffrage, beating an Adams in the process.
These stereotypes are often terribly wrong. Some peoples of the world, upon seeing any foreigner, still only have one word for foreigners, Americans.
But a lot of this had moderated, perhaps the EU, movement away from Cold War, and by no small measure this impacted the notions that existed. In no way a conspiracy, but a truth leading to thought experiment. It is well known the KGB funded, up to, and other services after, the fall of the Soviet Union, the anti-nuclear rallies in Western Europe. This, among many others, was a manipulation to influence the beliefs of the western electorate. Not maniacal, the USSR had numerical supremacy in conventional forces on the northern European plain. To influence the body politick, would inevitably lead to social forces that were neither interested in nuclear energy, nuclear arms, and the American protectors in Germany and elsewhere. This was a tool, and an understandable one insofar as they wanted to advance their position. So many other issues, even Europeans coming to define themselves in their social democractic systems, as successful against their more revolutionary authoritarian socialist brothers (in communism, further on the spectrum to the left) and the capitalist Americans. This not delinked from their security fears on the continent, and sensitive to movements that would be anti-thetic to those; then of course influenced by the socio-poitico philosophies to which they would inevitably be exposed, and the use of some, of the assumptions that undergird them, to influence public opinion, and inevitably policy choices.
That loudmouth jackass at the bar sounds like me.
There was an interesting study done at Princeton which came out recently that examined what happened when elites favored a set of policies but most voters favored other policies. For example globalization and free trade is an area where elite desires and the desires of non-elite voters vary. Here is the link:
http://tinyurl.com/ns7yxo9
The finding was that the opinion of ordinary voters does not matter, when preferences differ.
This complicates your analysis. The question becomes, when is it in elite interest to change the role the US plays in the global trade regime?
It seems to me is has long been in the interest of ordinary voters (who depend on the American job market) to change this role but it has not been in elite interest. I’m not sure it will ever be in the interest of elites, who are globally mobile in terms of production and even research. They can park themselves in the USA and make their money overseas, where growth is faster and markets are expanding.
There has been a lot of fuss about manufacturing returning to the USA but everything I have read has not found any change in the relevant statistics.
I would be interested to hear a further analysis from you as to when and why a change in the global trade regime would be in the interest of American elites.
«It seems to me is has long been in the interest of ordinary voters (who depend on the American job market) to change this role but it has not been in elite interest.»
That is probably a bit “optimistic” because:
* In the USA only around 50% of citizens vote, and they are almost entirely the better off 50%; there are also quite a lot of non-citizens, usually at the lowest end of income range.
* Many if not most of those 50% think that they depend more on the property market and the stock market, just like the elites. In the USA unemployment and job insecurity affect mostly the lower income 50% of workers, those who usually don’t vote. Parties that represent the interests of the upper class like the latter situation so much that they have been working hard to make it less likely that lower income citizens are discouraged from voting.
The elites are constantly reminding higher-middle income (suburban middle classes) Usians that the current global financial, trading and immigration regime benefits them by delivering bigger property and stock prices, as well as cheaper technology products and lower wages for cleaners, gardeners, carers and other low income workers.
The Economist magazine was even suggesting that middle and upper classes ought to form a voting coalition against their “exploitation” by the working class and the underclass *in India* just like it has happened in the USA and the UK.
That’s why it is for me quite important to about using the idea of the interests of “the US”, because they are far from uniform within the country.
On a very broad scale, the current global trading regime is an alliance between first-world elites and third-world elites where the first-world elites offshore low-income jobs and procutive capital to third-world workers, so the third-world elites don’t get political problems from joblessness, and the third-world elites export massive amounts of financial capital to first-world capital markets to create vast capital gains for the first-world elites as they asset strip their countries.
Putting it somewhat loosely, the Chinese Communist Party have ended being the biggest supporters of the USA Republican Party.
More than votes or policy, of the big-bad or righteous philosopher kings who represent us, structural matters obtain, inevitably, they will win, as if sandbags on a levy (working or failing as it were).
I agree with this. It’s the structural problems that need to be fixed.
Interesting reasoning. That would explain why US, European and Asian elites are still pushing for new commerce treaties while the masses know nothing about them.
Read the association magazines for industries, and then see if there has been, or hasn’t been change on the manufacturing front.
As they say in the State department, Lucidbee, that question is way above my pay grade. This deserves a very long and detailed answer, which I can’t even try to give now, but it seems to me that throughout American history periods of sharply rising income inequality that have been followed by economic slumps (and perhaps the latter has always followed the former), have usually created nasty political fights which ended with policy-driven income redistribution, the last and most obvious of which may have been under FDR in the 1930s.
The interesting thing to me (and the subject of another one of the dozens of books I plan to write in the next 200 years) is the role of the equivalent of the Tea-Partiers in all of this. Much as polite society shuns their vulgar populism, their nativism, and the way they manage to choose scoundrels as leaders (and leaders that nearly always end up fleecing them), they nonetheless are part of a long tradition in American history. The original Tea Partiers have been much mythologized, but worthies like Adams, Jefferson, Washington and Hamilton (my personal hero) looked down on them for many of the same reasons we look down on their namesakes today. Their ranks include the Know-nothings, the Locofocs, many of the working-class progressives in the late 19th Century, the Jacksonians in the 1830s, and so on.
In fact I think of them as the Jacksonian tendency in American political thinking, which should be correctly added to the two tendencies, Jeffersonian and Hamiltonian, into which we usually divide American political tendencies. Their unifying characteristics tend to include a virulent nativism and a hatred of both Washington (the symbol of big politics) and New York (the symbol of big bank).
They can gather under the banner of either the left or the right, depending on which side woos them most assiduously, and this affects their role in the debate about income inequality. I wonder if we don’t sometimes allow our snobbery to understate their influence, not always baneful, on American history. But this very superficial potted history written under the influence of a couple of beers really belongs to a much longer discussion for some other time,
PLEASE CALM DOWN everybody! If Krugman is right there is nothing to worry about!
Actually, from my vantage point, true, nothing to worry about. But from the vantage point of development, regions, and countries abutting countries globally, much, unless one were want to retreat. Which, again is not necessarily a bad thing from my vantage point. Or good for that matter. More serious, then mere economic efficiency, especially in the system that obtains, within the system, under the set of forces, and opportunities/constraints, that obtain.
As a totally different sort of comment, I think I like your use of “balance” and “rebalance” as words to indicate the real state of economies, rather than the usual word “equilibrium” used by “sell-side” Economists.
The word “equilibrium” conveys a constant perfect match of impulses in the best of all possible worlds, and ther sometimes used “disequilibrium” to me me conveys a sense of impossibility, as in economies cannot be in “disequilibrium”.
A very important concept for me is the difference between ex-ante and ex-post quantities, as the difference conveys a sense of dynamics; for example the difference between ex-ante and ex-post aggregate demand and supply results in “inventories”, and while ex-post everything is in “equilibrium”, ex-ante vs. ex-post and inventory changes matter a great deal to insight.
I guess that for a balance sheet guy like you (and I have been trained a bit in that…) of course the word “balance” comes natural, but also with connotations. Surely, in a balance sheet everything is statically at one point in time in “equilibrium”, but the different items in it can be at the same time very much “unbalanced”, in a substantive, rather than arithmetic, sense.
Well I think that talking of economies that are of formally always, in the parlance of “sell-side” Economists, in “equilibrium” as also being at the same time “unbalanced” in their components and needing to be “rebalanced” is very useful, because “balance” conveys a sense of dynamic evolution, of potential paths towards stability or instability, of changes among forces that push against each other.
I now realize that I have liked your books and posts, also because, and it may seem tiny, that use of “balance” and “rebalance” to convey so much more than “equilibrium”.
Thanks Blissex. I think those who tend to think naturally in terms of “systems” especially in economics, tend also to think in terms of actions requiring balancing reactions. As I mentioned in one of my earlier posts, one of Hyman Minsky’s great contributions to economics, it seems to me, was to force us to think of every economic entity as a “bank”, wit its own balance sheet in which every asset is matched by either a liability or an equity position, internally, of course, and also externally in a way that links it with other entities.
In Minsky’s view, the global economic “system” is nothing more (or less) than a series of interlocking balance sheets. This is only one of many ways to think about the economy, of course, but it seems to me to be a very natural and a very “rich” way of thinking about economics.
If you add to this view of the world Hirschman’s insight that all economic growth (indeed all economic movement) is unbalanced, and imbalances must be reversed, then we are forced to think about the adjustment process as one of the keys to understanding long-term growth. It also leads us to think about institutional constraints, and the ways in which they prevent automatic adjustment or, to put it in the words of Minsky’s famous hypothesis, institutions that enforce stability are themselves destabilizing.
This all sounds terribly abstract, but, again, I find it such a “rich” way of thinking about economics.
The “inevitable” rising cost – falling benefits argument is similar to the “inevitable” rising China-status quo America military clash argument. Logic, historical precedent and mounting evidence suggest that both arguments are correct and interrelated. It’s the “inevitable” that bothers me. TPP and military to military interactions are small steps, however inadequate, in the right direction. Describing these developments as “inevitable” contributes to the problem by precluding attempts to design “the alternative sooner rather than later.” No one is attempting to design an alternative to old age.
Not ust logic, take the following:
Every sunday I held a big dinner for my family of 10.
After 10 years, the youngsters were married with spouses, another five, their children, so now 25.
So on and so forth. While I still have three cows, 5 pigs, 15 chickens and a plot for my veggies.
The demand of those who attend the meal, outpaces my supply of the ability to provide demand so we are eventually left with an appetizer of molecular gastronomical proportions, and of course, structures will change, as pendulums on all side of ideological battlefields are re-calibrated as the grander pendulum is itself.
Dan Berg, could you please explain to me in simple english (it is not my mother language) why you think that TPP (or TAP) is an inadequate step in the rigth direction? It seems to me that you are using TPP as synonimous to trade wars rather than trade agreements.
I’m not using trade negotiations as synonymous with trade wars, but an attempt to AVOID trade wars. “Inadequate” because I think much more needs to be done to strengthen international economic institutions. I would much rather see nations interact economically than militarily which I fear is the alternative.
Maybe not design an alternative to getting old, but if I consistently spend more than I earn, for example, the same logical process says I will inevitably go bankrupt, and this logic forces me, or anyone working with me or depending on my wealth, to want to consider and design alternatives.
“I hope the U.S. will engage in efforts and in cooperation to maintain exchange stability so we will not succumb to the temptation to sell off Treasury bills and switch our funds to gold”
– Japanese Prime Minister Ryutaro Hashimoto, June 24, 1997
By the time of 1997 Asian financial crisis, most of the world’s governments have realized the unsustainability of the US-dollar centric global monetary system.
Why do you say that, Morse? It was around 1998-99 that we began to see a massive increase, wholly unprecedented in history, of US dollar reserve accumulation by foreign, mostly Asian, central banks. It is strange that just when everyone finally recognized that the dollar reserve system was unsustainable, they went on a massive buying spree.
Perhaps they were doing it out of generosity? Like too many other people, Prime Minister Hashimoto may have been under the impression that Japan’s accumulation of US dollar reserves were Japan’s “gift” to the United States, and not a consequence of Japanese desire to reduce domestic unemployment, and that American demands in the 1980s that Japan stop accumulating dollars, and Japan’s insistence that it continue, represented American foolishness and Japanese generosity in forcing the Americans to do what was best for them.
Of course not so long ago, in 2011 and 2012 if I remember correctly, when the PBoC generously began stockpiling Japanese government bonds, the Japanese, very foolishly I guess, were infuriated and demanded that the PBoC stop buying. It is funny how everyone in the world is so eager to help the United States by buying USG bonds that they do so even in the face of American anger, and yet when foreign central banks try to help them by buying their own government bonds, they respond with fury. It really warms the heart to know that most countries engage in the global trading system purely out of altruism.
This is the problem with the SDR, in the philosophically muddled, contradiction of assumptions, discussions had on these matters. I essentially see it as we all can mutually benefit, but most are merely focused upon parochial needs (some will degenerate, to a simplification of needs of cronies, but nothing is so required).
Like the Chinese Minister of Transport who commented that Myanmar will eventually want the train-link from (?!?Kunimng?!?) because the Myanmarese will want easy access to cheap Chinese goods (rather than upgrading their thatched roof bamboo huts, and dirt roads, and degrading infrastructure via industrialization itself, where Chinese overcapacity limits it, in developing Asia and elsewhere.)
Not just dastardly Dan of the Robber Baron (maniacal, evil) era cartoons, they, as we have our beliefs structured, largely to believe what we believe is truth, necessarily. Such is problematic when the assumptions that undergird our beliefs contradict too successfully. Our thought and frames become useless, and we emotional in relation to them, supporting fanaticism.
Hi Michael, Very interesting read on Americas relationship with the rest of the world. I know you don’t like making predictions or pigeon holing economic out comes but do you think some of the articles out there about the USA facing depression or hyperinflation in the next few years because of rising interest rates and government debt levels as something that will never happen and are just views put out there by conspiracy theorists?
Depression averted 2008.
Interest rates, not so fast, lower growth era globally, just as many would not want to dismiss the role of China to influence asset values in chinese stock markets, one would not want to dismiss the US’s ability to influence its own interest rates, where it holds such a large portion of its own debt itself, thanks to Bernanke.
Due to grave levels of asset bloat globally and great overcapacity, I scarce imagine the US is the one facing hyper-inflation, rather otherwise, especially if places like china are 30-60% overvalued, and Europes banking system so fragile.
I am far more worried about disinflation than hyperinflation, Laurent. In a world of weak demand and excess capacity, I don’t see where inflationary pressures come from, at least not until excess debt levels around the world have been resolved.
«I am far more worried about disinflation than hyperinflation, Laurent. In a world of weak demand and excess capacity, I don’t see where inflationary pressures come from»
Higher energy costs. Energy makes a colossal difference to value added/productivity.
If energy prices continue to go higher the outcome might well be stagflation again.
Of course the argument is that lower demand may actually cause a fall in the price of energy, but supply could go lower still.
Sometimes I think that “austerity” was designed by the governments of USA, UK and the Euro area to be deliberately contractionary (contrarily to their propaganda) in order to keep energy prices from ramping, as it seems that as soon as global economic activity goers up, energy prices go up faster.
The worst sign as to supply is that global oil prices have quadrupled and global supply has not yet increased since then.
This did not happen after the previous stagflation episode.
Blissex:
All wrong, muddled and sounding as if paranoid.
it sounds as if you do not read the data, at all, and simply state, from the oldest of (my critique of all the veins of thought that lie beneath these thoughts).
Simply incorrect. And prices moderate. How much is a barrel of oil worth?
the higher the price the more (technically recoverable oil) in the ground.
The GDP link to oil, as far as economics, is much stronger through the energy intensive, initial phases of industrialization, thereafter it lessens. Which would be a story of developing world rather than developed.
How much is oil?
This depends on many factors.
The real interesting story here, is despite great dislocations in MENA, oil has lessened from pre-crisis levels (which saw spikes due to inventory draw-downs on a consistent basis; 1.5 million barrels a day), while OPEC as a percentage of global oil production has lessened. Which means, still as many MENA OPEC countries are not exporting, or exporting less, global production (due to higher costs for unconventional and deep sea fields) is rising. Even to the point that light sweet has been switching from US and Eu (refinery cost differentials vis a vis US markets to Asia); Ghana, Nigeria, etc…..
Is it merely the long-term, counter culture era noise that can be processed by the ole knoggin.
«global production (due to higher costs for unconventional and deep sea fields) is rising.»
Well, despite a quadrupling of prices production of *oil* (as I wrote) has not increased for a long time, and has actually declined; production of non-oil liquids has increased, enough to cause a slight increase in total *liquids* production, but at very high cost as you write, and *liquids* are nowhere as useful as oil.
But my point was not about *production*, but about *price*, and I was using production just as an indicator of the likely path of oil prices in the long term: they have quadrupled, and yet production has not increased.
Because we were discussing *inflation*, and our blogger was arguing that since ther most likely outcome is a fall in general consumption, general prices would fall instead of inflate.
We have relatively recent experience of both stagnation of consumption and inflation of prices happening, and that can happen again:
«If energy prices continue to go higher the outcome might well be stagflation again.»
Perhaps a contraction in general consumption will contract oil consumption faster than the oil supply, but it is entirely possible that the oil supply will contract faster than oil consumption, leading to energy-cost push inflation of prices at the same time as general consumption contracts.
Ah there is another escape: even if that happens, if wages fall “proportionally” more than oil prices increase, then general prices expressed in money (rather than wage units) will also fall. I guess that this has been the plan in some “austerity” countries; others instead have accepted a degree of nominal price increases to reduce *real* wages faster than the increase in energy prices, for exampke the UK.
A political revolution in the US is unlikely. A change in elite opinion over time is less unlikely. We have seen that some academic economists in the US have noticed Michael’s work. The next step will be for some of them to try and rebut it. Then we will see an interesting debate.
Two factual remarks (short sweet to the point, as requested by popular demand)
First “Allies” who met at Bretton Woods and the “Allies” of World War II, were not the same thing. Most notable absence in Canadian conference was world’s biggest economy of the time, USSR.
Second, Harry Dexter White was not a Soviet Operative. The latest and most public discussion of this issue was between Eric Rauchway and Benn Steil, where all referances are indicated on Crooked Timber bog. As one could expect from a non-historian, Mr. Steil has a penchant for sensationalising and the idea that Harry was a spy, or an “operative” is flat out wrong. James Boughton in an IMF paper in 2000 reiterated the point.
You are not quite right on the first point. The USSR was invited to the conference and sent a delegation to some of the Bretton Wood conferences, including I think the main one — in fact its delegation included one of the only two women delegates to attend. I believe they even signed the Final Act of the Conference, but then refused to ratify it. They were also involved in the subsequent discussions about the creation of the Bretton Wood institutions, including the IMF, but refused to join, largely because their quota was only slightly larger than that of China, which they considered insulting.
The second point is a little more controversial, but the claims about White don’t just come from Steil. They had been floating around at least since 1941, and it was a Russian journalist and former KGB operative who claimed to have seen the relevant KGB files whose evidence was considered most damning.
Perhaps you are so certain that White wasn’t because you have far more access to the primary sources then I do (I have none), but an economist and economic historian for whose integrity and thoughtfulness I have a lot of respect, Robert Skidelsky, did his own study, published around ten years ago or so, while writing the last volume of his history of Keynes, in which he said: “There is no question of treachery, in the accepted sense of betraying one’s country’s secrets to an enemy. But there can be no doubt that, in passing classified information to the Soviets, White knew he was betraying his trust, even if he did not thereby think he was betraying his country .”
I stand partly corrected. “Partly” because although it is true that the USSR attended and signed the final Bretton Woods agreement, it is also true that it felt excluded from virtually all expert conferences, which were negotiated uniquelly in washington between Canadians and Americans, and the British. I would be very circumcscribed about describing the USSR’s presence at the conference as genuine participation. We have not one Soviet participants name nor formal contribution. 99% of what transpired was Anglo-centered. Even the French made no noticable contributions represented as they were via London. The Bretton Woods Conferences was not a genuine international event and it is never presented as such. Technically of course, the USSR was present, and in two ways, one was its muted and clueless delegation, second via personal diplomacy authorised by FDR, via H. White, and Edward Bernstein.
Details on the Soviet role can be found in Peter Kugler’s “The Bretton Woods System: Designand Operation” , Josef Acsay “Plannin for Postwar Economic Cooperation.” A basic outline of the diplomatic aspects is provided by Edward Bernstein’s “”The Soviet Union and Bretton Woords” (for those unfamiliar with Bernstein, he was even more sympathetic to USSR central planned economies, than White or Keynes!)
Bretton Woord was in its design, initiation, and content a joint UK and US effort, headed personally by FDR, who unilaterally initiated the conference. The Soviets received polite invitations to attend. As many of FDR’s economists were socialist or central planning experts, the USSR went in with mixed feelings knowing that as it was literally doing most of the actual fighitng in the war, it had precious little resources to dedicate to post-war issues, reliant as it was already on America’s land-lease support.
In some respect, CHina’s delegation was the second biggest, but it too, was never included in technical discussions nor the overall frameowkr. Part of the reason the USSR did not bbecame member of any Bretton Woods institutions has to do with a certain Seantor from Missouri not having this relationsip with the GEneralisimo, who was far more busy with actual fighting of the war and this was a point made in the conferene in relation to gold, to which coincidentally the USSR laid legal claims via litigation aginst American banks in New York (i..e Czar’s gold).
The tension between Truman and FDR were well reflected in the US congress wherein Stalin understood that withotu FDR’s personal intervention, the Congress did not see itself in anyway an “ally” of the USSR. He understood the funmamental incompatibility of an Anglo-designed capitalist system, and it was only in FDRs own socialist leanings that genuine international diplomacy stood a chance. In terms of overall negotiations, Stalin positioned himself correctly in that Truman was to FDR what Bush is to Obama. The sympathies of the Whites and Keynes, came in handy under FDR. Their socialist tendencies were for all practical purposes a middle-ground between Truman’s all-out free market sentiments, and Wallaces pro-Stalinist leanings.
Dexter White’s situation is a good measure of the behind the scenes conflict of the conference. For lack of a better word, White was a Soviet sympathizer, although this should nto be taken out of context either. In this sense Berinstein, Kuznets and, Simons were all sympathizers. All had indirect contacts with the Soviets, all knew Gromyko personally, all knew Gouseva, etc. In the eyes of his enemies Keynes was a Soviet sympathizer although the Soviets had no illusions on this aristocrat’s account. Keynes had in fact endorsed central planning in the 30s, both for Nazi Germany and the USSR, so its not far fetched to interpret him harshly in this respect. White’s contacts with the Soviet agents may have been more intense than that of Bernstein, but this was authorised by both Morgenthau and FDR, as was part of FDR’s personal diplomacy with Stalin, which also passed through Henry Wallace.
Steil is not the latest ignoramus to parrot the vapid accusations of McCarthy against Harry White. Driven by a visceral Anti-Semitism, red bating, and a scythe-hugging antipathy to anything cosmopolitan, McCarthy was the first to launch a campaign against White, both as a Truman and Eisenhower backed deliberate purgest of Henry Wallace’s and FDR’s people in the government, and White stood out. It is a testament to White’s integrity that he never betrayed the trust of FDR and Morgenthau and never “blamed” them for issuing his orders. White was genuinly interseted in central planning, as were neraly all the economists under FDR, and had more affinity with teh USSR’s economic model of the period, than makes sense to historical revisionist today. It is a testament to the stupidy of Steil to write a popular history book explicitly denigrating White. Steil is directly perpetuating McCarthyism. I can only attribute this to a personal viciousness born of his position in the CFR, traditonally painted by right wing lunatics as a Soviet proxy in the USA. Perhaps there are further personal issues Steil has with White. The ones actually propounding the White was an agent meme in academia were more or less all compromised historians doing hack jobs. THey aer not worht the paper they are written on. No maisntream historian who has actualy accessed the archives and is familiar with any aspects of Bretton woords and its subsequent development takes this charge againast White seriously. In this respect, we can be categorical, no, White was not, at any point, a Soviet agent or operative. To claim this is to propgaate lunatic McCarthy myths, and to distort the diplomatic policies of FDR. Of cousre Steil understands that were he to discuss FDR’s and Wallaces’s personal ties to Stalin publicly, he would be in the uncoveted position of blackening FDR’s legacy. This is why I suggested Steil’s own personal democratic leanings prevent him from being honest about these issues. Considering how Morgenthau has historicaly been singled out as a target of vicious anti-semitic attacks, it only makes sense that someone like Stiel, perched in the CFR, would lay all the blame and fault for FDR’s Soviet diploacy, at the feet of what at the time was considered a beaurocratic position, although of some stature. What could be easier than blamming the beaurocrat with no one to defend his reputation?
I sincerely ask you professor, don’t contribute to such a distorted history unless you sincerely sympathise with the ghastly purges of Josef McCarthy, and his lunatic backers. They were lunatics then, they remain lunatics today. McCarthy, and today the birthers. Same thing.
Now Skidelsky is a separate issue. You cite someone whose life is built on his reputation and not much else. Let me point out three conflicts of interests for Mr. Skidelsky, and I hope you do not mind publishing what I am about to say. First, there is absolutely no basis to the charge thta White passed secret information to the Soviets. None whatsoever, and so you’ve found a good isntance of why Skidekly is a popular historian, whose purvies is of Keynes, not White, and who publishes nothing academically. Second, the Skidelky family made millions of dollars in the Soviet Far East, in ways that inspire no respect. Not only are there strong historical evidence suggesting that the Skidelsky’s were directly linked to Bolshevik Heroin pipelines through the far east (yes dear proffesor, its a poorly known episode, but the Soviets needed cash, didn’t they?) even the mainstream stories suggest that their lumber and Harbin businesses participated in activities which were rapacious, exploitative, clanish, and throroughly corrupt. Skidelksy’s own dishonesty on this account, is disappointing for those of us familiar with the story. Until Skidelsky pulls his skeletons out of his closet, he has more at stake in defending Keyne’s reputation by knocking Whites, than meets the eye. Now why would Skidelsky then contribute to this confusion? Thank you for his work on Keynes, but yah, it needs academic reviews to be convincing.
I am sorry, but this is such utter nonsense that I had to jump in again. Pettis starts off by saying, “in 1944, the Allies…met at Bretton Woods.” Although this is perfectly true, and although it is not important at all to the subsequent discussion, PerpReader decides to prove his superior knowledge of history by stating:
1. The USSR was absent from the Canadian conference (Bretton Woods)
2. This is all the more significant because the USSR was the world’s biggest economy
3. The idea that White was a Soviet operative is “flat out wrong” (another “fact” irrelevant to the essay).
Pettis, perhaps out of courtesy, or perhaps because he was too overwhelmed with all the nonsense being spouted to have notice, failed to point out that Bretton Woods is not in Canada and never has been. As Pettis notes elsewhere, it is in New Hampshire. Although I am British, and PerpReader is presumably American, I know with complete certainty that New Hampshire is in the United States, the northeastern part, to be precise.
Pettis then points out, much too politely, that contrary to PerpReader’s assertion, the USSR was most certainly a participant at the conference and in fact signed, but did not ratify, the final agreement. Instead of either slinking off, or manfully admitting that he had no idea, PerpReader says he stands “partly” corrected, and then, quickly scanning Wikipedia and whatever other source he can find to add heft to his vacillation (just look it up), says that his claim is correct because ” I would be very circumcscribed about describing the USSR’s presence at the conference as genuine participation.”
He means “circumspect” of course, but he is wrong. The Soviet delegation participated a great deal in the debate, most famously in the argument with China over how to classify remittances (China won), and in the end its quota was among the five largest. Of course the USSR did not get, nor did any other country it should be noted, what it wanted. The final agreement was largely determined by the interests of the United States, as Pettis correctly notes. In the end the USSR did not ratify the agreement because a radicalization of internal political infighting in Moscow made any seeming concession to the capitalist economies impossible. The claim that because it excluded the USSR, Pettis was wrong to say that the Allies gathered in Bretton Woods in 1944, is hooey, and would be complete hooey even if Bretton Woods were in Canada, as PrepReader claims.
But this is minor hooey compared to the claim that the USSR was the world’s largest economy in 1944. PerpReader, after being called out on that absurd statement, says it would be an interesting exercise to show that he is right in some deeper sense because of how well the USSR did economically in the decades preceding. The USSR suffered civil war in the 1920s. It partially demolished its agricultural base in the 1930s. It was invaded and suffered huge damage in the 1940s. There is absolutely no way in which the USSR can be called the world’s largest economy in 1944 or at any other time.
All you have to do is checks Angus Maddison’s numbers, which are the most widely accepted among economists. In 1944 the Soviet economy was smaller than it was in 1935. Its peak was in 1939, after a massive and ruthless industrialization push that replicated by the way the over-investment model Pettis has done so much to explain. Even then it was little more than one-third the size of the US. In 1944, aside from being less than one-fifth the size of the US, its economy was smaller than that of the United Kingdom or of Germany. There is no possible way anyone can imply, partially or fully, that the USSR was the world’s largest economy in 1944. It is sheer stupidity.
Finally, Pettis correctly notes that there is a real controversy over whether or not White was a Soviet operative, but he believes, as do most historians by the way, that he was. PerpReader, based on not a single piece of additional primary evidence, states flat out that he isn’t, and hysterically insists that anyone who disagrees with him is either anti-semitic or a McCarthyite. He then bloviates endlessly (just look it up) about secret agenda, throwing in names, sweeping generalizations and “insider” scoops, sounding always like Lyndon Larouche, or one of those guys mortified by his third-rate university degree.
When Pettis refutes his insistence that no financial historian thinks White was a Soviet operative with a very fair and sober quote from the very well-respected Robert Skidelsky (only one of many financial historians who believe White to be guilty), PerpReader pulls another of the tricks from his Lyndon LaRouche’s bag and engages in character assassination with dark mutterings about rumors around the alleged sources of Skidelsky’s family wealth, as if this had the slightest bearing on Skidelsky’s credibility.
Whether or not White was a Soviet operative is neither here nor there, and its truth is completely irrelevant to the argument Pettis makes, but the most credible thing anyone can say at this point is that there is a controversy over whether White may have been working with the Soviets, with majority opinion accepting that he did. Yes, there are lunatics on one side or the other who insist that the matter is fully resolved and only bad faith and secret agenda prevent the other side from admitting the truth, but this is just the silliness that conspiracy theorists bring to every debate.
PerpReader, you are a bloviating fool (just look it up again), so determined to play at being intelligent and only knowing how to do so, like other uneducated people, by attacking your betters. You say things that are amazingly stupid when it is even possible to decipher your logic. You speak pompously about your experience at a boutique investment firm as if this gives you an edge over “mere” economists, but I am a real investment banker (Morgan Stanley), and I know Pettis ran trading and capital markets at real investment banks, and is quite famous a banker and trader. You are not in the same league.
I know what “boutique” investment firms are. With a few exceptions, they are the places that hire those who cannot get jobs at investment banks, hedge funds, or even small mutual funds or second-string commercial banks. As you bring it up as the source of your edge, which “boutique” do you work for, and what do you do there?
Professor Pettis, I will continue to read your blog because it is the most intelligent in the world and your analysis is better than anything else I have read. The comment section, however, has become useless. It is a soap box for loudmouths who cannot get anyone to read their own blogs. This is a pity because it used to be a great addition to your entries. If I can make a suggestion: perhaps you can limit comments to 500 words?
Hear hear
Bloviate is certainly an appropriate way to describe much of what Mr.Perplexed and many others contribute to the comments section. It is increasingly hard to wade through the comments to find something that reflects the original blog entry.
Thank you, D, especially the last paragraph and last sentence
Well said, and I might be in the category that you despise, but am extremely tired of hearing people assume away so much, and always in this backward looking, dis-empowering vein, where they can not seem to separate (conspiracy type notions, of great dispute, and certain futility). Thus….. do pipe up, as you see fit, and I suspect even in, for the mass of confusion, this is useful, as it illustrates what exists, what is thought, and that is useful for considering what to discuss, which I am sure Michael knows…
If you’re so smart then a basic word count indicates you’ve just smeared your own comment as useless rubbish. It is perhaps 1000 words long. Its content is personal, devoid of any references, aimed at character assassination, and if judged by your own standards, makes for a tasteful contribution to the professors comment section. You go boy! By all means, keep it coming. You are so important, so cock-sure of yourself, that one semester of psychology class tells me what motivated your involved response to my statements. Yes readers, you can trust your intuition. If someone tells you they work at Morgan Stanley, gives you free English lessons, and parades as a historian all at the same time, you are in the presence of the janitor, back-office clerk, or disgruntled former employee. Just to flatter your ego, we’ll call you the MSprick from now on.
As a matter of fact, every single historical narrative of Bretton Woods written in the UK and USA excludes the USSR from the discussion. You’re not attacking me , nor was I attacking your professor in poiting out the obivious. Your both question the last 60 years of historical writting on Bretton Woods, and all the historians who partook in it. In this massive amount of work on Bretton Woods, the USSRs contributions to the conference are never mentioned. Never. There are objective reasons for this. The USSRs presence at Bretton Woods did not alter, nor had any impact, on absolutely anything that transpired there. Whoever dug up the remitance issue, really had a lot of time on their hands, but pulling factoids out of your rabbit hat doesnt’ invalidate the much larger point. I.e. factually I cede the point. The USSR was there. Sorry professor. Sorry. Sorry MSprick, I swear I’ll never do it again. Never. Are you happy now? Well, it puts a smile on my face at least, dear MsPrick. So take yoru argument to the last 60 years of books you’ve never read, and go ahead and ask the professors involved, why they failed to mention the USSR at the conference. As a busy janitor I’ll save you precious time to do the bathrooms (MS piss, must be so clean), they’ll tell you what I just told you. The histories of Bretton Woods do not mention the USSR because their technical presence did not amount to jack shit. It was marginal. The Chinese delegations contribution is also a big mystery. You can thank me for this insight later.
I know that being from a shitty boutique firm, and you from Morgan Stanley I will eventually have to automatically shut up, bow down, and say amen! Still, if you want to talk conspiracy, perhaps you should get off the Larouche train yourself, buy yourself a subscription to JSTOR, and actually identify the historians who have accessed the primary sources on White (not Keynes , becuase perhaps you failed to notice that that was Skidelskys domain, not White) and who claim they have irrefutable evidence of his trechery. Go ahead and enlighten us. I dont know if being second-rate boutique firms makes us sticklers on facts and references, but I gave mine when it comes to Steil, so you dont need to ask me the same.
As Goebbles said, you can repeat a lie 1000 times, and for some idiots it becomes true. For the types who counfound “popular writers of history” such as Skidelsky or Steil, with peer-reviewed work, the argument is more pedagogical, i.e. critical reviews actually mean something but it takes more than 500 words to explain. Little men have a tendency to want to not only tell people that they are big and hence when to speak, what to say, and when to shut up and in whose presence, they also have a tendency to quickly assume the role of judge, jury, executioner, whenever the opportunity presents itself. Steil and Skidelsky are your opportunity, and you’re the one playing into the Larouche camp.
I love how you modest banking types not only feel a perpetual need to remind everyone of your superirity by depricating the status of everyone else (thansk for the boutique description), and yet can’t get over a narcissistic think-skinned approcah to anyone who challanges your orthodoxy. One word of advice, if you dont like being carricuatured as a “banking prick” then dont carricature “boutique firms” and dont give yourself off as representing anyone. I disclosed my professional credentials because I was aksed this question by readers, not to denigrate anyone.
Speaking of which, I did not intend to denigrate the professor either by pointing out the obvious, but if you grow up out of your arrogant self-conceited world of Morgan Stanely, and begin to distinguish historians proper from popular historians whose books you buy on Amazon, Tweet abotu reading, and then gloat to your more educated friends so you can show them that being a banker you’re not an ignorant philisitine, then you may grasp that the issue has specifically with avoiding Larouche like conspiratiroial claims against White. [THE REST OF THIS PARAGRAPH HAS BEEN DELETED]
Whether you like it or not, much of McCarthyism was motivated by anti-semitism. White has been a delicious target ever since, and it would be wonderful if there was some concrete evidence for bankers in Morgan Stanely or pseudo-academics in CFR to justify their role of judge, jury, and executioner. Do take the time to review the sources I indicated. Steil, whose own career was so impersively built on his sneaky Watergate dealings, should first publish something in a peer-reviewed journal, until then, go on pandering your anti-semitic McCarhiate conspiracy crap.
I gave my sources, you are welcome to read them, and if worst comes to worst, contact the professors involved directly and raise the issue with them. As it stands, there is nothing, not a shred of evidence that indicates White had any greater and unauthorised involvement with the Soviets, than Hans Morgenthau (go to Britannica if you need a reference buddy).
I appreciate your English lesson, but you’re trying to score points by it, and sound like an authority on English. I didnt’ realise MS hires literature majors? Any idiot understands that actually circumscribed goes in just as well as circumspect, since all it indicaets is a sense of limits on the issue, but if you really must exercise your ego to prove to everyone that you can count to ten and thereby imply that a typo proves the utter imbecility of your peers, then I can recommend a shrink in manhattan that deals with kindergarden complexes. Shutting people up by any means is something you must have imbibed postpartum, i.e. maternal issues. You are clearly a hysteric, looking for a hand to hold, preferably a professors, so you can bury those pre-school memories of being worst dressed than your peers.
The question of the USSR economy, whether it was second or first, is actually technical. It was sizable, and it was important, it was the China of its day. Getting hysterical about it, is like getting hysterial about China’s figures today. Again, got a shrink for ya there, but it wont change that the USSR was what it was in the 30s, and I really dont need to engage you on your vision of the USSR if you prefer to cling to old bromides.
Nothing of what you said D, refutes the simple assertion that the USSR made no notable contribution to the Bretton Woods Conference, and participated as a full-fledged and legitimate participant. It did not. If Stalin had had the time and interest, the USSR delegation would have been as large as that of the US. Get off your “monumental remittances” debate. This was a freaking marginal issue between China and Moscow. If you get through even a basic reading of WWII you’ll understand that while the Anglos were skittish about finance, the Soviets were actually doing the fighting, and issues of post-war monetary regimes, for a nation on the brink of collapse, were by default secondary. Also get off the horse of teaching us history here. I was elaborating what everyone famliar with the actual details of the situation knows as a matter of basics. Your crap about Moscow’s internal politics is just that, utter crap. You wouldn’t be able to name a single member of the politburo around this period, nor anyone in the USSR at this point beyond Stalin. Just as you cannot name a single FDR representative to Bretton woods, besides Keynes and White. One way to test for insecure sharlattanism is by doing just that- asking simple questions. So when you can come up with a name around Stalin, we’ll talk.
Until then, I repeat. The Bretton Woods Conference was never, at any point, an event which englobed in it a world economy. Rather, it left out the USSR, which did not participate in spirit, and which correctly udnerstood the conffernce to be more about Anglo-American concerns than its own. Treating the Bretton Woods conferences as a seminal world event, is wrong. It wasn’t. It was seminal for one part of the world. The debate abotu the USSRs ecoomy is not about statistics, which were not even in existnace at the time in the USA where GDP is concerned and which retrospectively may be meaningless..but if you take such at face value, well, youre just playing your MsPrick role. The question is much more about the perceptible importance of the Soviet beast, and the signifcant portion of the world which was not represented at Bretton Woods. Even the Chiense delegation, one has to ask, what was its role? This was no doubt by some part of the Kuomingtang, with which Mao was already involved in a civil war, largely supported by the Soviets, who by then would enter the war on teh Easetrn Front and dish out crushign defeats to the Japanese on land.
D and Perplexed, there are legitimate disagreements about the role of the USSR, the size of the Soviet economy, and Harry Dexter White’s activities, some of them relevant to this blog post, but I don’t think this is the best way to discuss them.
I have decided to delete a portion of Perplexed’s comment. You two can say whatever you like about each other, especially because neither of you is willing to reveal his name, but it isn’t fair to attack a third party anonymously with such viciousness. I have known Mr. Skidelsky for several years. Along with some wonderful dinners in London he has been kind enough to participate in my PKU seminar whenever he is in Beijing, and in spite of jet lag has provided my students unlimited time for discussion. All of my students have been terribly impressed by his intelligence, generosity and courtesy. I think he is Jewish but whether or not he is, I can say with total confidence that he is not in the least anti-semitic, racist, or even capable of boorish behavior. What is more, I know people who are a lot smarter than any of us who have very high opinions of his work. I personally have read his three volumes on Keynes and two other books of his, most before meeting him, and have only done so because they are brilliant works which reflect enormous intelligence and knowledge.
By the way sneering at a book of history because it is widely read would obviously cause you to disqualify an awful lot of incredibly important books — Adam Tooze’s two recent books on the 1914-39 period and Barry Eichengreen’s Golden Fetters immediately come to mind. Only a very insecure kind of intellectual snobbery allows anyone to sneer at a book as “popular”, at least once he is no longer an undergrad.
After this last batch of comments, along with some of the other comments from this and my previous entry, I am seriously considering either disabling the blogs comments function for a while or, at the very least, not accepting them as readily as I have in the past. If monitoring the comments takes up a lot more of my time it will be hard to justify if reading them becomes more trouble than it is worth.
PerplexedReader,
I have read Mr. Pettis’s post and all of the comments (not always easy for me) and I can’t find anywhere the argument that the USSR played a major role in Bretton Woods, which is the claim you seem so anxious to refute. Can you guide me as to who is making this claim? Of course I think you are right to say that the USSR did not play a major role in establishing what the British have liked to call “the rules of the game”, but this is true of many countries that came to the conference, including poor France. I think Mr. Pettis only said that the “allies” gathered together at the conference, and this seems quite accurate to me. Has Mr. Pettis or someone else explained why he believes the USSR played a more important role than you believe is correct? It is otherwise hard for me to understand why this person would have insisted so much.
And forgive me for the intrusion but did you “take down” Mr. Skidelsky or did you question his integrity? From Mr. Pettis’s defense of Mr. Skidelsky, and from your comments about Mr. Steil (and perhaps one or two others), it seems that there might be a disagreement about what constitutes a legitimate refutation, or “take down”. Now please don’t take me down too, because I am not intending to take sides, but among all intelligent people here, and of course I include you, there are considered some legitimate ways to refute an argument and some less legitimate. I am not sure why Mr. Pettis would prevent you from showing that Mr. Skidelsky made an incorrect statement of fact regarding Mr. White’s activities, as he has allowed stronger attacks, not all legitimate I think, on his own words. He seems mainly discomfited by accusations that Mr. Skidelsky is anti-semitic , which hardly seems plausible to me, or boorish or lacking intelligence. I am just an academic, not a banker or trader, but I think the latter might not always be considered legitimate criticisms.
I should add that as an academic I am an economic historian, or at least, which I confess is far from the same thing, I have qualified as one, having taken my PhD in the subject. I should also quickly add that my work never included anything more modern than 17th Century Italian banking (I actually “do” Roman banking, but one of the threads led me to Florence of later fame), not a very useful perspective, I admit, when addressing Bretton Woods, but I must agree with Mr. Pettis that there are many “popular” history books that are highly regarded, at least by me. Among historians, if I may speak on behalf of such a varied group, the standard of a book’s quality does not exclude that it is widely read. I mention for example the works or Mr. Goldthwaite, or Mr. de Roover, both on Florentine banking, which I at least found to be very impressive works.
Sorry for intruding in such a vigorous debate and one so far beyond my knowledge, but I thought perhaps if I can clarify some confusions I would be of some help and Mr. Pettis would not be so reluctant to continue his role as comments “monitor”.
By the way, PerplexedReader, in my response I completely missed the second part of your first factual correction.
You say the world’s biggest economy at the time was the USSR. Why do you think that? I don’t think it was even close to being the world’s biggest economy, at that time or any other time, although I suppose we can check. I know in the early 1960s it was predicted by many to become the world’s largest economy by the end of the century, but this was as close as it got.
Perhaps you mean the world’s largest geographical entity?.
Actually, I know that by 1956 (even though Sputnick and technological progress as far as science continued in some sectors), it was known that USSR Industrial Production, had leveled off an was falling’ that their initial post revolution industrial phase was depleted. This, has always puzzled me as to the later growth periods that you note, 1960’s-1970’s, and wonder if there is not some structural functions of consideration existent of it; in relation to normal processes of industrialization, and wasteful investment thereafter, in limiting countries abilities to transit middle income curses.
Not so surprising, Csteven. It is hard to find many cases of this kind of growth model in which over-excited predictions were not made about future growth. I sometimes call this the “Gershenkron” model because it is designed in part to address two of the main developing-country growth constraints he, if I remember correctly, identified — low savings rates and weak incentives for productive infrastructure investment — and as a Ukranian (before he became American) he obviously had a lot of familiarity with the Soviet version of the model.
In such cases, real growth rates typically tend to drop long before growth expectations do.
In the case of the USSR and Russia in general, how much productive investment opportunities are there? Most of the country is a barren wasteland and around 70%% of the population lives in around 20-30% of the land. It seems like almost all projects East of the Ural Mountains would be a complete and total waste.
From my understanding, Russia has always been incompetent economically, but it’s a powerful military entity ranging from its size, natural resources, and diversity.
my claim about the USSR economy in the 30s.
I have nothing to substantiate this claim. Just common sense. The USSR did not suffer from any economic malaise during the 20s and 30s. Nor from the great depression. Hence it was adulated by economists in the USA and FDR right up till Truman usurped the vice presidency in 1944 against Wallace. In terms of productivity indicators, the USSR growth had no comparison. Not only because everyone else stagnated, but in terms of steel, iron, cattle, etc. Its easy to forget today just how many US firms were involved in helping Stailn build his workers’s paradise. Easy to forget the enthusiasm. let’s avoid parallels with today’s China, the situation was significanly more idealistic. For sheer enthusiasm factor, it had no comparisons. It was the beacon of hope for everyone except the Nazis who nevertheless applied Soviet principles to their own ecomoy, as FDR would in America.
In actual GDP, I doubt my claim has real substance, but it would be an interesting analysis.
I think my point was much more general than this professor, its that speaking of world ecoomies, while leaving out the entire Soviet Union at a time when it, and not AMerica looked was perceived as a dominant power, is a perpetual mistake of US historians. To speak of “international” without acknowledgint bipolarity, is the bipolar state of US historiography. Starting to mention it, however, implies being tarred with the pinko brush. History of economics however, remains infintile until political and geopolitical considerarations are taken into account. I find it much more interesting to analyze the trade regime in light of shifts from bipolarity to temrporary unipolarity and now towards multipolarity, than the stylised assumtpion that these shifts are irrelevant to our portrayal of economist history of hte last 50 yeras. Its like your example with Kindelberger. You can reduce the Nixon shock to a mere response to French activity on the gold markets, or you can expand it to include de Gaulle’s Third way, as a serious irritant for US policy vis a vis Moscow.
1920′-1930’s: Forced collectivization, starvation, forced emigration (within republics), purges, etc…..there is a great deal out there on it.
yes Csteven, but this was in retrospect. It does not reflect the actual perception of the USSR at the time. Its like us revising our vision of the years from 2001-2008 not as boom years, but as years of rapacious exploitation and currency warfare. It may be true, but this was not the perception of circumstances at the time. The perception of circumstnaces at the time, was more important than our perception, well summed up by the likes of MSprick. At the time, the entire world was looking towards the USSR, not America, for guidance and direction. While the USA suffered, the USSR was taking off. No one had a clue about what was really going on behidn the scenes. All one heard and saw was that while the breadline was a fwe miles long in the Midwest, the Soviets were advancing forward.
This is why, when Bretton Woods took place, and received a puny soviet delegation, asked to rubber stamp an Anglo-Aemrican agenda, interpreting the conferences as an event representing the globe, and the global trading system at the time, is simply naive.
After being savagely beratted by janitors from Morgan Stanely, and seeing the support this generates, I want to clarify a few things. It is apparent that some readers simply despise my questions and comments. They misconstrue them as spiteful attacks either directly on themselves or the professor. I am dumbstruck by this, since I’ve kept my comments very concrete. I can only explain this sensitivity as something related to a deep personal affaction for the professor and what he has to sayI get the impression that while I stick to the concrete, others see in this a regular opportunity to express their bile, encourage censorship, and denigrate me. I wont mention how this reflects on Morgan Stanely, janitors, or other commentators. I just want to clarify something more germaine.
There seems to no more be any point in saying “I love the professor… but.” This is childish. We can love him or hate him, but let’s stick to the subject and facts. I understand some people here have big egos and yes, I am sure you are very important, and maybe you need therapists to drum that into your brains, and make the doutb dissolve, because it wont be through teaching me english lessosn that your ego will be more secured.
Bretton Woods took place, and received a puny soviet delegation, asked to rubber stamp an Anglo-Aemrican agenda. Interpreting the conferences as an event representing the globe, and the global trading system at the time, is simply naive and factually wrong. Yes, technically the USSR was present and yes I missed this, because for 60 yeras of historians and their work who had very good reasons for ignoring the USSR presence for the simple reason, that there is not one aspect of what transcribed at Bretton Woords, that the USSR had any impact on.
Now if you think I brough these poitns up merely to exercise my ego, agian, I have the business cards of many shrinks, that I hear are very good, but if for a second you allow for the possibilty that I brough these points up not so you can have a great time denigrating me by showing off your credentials, (I repeat, I brought in my job because someone asked me in the previous comments), but for making a legitimate point, then you’ll undestand something simple.
The USSR with all its defects, faults, and problems of which we are now aware in retrospect, was in the 30s an extremely important global player. How you want to measure this economically, is perhaps besides the point. Not a few American corporations did business with it, thought it was important to do business with Stalin, and helped the country move forward in virtually every industraila domain. If you dont like my descripton of the USSR, its importance, and progress, then ask Ford what his thoughts were when he helped the USSR build its cars. Dont take it out on me.
As an important global player you should ask yourself how it was, that the Bretton Woods Conference in which the Soviets seem to hvae been technically present, was never once described by a single American or Canadian historian as having in any way shape or form have its agenda shapped by anyone but the Anglo-American alliance. Get off your remittances debate. You found one instnace of something, which has virtually no impact on the overall framework. You are welcome to rifle through millions of pages written about the conference adn you’ll find that the USSR is woefully absent from the narrative.
Yes, it was present, no, its presence amounted to absolutely nothing.
Now why this was the case, let’s debate that somewhere else. That it was the case, is not debatable, is it?
Now I think it rather important that if we’re going to write meta-histories of finance, economics, and trade, that fromt he very start our story reflects actual facts, than mere stylised facts. Whig history is fine, but if you’ve never accesssed Jstor, you perhaps lack the ability to think about Whig history critically. Someone’s typo, language usage, or mistake, does not invalidate that persons knowledge or point. If that were the case, then frankly there would be no point at which anyone could for ay conceivable reason be allowed to comment anywhere. I am not attacking the professor on small points, I am proposing a very coherent critique. You’re taking your frustration on me, some commentators, and taking me donw for spelling mistakes, but it doesnt’ speak to your general intelligence, that you miss the whole point of what is being said. To remedy this, I will summarise, as in I will put it in big print for the MSprick types whose credentials somehow blind them to the more obvious, and who conruse their English spelling pedigree, with reading comprehension skills.
I woudl think it damn obvious that there is a sustained criticism on my part of a historical narrative written by a non-historian in which
*the benefits to the US of a US-centered trade system are not defined, hence who the hell knows what we are really talking about anyway
*the benefits or costs to other participants in this US centered system, are not defined or even considered.
*its not even clear what the system we are discussing is. We talk about it as global, but it wan’t so from its inception, and from no point did it go beyond bipolarity. So even “US -centric” is a best approximative.
*when inquiring about how the US can pull back, there are no answers. This is obviously linked to the fialure to define the benefits and costs.
Think about all of this. Here you are making up little graphs with slopes, of benefits and costs, which mean absolutely nothing. You dont know what benefits and costs are being talked about, nor do you seem to care. When someone points this out you tell them to f@%# off. I mean don’t flatter yourselves, but you certainly don’t flatter anyone even mildly sincere in the discussion.
I think I made a very good point about disinflation. If global trade is imagined as inherently disinflationary, then a collapse becomes inevitable.
If the good professor doesnt’ want to list what he had in mind in terms of America pulling out of the system, rest assured I can fill in the blanks, but I prefer he does it, and not me. I can assume that he implies some continuation of a Plaza or Louvre accords, and as indicated placing liits on foreigners buying treasuries. If that’s the case, the professor is politely trying to avoid the term “closing teh capital account.” since this would blatantly imply that America will try to game teh global trade system, and will thus undermine it.
For readers who come here to assert their status, the implications of the professors statemetns is obvously marginal compared to the importance of proving their self-importance. To me, the implications are ghastly, frightening, and I would very much like him to take them to their logical conclusion and assume them outright.
If you fear-monger but refuse to engage in debate about it, then you run the risk of being treated as alarmist.
I dont have to justify my take on White. I find it odious to reduce the man, and his contribution, to alegations. Since these alegations stick, one is justified in demanding to know why some insist on making them stick. Is it closed-mindedness, ignorance, of an agenda. From the get go, there was an agenda to get White, becuase he was not-pro-business. Now you get some MSprick who dismisses any such inquiry as conspiracy, blissfully or ignorantly unaweare in his arrognace just how much of an agenda he himself is serving. Skidelsky of course has absolutely no conflicet of interest denigrating White’s legacy. Right? Steil, whose lame books wouldn’t sell if he didn’t add the “spy thriller” touch to it, if he didn’t spice up his history like he was selling you a bar of soap like your life counted on it, seems to have zero incentive to do more than a hack job to try to climb the bookcharts, and maintain the CFR’s dominant presence in foreign erlations books (dont worry, its not a conspircya theory). I.e. show me one work of history where the CFR has received serious peer reviews. This is why I think it deplorable, that a credible professor such as Mr. Pettis, decides to regurgitate trash.
If you dont like me taking down skideslky, maybe you shouldn’t use him next time as mere credibility and instead get right into the debate with actual sources. Dont cry when your source is shot, if the only reason you bring him up, is for his reputation. I respect Skidelsky on Keynes, not White, and I think if someone wants to play the White game, they put their own credibility at stake.
As I pointed out, if someone is going to engage in writting a pseudo-history of economics, and take thsemvesl very very seriusly while at it, then they are themselves playing a game of credibility, a game of egos.
As for commentators who get worked up over this approach, I understand medicority. It hurts. I dont waste my time with who you are or how much you make, you just have to site your damn sources and formulate your arguments, and that’s what I’ll judge you by. White was a real person. Before you make yorself judge, jury and executioner, show some maturity and restraint expected of men, not hysterical teenagers.
As it stands, I construe the reaction to what I say as a deep discomfort with a rather coherent critique of amateur econonomic history, which makes some readers feel very imoprtant but which suffesr from diminishing returns when they respond with personal attacks.
2000-2008…..not to you maybe (I never had the knee jerk response that has led to inane popular criticism, as it always does, but was quite actively concerned (as any of my “investor” friends new.
I have never been one to simplify to Banksters, Fraudsters and Enron
You like History, that is great, me to, but I would advise known to a quick application, of what you read, insofar as to specific (Question Words; who, what where, etc)
These inevitably, and often too quickly assume too much.
Biographies, for History, are, even, generally worth even less.
It is my opinion, that you assume way too much (even if long, great effort at studying the matter).
You use language (usurped, that assumes a finality) and notions (FDR copied USSR eco policy) that are decidedly (popular) within certain genre of thought, Then demote the structural aspects of what occurred in the USSR as unrelated to China (because of idealism).
This when hoping to see the 2000’s through the changing lens of how it was reviewed. in all this you confound what a thing is, or was, is somehow more important to how people reflect on it (this is why I list the 17th to 18th Century of Romance; feeling above reason).
But what we have tended to discuss here are structural, systemic properties. Not the ultimately subjective experience of an individuals experience of the world, to a heightened truth, as truth itself, inevitably relegating all thought, reflection to futility (my thought is an important as your thought, so whats the purpose). When in the end the importance of our “truth” is likely less important than our reflection. Perplexed, it seems you are trying to establish some “truth”, confused to point at present, rather than understand the structural, systemic forces that obtain, which is generally why so many come to read Michael, because it is not ideological, it is structural forces he describes (so well). You seem to want to gain ideological substantiation.
Perplexed
“The Professor”, some background, I migrated over from “FtheM”, where while many were impressed of the 2000’s boom time, many were concerned of capital flows and what was happening in the global economy at the time. Michael was a commentator on the blog (and, I suspect (came to find out), 90% of the other commentators had blogs of their own, many the top economic bloggers in the world (then and) today (some whose opinions you might prefer). So we are here, largely to discuss within Michaels frame as is our want and choice (and, I would say many are the better of it).
Just to let you know, I see your thought, rather than concrete to be rather more hopeful toward a pre-chosen perspective, you have, or an ideology, that I have yet to completely determine, largely because your perspectives mix many. Inevitably, we would always concretize out values and truths as true, and thus see our explication of these as concrete, not least because we have made {chosen, believe (them) to be)) them so.
As you are want to pretend some undue affection (or due), and to posit us in the position you do, then I might say that your mommy thought you were the brightest, cutest and most wonderful little rascal in the world; however, we, not least to your rather quick assumption, have decided it isn’t so. After all, we have come to Michael’s blog, not the Perplexed blog. Can you understand that? Further, the level of consideration that provides you with such a vantage point, is not surprising relative to how muddled your thinking is. Baby boomers need realize that all that {counter-culture, old, self-idealistically validating} noise is dying, not least, to borrow a page from the pseudo-science it generated, we have transcended it. We are tired of it and it leads so many into the least fruitful of perspectives (relations, beliefs, truths, assumptions, cycles, spiritual structures, emotional structures, ideologies, etc).
Inevitably you suffer rather more severely from your criticisms, yourself.
“I woudl think it damn obvious that there is a sustained criticism on my part of a historical narrative written by a non-historian etc, etc.”
not so damned obvious to me and if he’s a non-historian than, sorry, but the rest of us including you are total history morons. Yeah, yeah, I work in a prestigious bank-who-shall-not-be-named, so I must be twisted and you are going to get all intimidated and huffy, but no, its not because I am Pettis groupy, although you can keep telling yourself that. I’ve agreed and disagreed with him, but only to myself or to my friends over beers, because I am like you, no one really wants to know my opinions, and when i get too loud they dump on me. but everyone wants to know Pettis’s opinion, and so every few months someone who no one ever reads hollers on Pettis’s own damned blog that Pettis won’t kick his ass because he can’t.
Give the man a break. Maybe he won’t kick your ass because he doesn’t care or maybe he doesnt take you seriously.
And you are all upset because everyone dumps on you? Maybe, like you’ve told us a dozen times, its because everyone here is a Pettis groupy and can’t deal with you kicking his ass. but maybe its because you are so easy to dump on, right?
Tell you what: Start your own blog. Won’t it feel great when your readership and influence zooms past him? And plus you could censor him any time he tried to hijack your blog and puff himself up.
Pettis, haven’t you figured it out? The Perplexed guy is Sully, remember the guy that in 1988 or 89 did the yen trade because “the NY Times said is was going to go up?”
Think about it. You said in 1944 the allies met in Bretton Woods blah blah blah.
Then he jumps on you and says you’re wrong because they didn’t invite the USSR (ding) to Canada (ding) even though they were the biggest economy in the world (ding ding ding).
You know I don’t know anything about anything, but if a guy says the USSR was the biggest economy in the world in 1944 even I am tuning out. And you know it’s Sully because he keeps writing pages and pages telling everybody why the USSR really sort of could have been the biggest and why they sort of could have not been invited. He just doesn’t get it and he doesn’t get why you aren’t reading his stuff. He never will.
Remember that no matter how many times everyone tried to explain why he couldn’t do the yen trade he never, never, got it, until Carlos finally said “you can’t do it because I said so!” The guy is Sully, dude, thick as a post.
Ha ha yes, JJ, I remember the yen trade and I remember everyone trying to explain to him why he couldn’t do it, even I think HH, who was just an intern or something.
It makes sense in more ways than one. He sent a message telling me that he wouldn’t expose me publicly for an anonymous attack on him (yes, I know, the irony) if I apologized to him on my blog, and that he once worked in my office and his initials are JS. I couldn’t figure out who it could possibly be, but now that you say its Sully, it makes sense, although I don’t remember him as the kind of guy who would say the kinds of things he said about Skidelsky. He gave me an email address but of course it didn’t work.
Probably got bitter. He didn’t do well. I know someone who might know where he works and I’ll tell you when I get back from traveling. Some dump I think.
He threatened to “expose” you unless you apologized? Great. Another brick-head Sully story.
http://www.gapminder.org/data/
search “total GDP”
The USSR was never, ever close to being the worlds largest economy. At it’s height relative to the US in the 1960s it was maybe 1/3rd the size of the US economy in PPP terms. Right after WWII it was pretty devastated by scorched-earth and was only slightly larger than Britain.
In the 20s and 30s the GDP of the USSR was similar to Germany and Britain in size, all three were considerably smaller than the US. (The US was probably as large or larger than all three combined)
Dear professor,
In summary, if and as America’s benefits from global trade decline, America will pull back from the global trade system. Is this correct?
What form will this isolationanism take? How will the US pull back?
Can you please explain something very simple, but that I fail to grasp becuase perhaps I am too dumb. you describe the situation between Japan+China+America “their soaring current account deficit must be balanced by a soaring US current account surplus”. In the case of Japan and China, they are the ones with surplus capital and America is the one with the capital deficit. Purchasing government IOUs implies America is selling debt, not capital. Should it technically then not be the current account deficit country and Japan + China the surplus?
I believe this was a misprint by Michael, as he waded through the his mostly thorough explication of the topic.
So, yes, you are correct, where the debt is an asset to the buyers of it. But such doesn’t merely impact Japan, China, Norway, MENA, Commodity-Boom, Off-Shore financial center acquisition, but impacts the values of assets more broadly, in the US, and more broadly, Abu Dhabi (actually RAK) building hydropower facilities in the Rpublic of Georgia, some Emirati private companies having the financing to hold 50,000 franchises in mallls around the globe (Armeni, Fendi, American Eagle, Levi, etc) or the development of coal fields in Australia, or the development of oil, off-shore Tanzania, etc, and so forth, to mention nothing of the bonds of each of these places, equities asset valuations, the development of sports fields, high speed trains, or healthcare facilities.
So serious matters, for a world that has seriously advanced, and without less provincialism and a new global compact, built less on the irrelevant, and irreconcilable ideologies of the past, will inevitably, retreat, causing the least damage in the places which have been previously goosing others growth.
Not dumb at all. A lot of people, eve economists, can get confused about the components of the balance of payments.
In this case Japan and China run current account surpluses (Japan until recently) and capital account deficits. The two must balance to zero, and always do.
In most textbooks changes in central bank reserves are treated as separate from the capital account, so that the sum of the current account and the capital account is equal to changes in central bank reserves. Both statements are true, and in fact are the same statement, but depending on which question you are asking, one or the other equation is the more useful.
Thank you. When you’re not working in macro all the time, the “capital account” and “current” account are irritatingly easy to confuse! Reading your clarificaiton I recall something I published 10 years ago on the subject, for a business magazine, and I had no trouble at the time…five yeras later, I no longer remembered, today, you remind me, and I recall just how I was irritated 5 yeras ago when I forgot. Well, this is certainly a domain where you are the expert, par excellence. Currently I am personally very interested in the details of such accounting, since it makes a rather big difference in what is being calculated.
Perplexed: Us Isolationism
The US, even if the USd were to go by the wayside, will still be able to cooperate with other nations on trade and development. It will long have much in the way of being a useful partner too many, even if it were to recede. (Receding is the more unlikely reality, than lack of partners, were it to do so.)
The neo-cons suggested a League of Democracies early on in their administration of the US, as platform, prior to foreign interventionism in the 2000’s. It would seem it would take little to get the American populace on board with that one, is well within the electorates beliefs that can said to be (or {is)} normalized across the population (is that a correct way to state it Suvy).
The Us is not the one with the capital deficit. it is the one with completely open capital markets, and a deep array of varied types of products, in which people who hold dollars can invest in.
Qaddafi, might not have gotten a visa to come to the US, but he could buy a house, securities, treasuries, etc…
The US with 60% of the worlds pension assets, etc, etc, etc is in no way capital poor. This is what you are missing, I believe in your analysis. The extra capital, created by the fact that others structure their economies high savings, and slightly lower investment goosing GDP, create a necessary flow of capital elsewhere, this is often to the US (even if it were to Nigeria, Nigerians may take it to London, and back to US).
Where you probably think the US just prints money, essentially these others do it at multiples of the US (essentially through one mechanism or another), actually, and this creates the functions as just described. You must realize that the US is not capital poor….check out these
http://www.thecityuk.com/research/our-work/reports-list/?InterestGroups=&Reportseries=2&Type=&start=0
This extra capital pushed down interest rates, raises asset values (even though the US’s Wealth to income ratio is around the same level of Germany’s 400%, with Japans and other Europes in the 600%-650% range), and lends to structural inflows, remember 2004, has Greenspan lots the ability to set interest rates, which were trending lower, due to increases in capital inflows. Interest rates do not become lower because there is too little capital, the opposite.
American Debt, anyones debt, that is bought, is the buyers asset, that returns income, and perhaps an increase in value otherwise when sold, able to be sold at a higher (or lower) price later.
Japan and China have the (structured) surpluses, they show a surplus on their Current Account, let’s say, thus have the capital, to buy the asset (american treasuries, equities, mbs, etc…..). They only enter a market of other sovereign investors, private investors, institutional investors which effects the prices of these assets (the debt, be it corporate or government, or be it another asset, equities, or be it options or hedges, etc)
“If Country X is a developing country with insufficient domestic savings to fund domestic investment, net capital exports are probably caused either by flight capital or by the net repayment of external debt. Brazil the 1980s suffered from both, and its large current account surplus was an “unhealthy” one.”
Why can’t it be purcahse of foreign equities? Don’t political regime, corruption and income distribution play a role?
“pushed in” as Country X tries to balance excess production at home with insufficient domestic demand by exporting excess savings to Country Y”
You are suggesting this is America’s case? Japanese and Chinese export their manufacturing surplus and finance us at the same time. I.e. the famous “Sloan model” of consumer finance?
“the US responded to German imbalances and French gold purchases in the worst way possible, by accelerating fiscal expenditures on social welfare and stepping up the war in Vietnam. ”
are you suggesting that America’s foreign policy, rather than led by containment and roll-back was actually a mere riposte to French attempts to corner the gold-market?
“the burden placed on the United States made the global trading system unsustainable, especially as other large economies also chose reckless monetary and fiscal policies to resolve their own domestic imbalances, thereby creating or exacerbating large external imbalances.”
what was their choice? Was there a way to resolve the issue in any other conceivable manner? In some respect, the US set the rules at this time. Let’s recall the Marshall Plan. Let’s recall that it was shapped withing the Bretton Woods framework, and the objective was to create overseas markets for US manufacturers.
“Increases in global trade integration, in other words, probably increase the value of the global production of goods and services at a declining rate.”
This sounds Marxist. Hard to parse. Let me try. A larger share of traded goods and services (even if limited so far) in our grasps of GNI vs. GNP, the slower the increase in the costs of goods and services? Very confusing. Put another way, intense global trade is deflationary? Or are you just saying that Integration leads to disinflation?
“the most obvious case is that of China in the 1990s and 2000s, and it may also be the last such case, although of course India may or may not be another such case.”
Not Russia of course and half the post-soviet republics? Countries with whom the international economy de facto and sometimes de jure finds itself in closed capital accounts mode? Speaking of historiographical Americano-centrism one wonders when we will start to undersstand economcis holistically enough to value the role of country’s where assets lack formalisation. Just as you mentioned that post-World War II countries too poor to interest us in the global trade system were not part of it. Speaking of Marx, this reminds me of the “Romantic economic approach”. As if “fair trade” or the concept of “terms of trade” did not matter. Then again, how does one measure the economic impact of post-world war France or say the UK, considering their sizable empires?
“The most obvious way the US absorbs external volatility is by absorbing trade and capital flow distortions, and the associated cost is likely to be higher to the extent that other countries try to game the system to generate more growth at home.”
From this point on, it seems you outline only costs to the US. It is not clear to me what the benefit, at any point, was to the United States of all of this?
“First, there are significant costs associated with implementing and enforcing a global trade and capital flow regime. If there were not, the chaos that we saw in the 1920s and 1930s would probably have not occurred and the role of enforcer would have been voluntarily taken up, then and now, by international organizations.”
So international organisation is supposed to be spontaneous? Was the League of Nations even mandated with economic issues? I recall London was the epicenter of all such issues, and it had no legal mandate. Let’s hope that the 20s and 30s are in fact not relevant to our future. Again, if there are signifcant costs with enforcement, what are its benefits?
“the higher line representing a declining share of total benefits, whose slope is likely to be slightly positive tending towards flat, and the lower line, representing rising costs, whose slope is steeply positive and becoming more so – must cross, after which point the costs exceed the benefits.”
what is in the higher line? What are the benefits? What ist he “exorbitant priviledge” so to speak? Isn’t there somethign called “suzereneity”, a kind of tax one imagines America capable of imposing on others in some odd way? Also the idea of inflation of its currency?
” All it requires is that the “globalized” world experience faster economic growth than the US.”
The China variety, or the German variety. I.e. bubble vs. real growth.
I loved everythign you said, but I have an objection. You have bought into the unipolar vision on the one hand, and on the other, America the victim. America has the most developed capital markets in the world. It has the greatest economic depth in the world. Our states, counties, and municipalities, all raise money in our debt markets, we have massive amounts of charitabel money in the system, we have massive custodianship, pensions, and private capital in general. The world never fully opened up to most of it, and when it did, never followed up with legislation and enforcability of property rights which would deepen their markets. Compared to America, most markets, even in France and Germany, and especially Japan, lack depth. French municipalities are notoriously in debt and suying Dexia for billions, and German stadts, are doing better, but debt shy. Japan on the other hand, refused and found million non-tariff barriers to foreign capital since our post-war occupation. It has never, in any real sense, opened up its domestic market to foreign ownership, except in the bond market, implying its debt policy has not altered for more than a hundred years.
I cannot understand how you can square these facts, with the idea of unipolarity in which America is the victim of foreign machinations. The story always was that dollar suzerenity, or whatever it was called, led to a certain exploitaiton of the world economy to America’s advantage, not vice versa. We’ve certainly seen the Plaza and Louvre accords devastating Japan’s growth, but then James Baker was literally forced to negotiate this as a good example of everything you outline above. The costs and benefits go both ways, and from its inception the Bretton Woods system while heavily reliant on America, was never conceived unilaterally. Japan and Germany paid into it.
You seem to suggest that its Americano-centric, and that America has free-hand in designing its future, with no outside participants. This is very odd.
Mssing from your picture, are TNC. You’re forgetting that much of what you describe as capital takes on a large variety of forms, and TNCs’ wre the ones who flooded China with capex translating into goods, and reserve accumulation. You speak of the costs and benefits to America, but this may not correspond to neither economic, nor political reality. Economically in a financially intermediated world, TNCs and jobs may not represent a unitary actor. As you suggest, integration has perhaps slowed productiivty domestically, and as you also seem to imply this effect has been disinflationary. Western consumers benefiting ont he one one hand from Chinese imports, and losing out on the other, because of lost income, correspondingly, share of US financial services in US economy baloons, again, as if Sloan model, of largely consumer finance intermediation, takes place. Not only is unitary state actor not clear, but even costs and benefits of circumstancse, cannot be analytically ascertained.
Perhaps then, the issue isn’t a balance sheet, but something more political? You mention discussions with your correspondant on geopolitics. Not a coincidence I am sure. Market depth suggest Europe, not East Asia, has real capacity. Demographics are a problem in Asia, not in Europe, where immigration is open-door and labor markets show no shortage. Same goes for second largest underutilised industrial region, former USSR. You’re want of debating sustainability of immigration, but provided instititutions remain in place, both labor and capital will remain in these areas. In this respect, it’s not Asia’s share that matters, but the EU’s and its immediate neighbourhood. Solid growth for Latin America is also centered on the Atlantic, and future South-North integration in the region, including litoral Africa. No great shift to Asia is seen relative to EMs in general. Latin Ameica which still holds out greater promise than Asia, and Africa would be the growth story in any future.
More important question, can we envision world of sustainable growth, rather than nominal? Maybe this, and not imagined economic constants, will determine whether world repeats 20s and 30s experience. In some respect, Asia can already be seen as repeat of 20s and 30s. War in Russia and Syria, is entirely resource based, with gas share of energy cutting into GCC share , ex pars field Qatar and Iran, Russia holds all energy cards, and worst – in Arctic as well. Developed world is making a last scramble for largest energy resource on earth. Already all about energy. 100 year aniversay of 1914 celebrated with massive bang eh?
Demographics aren’t a problem in Europe? In all of Europe (except for Scandinavia), birth rates have been collapsing. The only real place in Asia where demographics are a major problem is in China and Russia, but most of Russia’s population lives West of the Urals (i.o.w. they live in Europe). Countries like India, Cambodia, Laos, Indonesia, Malaysia, and India will all have growing populations for the next 40 years.
Syria isn’t as much about energy as it is about supply lines. I don’t think we’ll see an energy shortage as energy producing countries continue to get killed. Keeping Syria in control of Assad allows Putin to keep his natural gas monopoly on Europe, which is why Syria is a battle in the first place. I wonder when people will realize Syria and Ukraine are about the same thing.
Keeping the immigration doors open in Europe? With the rise of European nationalism, I doubt that’s gonna happen.
By the way, Germany will experience many years of slow growth and Germany is stacked with debt. You seem to portray Germany as this place of fiscal rectitude. I’m not so sure. Germany’s government debt/GDP ratio is almost as high as the US while its banking system is 3-4 times as large with around half the capital ratio. If you were to account for the cost of recapitalizing the German banking system, I’m willing to bet that German public debt/GDP ratio would be greater than the American ratio. On top of this, Germany is a surplus country, not a deficit country.
I don’t think you seem to grasp the basic problem for the US. The US is the most capital rich country in the world and the current monetary system makes us import more capital (capital account surplus). Naturally, this means you’re running current account deficits (from the capital account surplus). In other words, you’re forced to choose between asset bubbles and excess unemployment. Until you fix the monetary system, the Fed will be forced to make this decision.
«In other words, you’re forced to choose between asset bubbles and excess unemployment.»
Perhaps I have not been clear before, but it seems to me that the USA elites and property-owning middle classes want badly *both* higher USA unemployment and higher USA asset prices.
That is the dominant political coalition in USA politics.
The Fed Board and the Adminsitrations over the past 30 years have worked hard to increase asset prices and unemployment, with various excuses: the mythical wage-price spiral is driven by wages, so lower wages mean lower inflation, higher asset prices drive the wealth effect that compensates for lower wages, etc. etc. etc. etc.
In they they have a strong alignment of interests with the political elites of China and India (and Japan, in part).
What about the young who’re beginning their early adulthood (ex. someone like me)? We have a very different view of the world and we’re not gonna sit there while these retards run our country into the ground. The change will come and I suspect it’ll be much quicker than anyone else predicts.
You’re talking about how the Chinese elite have been the largest beneficiaries from the mainline Republican party, but the GOP is seeing a split. From the looks of it, the mainline Republicans will be the first to break. In 5-10 years, the GOP will look completely different than it does now.
Democrats moved to the center under Clinton (from time of Reagen). Republicans got confused and fractious (factional and blocking).
I suspect they will have to unite under small business, entrepreneurship and innovation or become irrelevant. This will move the Democrats to be able to discuss along their long-term principles, as the republicans reinvigorate their own, and a more useful discussion begins anew. Now, merely obstructionist, the long-term principles underlying the dialogues important, and more eternal than a politician or policy response or three..
«What about the young who’re beginning their early adulthood (ex. someone like me)»
Mostly they don’t vote, and nearly don’t donate to campaigns, and mostly live their lives purely as consumers, not as politically engaged citizens.
Politicians know that very well, so they occasionally pass unfunded-mandate politically-correct laws, and otherwise ignore you people.
«The change will come and I suspect it’ll be much quicker than anyone else predicts.»
I am sure that change will come, but not from “young consumers of today”. It will come from either higher energy prices unraveling the current economic model, or a surprise development in technology continuing to provide cheap portable energy sources. Thje global trading model in the first case will change radically, and even the local one (no more suburbs or exurbs).
Csteven,
I don’t think the left-right dichotomy of the 80’s and 90’s exists anymore. Both of the mainline parties are bought by the big banks and corporations. If you don’t believe me, look at their donors. Both of the mainline parties are the same; there’s really no difference.
Suvy,
These, also might be enjoyable:
http://www.complexityexplorer.org/
Suvy,
Look at their donors then. Mostly, ideological claptrap, not interrogated by the donors. As if the banks themselves are separate of the pension funds, institutional investors, and around and around, and around.
«I don’t think the left-right dichotomy of the 80’s and 90’s exists anymore. Both of the mainline parties are bought by the big banks and corporations.»
I don’t quite agree, as I have a better way of expressing a similar notion.
There is still a left-right distinction, and that matters a lot, even if perhaps it is not so obvious between the two USA parties.
But there is independently of the left-right distinction one that has become perhaps more important which is the difference between “sell-side” and “buy-side”.
To a large extent “sell-side” means “big banks and corporations” but it also means rentier/parasitic middle and upper classes, etc.
There are many “sell-side” people on the left and many on the right; and there are many “sell-side” analysts, economists, politicians, historians, etc.
It used to be that the sell-side was mostly in the right and the buy-side was mostly on the left. Even if there has always been a significant “buy-side” part of the right and some “sell-side” people on the left too.
However since the Torches of Freedom PR campaign, the Powell Memo and the financialization of the economy the “sell-side” have acquired much greater influence both because:
* the “sell-side” is very generous at paying heralds, propagandists aligned with their interests and quite a few analysts, economists, … have noticed that;
* more of the middle and upper classes who vote and donate to political campaigns have come to see themselves as being on the “sell-side” because of their being invested in leveraged speculation in small or big assets.
Anyhow the left-right divide matters still, and one of the best successes of the “sell-side” has been to persuade so many of the lie that it does not matter with propaganda like “we are all middle class now” that has become “we all subprime now” which basically amount to “our interests are all on the sell-side”.
I suspect we’ll see the old guard in the Democratic party as the next to go. As I said, I’m not philosophically a libertarian and it’d be nice to see some type of movement in the Democratic party to get rid of the crooks in the Democratic party. I think we eventually will see that, but it will take time.
I actually interact with a lot of the younger libertarians and conservatives in my area. They’re usually pretty sensible, smart, and intelligent.
Suvy
Oh boy,….. Europe correct…..
For those interested…..
http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_birth_rate#mediaviewer/File:Birth_rate_figures_for_countries.PNG
Then, dependency ratio’s, old age and youth and the dependency ratio need be understood to understood what is happening in a country; not merely growth of global middle class or labor class arbitrage (this keeps many mired in cyclic roundabouts, not able to more lucidly discuss the issues).
Clearly, not just China and Russia, but Japan presently, and South Korea following quickly upon its heel to be in a worse position than Japan by mid-century, but even places like Vietnam, where China, in 2050, will have more old age dependents than all OECD members of 2005, in 2050. Problem is, most people around the world, and especially North Americans, had long heard of this as a US problem, usually when those who desired to slash entitlements discussed issues around entitlements 75 years hence. Always the over-focus on an over discussant US, rarely isolating the real problems that exist and where. )
Syria, if Syria is about supply lines, and then natural gas supply lines, how does the inevitable risk of an Eastern Saudi, which is Shiite, with a Sunni Qatar, who has the gas supplies, and difficulties between Saudi and Iran, the other country with advanced gas supplies, as supplies in the other countries decline, due to advanced growth within the GCC countries themselves, alter your analysis of what is taking, has taken place in Syria. Or does it not? Because, likely this sounds as if another CIA plan, however, based on the poorest of obviously incorrect assumptions. Because Syria and Ukraine are not merely the same thing. Ukraine is the birthplace of the Russian people, a country that had been under the imperial realm and part of a complex series of contentious histories that includes Poland, the Hapsburgs, Lithuania, Germany, Prussia, the Mongolians and NATO. Syria involves the diminution, merely of the Soviet Union, Putins strategy of hindering, blocking and norm entrapment as a strategy of one sovereign in competition with another for the re-establishment of national pride, and building of external images of such, under the design of a neo-imperial project. Syria and Ukraine, also include dynamics related to the extraction and sale, and setting of pricing dynamics, for a Russia whose prosperity had become more dependent upon such. More sure-footed analysis might underscore how there is much incongruity in this approach, and Putin imperils himself of this, by undermining stability up through the Western Urals (Tartarstan) and regionally located near to Russia’s European population centers. For such, domestic image restoration, seems to be a higher goal, than the necessary stability required for Russia’s transformation to a diversified modern economy.
German Wealth to Income are right around the US’s currently, but signifgantly lower than everyone elses, even, I suspect China’s. One mans debt is another mans asset. Others much higher overall 400 to 6005 or 650%.
What do you think is happening to the British Pound, that is a curious one.
Capital Account, as per Michaels discussion, and model, the dynamics he describes? Or is this the financing Gap you describe, but capital rich?
You’re right on Japan and South Korea, I forgot about them. I’d like to add that I don’t think
What I meant when I said Ukraine and Syria are about the same thing is coming from a US perspective. The reason the US is involved in both is to undermine Putin and (IMO) fragment the Russian Federation. I speak about all this here (where I actually mention all of the stuff you brought up on Ukraine):
http://suvysthoughts.blogspot.com/2014/09/us-russia-eu-and-ukraine.html
I agree with you on Syria and the natural gas supply lines. I also agree it’ll fuel tensions between the East and West Saudis (Shiite vs Sunni conflict). I think you’re likely to see the entire Middle East break up into small tribal states. You’ve already seen the beginning of this happen in Iraq, Libya, and Yemen. I suspect the Saudis are next.
What I think could end up happening is a US alliance with Iran while the US alliances with the Saudis and Qataris may not hold forever. Have you seen this piece by The New York Times?
http://www.nytimes.com/interactive/2013/09/29/sunday-review/how-5-countries-could-become-14.html
The real problem, in my view, is that the current map doesn’t make sense any more. The current map was, I think, created by the colonial powers to split up territory for their own needs (ex. Sykes-Picot Agreement that basically created Iraq-Syria border). Now, you’re seeing the map shift into a more natural way.
Suvy,
I posted a link for another posting, and thought of you, have you seen this, interesting class, difficult, but I managed to pull through.
https://www.coursera.org/course/maththink
Suvy,
What possibly could the US gain from fragmentation of the Russian Federation, we are likely still paying for Russian nuclear scientists today, and for the security of Russian nuclear fuel. It is absolutely preposterous how quickly you assume notions of interest to the US, when often they would be decidedly counter to those.
When you say it was in the interest to split up territory (Sykes Picot); what interests? Please, do not make such assertions so lightly. You mean that France would rule one area and Britain another. How were these split up, how did they exist under the Ottomans. Much, much further, before you can even establish a split-up, let alone a benefit. This from a person, who often might have considered Europeans terrible map-makers, as well (temper and hone, you use well to blunt an instrument).
The US is involved in Syria, because the Europeans, yet again, couldn’t get it together to handle. Similar to Libya. Don’t you remember how these were initially pushed by France and Britain, and then it switched to an issue to criticize the US, and pretend weakening of the “empire”, in many circles. This was but a short time ago.
It’s like someone going, see your ugly, see your ugly, uhmmmm, I never said i was pretty, to whit they respond, see you are ugly. Pretty soon the rest of the playground starts going, see you are ugly. Uhmmm, whether i am pretty or ugly is of no concern to me, but, just so we know, I never said I was pretty. Do you watch RT? Much of Us in Syria, is pundits creating a notion of innefectiveness, then motivations, when originally France and UK were the most interested, if we remember correctly, then Putin criticizing, and Russia and China hindering and blocking, and attempting to norm entrap (International Relations; Jervis and Ikenberry, if interested to review what is done by countries, that often filters incoherently through the frames of lessor journalists, Taleb, remember)
The class link you sent is a typical pre-Real Analysis class. It will be very difficult for those not used to writing proofs, but this kind of stuff is important. This is the way to learn rigor. It’s not easy, but we have to remember that we don’t do things because they’re easy, we do it because they’re hard.
What I mean by their “interests” was basically that the Europeans split up the territory to primarily extract natural resources, maintain trade routes, and other stuff like that. I don’t know if you know the story, but the old (and currently nonexistent) Iraq-Syria border was designed by some guy supposedly drawing a line from the last E in acre to the first K in Kirkuk. That’s not the proper way to draw a border while taking the social qualms of the people into consideration. When you look at the ethnicity maps, the old borders don’t really make sense. I don’t know how these places existed under the Ottomans. Here’s a look at the current religious (first link) and the ethnic (second link) distribution among the maps.
http://www.mappery.com/maps/Middle-East-Religious-Composition-Map.mediumthumb.jpg
http://cdn0.vox-cdn.com/assets/4232063/Mid_East_Ethnic_lg.png
I do agree that since the 1956 Suez Crisis, the US has taken the role of the old British empire. I suspect that we’ll see a free Kurdistan while the US and the West arm and ally with the Kurds (this is already happening). We’re likely to see an Alawite state near the Mediterranean, a Sunni state stretching from what used to be East Syria into Northwestern Iraq, a Shia state in Southeastern Iraq while Kurdistan comes together from parts of Southeastern Turkey, Northern Iraq, and some parts of Nortwestern Iran.
With the fragmentation of the Russian Federation, I never said we’ll see no Russia. I just think some parts could go flying off (like Chechnya and Dagestan). Russia is a very ethnically diverse country with populations of other large ethnic groups (ex. Russia is 20% Muslim). I don’t think it’s crazy to say some parts of Russia could fly off, particularly some heavily Muslim areas.
Your consideration is thoughtful, your assumptions rather more lengthy.
No, you said it was in the interest of the US that this happens, which is absurd (fragment the federation).there might be a Kurdish state, but there are Iranian Nuclear deals, and a reluctant turkey to consider. The Iraqui Kurds, will be pressing for more autonomy vis a vis Turkey and Iranian Kurds, and understand the difficulties. This presents, if Syrian borders change as ISIl is defeated, the Turks (and Iranians) will strongly resist a Syrian Kurdish region merged with Iraq (Nato and the nuclear deal). Perhaps, Assad will remain in control, with nominal change, change will already be recognized as necessary by him and for external support (and external financial assistance and investment). Regardless, it heralds a new non-Bathaaist Arab region. A reforming secular Arab nation, that has given up support of the Palestinians for external investment, even an Iran that might be changing is an interesting notion indeed.
Looking at it from a certain perspective, it could be said that the US spent the entire 20th century preventing one power from uniting all of Eurasia. Keeping this in mind, having a weaker Russian Federation certainly helps the US and drastically reduces threat of Russia interfering in world affairs (basically US affairs now).
Another problem we’ve gotta consider is the battle for the Arctic and a weaker Russia would allow a country like Canada (a geopolitical puppet of the US for all practical purposes) much more control over the Arctic. Global warming and climate change could really change the balance of power and the weaker Russia is, the (much) better off the US is.
I actually think it’s in favor of the US to support virtually all secessionist and independence movements that could happen. The more decentralized the world is, the better off we are IMO.
Ok, will stop here. My criticism of Perplexed vis a vis student and you, applies now to you and the (countries, groups, people, and humans) you so easily assemble (in a rather careless fashion, and under rather suspect principles). Further it is naive (relative to the world, in which individuals, and groups, and nations are coming to wield so much power, inevitably due to the march of technology, the spread of ICT’s and reduction in transportation costs, and the mass of information and perspectives that obtain to our actual world where your notions incentivize dysfunction (as if you were a millenarian armageddonist).
Be more careful in your words, this is no mere intellectual exercise.
Yea, I don’t really understand what you’re point is. I don’t really know if you understand what I’m saying. The reason I support radical decentralization is obvious and simple: decentralization on a large scale makes the system MUCH, MUCH more robust and probabilistically, it’s easy to see why.
It seems to me like you’re really overthinking it. The point is to reduce the power that nations, groups, and people have to negate the tail risk of the left side (i.e. risk of ruin). That’s it!
Perplexed
You should by Michaels Books, the Great Rebalancing, I think, or search “financial repression” and savings, investment and current account surplus, where he explicitly lays out clearly exactly the dynamics he believes to obtain to the system.
“are you suggesting that America’s foreign policy, rather than led by containment and roll-back was actually a mere riposte to French attempts to corner the gold-market?”
Good question, but I suspect, in reviewing the economics of the predicament, in the larger political ideological battle at the time, that such was what happened, rather than merely the French, which would have been a smaller aspect of the overall calculation.
“…….. objective was to create overseas markets for US manufacturers.”
Really!?!?!? Would you mind providing us with some bio-data? I think I am starting to see the picture more clearly. Are you a sociologist? Come clean?
“Increases in global trade integration, in other words, probably increase the value of the global production of goods and services at a declining rate.”
The gains have already been had. Tariffs are incredibly low for advanced countries, who still represent an excessive portion of final demand. There is a fair amount of harmonization via standards and a miniscule amount of non-tariff barriers to trade among said same. For example, some prosperous no Western countries (GCC), by default, simply accept US or EU standards, because safety standards have already been established, and why re-create the wheel or pay for something, they already spend a lot of money doing themselves. Some smart developing countries do the same, Republic of Georgia.
Then, already great overcapacity across industries.
Deflationary, China 175 of worlds population, more than half of the worlds steel capacity, cement not far behind, textiles, solar, wind, etc…. Then elsewhere great and excessive over-capacity, actually made worse these last few years, otherwise known as emerging markets driving global growth (the continued development of over-capacity along with asset bloat, often in real estate). All standard and well discussed everywhere.
“the most obvious case is that of China in the 1990s and 2000s, and it may also be the last such case, although of course India may or may not be another such case.” Michael
……” Speaking of historiographical Americano-centrism one wonders when we will start to undersstand economcis holistically enough to value the role of country’s where assets lack formalization”. (Perplexed)
“social anthropology”…….Uhmmmmmmm, de Soto’s Mystery of Capital, but he is probably easily dismissed as a Washington Consensus guy, rather than an earnest, experienced, economist who has a heart-felt belief, and the scholarship to back it up.
In a way, I believe Michaels models actually help to clean out the cobwebs, but of course have a romantic tinge yourself, that might be fulfilling as a perspective, but largely unimplementable otherwise.
No doubt you support proportional voting blocks for ethnicities in representative democracies, as well. Far easier had at the national level, difficult, still, and potentially fractious, how to do the same globally, can you imagine the difficulty, rather than assume the seeming benefit.
Just as you mentioned that post-World War II countries too poor to interest us in the global trade system were not part of it. Speaking of Marx, this reminds me of the “Romantic economic approach”. As if “fair trade” or the concept of “terms of trade” did not matter. Then again, how does one measure the economic impact of post-world war France or say the UK, considering their sizable empires?
“US absorbs external volatility”
Because, the operant point is the quote above…..the absence of such will see the absence of the stimulus that has rationalized many an initial stages of industrialization, in many a countries. Thus, the opportunity afforded will lessen, but this is already the case, as China has so much heft, that these last years, many countries have cycled into resource curses, however, with undervaluing currencies, as China delimits the range of their development options.
Benefit to the US,
Just like when it supported the Bolivarian revolutions at the time of Simone. Just as it fought the ideological-political battle with totalitarian socialism, just as it forced decolonization on the Europeans, just as it made mistakes, and didn’t make mistakes in its imposition of a containment policy, just as it instituted the Marshall plan, just as it didn’t dissemble plants in Czechoslovakia or North Korea, Manchuria or East Germany as the Soviets, it believed a better world, consistent with its values, that it supported, would also benefit itself. Not surprisingly. Such, a new way, in respect to the long held practice of the past, but for you apparently the Marshall plan was to support US exports. OK. Are you a fan of Oliver Stone, might you be Oliver Stone yourself? A film director? Merely a fan, and none too dissimilar perspective holder of Gordon Gecko?
“the higher line representing a declining share of total benefits, whose slope is likely to be slightly positive tending towards flat, and the lower line, representing rising costs, whose slope is steeply positive and becoming more so – must cross, after which point the costs exceed the benefits.”
“suzereneity”, a kind of tax one imagines America capable of imposing on others in some odd way?
Yes, there is one, and quite a farcical imagination at that. It’s the system man, Right on, Solid. Actually, it is the system, but neither as described or imagined.
“Also the idea of inflation of its currency?”
You mean over-valuation, under-valuation and revaluation under altering circumstances if the US were to withdraw. Inflation happens to prices.
” All it requires is that the “globalized” world experience faster economic growth than the US.”
Any, economic growth that continues to demand increased burdens as the demand providers shrink as a percentage of global GDP. Real, bubble or otherwise, might have less of an immediate effect, whether or not China is 30 or 60% overvalued, does not change the surplus generating structure of their system, which is cycled into US assets, often times treasuries that you must pay interest upon.
Micahel, Unipolar, I believe from your frame, you are reading way to much into Micahels writing. And while often a point of much critique, Unipolaroty merely refers to a thing having advanced material capabilities relative to other things, you are referring to unipolarity among states. Hegmony, is similar but has to do with relationships. Empire, is even further, in being abe to dictate, while the dictations are followed. So, even in the 1960’s with France, and demands for Gold, questions as to hegemony and empire are suspect. It might be said the US sits at the forefront of a system of uni-multi-polarity.
America the victim, wow, how about America who has worked hard to support a system of global governance and multi-lateral participation in systems institutions to mediate the trials and travails of living in a world that is often divided, often, more often, on border to border (than as many on Fox, in Hollywood, or on PressTv might imagine).
Unipolarity, I am not sure Michael has necessitated that he must live up. But your description of America, supports a notion of Unipolarity, insofar as its definitional content, advanced material capabilities, and for all, and more of the reasons you have described. I am not sure what you believe Unipolarity to be otherwise, but I am sure that if it extends beyond the definition that I have provided (one of advanced material capabilities vis a vis other cases) than it is incorrect, and probably based in the ideological chatter of some set of ideological post-modern belief constructs.
It might be that something exists as you describe, but it is certainly not to be found as unipolarity.
Unipolarity merely describes the existence of advanced material capabilities and nothing more if it is often used incorrectly.
“dollar suzerenity, or whatever it was called, led to a certain exploitaiton of the world economy”
Are you watching Ken Keiser. The onoy thing I have to say is Rock, Rock, Rock and Roll High School. Has anyone ever noticed how his co-host seems to get excited at the notion of destruction. Strange. I am sure CBGB’s in the 1970s never left his blood. Anarchy in the UK, Rock on. All brought to you by the Russian government.
“devastating Japan’s growth”
Really, rather than the disastrous structures that obtain to the model as Michael describes. Have you even reviewed his writings.
“America has free-hand in designing its future”
Uhmmm this seems to be a point of contention for you, that I do not see as discussed by Michael, but rather directly related to your sense-making frame, your weltanschauung, which seems to be a mishmash of some talk show hosts ideological claptrap. Or maybe it is Kudlow or Kramer, Honk, Honk. The Groucho Marx of financial tv. Rather it sounds a mix of Alex Jones meets Jeffrey Sachs. Oh how I wish we could get our assumptions together (Fancy, not fancy, just rattled like a Snow Globe in the hands of Bam Bam).
….. something more political?…..
All politics is local, then global, then secretive, hidden, maniacal, and doing to us something that I know is bad. I am not sure what it is, or how it works, but am quite sure it is not good. We must dispose of the governments. Anyway, corporations, despite being cold and uncaring, are far more efficient and will be able to deliver services, outside the hands of government far more efficiently. Now if we could only get rid of the governments, and agree on valuing other forms of assets; perhaps culturally based communally held assets. Of course this will be more possible by the ascent of 7 billion people, rather than 194 countries, as would so many other things.
Suvy
Europe for now, has a genuine open-door policy. One should not mistake attempting to regulate labor flows, with impeding them. European nationalism is marginal, and any incremental rise will be met with ferocious resistence. It will be crushed before it gets anywhere. Demographically, both the US and the EU will have no issues. Like I said, instititions are what counts. The interplay of institutions and demographics. Asia does not have institutions, nor does it inovate in them. Weber’s criticism of China, holds steady.
look, I can’t follow the terminology in suprluse and deficits if it makes no clear sense. you say America is a capital rich country. Suvy, you are a student, and the problem is that you take an abstract term and you simply refuse to ask yourself just what the hell it means in practice. In pra-cti-ce. I.e. I undertand why a professor thinks capital can be grasped only in the abstract, because he’s jugling terms left and right, but a practical young man, is bound to do practical things like look for work, etc. this is where capital is no longer abstract. You cannot simply talk about americ abeing a capitla rich country, there is a sociological process underlyign capital formation. Furthermore, you conclude by simply recapitulating Pettis’ bromide about “unemployemnt/exporting debt”. This is nonsense. Again, capital aint some abtract quantity. It’s real. The US cannot export mere capital in relation to jobs. This is some kind of wonderland logic.
csteven “No doubt you support proportional voting blocks for ethnicities in representative democracies, as well.”
um, no, not really. what makes you think this? This would merely recreate Asia on a global scale. Rather nasty idea.
I find your writting very fluid…like someone on LSD. Very curious. I am not a sociologist or anything. Work in international finance, in a boutique investment firm. I just respect domains. I am always worried when econonomists start talking about history. They dont know history. They know bromides. They confuse their bromies with presecriptive policy. Not sure if tghe professor has any experience in policy. His links to Princeton suggest a possibility. If I was in policy I would call the professor, ask his opinion, and then call Nouriel Roubini to ask him for the details. Professor is central in solid theory of balances. However, some of those who preceeded him considered the concrete issues of what is capital more relevant.
With respect to capital formation, the US is one of the world’s richest countries in nearly every form of capital including social, political, and financial capital. The US government is still basically the same government structure in 225 years and it’s shown to be extremely robust. The US has 50 different states that basically allow for 50 different “laboratories of democracy”. Also note the flexibility of the US financial system. By any standard of capital formation, I’d have difficulty seeing one case where the US wasn’t either the global leader or at the very highest among a few countries.
The point I was making is that it’s destructive for the US to be importing large amounts of capital, but I don’t think that’s a revolutionary statement.
«If I was in policy I would call the professor, ask his opinion, and then call Nouriel Roubini to ask him for the details. Professor is central in solid theory of balances. However, some of those who preceeded him considered the concrete issues of what is capital more relevant.x
I like the attitude. But note that Michael Pettis is also strong on noticing cultural differences and doing research about history.
Because he is keenly aware of both, while so many USA “sell-side” Economists or MBAs are extremely parochial and unknowing of other cultures or the past.
I am impressed that someone who works “in international finance, in a boutique investment firm” is aware of those too, like Jim Rogers.
PFast typing, flow of consciousness, fluid and fun-loving, (yes, even single), in the spirit of satsang, to be in the company of truth, rather than occupying truth itself (Taleb, Suvy). Is the fluidity of the writing a problem, of the sort you pretend, which would assume you to be cognizant of such able to create fluidity, no, thus a criticism, or habituation of causticity. But, I would assume, such to be better, than irretrievably confused, it would seem, about relatively simple matters, where even the most simple of concepts, that obtain definition-ally seem to confront your over-ideological, over assumptive, muddled notions which lead, at least, counter-intuitively to you, it seems, to irrelevant even, oft insulting conclusions (again largely of your general confusion I believe; and I am the fan of run-on sentences). International Finance, hmmmm. I must say that might be disappointing.
Well, anyway, International Finance, is but a paragraph in the book. So if the “concrete issues of what is capital is more relevant”, (ultimately this sounds as if a well-sounding cop-out), anyway, how do you review the model suggested by Michael, insofar as to how capital is generated, then how is its generation at present, in this dilemma we discuss, impacting on the current structure of the global economy, of global finance, merely, if you prefer, and economic development, regarding the current disruptions the forces that obtain to the system, and have riled so many. (BTW, with my question, your response would lead to exhibit the assumptions, of what you believe, where so many will hold different one’s, and this comes from clarity and a practiced objectivity in thought. That is important to remember, in dispelling the need to too easily place assertions as to what the other is doing. Michael, not answering your question, doing this and that, btw)
BTW, not LSD, a Complex Adaptive Systems guy, fairly well versed in many literatures that I will be a lifelong student of, in the hope of finding new vantage points from which to view these complex issues. (Student: despit your notion to Suvy, which is arrogant, you realize that Michael Porter is a student of Strategy, that Krugman of Economics, Simon of multiple fields)
Too easily people settle into a frame, or heuristic, for simplifying the world around them, necessary for survival, some would have, but, which inevitably, limits their sight.
Damn, this blog’s comments section has everything ranging from technical economics to mathematics to music and acid trips. I wonder what’s wrong with us.
basic question,
you talk of US benefit and cost.
what of other participants benefit and cost.
Speaking of “financial repression”, Ron McKinnon died today. It is impossible to discuss the topic of financial repression seriously without his direct or indirect influence (and that of Edward Shaw, who co-wrote the book in which the phrase was first used, I think).
PerplexedReader asks:
1. “Why can’t it be purchase of foreign equities? Don’t political regime, corruption and income distribution play a role?”
Yes, they often do play a role. Flight capital can occur in many forms, including purchases of foreign equity, or even of foreign real estate, art, or anything else. In China, flight capital has included (and probably still does) domestic purchases of gold, which are then sent abroad, often to family members (mainlanders are allowed to send a maximum amount of gold every year – I forget the amount – to Taiwan). Several years ago, when domestic oil prices were heavily subsidized, politically connected individuals were able to buy large amounts of subsidized oil and were able to send the oil in trucks across the border to Thailand, where the oil was sold at marker prices. This is also a form of flight capital, although in many cases the money was round-tripped back into the country, which transformed flight capital into speculative inflows for no change in the net capital account.
2. “are you suggesting that America’s foreign policy, rather than led by containment and roll-back was actually a mere riposte to French attempts to corner the gold-market?”
No, not at all. US policies were driven by domestic political considerations. But given German and French policies at the time, they could not help but exacerbate the underling imbalances.
3. ““Increases in global trade integration, in other words, probably increase the value of the global production of goods and services at a declining rate.”
This sounds Marxist.
Marxist, Ricardian, Smithian, and lots of others. Partly it just suggests that you cannot increase inputs without at some point reaching limits of one of the factors of production – land, capital, labor, or any of the other ways in which they are classified. Partly it reflects studies that economies of scale are not linear, perhaps because of management limits. Steven Keen writes about this a lot. Partly it is part of the technological convergence process. When you gave no roads, a dirt road will have a significant impact on productivity growth, but as you keep upgrading the road, the benefits of each subsequent upgrade are smaller as a share of the cost of the upgrade, until you reach the point where further upgrades may actually have a negative return.
4. “the most obvious case is that of China in the 1990s and 2000s, and it may also be the last such case, although of course India may or may not be another such case.” Not Russia of course and half the post-soviet republics?
Sure, you can include Russia, although it was much less further behind and a much smaller economy, so its addition was much smaller. You can go all the way down and include Haiti. It depends only on where you draw the line between “large” and “not large”
5. From this point on, it seems you outline only costs to the US. It is not clear to me what the benefit, at any point, was to the United States of all of this?
No, I am afraid you haven’t understood this art very well. In the beginning I listed the benefit, which is the US “share” of the increase in global output. Then I listed the cost, which to me is the mainly the cost of absorbing deficient demand from abroad. I asked if anyone could think of other costs.
I am not able to answer the rest of your points because I am not sure I understand them. The US was willing to absorb the costs of adjustment not because it was a victim, but because there was a time when the benefits significantly exceeded the costs, and against the advice of others, including Keynes very important objection, the US preferred a system in which it managed the adjustment process because it clearly believed that it derived important economic and political benefits – and the latter were not insignificant especially because this all took place during the Cold War. It was strong enough that it as able to overcome the objections of the British, the French, and everyone else.
There were other objections by the way, among various countries. I remember culling this, obviously given my interest in China, from the recently published transcripts:
“The USSR was also opposed to the idea that ― moderate immigrant remittances for family living expenses‖ would be free from capital controls; China made the most eloquent arguments against the Soviet position, and immigrant remittances remained unimpeded by controls.”
At any rate since then conditions have changed significantly, and I argue in my essay that at some point, and perhaps we have reached it already, the costs exceed the benefits. I know it is very difficult to think about these issues except in terms of figuring out who are the white hats, who are the black hats, and who are the victims, but because I do not think of the global trading system at all in this way, it is very difficult for me to point to which is which.
my basic confusion is about benefits. I dont see the credit side of the leger in you analysis. What was the US benefit to all of this. You just said the fifth point above, you mention “– and the latter were not insignificant especially because this all took place during the Cold War.” Again though, the only term I am familiar with in describing hte economic benefits are dollar suzerenity, and the second was in the context of the Marshall plan providing Europe with the means of becoming a consumer of America’s surplus production. The question of “surplus production” being a very antiquated term in today’s context, but very intuitive of the corporate backers of Truman’s ideas for Europe in 1947-48. I fear that were we to talk of further benefits to the US, they are laregly political, not economic. NOt sure what you think.
Second, you portray the system as unipolar, while I assume it was more or less tripolar in its conception (UK, USA, Commonwealth) and multipolar in its practice (original grouping + Germany, Japan, eventually Taiwan, Korea, etc). So this creates all my perplexion about this article, which I still find brilliant like everyone else here (but quite frankly, we’re aiming at understanding something, arent’ we, so why flatter each other in the end?)
I am assuming the regime was not unipolar since you have not the US designing the system, but the UK and the US. When the War terminates, there are three victors. The USA, USSR, the British Empire, and very shortly by teh French Empire. The Atlantic charter applies to the Commonwealth, partly French, not the USSR . Bretton woords is produced not as a unipolar act, but in confines of Anglo-American alliance, with European integration processes guided by geopolitical considerations.
Your article in my mind doesn’t actually portray the situation in this light. You cannot merely speak of the costs for the US of maintaiing this system in economic terms as if system maintenance (hat tip to cstevens who likes systems theory) isn’t about one actor. The system was not conceived unilaterally. Nor was it conceived with unitary “economic” intersets in mind. In fact, it was conceived more or less through blocs.
Imagine it in accounting terms, you cannot reduce world trade regime to one entitty’s accounts, since you own stock in five corporations, some of which even compete for market share, and you are trying to maximise profit. Three of the five corporatiosn are in the same sector, and 1/3 and have interlocking directorship because 1/3 of their shares are owned by one another.
If this is missing from the analysis, then I dont understand the analysis, or its point. I dont see how the US has any room to pull out of anything unilaterally.
I disagree on your take on Russia. We’re talking the FSU, and the Soviet bloc, not Russia. We’re talking what was till 1992, the world’s second largest economy, and second largest trading bloc in the world. Although “trading” is a misnomer. This economy collapsed regionaly. If you look at it in old fashioned analyses of industrial potential, prior to 1992 the hiearchy was USA, Eastern Block, then Western Europe, and then Japan along with islands in South China sea and Korean pen.. The 90s are marked by the absence of the FSU and Warshaw pact, not by their economimic size. In other wrods, you say “a smalelr economy”, but that’s not aposite. It’s more like “the world’s second largest industrial bloc, collapsed”. By second hlaf of 90s there is an industrial shift to China, from South East Asia supply chains, and this creates Chinese manufacuring “miracle”. Do you feel where I am going with this? I dont want to belabor it or distract from your larger point, but if you’re looking for investment and bubbles, its interesting to keep in mind that at no point was there a genuine global trade system.
“Partly it is part of the technological convergence process. ”
this is Marxist in the sense that it is a fatalistic, but neo-classical in terms of diminishing returns. More improtant is your disinflationary suggestion, isn’t it? You’re agreeing with the idea that deepening international trade reduces productivity, and leads to stagnation. This implies then that when we see Italy’s or Japan’s debt to GDP increasing per accounting because monetary value of debt increases as a result of deflationary pressure, this can be the result of both greater economic trade, or poor economic performance. You do realise what this means?
It means that policies aimed at increasing competitivness produce empoverishment. Thta is to say that becoming too competitive in the global economy means reducing everyone’s shrae of income, diminishing productivity, and destroying incomes.
I mean you’ve just put global trade on its head! In this respect the real motivation why America might want to pull out of global trade, holds for all participants. Want economic growth? Then stop trading so much! Paradoxically, as everyone finds it beneficial to abandong trade, imbalances will only increase, and the system will collapse in exactly the same way as if trade continues with no imbalances being redressed. There seems to be absolutely no way out of this. War is inevitable. You die if you do, and you die if you don’t. Put up barriers now, you beggar thy neighbour, and then beggar thyself. Dont put them up, and your neighbour beggars you, and you begar your neighbour.
I can see prozac sales skyrocketing. Invest in pharma!
How much longer can the global trading system last? Until the US quits running a deficit. Probably be a long, long time.
“In 1963 the United States accounted for 40.3 percent of world economic activity, measured by gross domestic product (GDP). By 2008, the United States accounted for 20.7 percent of world GDP,…… The same occurred to Germany, France, and the United Kingdom, all nations that were among the first to industrialize…….not an absolute decline…………. a relative decline, reflecting the faster economic growth of …other economies.”
(Charles Hill, International Business: Competing in the International Marketplace)
(by far the best textbook on International Business in Use)
So, from above there is no drastic movement in the standing of the “west”, but a gradual, continuing and long-term process, many might say that was baked into the system. Nationalists and cultural Conservatives, lose their moral judgments on why such has happened, Liberal Cosmopolitan Internationalists lose on their notions that on their mere hope that such CAN lead, without more maturity on the part of other countries, to Rawlsian Justice (Jeffrey Sachs), even when the premises of Nozick (Steven Roach) are used; even more confused when the process is reviewed on the premises of the faulty literature that accompanied decolonization (where many still do not realize who forced decolonization; although continental writings of European intelligentsia from the 1950’s are quite direct as to the machinations of the culprit, if the fictional interpretations on RT and PressTV would not prefer such a view).
“the US is not able to game the system in the way other countries can” (Michael)
Cultural Nationalists, Marxists, the perplexed, Liberal Cosmopolitans (libertarian and Marxian), will no doubt not be able to stomach this statement (much less extension of this one, “not for evil intent but simply because policymakers everywhere always prioritize the resolution of domestic imbalances over external imbalances” Michael). Because either the better, moral imperative (Kantian Idealist) apologist or (and selfsame Marxian critic) the dastardly dan, robber baron era, maniacal actor, within dogma, nefarious actor infused ideologues, can not see the systemic properties that undermine (lend quicksand to the foundations undergirding) their preferred heart-felt, or paranoia induced, beliefs (interesting, where even Jim Jones in Guyana thought it would be good, or better for his adherents to drink the cyanide laced Kool-aid, even if others hold such a notion to be preposterous, necessarily of their own chosen (or acquired) beliefs and values themselves, ironically. Kahneman and Tversky may note irrationality, but Spinoza gave us a wonderful gift indeed in his Ethica, notions of the good and bad in relation to rationality, and coming nearer to truth, Eastern notion of Satsang).
“Growth in the global economy should naturally require that the rest of the world accumulate dollar reserves” (Michael)
More on this, systemically necessary in modest amounts, for trade cover, to cover any disruptions to the ability of a country to import necessary goods and services, were exports to be disrupted (Fukushima). Initially long suggested to be 3 months. Such has spiked for some countries, East Asia, where the international institutions, relented and now suggest 6 months, due to some countries having up to a few years. An increase in these were initially suggested by Murray Feldstein in the aftermath of the Asian Currency crisis; a process known by some as insuring against “financial volatility” or by others as the US being reliant on foreign financing, but as Michael describes where 95% of all national currencies in the world today are weaker, sometimes far weaker against the USD than they were in 1995 (let alone 1997).
“Triffin Dilemma”
While true, or seemingly true, the existence of such can be altered, by policy response in the US. But the real difficulty is as this is being done in some countries, some able to do it with great heft, this inevitably limits growth trajectories elsewhere in the rest of the developing world, while the great growth story of the global middle class is inevitably subsumed to the reality of who benefits of this in the developing world countries who do it. This is exhibited in China, where, the wage share of GDP continues to fall as income inequality rises. Essentially while creating grave risk in the US, per se, it puts a break on non-East Asian growth trajectories. Lip service may be given to South-South trade and investment, but this is a neo-mercantilism of East Asia, that can but only shift to find new sources of growth for this process(as the West shifts to a lower percentage of global GDP), and this process is merely aided by currency swaps (rather than internationalization of RMB). The irony, the difficulty many ideologues have as regards this matter in extracting themselves from the quicksand of their value based belief constructs which run counter to both their values and expectations.
Evaluation of Points at Which costs Exceed Costs
True enough Michael, my only criticism is how tightly the link has been between offering continuous demand over the period of “advanced” countries (relative) declines, both before and after some countries could be called advanced countries, as more countries join, and the reticence, of many of those advanced countries, and newly advancing countries, to shift into the position the US has held as a demand provider, and how this will impact on the potential for countries to converge, much less the possibility, probability, or actuality of it occurring.
Then look at asset bloat, from the streets of Bucharest, through the Middle East, East Asia and elsewhere, coupled to vast overcapacity in productive capacity and it becomes even more murky. This, as ideologues descend into irrelevant positions, and countries drive themselves into a ravine as if they were ancient mastodon’s being guiding by peaceable animists (of course and by nature; inevitably, horridly disastrous for these. Is that coffee I smell?).
Anyway, it is the success of the system, for all its worts, isn’t it.
A shame so many, are so parochial. Perhaps Madonna was right, we are living in a material world, and I am just a material (X). A shame really, a shame that few people have ever spend time drinking rot gut with developing world construction workers, with their sandels, climbing up their bamboo scaffolding. It seems their mirror is merely the distortionary one at the carnival.
Michael,
You mention at length in this post and previous ones the linkages between Savings, Investment, Capital/Current acocunts, Debt and Employment.
Do you have any models, or can point in the direction of models developed by other economics that represent a good reflection of the identities you are discussing? I often find that the simple logic of math enhances my own intuitive understanding of the macroeconomic processes you are describing.
Thanks.
I think most if not all macroeconomic textbooks have the equations, Jeff.
This link might be useful, videos, quizzes, reading material, videos might be quickest…
https://www.coursera.org/course/wealthofnations
Very good Blissex, you’ve uncovered the conspiracy. The only question now is what you’re going to do to stop us.
Sincerely:
US Middle Class Property Owners, First-world Elites, Third-world Elites, USA Republicans, Chinese Communists
«you’ve uncovered the conspiracy.»
It is not at all a conspiracy! It is a well known and declared political strategy and policy of the interest groups involved. They just use euphemisms to propagandize it to the public, sometimes “dog whistle” like. I have just provided a summary without the euphemisms.
This I have done to emphasize that «the US» is not a single entity, and the current system of trade benefits greatly some interest groups in the USA, even as it damages the interests of other USA groups, which is also in the interest of the previous interest groups, and that the system of trade exists not because of the interests of «the US» and “China”, but of specifc political and economic factions within them, who have interests aligned with each other, but not necessarily with other interest groups in their own countries, especially in the USA.
Michael, I also recommend The Battle of Bretton Woods by Benn Steil… http://press.princeton.edu/titles/9925.html as a good read on this topic.
Dear Professor
Thanks for another great article. If the US is the only country that absorbs the systemic imbalances because of the US$’s reserve currency status, then can’t one solution (or at least a mitigating approach) be to elevate the special drawing rights to a reserve currency status? Then, those countries whose currencies constitute the SDR will collectively absorb systemic imbalances, and because only the currencies of large economies will be part of the SDR, there won’t likely be large systemic trade imbalances. What’s your take on the use of the SDR?
Many thanks,
Yu are absolutely right, Justin, which is probably why we will never move to an SDR system until the US threatens to pull the plug on the dollar.
I am not an economist, but an engineer, and not ignorant of economics. From a standpoint of physical systems I think the work of Didier Sornette is interesting. Analyzing log periodicity he puts singularity for the global system at 2045 +/- a few years, but also recognizes that physical systems usually break down well before singularity.
We have already reached the point where increased debt adds little at the margin in terms of economic activity. It is something of a tautology, but I think we can expect the global system to break down when it is no longer in the interest of a major player to keep the charade going. At that point I expect the world to begin to degenerate into trade blocs with favorable treatment being swapped for support of bloc interests. After that – war.
Von Mises has this right, IMO:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
We are well past a point where voluntary abandonment is politically feasible. We will flog this horse until it collapses and dies.
Maybe, Fred, and this is what I expect to happen in Europe, unless the nationalist right forces an abandonment of the euro.
Yes, the US must go deeper and deeper into debt if it has to issue more and more $ as international reserve currency to the rest of the world that grows faster than itself, if for no other reason than because it is less advanced. This is clear for over 30 years already.
Yes, China – among other countries but on a different scale given it sheer size – has gamed the system in the 1990’s and 2000’s by joining the global trade system while undervaluing its currency relative to the $ and suppressing domestic consumption so as to accelerate its economic development at the expense of the US and of developed countries in general.
But if you are aiming to resolve the situation, it is critical to realize that China has done so under the intellectual authority of anglo-saxon theoricians and with the very interested complicity of Western multinational corporations and banks. US ideologues and big business interests have been China best allies in gaming the system.
You have reminded us that if China sells more goods to the US than it purchases from the US, it ends up with a credit on the US for the surplus. In other words, goods are exchanged not for other goods (via money as a medium) but for credit.
This is very directly in contradiction with the theory which has served and still serves today (you have of course used it in your article) as the justification for the push towards free trade globalisation since the 1970’s, namely David Ricardo’s theory of comparative advantage.
Ricardo’s theory of comparative advantage states that countries will mutually benefit if they exchange finished products for which they have a relative cost advantage, leading to a specialisation of said countries in the production of said finished products, leading to a rising standard of living in all participating countries. This conclusion is reached under the assumption that countries trade finished goods for finished goods, for instance Portugal sells wine to England in exchange for cloth. This goods for goods exchange means that, in Ricardo’s framework, trade balance remain balanced. Said differently, Ricardo’s theory is not supposed to be valid if a country exchange goods for IOUs issued by another country. Oops! In a monetary environment, the corresponding assumption would be that exchange rates are set at levels that, on average, makes the respective trade balance be at equilibrium. There is no doubt that this mutual benefit is the intention of the founding fathers of the GATT as it is explicitly and solemnly indicated in the preamble to the original 1947 agreement. However, to my knowledge, nowhere in the various GATT / WTO agreements that have been signed over recent decades to liberalise international trade is there any mention of the fact that exchange rates should be set at levels that make trade flows balanced across participating countries. The WTO has pushed free trade globalization without any consideration for exchange rates. As if international trade and exchange rates were two completely different things, while of course they are the two inseparable sides of the same coin. Re-oops!
Instead, Milton Friedman theory of floating exchange rates has been added to Ricardo’s theory of comparative advantages as the second intellectual backbone of the push towards trade globalisation in the post Bretton Woods world unilaterally decided by the US in 1971.
Milton Friedman’s theory states that market forces will ensure that exchange rates adjust at levels which, on average, make trade balances balance. This conclusion is reached under the assumption that there is no official intervention in FX markets. Of course, this assumption has never been valid in the real world. In practise, surplus countries recycle their accumulated monetary reserves back into the deficit countries, thereby bidding up the currency of the deficit country relative to their own, thus completely negating the adjustment envisaged by Friedman. Re-re-oops!
So, in the current system, trades flows result in large and persistent imbalances and goods are not being exchange for other goods but increasingly for credit. Like global trade has been growing faster than GDP from the early 1980’s, so has global debt. If this continues long enough, of course debtor countries will eventually reach a point where they are no longer solvent and creditor countries will eventually pay the price by holding worthless bonds. The mutually beneficial outcome initially envisaged by the theory will end up being mutually detrimental in practise. Bravo!
In the meantime, rising debt is a blessing for banks which see the cake on which they charge interest and / or trading commissions grow, further compounded by countless derivatives and repackaging opportunities on these securities. Exchange rate volatility is also a blessing for banks as it means much more commissions on FX trades and related derivatives than in a world of fixed but adjustable exchange rates like pre-1971. Financial profits as % of GDP have increased dramatically since the early 1980’s.
There is more still. Ricardo’s theory also assumes that there is no relative technological change between countries engaged in trade. But, in the current system, US firms can set up in China via FDI with their own equipment, technology and range of intermediary products. Said differently, US firms can import US relative advantage (ie. its modern production technology) to China and combine it with China relative advantage (ie. its cheap labor). At the end, the technological transfer means that the initial relative advantage between countries is altered. China ends up with both efficient production methods imported from the US – which means that its initially lower productivity can quickly catch up – and cheap labor. The overall balance of relative advantages is firmly tilted into China’s favor. Under this condition, it is no surprise that trade becomes unbalanced and that China becomes net exporter to the US. To my knowledge, nowhere in the GATT / WTO agreements is there any restrictions on cross-border investments that alter the initial conditions of production, ie. the comparative advantages in Ricardo’s sense, between participating countries. Re-re-re-oops!
Developed countries multinational firms and their shareholders are happy as the product of this arbitrage (labor costs / productivity x exchange rate) goes straight to their profits. Like global trade has been rising faster than global GDP since the early 1980’s, so has global profits. Symmetrically, global wages have grown more slowly than GDP. Here is the source of the weak aggregate demand. Here is the source of deflationary forces. As discussed in “Economic Consequences of Income Inequality”, soaring global debt has been the price to pay for global demand to keep up with global production despite global labor share of production falling materially.
So, we see that the intellectual foundation and justification for the current international trade and monetary system in place since the 1970’s are very weak and essentially non-existent. Certainly, things have not been working according to these David Ricardo and Milton Friedman theories. They have been contradicted by the facts, either because they are wrong or because they are only correct under certain assumptions that are not met in the real world. Remember, when the theories and the facts are not in accordance, it is always the facts that are correct.
Global trade has not been mutually beneficial. Under-employment (official unemployment + part time for economic reasons + dropping out of labor force for reasons unrelated to demographics + disability) has skyrocketed in developed countries, in parallel with debt. Floating exchange rates, while they have certainly been very volatile, have not pushed trade balances any closer to equilibrium, quite the opposite.
All of this is perfectly understood by all the managers of multinational companies that evaluate precisely all these factors when they decide to set up, acquire a local company or expand in developing countries and assess the “value creation” potential of such a move. Of course, in such a system, the value creation accruing to the shareholders of the multinational companies is compensated by the value destruction for developed countries via the mutualisation and socialisation of jobs losses, salary losses and bad debts losses. That’s why profit share of GDP and total-debt-to-GDP have been rising in tandem on a global basis since the early 1980’s. The system results in private profits being funded by socialized losses. Income and wealth inequality within countries have been soaring since the early 1980’s even as the average gap between countries has been narrowing. Not quite the definition of mutually beneficial.
While all of this is very well understood by managers of large companies (who are in it big time “gaming the system” with China) it remains poorly understood or at least not publicly recognized by many economists (yourself are part of a small minority) and virtually all policymakers that continue to use Ricardo’s comparative advantage and Friedman’s freely floating exchange rate theories as justification for a system that is dangerously unbalanced and leveraged and behaving in complete contradiction to the predicted results. Whether these ideologues and policymakers are completely blind to facts, or whether they are in the pocket of big business, or both, remains a matter of speculation for the time being.
Maurice Allais was already using the prestige of his 1988 Nobel Prize to explain in the early 1990’s what you are now explaining. He was not only ignored but ridiculed despite his explanations making complete sense and never being seriously challenged. In that case, the propagandists know what to do: attack the person if you can’t attack his ideas. By the time what he had long predicted finally occurred in 2008, he was 97 years old and was no longer intervening in the public debate. He became bitter and disillusioned and concluded that “it’s impossible to make the blind see and the deaf hear”. Now, it’ your turn to try. While 2008 might have shaken a few beliefs and might have raised the critical spirit of many ordinary people towards the official party line, you can’t underestimate the interests that you are taking on. You are asking big corporations and big banks to lower their share of profit. Of course, it is in their interest to have a gradual relative drop over time rather than a complete, sudden and absolute collapse as in the early 1930’s but don’t believe that they are so reasonable.
In any case, thank you for yet another stimulating article. Beyond the very clear explanation of the mechanisms at play, what is missing in my opinion is still the same: what is the solution? I mean other than letting the system go to the wall. There is, i think, a way to keep international trade open while preventing the development of debt-funded imbalances and while closing these labor arbitrage opportunities that are eroding aggregate demand and feeding the debt snowball. It seems logical to me that this is where your so far largely descriptive work leads to.
In any case, it is very clear from the on-going response to 2008-2009 that we shouldn’t count on G20 officials to change the system. They are the system. Developing countries officials are happy as they provide jobs for their people. Developed countries officials are happy as they provide profits to their corporate and financial benefactors (who cares if they effectively let down large parts of their population as long as they can plausibly deny it and issue empty words to the contrary?). The world continues to releverage at an even steeper pace than pre-2007 (thanks to China in no small measure), which is precisely the point of the “credit easing” policy applied everywhere. Speculative bubbles are bigger and more widespread than in 2000 ad 2007. Under-employment remains unbearably high many developed countries. Profit share continues to go up. Labor share continues to go down. Income and wealth inequalities are stretched beyond merit. Social tensions are rising. Currency wars are raging. One would be forgiven to think the G20 has been actively preparing the next crisis.
Any chance of resolving this peacefully now rest on people like you with a clear grasp of what’s going on, an understanding of the lessons of history, a passion and a talent for explaining it and the great ability to get an audience.
Thank you.
«creditor countries will eventually pay the price by holding worthless bonds.»
The Chinese political elites are buying those bonds not as an investment in USA paper but to hold down the RMB. Those bonds are just pieces of paper that represent the difference between the RMB exchange rate that would happen otherwise and the RMB exchange rate of today that is kept lower to motivate foreign direct investment.
Because the prize that the China government is aiming for is not lots of pointless USA financial assets, but building a base of material and intellectual *productive* assets, as you write:
«But, in the current system, US firms can set up in China via FDI with their own equipment, technology and range of intermediary products. Said differently, US firms can import US relative advantage (ie. its modern production technology) to China and combine it with China relative advantage (ie. its cheap labor).»
That is indeed happening and not by chance.
When all is said and done even if the 4 trillions of USA financial assets that the Chinese government holds were to disappear tomorrow, China would be immensely richer than 25 years ago in terms of entire regions filled with productive factories and technology where empty fields were before, and the USA would have a lot more iPhones and a lot less productive assets.
The China government is playing the long game, and by “sterilizing” away into USA financial assets the difference between a “balanced” RMB exchange rate and the current one, they are building China up with real assets, and at the same time weakening the USA in the same way.
Because «the US» in the aggregate is not using the immense profits from an artificially lower RMB exchange rate to build up value-adding enterprises or infrastructure and/or raise wages, but to buy iPhones and speculate on paper assets.
So what matters is not so much the financial assets story, but that the China government are boosting the productive capital and the operating income of their country. Because they know very well that possession is 9/10th of the law for one thing.
Sure a lot of capital is being destroyed in China too in pointless asset speculation, just like in the USA, but in 25 years China has built countless factories, learned new technologies, raised wages, thanks to huge new value adding businesses. The USA instead…
The worthless bonds are a sideshow, even if they matter to Chinese public political arguments because of their totemic significance.
But then can be said, the most advanced of new factories have but a ten year lifespan, before being made obsolete by new techniques, production methods, etc…..
Also, that factories only matter insofar as demand exists for the produce, where the economics can be satisfied of this (global over-capacity at present across most industries)
Etc, Etc, Etc….
Alternatively, and in contradiction to what I state above, many hobby farmers in the US, and even professional farmers are still operating Dodge and Ford tractors from the 1950’s and the 1940’s, so…..
These things are not so easily discerned.
One thing is, if forces obtain to perpetuate the system, forces can coalesce to alter the trajectory.
Business, Labor, REIT’s, Institutional investors, Banks, seeing the value of their assets threatened (the structures that support valuations), might see a very different set of incentives than in the past.
«But then can be said, the most advanced of new factories have but a ten year lifespan, before being made obsolete by new techniques, production methods, etc…..»
Thanks to significantly subsidized FDI the CPC have bootstrapped a poor country into a poor country with a large first-world sector.
Where there were peasants who did not even know how to boost the productivity of their farms there is now a vast network of engineers and businessmen who can setup and manage any kind of first-world class industry.
Think of Germany after WWII: most of their cities reduced to rubble, most of their factories flattened out. They were desperately poor, but in 20 years they rebuilt it all because they had the engineers and businessmen who knew how to create and run top-level industrial organisations. Compare to the Arab peninsula countries: they are now extremely rich but they don’t have anything of that depth of know how and culture.
China has been for a very long time a highly developed, cultured, civilized country, but was left behind as to the latest-and-greatest in technology and oerganization. The CPC have subsidized FDI, and FDI has brought in everything (training, capital, culture) that China needs to have a (nearly) first-rate industrial system in good and even in services.
How did the CPC was sure of this? Well, praise Jang Zeming’s predecessor, who understood it well, and who understood what was happening in Singapore and Taiwan.
BTW Jang Zeming’s predecessor wrote some famous autobiography, in two parts: the first part tells the story of the troubles of 25 years ago, on which people obsess, but however tragic is nothing different from that happened in a lot of other places.
Most people seem not to read the second part, which is all about the development plans that Jang Zeming’s predecessor thought were necessary, and there are stunningly lucid passages.
The Arab countries have no culture? That’s BS. Muslims, in general, tend to be extremely hospitable people with a very rich culture. If you come in their home as a guest, they’ll offer you everything they have, even if they have absolutely nothing.
I’m not Muslim either (I’m Hindu if anyone cares), but to say that Arabs don’t have a rich culture is, IMO, kinda ignorant.
I agree with Suvy on Arab culture although I suspect Blisex was using culture in a different way. Arab cultures (there is more than one) are old, extensive, intricate and very varied (and, not to mention, responsible for preserving for Renaissance Italians much of Greek culture that otherwise would have been lost). Having spent over one-third of my pre-university life growing up in Pakistan and Morocco, and with an Iranian sister-in-law and a Moslem niece, I can add that courtesy to strangers is almost an obsession within most Moslem cultures and this probably comes from its Arab roots.
I can add that in the 1980s my father spent four years in Syria designing and building the internal road network, and he always said his two biggest problems in Syria were 1)trying to dig holes in the ground without destroying marvelous relics of the many cultures that had passed through or developed in Syria, and 2)keeping his weight down — he could not pass through a village, however poor, without being invited by the local leading family to a feast, sometimes more than one a day. Neither of these problems indicate a lack of culture.
But, once again, we are straying far from the topic of the essay.
Definition: Culture (on google)
As an exercise for reflection, check this out:
https://www.google.com/search?q=culture&oq=culture&aqs=chrome..69i57.1463j0j1&sourceid=chrome&ie=UTF-8#q=definition+of+culture
Look below googles list of word origins for “culture”, and check out the chart of its usage…..
Frankly, I despise the notion, for all that is being loaded into it, while relishing in its experience, for all the similarity, rather than difference that I notice between peoples, not dissimilar to the story of Michael’s father. (now, we can even have sub-cultures, where we can strike poses, physically and intellectually, as Madonna, vogue, vogue, vogue)
«because they had the engineers and businessmen who knew how to create and run top-level industrial organisations [ … ] the Arab peninsula countries: they are now extremely rich but they don’t have anything of that depth of know how and culture.»
«The Arab countries have no culture? That’s BS.»
That’s indeed a crazy idea, just as it is quite mad or perhaps malicious to misrepresent «Arab peninsula» as «Arab countries» and the absence of «that depth of know how and culture» embedded in «the engineers and businessmen who know how to create and run top-level industrial organisations» for «no culture».
The culture of the Arab peninsula countries up to a few decades ago was one of subsistence farming and herding, plus some moderately advanced bazaari style trading and finance, and an ancient and great tradition in literature and philosophy.
They have made some progress beyond that, but they still have nothing comparable to Germany as to «the engineers and businessmen» with «that depth of know how and culture» that enabled Germany to «create and run top-level industrial organisations» from the rubble of a terrible defeat.
«Muslims, in general, tend to be extremely hospitable people with a very rich culture.»
That’s a crazy statement again. Hundred of millions of Mulisms, who live far from the Arab peninsula, in countries with totally different histories and traditions are not necessarily that ospitable and may have at best a pre-medieval type of culture.
Conversely some large Muslism countries like Iran and Iraq, while being near to but not part of the Arab peninsula, have significant parts of their economy with perhaps not German, but near-first-world levels of «that depth of know how and culture» which manifest as «engineers and businessmen who knew how to create and run top-level industrial organisations».
Put another way rich/poor and “advanced”/”backward” are two different categories, that don’t always coincide. Most of the countries of the Arab peninsula are rich and “backward” (a few are are poor and “backward”).
If most of the Arab peninsula countries had not enjoyed an immense mineral wealth windfall, they would probably still look like Yemen, a country that so obviously does not have anything like «that depth of know how and culture» that enabled the reduced-to-rubble post-WW2 Germany (and Japan) to «create and run top-level industrial organisations» all over again.
That does not mean that Yemenis (or the rest of the much richer countries of the Arab peninsula) are stupid or lack some sort of culture: they just don’t have collectively «that depth of know how and culture» that results in «top-level industrial organisations». While in some significant way Persia and Iraq have it, and it is still out of the reach of Bangladesh or Nigeria (huge Muslim countries far away from the Arab peninsula).
The point again is that China was overall poor but “advanced” or potentially “advanced” (while still having large “backward” areas, like say Brazil), at least in the same sense that Taiwan, Japan, Korea, Singapore were poor but “advanced”, and the Chinese leadership thanks to their long-term oriented policy of subsidizing FDI with a “compressed” exchange rate by exporting financial capital to the USA, have obtained immense amounts of *productive* physical and intellectual capital.
Like Korea, Taiwan, Singapore they have welcomed FDI, studied closely the factories and technologies and methods that FDI brought them, and enriched immensely their country with stuff that generates operating profits rather than speculative gains. Plus of course a lot of stupid speculation too, but sometimes it is difficult to resist the temptation.
It would be a very bad thing in general if the USA managed to ahem “get out” of the $4 trillion it owes to China and the $1.5 trillion it owes to Japan (and the other enourmous amount it owes to Saudi Arabia), but in the case of China (and Japan) the gamble of buying USA debt to subsidize FDI to build a large industrial base has been a winning gamble regardless of the colossal imbalances and the risk of getting a bad deal on that debt.
those who propagate shame and humiliation, will, and do , use notions that are useful to use, for the ends they deem. Thus, of course, increasing the territorial integrity of China as presently construed, and advancing the material capabilities of China are inevitably more important, but, if and when necessary, they will attempt to use the notion that the US has not properly secured the value of their assets (Chinese holdings of US assets) when and as that is useful and necessary. Of course they have to be careful in this, because of the sensitivities of those in whom they have cultivated humiliation and shame, and negative responses from these upon the party’s stewardship itself.
this is why those who assume the unassailable actions of nefarious actors, are too easily to see a simple result of the actions (and thus are usually, incorrect in the first assumption).
I understand what you are saying about the benefits for China of holding US bonds and how the real value is elsewhere for them than in this bond portfolio.
Still, i wonder – hypothetically – what would be the impact of writing down $4Tr of foreign bonds (out of PBoC balance sheet of $5.4Tr) on China’s own domestic credit system. In the context of $19.5Tr M2 money supply and $22.7Tr non-financial-debt, would it not be the case that such a destruction of base money would result in a contraction of the money supply and a credit crunch in China, the credit multiplier of the fractional reserve banking system working both ways and, in that case, becoming a divisor?
After all, it is these reserves, accumulated in the 2000-2008 period, that have allowed China’s dramatic credit expansion post 2009. If reserve accumulation allows credit expansion, shouldn’t reserve destruction result in credit contraction?
DvD: you are mixing up apples and oranges; rmb and $; clearly the Chinese govt can contract or expand credit with or without $ reserves.
Could be, and in that case Blissex would be right that US bonds (and European bonds for that matter) are just a sideshow to China of no significance other than totemic.
Also, let’s remember we are examining a very specific case here, one where creditor countries “pay the price” by seeing bonds of debtor countries they hold become worthless. This is one among many other possible cases. It was my mistake in my initial post to present this very specific case as if it was generic. Creditor countries are in fact more likely to “pay the price” through sharply reduced foreign demand addressed to them well before (and rather than) seeing debtors default on their financial obligations.
Still, since we are considering this very specific case, the potential implications on the money system of the creditor country are not completely clear to me. Perhaps you wouldn’t mind being a bit more precise?
– The $ bonds are on the asset side of the Chinese central bank balance sheet,
– The RMB are on the liabilities side,
– Say the $ bonds become worthless overnight. 75% of PBoC’s total assets are gone,
– Then what?
Thank you
Bravo DVD!!
so why dont you take a shot at the solutions?
My solution would be to discuss within the G20s an agenda of commitment to circumventing Doha by securing from all G20s a two year time horizon for total capital account liberalisation, beginning with immediate steps in this direction, failure of which leads to progressive disqualification fro G20 forums. fully floating and fully convertible currencies would be concomitant steps.
enforcement will be construed as internal, i.e. if US fails (vis a vis Chinese and Russian capital) then it will disqualify itself.
sounds a bit farsical, doesn’t it?
so what are other’s proposals?
I tried to do so in my comments to “Economic Consequences of Income Inequality” on this blog.
DvD: I don’t disagree with your analysis, but with the conclusions you draw from that correct analysis. 2 points. 1). You observe economic history through the wrong end of the spyglass. Ricardo was not a bad old version of modern economic analysis, but an enormous improvement over an earlier mercantilism. During the 1960s when Friedman was arguing for free trade the burning issue of the day was how to keep out cheap Japanese textiles. Today he would say the system is working: rising Chinese wage rates, stagnant wages in high-wage countries. (He also predicted the euro would fail its first crisis).
(2) Chinese govt has now collected $4,000,000,000,000.00 worth of paper IOUs from the US, while the US has 6 or so generations of laptops, Ipads, smart phones and all that stuff in Walmart. You choose – which is preferable? This can’t continue? Over the next 30 years China and the US can slowly rebalance. Additionally: who, if not the US, will buy $4t worth of bonds? At what price? At what exchange rate? Will those be determined by the Chinese govt?
Finally: “Global trade has not been mutually beneficial” and “it is always the facts that are correct.” So check the facts, then delete. And thank you for the thought provoking post.
Dan
Ok, sounds good, and of course a useful counterpoint to DvD.
Now look at China collecting these IOU’s; while others have continued to do so, and quickened their pace, as well.
Look at how previously, to when you mention Japanese textiles, the number of participants and expectations. Compare to today. Consider the profiles of participants relative to cumulative stats at the global level.
Considering the staging of these (Euro and Japan, NIE’s, Tigers……..now, BRICS, MIST, n-11, N21, etc….)
Consider the vast coagulation (visualize how blood coagulates) of these. Consider the rise in population, consider the spread of ICT’s, consider the massification of education, consider the spread of faulty ideologies, etc…. EXPECTATIONS, in a world of parochialism, under the fallacious notions of control (while those of us with the time, and inclination, to mention nothing of the huddling masses, are often so unawares of the extension of our thought, let alone the pedigrees of our assumptions).
Do the US and China even have this time and distance to slowly rebalance?
Whaddya think?
Dan Berg,
Thank you for your overall appreciation.
1) Can i please clarify that i don’t take Ricardo for a bad old version of modern economic analysis (where is that coming from?) All i’m saying is that his theory of comparative advantage might well be correct under certain assumptions but that these are not met in the real world and are not built into the GATT / WTO framework (initially, the IMF was set up in 1945 just before the GATT in 1947 precisely to regulate exchange rates but it is a function it has de facto lost since 1971). So, Ricardo’s theory can not be used as a justification for the international trade and monetary system that emerged in the 1970’s and developed since then. Yet, Ricardo’s comparative advantage theory is used all the time, the assumptions being conveniently forgotten. Same for Friedman. His freely floating exchange rate theory might well be correct if there was no official intervention and if FX flows were merely reflecting trade flows. But neither is true in the real world. To my knowledge, there has been no demonstration that the current international trade and monetary system – which is very different from the one envisaged by Ricardo with respect to exchange rates and cross-border investment and very different from the one envisaged by Friedman with respect to FX markets – is mutually beneficial and leads to an optimal situation. On the other hand, there is by now empirical evidence that this system results in large and persistent trade imbalances, rising debt load, weakening global demand and extremely inequitable income and wealth distribution, fuelling social tensions. Which is not to say that the system didn’t have noticeable benefit. In particular, it has benefited hundreds of millions of people in developing countries that have seen their living standards rise materially over recent decades, a great many of them lifted out of poverty. That’s great! (If that’s what you mean by “check the facts”, i myself provided data on how many developing countries people joined the global salaried workforce and what the increase in their collective purchasing power has been in one of my comments to “Economic Consequences of Income Inequality”, so i’m not at all ignoring this remarkable fact, which is not incompatible with the conclusion that the current trade and monetary system has not been mutually beneficial. This conclusion stands). Now, for this great benefit to be sustainable, it is becoming critical to ensure that the development of some is not built on the regression of others. I fully agree that developed countries can not deny developing countries the means of their development. Symmetrically, developing countries can not base their development on rising debt and rising under-employment in developed countries (with only a tiny minority of developed countries citizens benefiting, ie. those indexed on the profits of large multinational companies headquartered or listed in developed countries). It is in fact my overall conclusion that we should try to find a solution to keep international trade open in a way that is indeed balanced and mutually beneficial so as to resolve the current precarious situation peacefully.
2) The question is really not to choose between buying all these products and having all this debt, on the one hand, and being debt-free but having no or less products available, on the other hand. The question is how to go back to a self-financed economic process where you can buy these products out of current income rather than by going into debt. If what you mean is that all these products are cheaper to the consumer than if they were manufactured in the US, that’s not true for two reasons. First, the lower production cost is almost completely captured by higher corporate profits (see the Iphones you are alluding to, it’s not because it was manufactured by Foxconn at Chinese costs that it came cheap, instead it came at US price and it’s Apple profit that exploded). Second, what does it mean to the US consumer to pay a little less for products if he / she has lost his / her job or if he / she has seen his / her purchasing power decline in real terms for many years or if he / she has to ultimately support the rising costs of benefits to the displaced workers. At the end, the total cost of these “cheaper products” to US society is higher than if products were manufactured in the US, which is why debt is rising. What’s more is that this higher total cost is very inequitably spread: a tiny few are very net beneficiaries (eg. Apple shareholders) and the vast majority is net payers. So, how to go back to a self-funded economic process where you can buy these products out of current income rather than by incurring debt is the key question. In that respect, rebalancing would be great, indeed. But the combination of policies being pursued ensures it is not happening, quite the opposite: the deficit country – the US – has been trying to stimulate demand via credit easing while the surplus country – China – has greatly added to capacity via its debt funded investment program of the past few years. As a result, there has been no rebalancing and no deleveraging. That’s the title of the just released Geneva Reports on the World Economy that Csteven has attached: “Deleveraging? What Deleveraging?”. Similar to the 2002-2007 cycle, the world has in fact continued to releverage during the current cycle. This is the best sign that no rebalancing has started. Capital is not an infinite multiple of production (you only need so many factories, buildings, equipment, infrastructure, universities, transport systems, etc for a given level of production). Of course you can always dilute this finite amount of capital into an infinite amount of monetary units, which is where the confusion comes from. Total Capital is typically ~ 4.5-5x Nominal GDP. Global debt is now ~ 3.4x global GDP. There is precious little equity left in the system. If you look at how quickly wage level converge between developing and developed countries and how quickly total-debt-to-GDP grows, it is very clear that wage convergence will not be achieved in time to save the system. We have to be more pro-active than that, which is my only real conclusion from the analysis. Could it be also what is suggested by the title of Michael Pettis article?
DvD: we agree: neither simple comparative advantage nor freely floating exchange rates describe “the real world.” From which you conclude: “So, ricardo’s . . .same for Friedman”. I conclude something very different. You then conflate all of this with the assertion that the current system is neither mutually beneficial nor optimal. I agree with the list of shortcoming – not optimal, but surely beneficial as you yourself make clear. Then; “. . .not incompatible with the conclusion . . .this conclusion stands.” Here, I respectfully suggest, is where you fly off the rails and become incoherent. In part 2) I again agree with all of the facts and once again come to different conclusions. I see nothing wrong with Apple making profits. Would you have stopped American firms from going to Mexico in the 70s? Before 1980 the US had no trade with China – were both better off? Between 1980-90 Chinese exports were textiles, toys and shoes. Should those jobs have stayed in the US? (same issue Friedman dealt with in the 1960s). Chinese real wage rates are now more than 20% higher than those in Mexico and rising. Don’t want to rattle on; do you have an e mail? Michael is getting annoyed at all this Perplexing noise.
Don’t worry Dan, please continue. I confess having read what PR actually said about Skidelsky I was furious that he would accuse me of hiding from his arguments, and making what seemed like a threat, when I believed those comment to be pure spite and might even have subjected me to legal action — I have no idea how legal responsibility is assigned on a blog. PR has asked me to remove his last comment, and I have. Perhaps tomorrow and over the next few days he and I can find a way to decide which of us is right without the need for either of us to be anonymous.
Hopefully, Michael will forgive us for debating the subject of his article…
1) What do you conclude from the use of models based on assumptions that don’t apply in real life for designing policies that do apply in real life?
I didn’t say the system was not beneficial, i said it was not mutually beneficial. It is not a semantic point. It makes all the difference in the world as it means the system is not sustainable and is in fact dangerously unstable, resting as it is on a fragile pyramid of debt and a social situation in many countries that is akin to seeding the “grapes of wrath”.
There is nothing incoherent at all. What i’m saying is that the system is beneficial to developing countries (both elites and ordinary people) and to elites of developed countries. It is detrimental to ordinary people of developed countries. It is therefore not mutually beneficial.
2) I did not conclude that it is illegitimate for Apple or any other companies to make profits. I have repeatedly said in various comments since “Economic Consequences of Income Inequality” that corporations are simply acting as they should within the institutional set-up decided and implemented by policyholders.
What do you conclude? And what do you propose?
Extremely well said, DvD. Thanks. Flawless.
DvD: thanks for the reply; ok: “not mutually beneficial”. You know that China has benefited enormously; I believe the US has also benefited; more? less? who cares; therefore: mutually beneficial, in spite of the weaknesses you correctly point out. This trade is obviously detrimental to those Americans who have lost their jobs – we can, and should, fix that; but the general benefits far outweigh the specific costs. Technology also destroys jobs – good. Schumpeter’s creative destruction, no more typewriter repair shops.
I propose more, not less, free trade; more domestic help to those negatively impacted; the alternative to trade, I fear, is people shooting at one another.
Thank you again for the article and the perspective. A similar debate is recurring in regards to US military support for a stable global order- does the price tag match the benefit? Can’t we just forget about the rest of the world and re-build our bridges and schools?
I think that one option that is not expressed here is that the policy elite have a lot of affinity for maintaining US reserve currency status, in the same way there is a lot of emotional and intellectual attachment to US military dominance. One policy option, given that the costs are going up while the benefits are declining, is to actively seek to increase the benefits to the US of providing the global service (for entirely selfish reasons) of being both the reserve currency of the world and the global military power.
This “actively seeking to increase the benefits to the US” may look more and more coercive to the rest of the world, and I believe that it is more likely to take place in bi-lateral and uni-lateral agreements and actions, rather than in a specific policy such as taxing the foreign accumulation of US Federal debt, or taxation of other financial goods or services. For example, actions that restrict the availability of petroleum on the global market might hurt other oil-consuming nations, while greatly benefiting the petroleum extraction in the US. OR restricting global gas supplies to natural gas supporters (Europe) might induce the US to export natural gas.
In other words, as the the economic cost of reserve currency status increase, benefits may be extracted by non-economic means.
Shoshen I have tried to distill your argument below:
“Debate US Role in Global Governance: Worth it or Not
US military role in stable global order: Necessary to US or Retrenchment and Rebuilding
Impediment/Difficulty: Elite affinities (reserve currency status, US military dominance)
Solution: Increase benefits to US of providing (services; Reserve currency and Military power)
Impediment/Difficulty: may look coercive to RoW, fragmented, (of bi-lateral agreements and actions; rather than multi-lateral, in the system that has been built and supported)
Policy Action 1: {Taxing foreign accumulation of US (assets)}
Policy Action 2: RESTRICT availability of petroleum on global market
Assumption: hurt other nations, benefit {US extraction}
Policy Action 3: RESTRICT global gas supplies to natural gas supporters (Europe) induce US {NG exports}
Economic cost {reserve currency status} increase, benefits {extracted by non-economic means}
US and Global Governance
Problem: Philosophies obtain to different actors, with different assumptions (whether or not we believe we are using good ole common sense, or not;
Westphalian Territorialist (China),
Liberal Cosmopolitan Redistributionist (Social Democracies to Marxists),
Liberal Cosmopolitan Classicists (Free-Market non-interventionists to Libertarians; whose perspectives in the latter case close in on Marxian assumptions)
Different actors find themselves in different positions; people, producers, consumers, associations of a group or another, Governments, International Institutions, INGO’s, academics, etc…)
Most discussants are neither understanding, nor cognizant that assumptions undergird their perspectives, let alone critical of their assumptions, interrogating their assumptions, they hold, and believe and act upon them as if they were truth, sometimes even glaringly of a folksy common sense, despite the fact that others arrive at different places, with the same understanding, geeze, its common sense, those others are just doing this and that, because of this or that, or the worse yet, “my people have long suffered” notions, which grew of 19th century Age of Nationalism, and plagues the interrogating functions of many to this very day)
So, US discussions, if it wants to refocus its energy, especially, where so many are so “ungrateful”, or misguided by ideologies; if such is accepted as the case, inevitably by very many it won’t, and by others it will, where still others will find such a notion irrelevant and naïve, as they find others to such notions on all sides, irrelevant and naïve.
I am not sure I find the RESTRICTIONS you propose either possible, or resulting in the result you describe (as to Energy flows). I tend to find them of some popular dialogues, that find preferred actions of some parties, hoping such will eventuate, and trying to tie those to others who might be more interested in taming Russian aggressions (5% of the population hoping to convince 10% of the population, that such an occurrence is beneficial to the 10%, where the 10% might have no care otherwise for what the 5% desires).
So many difficulties, in no way insurmountable, lend to complicating relevant US action. Likely alterations will occur when a critical mass of interests coalesce. While DvD was profound in his/her explication of the structure that obtains to the system as it has operated (although I disagree with some of his/her assumptions), movements will be had when the time is ripe.
While DvD dismisses the ability to surmount the forces that obtain, insofar as it is useful, or necessary to surmount these, I suggest there is growing understanding more broadly on these matters, and among a wider constituency that might have existed. The pendulum does swing.
As to US governance, while France, Germany and the UK could not make their minds up as to what to do in Yugoslavia in the 1990’s, Ethiopia and Kenya (and other Au troops) are squashing Al Shabab. While Japan is taking a more proactive defense posture, something they have been implored to do for more than 25 years, they are doing this, thus change is afoot, and no need for American coercion, or some perceived US material benefit for such actions as these to occur. While the Arab spring may have been shocking, and great uncertainty resultant, many are more cognizant that their interests require their action, and not waiting for the US to solve it for them (while many on all sides of the dialogue, criticize whether they know it or not, from long legacies of philosophical literatures that have diffused through our reading material, and thus the opinions others have shared, which have helped to shape our views).
So, I suspect, that more will be done by more nations, as more will be required of them, as structures change to address the imbalances the imbalances that have occurred.
Michael said previously that China might be the last country able to have used the Asian development model. I said it before, as well. This is why those who from truth, discuss widely, without interrogating their assumptions, of their feelings, and moral betters, merely may inevitably cause more dysfunction than they imagine. Still today, countries like India are plagued by the literature that enabled them to think of themselves as victims, rather than actors, inhibiting their development, even their potential to develop as others leaped ahead. Or take Vietnam, with a long history with China, who has always seen their biggest threat coming from China, in history and in the future, imagine that they still think they can merely imitate China, taking half steps, and half reforms, 3 years after the Chinese, while they believe they must increase their relative strength vis a vis the Chinese, which of course will not eventuate of imitation, rather necessitates radical departure.
So, by necessity, reality, clear-sighted and freeing ourselves from the schizophrenia, of post-modernist thought, we will recognize, the clear activities that are portending change is afoot, and of course this is not to be found, merely in the economic (financial) narratives notion of economic (financial) power moving from West to the East, or North to the South. A shame that philosophies and ideologies have been so poorly interrogated by those who discuss from them inevitably, partially and too often detrimentally.
«This “actively seeking to increase the benefits to the US” may look more and more coercive to the rest of the world,»
Again, the benefits of the current international trade system are not to «the US», but to vested interests within the USA and the political factions representing them.
Similarly many vested interests in the rest of the world are very happy about the policies of those USA vested interests; in particular a lot of very poor Chinese (and other third world) workers have been very happy indeed to be given the opportunity to get much better paying jobs working for USA companies by underbidding middle income USA workers.
IIRC in “coastal regions” median wages have risen from $1 per hour to $5 per hour since China joined the WTO, a compound rate of 15% per year over more than a decade. In the USA median hourly wages have gone noticeably down over the same period.
For some interest groups within the various participating countries, including the USA, the current trade system has been and is of great benefit.
The trade system will change when either those interest groups lose power within their countries, and other interest groups try to setup a different system, or when the trade system becomes unsustainable and even the interest groups within each country that benefit from it can no longer maintain it.
There is the theoretical possibility that the vested interests that within within each country benefit from the current system may want to change it because they see its impending end, but this almost never happens; most interests invested in a system double down on it to the bitter end, because their political power would be diminished by its end anyhow. So, if they can get away from the final mess, they reckon they can make more by milking all the benefits they can until they no longer have the power or opportunity to do so, rather than facilitating a transition to new sytem that benefits mostly someone else.
BTW the two paragraphs above are what are missing from the analysis of this blog article bexcause of the mistake of talking of “the US” as if it were a single interest group where everybody decides policies and benefits from them.
For the USA I have the impression that the elites that benefit from the current system of world trade have anyhow decided to asset strip the USA and invest in new growth opportunities elsewhere, just like what were USA-based multinationals have already done.
There is a case that the current political and business elites of China have been in part asset stripping China, if the form of running down its capital of fertile land, mineral resources, and unpolluted areas; they seem acutely aware of it, and from a long distance I have the impression that the business elites accordingly are trying to get away from that mess as fast as they can, while the political elites, who are keenly aware of the consequences of the “mandate of heaven”, think that some asset stripping during fast development is inevitable, and happened to the UK, Europe and the USA when they were developing, and seem to be trying fairly hard to stop it and revert it.
Everyone the New Geneva World Report is out
http://www.voxeu.org/content/deleveraging-what-deleveraging-16th-geneva-report-world-economy
Perplexed, in case you haven’t read, Michael was an author of the 14th, you might be able to come to see more of his opinions there, if reluctant to buy his books.
http://www.voxeu.org/content/after-fall-future-global-cooperation (free pdf)
http://www.amazon.com/Michael-Pettis/e/B001ITW1FY
Lecturer in Economics, Sun Yatsen University A-level Programme and Meivy International College, Guangzhou
Prof. Pettis,
I’ve got a question that’s kinda unrelated, but I think it’s important. If we take a country like Argentina in the late 1800’s vs a country like the US, what were the key factors that turned the US into the top dog while Argentina was left behind. At first, my guess would be that Argentina didn’t ever develop any proper industrial capacity, but this would seem to be patently false because Argentina industrialized at many points during it’s past.
This brings me to my next question (that’s very related): what factors are usually the primary factors in determining where a country would end up. The more and more I think about it, it seems to me that if you were to try and guess who would be the top dog in 1860, Argentina would’ve been a more intelligent guess as the US was mired in Civil War and eventually end up in a depression.
One key (obvious) difference would seem to be the robust nature of the American political system, but in 1860, the advantages would seem much less obvious as the US not only had less states, but was also less than half of its current landmass and was without the Mississippi. Was the answer finance?
Argentina never replaced UK as its major trading partner after the 20s………did not join the allies in WW2, basically has isolated itself from the West.
As George W used to say, if you’re not with us you’re against us. Some nations have made neutrality work – Switzerland, to a lesser extent Uruguay – but Argentina has paid a heavy economic price for deciding to retain an independent foreign policy.
^^Michael Pettis wrote: “….What is more, when large countries, like Japan in the 1980s or China in the 2000s, try to generate very rapid domestic growth by repressing domestic interest rates…”
————————–
In this blog, Michael has provided clear insight into the origins of China’s growing imbalances, and suggests that China must rebalance soon in order to avoid a debt-crisis. Michael’s DEMAND-side research also shows that slower future GDP growth in China will be a necessary consequence of this rebalancing.
But this DEMAND-side research does not shed much light on certain keys questions:
(1) Will unemployment rise as China slows its GDP growth in order to rebalance?
(2) What effect would rebalancing have on Total Factor Productivity (TFP, efficiency) in China?
(3) If it takes China has years of slow-growth for rebalancing, will China end up in eternal stagnation like Japan?
(4) If China slows down to rebalance, will it get caught in the infamous Middle-Income Trap like Latin-America?
To get the answers to these questions, a complementary SUPPLY-side analysis is necessary. Given that a SUPPLY-side analysis would be a tangent to Michael’s DEMAND-side research and would just clutter-up his blog if I posted it here, I have put up the complementary analysis online separately. Here it is:
http://mindinstruments.blogspot.com/2014/10/the-chinese-pendulum.html
This may be of interest to all the regular blog participants here, and ESPECIALLY so to readers who may have an interest in China, Korea, Japan and/or East-Asia in general.
That analysis is gold.
Vinezi,
Thank you very much for the very high quality of your input and your exigence on factual data to back up ideas.
If i may, it would be very useful to further complete the demand and supply side analysis with a balance sheet and debt service analysis.
If you look at how total-debt-to-GDP has evolved in China over the period, it becomes clear that the main rebalancing mechanisms used in 1994-2000 – high real interest rates – is not available nearly to the same extent or perhaps not available at all this time around. At current level of relative debt (~ 210%), it can even be counter-productive in that debt service (principal + interest, remember our conversation on that in “Bad Debts Can’t Simply Be Socialized”?) would absorb too much of income, thereby putting pressure on spending. High real interest rates can also accelerate the popping of the real estate bubble and results in rising household savings, as you have noticed, thereby limiting or negating the desired impact on consumption and overall growth.
Once the balance sheet analysis is included to complement the demand and supply side analysis, the conclusion becomes even less optimistic than your long and difficult rebalancing for the next 12-14 years. The conclusion becomes that the path to rebalancing is so narrow as to be practically closed.
Thank you
^DvD WROTE: “…..If you look at how total-debt-to-GDP has evolved in China over the period, it becomes clear that the main rebalancing mechanisms used in 1994-2000 – high real interest rates – is not available nearly to the same extent…. xx …. At current level of relative debt (~ 210%), it can even be counter-productive in that debt service….. xx ….would absorb too much of income, thereby putting pressure on spending….. ”
———-
What you say is true of the United States, but it is not true of China. I think Michael had explained this in some of his earlier articles:
1) In the US, ordinary households (consumers) are the net-borrowers, whereas foreigners and rich Americans are the net-savers. Therefore, when real interest rates rise in the US, it transfers income from ordinary households (consumers) to foreigners & rich Americans. Naturally, as you rightly point out, this acts to SUPPRESS CONSUMPTION, which in turn suppresses investment & production, leading to a higher unemployment & and slow growth.
2) In China, on the other hand, ordinary households (consumers) are the net-savers, whereas SOE, Local Governments, Real-Estate Developers (producers) are the net-borrowers. When real interest rates are negative or very low, as they usually are during imbalance-formation, it acts as a subsidy to producers and as a tax on consumers, thereby SUPPRESSING CONSUMPTION. Therefore, in China, the rising of real interest rate transfers income from SOE, Local Governments, Real-Estate Developers etc. (producers) to ordinary households (consumers). This acts to SUPPRESS INVESTMENT, but decreases the suppression of consumption because households, being net savers, receive MORE INCOME from the higher real interest rate. As consumption proceeds, future jobs are created in the more labor-intensive consumer-sector rather than in the more capital-intensive producer sectors, and so there is a negligible impact on overall unemployment as well.
The situation in the US is more normal and is seen is most countries. The situation in China is unusual and is a peculiar feature of the countries that practice severe and prolonged financial repression.
~~~~
The fact that China’s overall debt-load (as % of GDP) is HIGHER this time around actually implies that, at the same higher real interest rate, an even GREATER share of income will be transferred from producers (institutional net-borrowers) to consumers (household net-savers). This will only HELP rebalancing (more consumption & less investment) EVEN MORE than it did during the previous episode.
Do you disagree? Let me know you thoughts.
Could be, though sounds like a best case, around which the two clear risk factors are (a) potential impact of lower real estate values caused by higher real interest rates on household wealth and spending / saving behaviour and (b) cost of bad debts – a number of these highly leveraged borrowers won’t make it with higher real interest rates – and on who falls the loss, the most likely candidate being households.
^DvD WROTE: “….and (b) cost of bad debts – a number of these highly leveraged borrowers won’t make it with higher real interest rates – and on who falls the loss, the most likely candidate being households…..”
————
I recall Michael explaining this point earlier. You are correct that a lot of borrowers (SOE, local governments, RE developers, Guanxi Corporations) won’t make it, and will be driven to the brink of default. As Michael explained, China’s central government will take on most of that bad-debt on to its books as ‘bail-out’. This will cause Chinese central government debt to sky-rocket, exactly as happened in Japan during the 1990s when it was rebalancing:
http://alturl.com/d492o
You are correct that the issue of who will pay to service this new central government debt will affect the rebalancing process. If the government once again engages in financial repression and makes households pay for that debt, then rebalancing will become extremely difficult. This is why Michael has been saying that China should think of using SOE-privatization proceeds to service that debt. That way ordinary households will be spared and the pile-up of bad debt will not affect the rebalancing as much, as consumption will proceed well due to the rising share of household income delivered by the increase in the effective (or real) interest rate paid on bank deposits.
Please visit some of Michael’s earlier articles to get his full explanation of these two points.
Wealth transfer via privatizations has to offset not only (b) but also (a). We are talking about a very big transfer in a domestic context. And, internationally, India has to not be too successful at its strategy of becoming itself a “global manufacturing hub” so as not to undermine Chinese wage growth too much. “Simple but not easy”.
I don’t know too much about China’s banking system, but it is very tightly controlled. The financial system is not very advanced and, if I’m correct, the entire system is extremely centralized. I think that has something to do with the diversity, or lack there of, in terms of the Chinese financial system.
Either way, I think both of you need to look at nominal interest rates along with real interest rates. Anytime debts are many multiples of your income, debt servicing costs/income ratios blow up to shifts in interest rates. If I’m $1 million in the hole, making $150 grand, and I’m paying 1%, that’s $10 grand going to just debt servicing costs. If you jacked up interest rates to 10%, my debt servicing costs explode to $100 grand and we’re not even touching the principal. If real interest rates do not shift, the 10% inflation could increase my income by a factor of 50% (a very high and generous assumption to make), but my debt servicing costs/income ratio would explode. Clearly, we can’t just look at real interest rates.
I may be wrong somewhere, so please correct me if I am.
^^Suvy WROTE: “If I’m $1 million in the hole, making $150 grand, and I’m paying 1%, that’s $10 grand going to just debt servicing costs. If you jacked up interest rates to 10%, my debt servicing costs explode to $100 grand and we’re not even touching the principal. If real interest rates do not shift, the 10% inflation………”
——————–
CASE 1) Assume Zero Inflation
A) This year
Debt: 1,000,000$
Asset LTV: 0.5
Asset Price: 2,000,000
Real Interest: 1%
Inflation: 0%
Nominal Interest: 1%
Payment Required: 10,000$
Income: 100,000$
Payment Made: 10,000$
Out-of-pocket Payment/Income: 10%
Debt/Income Ratio: 10
B) Next year
Same as last year. Continues forever, will roll-over
~~~~~~~~~~~~~~~~~
CASE 2) Assume that 10% Inflation sets in
A) Previous year
Debt: 1,000,000$
Asset LTV: 0.5
Asset Price: 2,000,000
Real Interest: 1%
Inflation: 0%
Nominal Interest: 1%
Payment Required: 10,000$
Income: 100,000$
Payment Made: 10,000$
Out-of-pocket Payment/Income: 10%
Debt/Income Ratio: 10
B) This year (after adding 10% inflation)
Debt: 1,000,000$ (last year’s debt) + 100,000$ (borrowed this year against constant LTV) = 1,100,000$
Asset LTV: 0.5 (CONSTANT)
Asset Price: 2,200,000 (increased by rate of inflation)
Real Interest: 1% (CONSTANT)
Inflation: 10% (new inflation)
Nominal Interest: 11%
Payment Required: 110,000$
Income: 110,000$ (increased by rate of inflation)
Payment Made: 11,000$ (kept constant at 10% of income) + 100,000$ (from the above borrowing) = 111,000$
Out-of-pocket Payment/Income: 10% (CONSTANT)
Debt/Income Ratio: 10 (CONSTANT)
C) Next year (add 10% again)
Debt: 1,100,000$ (last year’s debt) + 110,000$ (borrowed this year against constant LTV) = 1,210,000$
Asset LTV: 0.5 (CONSTANT)
Asset Price: 2,420,000 (increased by rate of inflation)
Real Interest: 1% (CONSTANT)
Inflation: 10% (new inflation)
Nominal Interest: 11%
Payment Required: 121,000$
Income: 121,000$ (increased by rate of inflation)
Payment Made: 12,100$ (kept constant at 10% of income) + 110,000$ (from the above borrowing) = 122,100$
Out-of-pocket Payment/Income: 10% (CONSTANT)
Debt/Income Ratio: 10 (CONSTANT)
D) And so on…. If you run this in your spreadsheet, I suspect you will see that CASE (2) with inflation makes it EASIER for the borrower to pay back the original debt.
You’re assuming I have assets of $2 million. If I borrowed to consume or invested it poorly, you’d be much worse off in the second scenario.
In the discussion section of a previous article on this blog (see link below), Michael Pettis WROTE: “……..As for China’s GDP-deflator being so much higher than CPI inflation……. xx …….a substantial portion of the difference can be explained by the fact that financial repression tends to repress CPI inflation by suppressing consumption growth and goosing production growth…..”
http://alturl.com/esznb
——————————-
In light of the fact that the 1994-2000 period seems to have been the FIRST rebalancing period with removal of financial repression and restraining of production growth, we should *LOOK VERY CAREFULLY* at what happened to the patterns of CPI inflation & GDP-deflator in China during that key rebalancing period. Here are the data:
http://alturl.com/wrgf4
EXACTLY as PREDICTED by Michael, the first rebalancing period shows a clear switch-over between the CPI inflation & the GDP deflator:
A) Before 1994, the GDP-deflator is HIGHER than the CPI inflation, implying that financial repression is going on and that investment-led growth is occurring (i.e. imbalance-formation)
B) Between 1994 to 2000, the GDP-deflator is LOWER than the CPI inflation, implying that financial repression has been removed and that consumption-led growth is occurring (i.e. rebalancing)
C) After 2000, the GDP deflator is AGAIN higher than the CPI inflation, implying that financial repression is BACK and that growth has returned to the investment-led type (i.e. back to imbalance-formation once again).
Congratulations to Michael. His theoretical prediction of the relationship between CPI & GDP-deflator and the issue of imbalance-formation and rebalancing in China has been proven to be EXACTLY correct by the historical Chinese data.
No doubt that once China enters into its upcoming (second) rebalancing, the two curves will again trade places and CPI inflation will once gain become higher than the GDP deflation, exactly as it was between 1994-2000 during the first rebalancing. That would be interesting to see as a DOUBLE-confirmation of Michael’s theory of financial-repression and imbalance formation in China.
Michael,
Another excellent post! I would really love to see a follow up, or an extension of this into the cost/benefit to citizens of each nation as well. Ralph Gomory (are you familiar with his work?) , has written about this topic and explains why when corporate goals diverge from national ones nations suffer.
Mr. Pettis.
Although I agree with the overall conclusion of your story I don’t agree with a number things on which the story is based.
– Gaming the sytem ? Yes, Germany, France, China have gamed the system to their own advantage, but the US is aware of how the current monetary system benefits the US as well. The socalled “Exorbitant Privilege” has allowed the US (Bush administration) to wage wars in the Middle East. Yes, the US has gamed the system as well.
– Yes, the US will retrench into isolationism but NOT voluntarily. It will – IMO – be FORCED into that because the US consumer will reduce spending/consumption as well in the next say 5 to 10 years. Pushing the US Current Account Deficit down to zero or even into a Surplus. And to see how that works one has to look at recent economic developments in Spain.
1. Perhaps, Willy2, but I don’t see this as providing much advantage to the US, and certainly no economic advantage. It simply means that the US does not have to pay for foreign adventures by constraining household consumption, the way everyone else must. This makes it politically easier for Washington to choose intervention, but I would argue that Americans would be much better off economically as well as militarily if it were not politically so easy to do so.
The urge to intervene abroad is based on a mind set, perhaps still too common in the US, at least among the political elite, that the benefits of imposing itself as the global cop outweighs the costs, whereas I believe that the costs far outweigh the benefits, and I suspect most Americans agree with me. In fact I would argue that the isolationist impulse in the US is even more likely to be driven by a desire for military disengagement than a desire for for trade disengagement.
I recognize that if the US were credibly to withdraw from its policeman role, total defense spending in the world would rise significantly even as US defense spending dropped, but this wouldn’t be bad for the US. I remember that in the early Obama years among my Asian friends involved in policymaking or advice this was actually a source of enormous private worry. But then so is too any threat of less open US markets.
The strange, I would say irrational, component of the American debate is that the most determined arguments against military disengagement tend to be made by the most nationalistic parts of US policymaking, who also tend to be the most worried about relative American decline. It seems to me however that they have it exactly backwards.
If the US were to become more isolationist today, whether militarily or economically, over the medium to long term it would actually be in a stronger position relatively. Because of the US role, for example, the important players in Asia — the big four of China, India, Japan, and Russia, along with potentially a united Korea, Vietnam, Indonesia, and two or three more — organize themselves mainly as either US allies or as potential regional challengers.
Without the US presence, however, the deep mistrust and historical hostility among them would almost certainly drive them back towards a more “normal” arrangement, in which countries would group themselves primarily in ways that prevent any one country from establishing a clear lead over its neighbors. Add to this the very destabilizing demographic changes taking place, so that three of the big four are in substantial demographic decline, while one of them, probably the weakest for now, is on a demographic rise, while several of the “secondary” major powers, like Vietnam, Indonesia, and possible a united Korea, are also on a demographic rise, and it is hard to see how any stable arrangement of power would emerge. In that case the US, with a much smaller presence, would actually be able to influence events as much or more than ever. Britain was the most powerful country in the world for a very long time, after all, when it simply balanced regional rivalries in continental Europe, even though at least three or four European countries had larger populations and there were many times when the economies of Germany and France were roughly equal in size.
At any rate I would argue that your military point is really just one of the components of isolationism, and not a counter-argument against trade isolation. Supporters of one tend to support the other, and they have many of the same dynamics: If the US were to withdraw militarily (withdraw easy access to its domestic demand), global military spending would rise (global growth would drop) but US military spending would drop (US growth would rise). Some people argue that the US actually derives tremendous economic advantages from its role as the global cop because this allows it to protect its access to necessary raw materials, but I a very skeptical of this argument and anyway the only foreign commodity whose access the US would arguably need to protect might be oil/gas, and people who know far more about oil/gas than I do seem pretty convinced that within a decade or two the US will actually be one of the world’s largest exporters, and no longer an importer.
2. I don’t think we necessarily disagree. My argument is that either the US chooses voluntarily to disengage from its current role in the global trade regime, or it will be forced to do so, perhaps caused by a forcible reduction of consumption as in Spain (although I do not see this as very likely) or caused by constraints imposed by rising debt, which at some point must mean rising taxes (which I think is more likely).
Either way, the US choice is really limited to its ability to choose the timing: disengage now, from a position of strength, or disengage later, probably from a much weaker position. I think it is very hard to make the case that disengaging later will be less costly than disengaging now (and this is also true of the military argument, I think). Isolationism seems to me so obviously rational.
This is spot on. I don’t think that the US should take in a cold and clear cut balance of power strategy and I do think American foreign policy should definitely be based on moral principles (we should side with countries that share our same values and views of a society), but nation-building is plain stupid and policing the world is inherently unsustainable.
I don’t think “isolationism” is the right word either. Even Rand Paul isn’t asking for isolationism. The US would still be trading with people and using diplomacy, but this ridiculous war machine would stop.
The US should allow ISIS to proceed? Ignore Al Qaeda? Ignore Putin?
Ignore Putin? The only reason the US is involved in Ukraine is to undermine Putin.
Ignore ISIS? ISIS came about because the US armed the Syrian rebels to overthrow Assad, which was also being done in an effort to undermine Putin and to control supply lines. Hell, it was the allies of the US over the past 30-40 years that provided the initial funding for ISIS.
For the record, I think we should wipe out ISIS as soon as possible. We should have a moralist foreign policy.
As for Al-Qaeda and, to a lesser extent, ISIS along with other groups of that kind can be viewed as corporations. They work for whoever’s funding them. To wipe out Al-Qaeda requires a different type of thinking.
You DO NOT wipe out terrorism by killing terrorists. You strengthen their ideology by providing a place where people are drawn to the ideology.
«the US choice is really limited to»
«I don’t think that the US should take in»
Perhaps repetition eventually helps, as the Romans said…
Talking about the policies of “the US” without talking about the distributional impact within it, as if the impact, the benefits or costs of those policies were uniformly distributed within it, or as if their impact on the dominant political and economic factions controlling the government of the USA were not of the huge interest to those factions, is quite ridiculous.
Because the policy of “the US” is not decided by the enlightened moral or utilitarian calculus of all those wise and impartial philopher-kings in Congress or the administration, it is decided by internal politics, and the internal politics of international commerce of the USA are far from irrelevant.
I am merely trying to refine what Michael Pettis has written:
«policymakers tend to prioritize the domestic needs of the economy»
into the far more realistic version that avoids the weasel-words “the economy” (or “the US”) and reads:
“policmarkers tend to prioritize the domestic needs of [their constituents, narrowly defined as a rule as their sponsors, and sometimes their voters, at the expense of everybody else]”
Without making it explicit that trade (among others) policy is politics and designed not in the interests of “the economy” but of the constituencies of the policymakers it is usually impossible to understand the rationales behind those policies and their possible future evolution.
I would thus like to remind readers here of Simon Johnson’s lucid exposition that policies benefiting the constituents of policymakers are often followed to their bitter (for everybody else!) end:
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/
«Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.»
Not just “emerging market governments”…
«But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside. »
Yes, Suvy, for some reason any discussion of limiting the ability of foreign central banks to amass dollars inevitably results in someone asking incredulously if you really are stupid enough to think the US would be better off without any international trade.
Disengagement does not mean becoming North Korea. It means doing what countries like Germany, Japan, France, Thailand, Brazil and so on are able to do: trade with the world and intervene when you can help, but without assuming full responsibility for every adjustment. The US, Russia and now China have never been willing to give the UN more responsibility, but perhaps the UN and regional groupings are better fora for resolving certain economic and politics problems. In 1920 his advisors begged Wilson to think a little bit more about US inflation and a little bit less about Danzig. But he didn’t, and in the end inflation raged terribly and Danzig degenerated anyway into the problem it became.
The US attempted isolationism after WWI; after WWll most political leaders decided, I think correctly, that isolationism had been a mistake – lets call the alternative constructive engagement. Bretton Woods, Marshall Plan, NATO, SEATO, UN etc. and the global military requirements of the Cold War. Post cold war the US certainly could “withdraw from its policeman role.” Without a US presence in the Pacific (or the Middle East) doubtless the “deep mistrust and historical hostility” would drive them “back towards normal”; which is the problem the US is now attempting to avoid; i.e. Japan and S.Korea would immediately develop nuclear weapons. (and Vietnam? Indonesia? Singapore?. . .) “defense spending in the world would rise significantly”. Certainly good for US exports. “. . .it is hard to see how any stable arrangement of power would emerge.” Precisely. But that seems to be what you are advocating. From this new position of isolation “the US. . .would be able to influence events.” But the US now influences events: restrains the Japanese, re-assure the VN, warn the Chinese and clobber ISIS.
Finally, there is a third choice: not disengage at all. Why will the US be less able to engage in the future? Isolation seems to me so obviously irrational.
I am glad you brought up the post WW1 period, because it is after reading Adam Tooze’s extraordinary “The Deluge” (I cannot recommend it enough) that I became more certain than ever that the US must withdraw. The horrible trade, economic and political instability of the 1920s and 1930s was not caused by the refusal of the US to play a hegemonic role. It couldn’t resolve even a small portion of the problems unleashed by the war. As Tooze painstakingly points out, it was because WW1 undermined nearly the entire edifice of institutions that underpinned political and economic systems around the world (one great strengths of his book is that he shows the WW1 was not just a European affair).
My reading of the book is that when changes occur, either they evolve gradually, in which case stability can be maintained, or they are forced suddenly upon the world, in which case it may take decades of destruction and even war before a new stability emerges. If you think the US faces the option of disengaging now, or remain hegemon forever, perhaps we can discuss the pros and cons. But if you believe, as I do, that the option the US faces is really one of timing and manner — disengage now, when it is in an incredibly strong political and economic position, or disengage in the future when either it is forced to disengage, or when political sentiment turns powerfully isolationist as the costs of engagement rise. For me the answer is clearly: disengage now.
I am not one of those who believe, by the way, in the end of US primacy and the rise of Asia. As I said in my last entry, although I don’t doubt Asia’s share of global GDP will rise, I think its political rise will not match its economic rise. I expect the US to be the dominant power for many more decades, but I do think that every time it draws a new line in the sand and creates a new vital interest in an area that does not affect the lives of Americans, the end of US dominance draws a little closer and the likelihood of a disruptive change becomes greater..
– US’ “Exorbitant privilege” already has deteriorated much more than the CA Deficit has shrunk. One has to look at the US budget deficit as well. In 2006 the CAD was at ~ 880 billion with a BD of “only” ~ $ 220 billion. that meant that foreigners bought ALL US T-bonds issued & on top of that a significant amount of other USD denominated securities.
In 2013 the CAD was ~ $ 400 billion with a BD of ~ $ 700 billion. That meant that foreigners could limit their purchases to buying T-bonds. But then the US government needed to sell the remaining (700 – 400 =) 300 billions worth of T-bonds to US investors. So, assuming all the figures above are correct, the US experienced a swing in demand from + 600 billion to – 300 billion, a total swing/change of $ 900 billion.
http://www.foreignaffairs.com/articles/142114/alan-greenspan/golden-rule
interesting article by Alan Greenspan
A few years back when an earlier bout of PBoC gold buying set off a frenzy of conspiracies about secret Chinese aims, some economist pointed out that the gold share of PBoC reserves is much lower than that for most other central banks, so Chinese gold purchases were probably merely an attempt to achieve the same amount of diversification as other central banks. According to Greenspan “At the end of 2013, China was the world’s fifth-largest sovereign holder of gold, behind only the United States (261 million ounces), Germany (109 million ounces), Italy (79 million ounces), and France (78 million ounces).” because they have by far the world’s largest hoard of reserves, the fact that they only rank five in gold suggests they are still way underinvested. We have to avoid the temptation of reading enormous meaning into China’s every move.
I don’t think we are likely to return to gold-backed currencies, but I also don’t think it is crazy to recognize that gold backing did impose certain useful constraints on monetary policy that would have made current imbalances impossible. It would be helpful to think about those constraints and how e can replicate them (Bancor, anyone?).
You can think of a fixed exchange rate regime as a very crude version of a level targeting regime. It works to prevent a debt deflation by reflating the price level. If prices start to fall too low relative to the currency, the price level gets reflated. This is a very important advantage, but an often overlooked advantage, of a fixed exchange rate regime.
The only problem occurs when everyone in the world wants to hoard gold at the exact same time, which sends the worldwide price of gold (and thus the price of the currency) skyrocketing. This is what happened in the Great Depression.
The U.S. is doing things such as fining banks billions of dollars for transactions that they don’t like, that didn’t even occur in the American financial system, such as in the case of BNP Paribas. All this does is scream to the world that they need a new financial system. It’s going to come because it’s what the entire world, with the exception of the U.S., wants.
Dear Professor,
I’m a recent reader of your blog, I’m not an economist and I’ m a citizen of a Southern European country.
How do you see the TTIP negotiations ,and a possible final agreement, in the light of the dilemma you depict in this article ?
On France “gaming the system” in the 1960’s.
It would be historically more accurate to say that France clearly recognised the inherently unbalanced nature of the world monetary system based on the $-exchange-standard. You just have to read General de Gaulle – then French President – press conference of 4th of February 1965. Some parts are remarkably close to your most recent article on the “exorbitant burden” of the $. De Gaulle’s speech is reproduced p. 70-74 in Jacques Rueff’s “The monetary sin of the West” (http://library.mises.org/books/Jacques%20Rueff/The%20Monetary%20Sin%20of%20the%20West.pdf).
At the September 1964 IMF meeting in Tokyo, France evoked the idea to change the world monetary system in the direction suggested by Robert Triffin in the US and Jacques Rueff in France. This proposal was vehemently critized by then US Treasury Secretary Douglas Dillon.
It’s only after its proposal for monetary reform was rejected and clearly seeing the writing on the wall – the end of gold convertibility of official $ balances, which materialized in 1971 – that France began asking for conversion of its official $ reserves into gold. In 1965, France accounted for half of US gold outflows.
Far from gaming the system, France was rather proposing to change it in a way that could prevent the appearance and development of unhealthy debt-funded trade imbalances. Exactly as you are doing today, 50 years later. The only difference being that France proposed to revalue gold and to return to a true gold standard, different from the gold-exchange standard whereas your proposal is neutral on gold.
It seems “plus ça change, plus c’est la même chose”.
Pettis! this is your chance to explain tot the Chinenese, that they were in fact present!
http://mobile.nytimes.com/2014/10/10/world/asia/chinas-plan-for-regional-development-bank-runs-into-us-opposition.html
“China is more suspicious of the existing international institutions because China feels it was not one of the founders,” he said. “China feels a lack of ownership.”
just give them a link to this post and debate in comments.
I am not sure if your point is that China was not invited to participate in the Bretton Woods conference (apparently some of my readers also believe that the USSR was not invited, strangely enough), or if you are arguing that every country that participated in the conference was able fully to determine the final outcome, but either point is incorrect. Part of your confusion might be in that the “China” that participated in the conference and the “China” discussed in the New York Times article are generally not considered to be the same political entities.
Otherwise if you look at the participant list, scan the minutes, or read the final agreement, you will see that China did indeed participate. When the Nationalist government was later overthrown by the CPC, mainland China did not inherit the position (it went to Taiwan) and probably would not have accepted anyway. You will also see from the minutes that most if not all of the allies participated in Bretton Woods but every disagreement on an issue considered important by the US or England was resolved in favor of the US or of England, and rarely in favor of the less powerful participants.
At any rate, you should not so quickly assume that China’s refusal to participate to American or European satisfaction in the international institutions that emerged out of Bretton Woods shows that China is being either irrational or obstreperous. If Beijing believes that the Bretton Woods institutions are not designed to represent China’s interests, and may even constrain them, and that it should redesign a system more in line with its national interests, I think it is hard to disagree. China and a number of other developing countries are underrepresented in global institutions today.
By the way the US did not join the League of Nations or the BIS (or any number of international conferences) for exactly the same reason. It felt that these institutions were designed in part to constrain the US and to protect a European colonial system in which it had little interest. The fact that the US did not join the LoN may or may not have been a bad thing — the consensus is that it was a huge mistake, but after reading Tooze’s book I am not sure it would have made much of a difference — but even though Washington helped design the LoN, it was not wrong in its suspicions that the European powers were far from agreeing with the US position on colonies, economic restructuring, international debt, the need to undermine Germany, the relative size of various navies, or any of a number of other important issues. Europe was indeed suspicious of US intentions, and vice versa.
And its not just the US. Japan joined the LoN only because it believed that joining would grant it the status it correctly felt it deserved, but they never did get that status, and when the LoN refused to ratify a Japanese demand formally to acknowledge that all races were to be considered as fully equal, Japan withdrew from the League (of course the fact that the LoN would have constrained Japan’s plans in China was a strong, although less openly acknowledged, factor). Tokyo believed that the main Asian objective of the League was to restrain Japan’s rise, and they were probably not far wrong.
What do you mean when you say that CPC was not there? So who represented China at Bretton Woods? Who was in the actual delegation?
HOw can we mortals access the minutes, or participation lists?
thanks in advance
In international law practice works on basic important distinction between signing/ratification/adherence. I noticed in the debate above in some of the comments on this post, that readers and perhaps yourself do not make the distinction, i.e. the USSR did sign Bretton Woods, but it did not ratify it (to answer some confusion). For international law purposes a signature is viewed as ratification, while domestically, case based. Adherence is the practice of applying a treaty either in spirit or in letter, which is interpreted according to case law.
Re:versailles.
Wilson signed personally. Senate ratification was irrelevant to US diplomacy, which isolationists sought to constrain, but which was itself constrained by international practice, indicating that US accepted the Treaty in practice. Treaty of Versailles needed no approval in England, France, or Italy, i.e. the signatures of Wilson and Orlando, Clemeanceau, and George had equal backing. Versailles remained a legal reference of post-war American diplomacy. US wrote significant portions of the Treaty, recognised every diplomatic outcome of the treaty, in the form of states which resulted from it. The struggle within America in no way undermined Wilson’s signature and recognition of Treaties clauses except those related to the LoN.
Re:League of Nations
This was Wilson’s brainchild. US very active in some years, less in others, used as forum, and nearly full participation in many committees. US non-membership was trivial. Other non-members included USSR, actively used the forum.
Re: China.
In 1973 PRC was reconigsed as legitimate representative of “China” hence legally obligated itself to all treaties negotiated on behalf of China by the KMT. The CPC recognised the KMT negotiations on behalf of China already 1944, and it was only during the Civil War (1946), that Zhou Enli withdrew this recognition, on grounds similar to that of Poland used a few months later. Modern China has no claim that it was not present during the formulation of Bretton Woods institutions.
International institutions are not open-ended in their membership. You cannot join only for the benefits and leave when the costs are tallied. A signature has a meaning. Kissinger granting the mainland the Security Seat, had implications, which China has to assume. Otherwise it looks like a spoiled brat complaining about its obligations. Treaties are by design crafted to avoid being gamed, i.e. a signature implies domestic obligations. If China cannot assume its role in Bretton Woods, then it should not be sitting in the Security Council.
DVD thank you for very enlightening comment. The implication is that US refused to do good on its Bretton Woods obligations passing the costs to others. America undermined the system out of its own self-interest. It’s always difficult to distinguish cause and effect in foreign affairs. In what way can it do the same today, isn’t clear.
Yes, the US renegated on its Bretton Woods obligations in 1971 and thus undermined the system. But, i wouldn’t say they did it out of self-interest, rather by taking the easy road. In doing so, they in fact hurt their overall long term interest and placed themselves under excessive burden: in 1965, the US had total debt obligations of 143% of nominal GDP, now it’s 346% ; under-employment was 6.5% of working age population in 1965, now it’s 13% at cycle peak. So Michael Pettis is right, it is really an exorbitant burden for the US at the aggregate level, even though one has to look in much more details how the burden and the benefits are shared within the US and how the incentive structure of political decision makers is aligned in that respect.
What’s interesting in this De Gaulle statement is that it shows the debate that Michael Pettis is now leading was already taking place 50 years ago. It is not therefore true that “we are starting to see why it’s really the exorbitant burden” today. It was starting to show 50 years ago and was in fact discussed at heads of State level at the time. This debate was much more advanced in the 1960’s than today where it has not even officially started. Nixon’s (temporary) decision in 1971 was the US unilateral conclusion of this debate. But of course that decision changed nothing at all – just bought more time, the usual expedient – and the system has indeed become more and more burdensome for the US over time.
Saying that “we are just starting to see why it’s really the exorbitant privilege” today is simply being practical. If you want to reopen the discussion, you don’t start by saying to the other party that they are incompetent and / or conflicted, even if that’s the truth. Making it look like a new perspective is tactically much more constructive. But even this extremely diplomatic approach is not at all sure to be successful as the weight of pre-conceived ideas remain fantastically heavy despite their very visible failure. We’ll see. Worth a try for sure.
I am not sure I see a connection between what De Gaulle may have said (what did he say?) and what Pettis is saying.
it seems that Pettis’ argument is that that time immemorial we’ve spoken of the exorbitant priviledge, and now its time to speak of exorbitant costs. I suppose I agree on the first point. There have been few if any discussions of costs, and 99% of the time we’ve heard only of the priviledge. How this relates to the 1971 argument I dont know. It seems that Bretton Woods was about assuring gold convertibility in counter-party fashion. Was it only the dollar which was peged at a fixed rate to gold, or every currency? It certainly makes no sense to only peg one currency. However, I dont see how this would hvae been framed in the same terms as “exorbitant priviledge” and I fail to see the connection between the collapse of Bretton Woods I, and the discussion about the exorbintant priviledge/burden today. Bretton Woods II, or III based on whose doing the counting, is in my mind about a free floating exchange system, where a number of currencies are especially prominent, with the US dollar especially so.
Beyond this point, I fail to understand the basics of what is being stated either by Mr. Pettis, or by yourself DVD. I understood your initial point, in which you seem to have enriched Mr. Pettis’ premise about French conduct in bringing down the BWI system, I dont undersatnd the second point, the link bewteen the exorbitant burden and the BWI collapse, because I reading Mr. Pettis article I didn’t trully grasp what was the point he was making (refering to both this article, and the latest). It seems he is specifically focused on Federal bonds, and the suggestion that America can limit access to their purchase. The rest of what he says, I fail to understand. Links between balances, China, Spain, and someone’s priviledges and burdens, is beyond this simple little reader.
blame germany!
http://www.economonitor.com/edwardhugh/2014/10/14/eurocrisis-round-two-blame-the-germans-edition/
not true about wage repression.
If you settle trade in physical gold and allow the price of that gold to float in each nation’s currency, Triffin’s dilemma is solved.
This IMO is what china, Russia et al are doing with physical gold buying.
Couldn’t the US just tax foreign-held US assets as a way to be compensated for providing global public goods? To prevent unintended side effects, it could limit taxation to real estate and government bonds, and/or to assets held by nationals of countries with closed or restricted capital accounts (China, Russia, etc.). I can’t help but think that London’s new mansion tax (>2M pounds) is in part an attempt to stick it to the sheiks and Russian mobsters buying mansions there.
I don’t agree with a lot said, nor believe triffin relevant in a fiat regime, but I won’t get into much of that. I’ve thrown enough things at people when arguments begin assuming countries can attract investment by raising their interest rates. (well from anyone other than dummies, and I have not found as much dumb money as people like to suggest there is).
What I don’t understand is how the US will determine it wants to isolate itself. Aren’t I am the one who wants my fruits from Chile in mid-winter, my olive oil from Spain, my cars from Germany, my scotch from Scotland, and my women from Brazil?