Economists, though, worry that the good times are built on shaky foundations and wonder when they will end. "We're in a highly unstable equilibrium," says Martin Barnes, managing editor of The Bank Credit Analyst. "There are so many things that are three standards of deviation from normal."cheers!
What worries economists is that most of the savings is going to one country. According to Harvard University's Rogoff, the U.S. alone is soaking up as much as three-quarters of the excess global supply of savings. The result: a current-account deficit totaling $668 billion last year, or 5.7% of the country's GDP. And a further rise this year looks likely. Economists fret that at some point foreign investors and governments may tire of putting big sums into the U.S., triggering a steep decline of the dollar and a jump in U.S. interest rates.
So far, of course, that hasn't happened. Indeed, the dollar has risen 7% against a basket of major currencies this year, in part aided by Europe's woes...
It's not only the sheer size of the U.S. borrowing that could be a problem. It's also what the money is being used for. Unlike in the late 1990s, when the U.S. was tapping foreigners to help finance productivity-enhancing investment, much of today's borrowing goes to pay for the federal budget deficit and to fund a surge in house prices that many experts believe can't last...
Policymakers find themselves coping with a peculiar situation. The usual signals -- inflation and unemployment -- are in good shape, especially in the U.S. Nevertheless, imbalances spawned by low rates -- from the global housing boom to the swelling trade deficit in the U.S. -- may have left the markets and the economy more exposed to a monetary mistake by the Fed. "A concern is that...a policy misstep could cause a quick" shift in investor attitudes, potentially disrupting financial markets and the economy, Fed Vice-Chairman Roger W. Ferguson Jr. said in a speech in Berlin on May 27.
The savings surge also means that governments are not being penalized for running budget deficits. In the not-so-distant 1990s, traders -- the so-called "bond vigilantes" -- would drive up interest rates when they saw deficits getting out of control. Today, that's not happening. Such easy money could be helpful, if government spending is going for productive long-term investments such as infrastructure, education, and research and development. The danger, though, is that cheap capital will give politicians the opportunity to waste the money on items that don't boost long-term growth.
If low rates eventually pave the way for productive investment by governments and businesses, that would benefit investors. But until this happens, they must choose between accepting lower returns or taking on added risk. "In a balanced portfolio, you should expect an average rate of return of about 5%," says Barnes of The Bank Credit Analyst.
In search of better returns, investors have piled into a host of risky assets, from high-yield bonds to credit derivatives to emerging-market debt. If global growth slows, such indiscriminate buying could backfire. For example, the credit quality of newly issued junk bonds has declined sharply, according to Merrill Lynch & Co. A record 34% of new issue volume last year were by companies whose debt received the lowest ratings handed out by the ratings agencies, well above the previous record of 29.4% set in 2000. "The deterioration in credit quality in 2003 and 2004 could well show up in increased defaults in 2006 and 2007," says Martin Fridson, head of FridsonVision, a bond research service.
If global savings is channeled in the right ways, it can be a great boon for the world economy, enabling the sort of investment and risk-taking that fuel growth. But there's far too much evidence right now that low rates are encouraging behavior that could cause trouble. Hold on to your hats.
For the American government, the free ride may be coming to an end. It has run irresponsible fiscal policies, knowing that foreign governments and people would provide it with unlimited credit. But that credit comes at a price. When China holds huge reserves of dollars, it also holds the power to damage the American economy. To do so would certainly hurt China as much or more than it would America, but surely it would be better if U.S. policy were less vulnerable to such possibilities. Fiscal responsibility at home means greater freedom of action abroad.what might that look like? well...
In foreign policy, Washington will face two possibilities. The first is that China will push its weight around, anger its neighbors and frighten the world. In this case, there will be a natural balancing process by which Russia, Japan, India and the United States will come together to limit China's emerging power. But what if China is able to adhere to its asymmetrical strategy? What if it gradually expands its economic ties, acts calmly and moderately, and slowly enlarges its sphere of influence, hoping to wear out America's patience and endurance?
The United States will then have to respond in kind, also working quietly and carefully, also adopting a calibrated and nuanced policy for the long run. This is hardly beyond its capacity. America has been far more patient than most recognize. It pursued the containment of the Soviet Union for almost 50 years. American troops are still on the banks of the Rhine, along the DMZ in Korea and in Okinawa.
A world war is highly unlikely. Nuclear deterrence, economic interdependence, globalization all mitigate against it. But beneath this calm, there is probably going to be a soft war, a quiet competition for power and influence across the globe. America and China will be friends one day, rivals another, cooperate in one area, compete in another. Welcome to the 21st century.
At present the U.S. net foreign asset position stands at 26 percent of GDP, the result of cumulating successive current account deficits. That means non-U.S. residents own U.S. assets like bonds, equity, bricks and mortar to the tune of a quarter of annual GDP. Usually the more a country owes abroad the more likely it requires a low rate of foreign exchange or high rate of return on capital. Let’s make two assumptions and then ask what happens to the U.S. net foreign asset position. First, let’s assume the Bretton Woods II system stays in place for another three-to-five years or so, not an unrealistic assumption given many Asian countries’ priorities of urbanization and export-led growth. At PIMCO we’re not only treating that as an assumption, that’s one of our secular forecasts. Second, let’s assume the world economy continues to grow as it did on average between 2000 and 2004. If those assumptions hold, then as John Llewellyn at Lehman Brothers shows in a forthcoming paper, the U.S. net foreign asset position would decline to approximately 70 percent of GDP by the end of this decade...a secular decline in the dollar tho (not a dollar crash) implies steady losses as the value of dollar-denominated (financial) assets held abroad erode. to counteract this, i think you'll see a growing movement to diversify, and if not out of the dollar per se, then into 'hard' assets, or at least higher yielding or strategic ones...
For the U.S., the consequence of a declining net foreign asset position with a relatively tame FED implies the dollar will remain under pressure over the secular horizon. The dollar’s strength today will likely prove temporary. If the dollar does not depreciate in the face of a declining U.S. net foreign asset position, the empirical history of current account adjustments suggests that would be a statistical aberration.
US treasury secretary John Snow reckons a revaluation of the Chinese renminbi will come next month. He has been wrong before. Is he right this time?like i wonder what might happen if a chinese co. were to emerge as a bidder for BNFL's westinghouse unit? :D
On some counts, a move would be timely.
China's money supply last month grew 15.7 per cent, its fastest in a year and above the 15 per cent target set last July. Loan growth also accelerated, notwithstanding administrative efforts to temper overheating by clamping down on lending. There is pressure from mounting foreign exchange reserves too. These now stand at $711bn and are set to reach $1,000bn next year. All this argues in favour of the greater monetary control a flexible currency regime would provide.
Ultimately, however, Beijing can afford to remain intransigent. Inflation is muted, and manufacturing overcapacity acts as a useful depressant. For now, sterilising the money supply is affordable: the central bank's weekly bill issues are around half the levels of April and May. That also reflects slowing inflows of speculative money. (Counterintuitively, this is one of China's own prerequisites for a revaluation.)
All in all, banking on an imminent currency move is still brave. In any case, a revaluation of 5-10 per cent would barely dent the US trade deficit; nor would it revitalise American sunset industries. Beijing's appetite for US Treasuries could diminish. And it would become more tempting to spend foreign reserves, worth less in renminbi terms, on US acquisitions not a prospect America's politicians are likely to relish.
McCulley: But we don’t worry about the base case, we worry about the risk case scenario, which is that Bretton Woods II ends sooner rather than later. At this year’s forum, we concluded that many of the risks are tilted toward an early end to Bretton Woods II, and that if Bretton Woods II does come to an early end, it would tend to exert a deflationary bias to the world rather than an inflationary bias...cheers!
The number one risk to Bretton Woods II is protectionism, notably in the United States... Risk number two is that Bretton Woods II endemically has bubbles associated with it... Risk number three is commodity prices... A fourth concern is geopolitical risk, because you have a system where the poor are lending to the rich... And the fifth risk is that Euroland is the odd man out in this global monetary arrangement...
Powers: Another risk in addition to the ones that Paul has already outlined is how much it costs China, Japan and other countries to inherit U.S. monetary policy through the Bretton Woods II arrangement. Right now, the cost for Japan and China is nothing. In fact, it’s profitable. As Japan and China soak up the dollars that are flowing into their region by issuing domestic debt, the interest rates Japan and China are paying on domestic debt are far below the interest they are receiving on U.S. fixed income. But South Korea is right at the cusp of this arrangement starting to impose a cost on them and that is one of the reasons that South Korea appears to be front and center in considering diverisification away from U.S. fixed income.
There is no free market in passports. Indeed, the very definition of the sovereignty of nations includes the right – at the point of a gun – to define who is and isn’t a citizen: entitled to vote; subject to laws of the land, including the obligation to pay taxes and submit to conscription; and eligible for the social safety net funded by fellow citizens...now, i find this fascinating because, even tho there may be "no free and open global market in citizenship," that does not mean people do not vote with their feet, so to speak, migrate anyway and, perhaps most important, find accommodation wherever they may end up :D these movements not only blur nationalisms, regionalisms and identity itself (see discussion on sikhism in toronto, melbourne and india):
In turn, sovereign governments – especially democratically-elected governments, but also governments with democratic tendencies – must be responsive to their citizens’ needs and wants, not global citizens’ needs and wants. Thus, sovereign countries should and do have the ability to print their currencies in sufficient volume to keep them undervalued on purchasing power parity terms. It’s called mercantilism. And all developing countries practice it, to some degree, so as to bootstrap themselves to prosperity by exporting goods to developed countries, while importing their superior know how, institutions and political stability.
This is neither good nor bad, just the way it is: developing countries acting in their own perceived best interest, undervaluing their currencies through the power of sovereign-owned printing presses for money. Developed countries do the same thing, just in a different way, overvaluing their passports by restricting their production via sovereign-owned printing presses...
But until the day in which there is free trade in developed countries’ passports (like with New York City taxi medallions!), globalization will be a comparative advantage game tilted to the advantage of the haves relative to the have-nots.
Most accounts of America's arguments about itself concentrate on divisions within the country: red v blue states, religious v secular voters, the 50-50 nation. This survey takes a different route. It looks at things that Americans have always had in common: mobility (the willingness to up sticks and move); immigration; equality of opportunity; and a love of clubs and voluntary associations (“nothing, in my view, deserves more attention,” wrote Alexis de Tocqueville).writ large, the global centrifuge may yet spit out stephenson's 'burbclaves & phyles' :D
Ideally, all these things work together to create an open, forward-looking society. The restless and ambitious move to the frontier, setting up new industries and opening up new avenues to wealth. More opportunities attract more people, and greater equality of opportunity adds to the supply of wealth-seekers, so social and geographic mobility reinforce one another. A dynamic country attracts immigrants who refresh its stock of ambition. Voluntary associations flourish in the midst of all this activity, making for a stable as well as a dynamic country.
Yet this survey will argue that the cycle no longer works as it did. Some component parts—notably geographical mobility and immigration—continue to whirr merrily. Voluntary associations are reviving, though only after a long period of decline. But disturbingly, there are signs that social mobility is dwindling. The political system, for its part, is adding to social rigidities instead of counteracting them.
The problem is not that America has become less dynamic. Its society continues to grow and change as fast as ever. But traditionally the country has been seen as a melting pot, which after much stirring produces greater integration. Now some of that activity may be causing separation. Has America become a centrifuge?
China had all of 20 ICBMs that can reach the US
Of major importance to the ultimate success of the euro, in terms of the oil pricing, will be if Europe's two major oil producers — the United Kingdom and Norway join the single currency. Naturally, the future integration of these two countries into the Euro-zone and Europe will be important considering they are the region’s two major oil producers in the North Sea, which is home to the international crude oil benchmark, Brent. This might create a momentum to shift the oil pricing system to euros. However, from today’s perspective, even after the UK joins the single currency, there would seem to be little incentive for London’s International Petroleum Exchange (IPE), where Brent is traded, to switch its Brent crude oil and gas oil contracts to euros, since both are traded internationally and the dollar is at the centre of a complex global oil trading and hedging system.reserve diversification is, i think, a different matter! but i agree that the expansion of the eurozone, and the widening and deepening of its bond markets (securitised debt :) has been a major hallmark of its success (despite setbacks!) that can and in many respects already has granted the euro "prestige and a track record comparable to other strong currencies" :D
China (unlike the US) has an official "no first use" policy for nuclear weapons - previously, it has stated it will only use them in retaliation against nuclear attack. However, Zhu Chenghu's hawkish remarks may constitute some signalling to the US military that the Chinese position is changing. Zhu said he had previously made similar remarks to Adm. Blair, the former commander in chief of the United States Pacific Command. We'll have to see how far Beijing distances itself from Zhu's remarks.(!!)
Estimates of the size of China's ICBM arsenal have not changed in 20 years. Reports usually state that they have only 10-20 liquid-fueled missiles capable of reaching the US (albeit now MIRVed with miniaturized warheads similar to the W88 - how similar is a controversial question). However, China's capacity for production of ICBMs and warheads (one can extrapolate from their satellite launch and nuclear programs) suggests that the old estimates are drastically low. Even Israel is estimated to have hundreds of warheads in its arsenal.
The General's comments may have been carefully calculated by the Chinese military in order to force US planners to consider the possibility of a nuclear strike on a US carrier group in the area (or even a strike on US bases in Okinawa or Guam) in the event of a conflict over Taiwan. Zhu sounds bloodthirsty, until we recall that MacArthur wanted to use nuclear weapons against China during the Korean war (this nuclear "blackmail" was an important impetus to Mao to push for a Chinese atomic bomb, although he never admitted it publicly) and that the French wanted the US to save their garrison at Dien Bien Phu (Vietnam) with nuclear bombs.
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looked at the links, very flowery french BS.
the 'slide to disorder' eh?
posted by jimjam at 8:31 PM on July 15, 2005