House of Paine

to peg or not to peg

here's a few comment panels 
at the good brads site 

his post 
 casts a recognizable shadow in them

so i 'll just  jump ....


================= 


"i don't want to take my eye off the ball here 
 
the asian peg 
built around the rmb 
is the one hurting our local jobsters  
 
but i agree the oil sheiks ought  
to reval over nite  
but that would spread the wealth so to speak  
making all of arabia higher priced 
while the sheiks oil profits smaller  
the net to them personally ?? 
 
i agree with sw  
the portable bucks are key  
 
then again who's saying  
the exxons and shells 
don't prefer cheap local buys 
 
if i had to bet 
 
i'd say there is where the lever needs to be slipped 
 
under the trans nat oilers 
 
 
"pard get em to reval or ...." 
 
who's to say that  
 
prez bush ??? 

Written by Gcs on 2006-04-26 08:55:04
 
China: Embrace the Competition 
by Axel Merk 
http://www.safehaven.com/article-5041.htm 
 
" Competition from China is going to intensify: we better stop whining and embrace it. Times have changed! A low skilled Chinese worker today may produce more consistent quality than a highly skilled Eastern European worker. 
 
The Chinese approach is more scalable and - at the end of the day - may yield superior quality. Also note that a couple hundred thousand of highly qualified engineers are entering the workforce every year in China. Indeed, the Chinese are aware that they cannot compete on cost -- investors concerned primarily about cost are moving on to cheaper places such as Vietnam. Instead, China is working feverishly -- and successfully -- to serve later stages in the value chain. 
 
Ill guided policies have pushed the US economy towards consumption and debt rather than investments. The US is now in such a weak position that no policy maker dares to call for changes that foster savings and investments rather than consumption; such policies may induce a severe recession in the short term. Yet it is precisely the medicine the US needs if it wants to prevent the risk of ever increasing pressure on the dollar as the current account deficit escalates. " 
 
- Axel Merk 

Written by Dave Chiang on 2006-04-26 09:21:31


If China moves up the value chain -- say into car manufacturing for exports -- without allowing the RMB to adjust so that China's RER better reflects those of other countries that have moved up the value chain, the political system of the world will, in my judgement, reject trade with China. The implied adjustment mechanism is that the world brings its wages (in nominal terms) down to Chinese levels to bring about a real adjustment. and that is not a pleasant process. I am all for China moving up the value-chain; that's how folks get rich and become consumers (tho it would be nice if Chinese energy efficiency improved in the process, but we in the US can hardly talk). But I would like to see china's real exchange rate appreciate as well. And right now, judging from Chinn's graph (which puts China well below comparable countries, tho not outside the formal confidence level for a severe undervaluation) and Frankel's work and the expanding current account surplus, China has a bit of work to do. 

Written by bsetser on 2006-04-26 09:29:37


To Brad, 
 
The United States dollar is broadly overvalued against currencies of all major economic blocs in the world, not just the Chinese yuan. The Bush Administration's ulterior motive for demanding a yuan revaluation is to prevent a massive US currency devaluation against the entire world that would simply destroy the dollar as a global reserve currency. But it is simply unacceptable for the Chinese to accept those economic terms since it would result in a ruinous outsourcing of industry to other lower cost nations especially India and Vietnam.  
 
As Axel Merk states, if Americans do not want to adopt Asian wages in the West, they must compensate by providing incentives, rather than obstacles to invest. They have to think of ourselves as being a couple of steps ahead of the Chinese in the technology value chain; they must defend that position by constantly re-inventing ourselves. There are certain types of jobs that will not survive in America; there are also certain jobs that do not survive in China and have moved to Vietnam. 
 
Regards, 

Written by Dave Chiang on 2006-04-26 11:11:28


"Oil is way up this year, if you haven't noticed. But the purchasing power of the GCC currencies is down, since they all peg to the dollar. If anyone wants to explain why that makes economic sense, be my guest."  
 
Gcs has found the answer once again. It doesn't make economic sense, but it makes social sense. The big boys on the Arab peninsula want to avoid spreading the wealth around. This is especially necessary if they want to keep control over their many immigrant laborers. (I dunno if things have changed, but 30 years ago in Jeddah, you couldn't get a Saudi employee even to help move furniture - you had to go out in the street and find a Yemeni) The Saudis especially want to minimize contact of their laboring classes with Western culture, and keeping their income down is one way to do this. 

Written by FR on 2006-04-26 11:19:29



Brad--The only thing the G7 communique did was to depreciate the dollar against the euro and the yen, which would exacerbate rather than mitigate the global imbalances, because the Chinese and oil producers' currencies are virtually pegged to the depreciating dollar.  
 
The new IMF surveilance process may not materially improve the power and quality of surveilance, since the IMF itself is in a grave financial difficulty, and its staff lacks direction. 
 
Neither the G7 nor the IMF appear to have any power or determination to resolve the growing global imbalances. It is very unfortunate, but we may have to wait until the global imbalances start to explode (or implode?). 


Written by HK on 2006-04-26 11:33:57



Dave Chiang -- sorry, you are wrong. 
 
The US dollar has depreciated from grossly overvalued v. the euro in 2001 to a value that is broadly in line with long-term equilibrium. I think it needs to go below the long-term equilibrium as part of the global adjustment, but the dollar is clearly less overvalued against some currencies than others. 
 
The korean won for example has appreciated in real terms significantly against the dollar since its crisis. while the Japanese yen has now depreciated to a point where in real terms it is rather undervalued ...  
 
China and the GCC currencies are also more undervalued than other currencies. the GCC b/c their currencies haven't appreciated in line with the growth in their export revenues (contrast to Canada, South Africa, even Brazil). And China because it depreciated relative to the euro and thus has depreciated in real terms globally, and it hasn't appreciated against the dollar as one would expect given China's rapid productivity growth. There is no particularly good economic reason why a country that is growing as fast as China and whose productivity is rising as fast as China has a currency that in real terms is worth less than it was worth five years ago. Chinese exports went from $20b a month to $80b a month -- an indication of the increase in the productivity of China's economy, among other things. but the real value of its currency and thus the real purchasing power of China's citizens (assuming wages have been constant, which isn't true -- i should probably say the real purchasing power of each RMB of earnings) fell ...  
 
do you honestly think it makes sense for many oil exporter and China to have currencies that are worth less in real terms than five years ago, when their primary export (the GCC) is worth more or their productivity (China) is much higher? 
 
HK -- add in the Korean won, but otherwise, you are right. 

Written by bsetser on 2006-04-26 12:41:46
To Brad, 
 
The logic of revaluing the Chinese yuan, or any currency, as a means of balancing trade with the US is flawed. This is particularly true if prices are denominated in the currency of the consumer economy, as the US dollar is. It was ironic that US Treasury Secretary Lawrence Summers in the late 1990s repeatedly lectured Japan not to substitute sound balanced macro-economic policy with exchange rate or interest rate policies because the US did exactly that with the Plaza Accord in 1985 and with its strong dollar policy after the 1997 Asian financial crisis. Robert Mundell, 1999 Nobel laureate in economics, observed while attending a conference in Beijing in 2005 that never before in history has there been a case where international monetary authorities tried to pressure a country with a not-freely-convertible currency to appreciate its currency. He said China should not appreciate or devalue the yuan in the foreseeable future. “Appreciation or floating of the renminbi [RMB] would involve a major change in China's international monetary policy and have important consequences for growth and stability in China and the stability of Asia,” Mundell said. 
 
With the development of deregulated global financial market, the world financial architecture began to operate under the rules of US dollar hegemony. The growth in the US economy was concentrated mostly in the deregulated financial sector where the US was unquestionably the leader in innovation. The growing capital account surplus made the growing trade deficit benign as the balance of payments problem was transformed into a US debt bubble. The 1997 financial crisis in Asia sent local currencies plummeting, making their Asian goods drastically cheaper. Yet China was the only Asian nation that did not devalue its currency. By 1997, the US trade deficit hit $110 billion, and heading higher. But net capital inflow to the US after July 1997 reached over $100 billion at 7.2% of GDP. The 2004 $666 billion trade deficit was equal to $784 billion in 1997 dollars, more the seven folds what it was in 1997. Surely that geometric increase was more than a foreign exchange problem with China. 
 
Neo-liberals argue that with a stronger currency, the global purchasing power of China’s currency would rise, raising its income in global terms and consumption share, and thus reducing its rate of domestic saving. Yet under current terms of international trade, a higher exchange rate translates directly into a significantly lower domestic wage scale for any economy heavily dependent on export, further reducing domestic consumption.  
 
Regards, 

Written by Dave Chiang on 2006-04-26 13:25:52


"Ill guided policies have pushed the US economy towards consumption and debt rather than investments" 
thus sprak Axel Merk  
 
 
key point : 
 
is this a call  
for an american industrial policy 
 
or just a belower dollar  
plus  
higher taxes /lower spending 
to move the personal liberty nation 
towards  
a balanced fed budget  
and less 
pursuit of happiness  
by importation  
 
if its only scroogee  woogee
number two  
then the pain will be  
in my estimation too much
for the  little gain 

Written by Gcs on 2006-04-26 14:08:40


brad: 
" the dollar is clearly less overvalued against some currencies than others" 
 
yes indeed 
 
 johnny one note  rides again:
 
its the oilers and export tigers of the south 
that have badly  
undervalued currencies  
 
seems too often dollar forex talk  
ie  
the "you deval.... 
no you reval" debate  
 
turns into 
useless gabble  
among the first world's  
major floated currencies  
 
ie  
north v north forex  
 
when its  
the south side of the planetary market place 
that operates  
with chronic grossly undervalued currencies  
 
 isn't it  obvious  to eyes wide open 
 
like global climate change  
 twenty years ago 
 
or tobacco smoking and lung cancer 
in 1955 
 
as in those cases  
 
even if its not 
rigorously demonstrable  
 
should we wait around for the day  
senior chinn et al arrive 
banging at the door  
with definitive statistical "signifi -cance " ??? 
 


Written by Gcs on 2006-04-26 14:28:29


evil  corrolary  
 
since all the g7 can do 
is adjust among themselves 
and they damn well know it  
 
all this lower dollar
 higher euro talk  
means indeed 
given the asian peg
       a  euro relative
          drop in  asian forex too  
 
so  
isn't  this yet another 
g7 policy assault  
on euro wage workers ???? 

ie  
another blasting  away  
at their real wage cut resistence  
by further 
over valuation of the euro ????? 

Written by Gcs on 2006-04-26 14:39:59



Following up on GCS and FR, I'll throw out the following conjectures, and see whether y'all agree: 
 
1) A concerted policy to prevent currency appreciation is always and everywhere a technique whose effect (and usually whose purpose) is to maintain or augment inequality of wealth, both among different classes of private individuals, and between a government and its residents. The primary asset held by the vast majority of people in any country is a local currency wage perpetuity. An appreciating currency in import-accepting economy represents a vast, widely distributed increase in worker wealth, of which phenomena like housing bubbles are mere shadows. When a government actively intervenes to stop a currency appreciation, it captures wealth, via seignorage gains, citizen-subsidized interest rates, and other means, that would otherwise be widely distributed. Beneficiaries in absolute terms are governments and those who control them. Beneficiaries in relative terms are capital owners, who have protectable assets besides wage perpetuities. 
 
2) None of this says whether the prevention of currency appreciation is good or bad. In China's case, one can make a strong argument that China's wage earners are willingly making a worthwhile sacrifice for their nation, preserving their nation's competitive edge as China's breakneck development lifts all boats. I'm neither making this case nor arguing against it, just saying it's plausible. 
 
3) I think it's hard to find other than cynical motivations for oil state pegs. Perhaps the goal is not direct expropriation, merely the maintenance and expansion of existing social inequalities. Financial arguments aside, to the degree Western commentators wish to argue that oil-state internal inequality and injustice are "root causes" of terrorism, Western countries should be pressuring petrostates to abandon their pegs. The fact that these pegs distort US capital markets is icing on the cake, but pretty yummy icing. (It's worth emphasizing that, unlike China's case, there is no "national interest" economic case for oil state pegs, unless stimulating US consumption or increasing internal wealth concentration counts as a national interest.) 
 
4) With respect both to China and the oil states, the short term political effect of thwarting appreciation is to undergird existing power and wealth relations. It's "pro-stability". Medium-term, one might argue that the pegs contribute to internal tensions and contradictions that may undo some petrostates. In China, unrest tends to be local and related to concrete grievances, while concentration of (especially non-private) wealth and power goes mostly unchallenged. In China's context, preventing appreciation is clearly "pro-stability", short and medium term, and is a challenge to those who think economic development will force political reform. 

Written by Steve Waldman on 2006-04-26 15:16:35


The only good reason for maintaining a dollar peg for oil exporters like Saudi Arabia is that they don't want to suffer the "Dutch Disease." 

Written by Iasius on 2006-04-26 15:26:37


However, a major revaluation of the yuan-renmimbi will also put more serious upward pressure on the dollar price of oil, no matter what the Sa'udi riyal is pegged to or which currency oil is officially priced in. This is part of the dark side of the appreciation that everybody in Washington is calling for, even as they collectively freak out about rising oil and gas prices. 

Written by Barkley Rosser on 2006-04-26 16:54:52


Iasus -- Do the Saudis have enough of a non-oil tradables sector for "dutch disease" to be a real concern? (Perhaps the disease was congenital, in their case, but they're hoping the peg will be a miracle cure?) 

Written by Steve Waldman on 2006-04-26 18:41:02


GCS -- yep, fx is more than just the euro/dollar and a few other g-10 pairs, even those are the liquid markets with lots of action. and in many ways the adjustment of a range of emerging currencies against both the euro and dollar is the key to global adjustment. 
 
I see the Dutch disease argument for Russia, which has an industrial sector that isn't based on petrochemicals. The Gulf countries don't have a non-petrochemical industrial sector. So I don't think they have much to worry about there. I agree with Steve Waldman. 
 
I think they are concerned about a repeat of the 1990s, when low oil prices and rising populations meant rising spending presssures financed by debt and a bit of a spending squeeze. There certainly is a case for building up assets in good times to protect v. bad times. What I question is a policy that now relies almost entirely on asset buffers and doesn't make any use of exchange rates. The Saudi riyal was almost certainly overvalued when oil was at $15 (meaning even with limited export earnings, saudis had incentives to shop abroad rather than at home), and it is almost certainly undervalued with oil at $70 plus. Letting the riyal move in line with oil (and letting the external purchasing power of the riyal move up and down as export revenues move up or down) is one way to manage oil price volatility -- it just is one the Saudis have opted not to use at all. Which means all the volatility either comes from building up assets/ spending down assets (or building up debt/ paying down debt) or moving spending up and down in line with oil ... my core thesis is that budgeting would be a lot easier if the riyal denominated salary for Saudi officials was a bit more stable, and what varied was its external purchasing power. 

Written by bsetser on 2006-04-26 19:06:11




i might suggest we generalize this 
no peg needed for national best interest 
to any economy with a long range plan
to remain what it is today:

some kind of  overwhelmingly 
            raw commodity exporter 
(oil gold iron ore timber cotton coffee eggs bacon 
fish gem stones ivory tusks ) 
 
ie 
products that are always globally marketable 
at some take it or leave it price 
 
good or bad 
 
for such "platonic" archetypal 
                  pure commodity export states  
a forex that moves with the world price 
or index of prices of its export commodities 
     makes total sense  
 
now how any real  live states  
                         out there 
                    match up to this type 
 
well i'll not play  the rude empiric  
 
except to  guess mother  russia  
 
(vs the pure oilers of the gulf )
 
 may be on 
   a national mission  
          to become the next canada...... x6  
 
ie dreaming of making
 some world class industrial products too 

stuff that climbs  
higher up the va pole  
(not just stinking  
endless tree farms 
ore holes  
and oil pools  ) 
 
peg drops might indeed 
lead to a dutch rub  here 
that might keep 
 this dream dead on arrival  
 
so drop the peg okay 
but first find 
some other form of protection 
some effective 
industrial incubation system  
prolly it'll need be  
overtly imposed  
by ....the state absolute or otherwise  
 


Written by Gcs 

------------------
comment on comments

notice no one picks up on the obvious 
point

exxon et al 
like an undervalued set of gulf state  forex too 

in fact forget the shieky ones
 trans nat big energy is  the sufficient 
 cause for  this arab peg  

nor does anyone take up my other spear chuck

about the euro jobsters compaction as the over valued euro
becomes the churchill  "gold "pound of the new millenium 


----------
another exchange shows you why he's brad the good 

brad: 
all too true 
 
but told  
in a very cranky manner  
 
my ear hears a voice 
with overtones  
almost  
like those 
of a fan who sees the play 
on the field  
in his favorite sport 
growing ever more stale  
and dirty 

Written by Gcs on 2006-04-25 20:32:14


gcs -- yes, I am a bit frustrated. 
Maybe even cranky.
 I apologize if I let that seep into my analysis.
 I grew up in a much more equal time
 (see Martin Wolf's graphs), 
and in a place that had, 
even by standards of the time,
 a much more equal income distribution.
 And I don't like certain trends 
that are now very obvious. 
This play has become stale.
 If all the gains from growth acrue to a few,
 it shouldn't be a surprise 
if a lot of people decide they want a different game. 
 
And more personally, my youngest brother
 just got fired from a job 
that hardly paid a lot to begin with 
(he cooked steaks).
 For being 8 minutes late. 

The joys of an "at will" economy.
 Flexibility you say. 
But in this case, I suspect 
he had been around long enough 
that he was paid far more than the average chef
. 8 minutes = nice excuse for cutting costs. 

Written by bsetser on 2006-04-26 00:07:38

brad  
 
i'm with ya 1000% 
 
 "at will" job systems = the free fire zone  
 
the point 
 
it don't have to be this way 
not even for a moment  
 
no god of optimal markets
                    makes it so