Pinkos Parlor

global macro notes

.Dooley high lites:

"an economically important bloc of (mostly Asian) countries

manages exchange rates to promote export growth

and rapid industrialization"

". Their primary economic problem

is the rapid assimilation

of hundreds of millions of workers

into a modern economy (China)

or an economic recovery (Japan)"

------ by throwing in japan he escapes

the south radius of his june nber paper ...

i wonder if he figures

labor slack inside a north country

with its temporary

near zero marginal product

is a good analogue

to his structural south model ???

seems if so

then the policy implications

become

not just

emerging one offery relevent

but emerged counter cyclical relevent too

as in the old beggar thy neighbor import tarrif games

and competitive devaluation rounds

i prefer keynes

a full employment fiscal deficit polcy

doesn't lead so obviously

to global great depressions ---------------

"Asian development policy

has generated very large purchases

of international reserves

and exports of savings to the rest of the world"

------------ no issue here ---------------

" We believe that the U.S. current-account deficit

is a byproduct of the ability of U.S. households and firms

to capture and profitably utilize this supply of internationally mobile savings"

---------- low mortgage rates and trans nat super profits

but how about stagnant north real wages ----------------------

"(this asian sourced) extra supply of savings .... in the U.S

has reduced long real interest rates by about 1.5 percentage points"

" It would be foolish to pass up such a bargain"

---------- as to this "baragin"'s benefits

to 'umble home owners..

isn't it

sort of

like what the spider

said to the fly .....

don't a lay strung out waiting for em

maybe even at the next step ????

a short run spending high

leading to

long run stag wage debt payment hang over

on houses with under water equity ???? ------------------

"The U.S. deficit and low interest rates

will last as long as Asian savings

are placed in the international market

by Asian governments

and as long as other industrial countries

are too weak to bid those savings away

from the U.S."

------------sloppy language here

"too weak "

isn't the real point

just as

this sudden high wave of "surplus" cash "glut"

inflowing from the south

lowered rates

a roll back out can raise em

here and all over the north

leaving the hideous high and dry

speared on a real rate of interest no man can stand for

an effect

often begging for a compensatory

but easily mis read

policy shift

toward a monetary base explosion ----------

" We predict that this will last for a decade

although the dollar will slowly depreciate

and U.S. rates will slowly rise

during this long adjustment period "

------------- this is pure salesmans blither

wheres the demo model ???

why assume soft rates of adjustment

when reality has

SO VERY OFTEN proves

to be a monster

of sudden and harsh swings ????--------------------

" Asian governments will want,

and be able to, feed international credit markets

as a part of their development strategy"

--------------that summary boast

reminds me of a thousand prior gaffs

of narrow hubris -------------------

-------------------------------------------------------------------------

-----us chicken littles as dooley puts words in our mouth ------

" China will overheat, reserve holders will dump dollars,

and the U.S. will protect itself from low-priced goods"

---------------- what's his point

inflation a currency run and protectionism

are laughably unlikely ???-----------------

" Moreover, the system will end with a crisis

a la Argentina by the end of this year."

-------- well here i agree

u know i'd never compare uncle hegemonic

to a run of the mill southie

any arguments about the us ad its imperial dollar

require analogues from the annals

of earlier reserve currency states ----------

* * *

-----now u step forth ---------------

Setser writes:

" the taxpayers of poor Asian countries (above all China) subsidize

through their central bank's accumulation of dollar reserves

wealthy consumers in the U.S"

--------------- some dramatic telescoping here

the full run of the powdre trail back to the keg

is a way up ahead

but at least potentially

this is a "dead on " reality -------------------------

" You argued that this system was far more stable

than the naysayers thought and would last for a generation!"

----------------- indeed he shows no caution at all

in fact refuses to suggest unckle trim his sails at all ----------------

"no cause to worry if U.S. net external debt --

that is, the gap between American assets abroad and what the U.S. owes

the rest of the world --

rises from around 20% of U.S. GDP in 2003

to something like 75% of U.S. GDP in 2013."

------- here i think u need to have something better then too hogh is too high

as in a precedent i saw a delong bit

where he claimed the brits prior to 1914

were at ratios "higher"

then your scenario leads to in 10-15 years -----------------------

" that will happen even if the trade deficit stays at around 6% of GDP".

"By 2013, the current-account deficit,

which includes interest payments,

would reach 9% of U.S. GDP

even if the trade deficit stabilizes"

------- right here u need a comparative --------------------

" it is OK if the U.S. doesn't save

since the U.S. can outsource saving to Asia for some time"

----------- this does not disentangle the heavy trans nat

asia headed fdi out flow

from the massive uncle assisted household usury racket

are we realy

crowding out domestic investment in productive facilities

or merely witnessing "the markets "

trans nats' real investment choices

which involve going for the higher returns in asia ???--------------

"these trends are unsustainable. They imply a lot of external debt

for a country that doesn't export much.

And since external debt is ultimately

a claim on future U.S. exports

, it implies further falls in the dollar"

------this is the heart of your argument

can america earn enough to pay its debts

are we going to rely on a system of studios and labs

and the stream of IP payments

they can earn us

over seas

to pay our foreign debts ???

of course we have bases over there too

protection and extortion rackets

to compliment our resource and cheap labor extractions

the key here

is the possible divurgence between

gdp and gnp

if you are an american"property owner"

it might all come out...

"spiffing " --------------------------

-------

" just as Argentina's rising external debt burden

eventually led to falls in the peso"

------- see above on north south croos over analogies ------------

" Those now lending to the U.S. in dollars

for long terms at low rates risk large losses"

--------- indeed uncle could run the dollar down

but we'd have a pre global depression crisis-----------

" A collapse in 2006, maybe. A collapse before 2008, likely; before 2010, almost certainly."

----- i'd avoid this short run merlin stuff -------------------

" even if China and the world's oil exporters

want to continue to subsidize the U.S.

will the U.S. be willing to accept the gift.??"

------ i like that line a lot

free heroin ----------------

" We haven't exactly found a way

to make sure all parts of the economy

share equally in this subsidy "

------- this speaks silent volumes ------------------

" Do you all really think China will be able to continue

to rely as heavily on exports for growth in 2006

as it did in 2005?"

------ we both know the party bosses know better then that -----------------

* * *

back to

dooley:

" But investors, our primary audience,

are very short-run oriented "

"-- if they get it wrong

for more than a year or so, they become history"

------ ya but if you get it right for one quater at a time

u make them happy

either way

policy changes to make things optimal

are not like market specs who can make money rain or shine

so long as they beat the stampede in or out

even by only one step ---------------

" An elegant long-run theory

is of no use to us

if it doesn't have strong predictions

for the time horizon important to market participants "

------- they needn't worry either way

their neither peddling elegence or the long view

just showing the scam still has legs ---------------

"The key is the link between then and now"

dooley doe setser

or does he .....???

"Suppose a collapse was "likely before 2008"

and that that means greater than 50%

over the next 26 months."

" Moreover the crisis is defined by

sharply higher U.S. interest rates

and a mega-devaluation of the dollar"

" If this is the market consensus forecast"

" something has to give now.

Interest parity demands

that either yields on dollar assets

have to be much higher

to compensate investors for the risk

of large losses on dollar assets

or, more likely, investors dump dollar assets

and the crisis happens now."

"Neither has happened. The market doesn't buy your story -- why not?"

"The market could be wrong"

------- no the market crawls along day by day

with a few eyes looking out 2 quaters or so --------------

" it is time to focus

on how the international monetary system

evolves in the absence of crises"

----- no its not

to assume way the crisis

is to assume away

the basic modus operandi of the system

as it morphs from one stage to the next in its development ----------

"The trends in debt-GDP ratios you propose

assume the only adjustment is a crash

Like recent calculations

that we are running out of oil,

such extrapolations make exciting reading

but they do not capture market dynamics"

------- very poor analogy

and yet oil prices run up and down

as badly as if they were cycling thru scarcity and glut scares -------

" the incentives that have sustained the system to date

also provide a smooth convergence

to a new equilibrium in the long run."

--again just salesmans' words here --------

" Our recent paper sets this mechanism out in detail"

------ not at all

there is no detail

its more like a kidnappers note

here's your sons hair lock

etc etc

it gets the message

across alright

but

without revealing the ploteers where abouts or anything else

of much use to the police ------

" there will be a very slow but sure

real devaluation of the dollar

against the Asian bloc

and a very slow but sure

rise in cyclically adjusted real interest rates

in the U.S. and other industrial countries."

------ the dollar will fall against these east asian currencies

like it did against the yen....

maybe so

but i see no proof beyond

assertion

and "well we ain't hit any ice bergs yet "---------------

" As Asian savings become less of a bargain for the U.S.

there will be a gradual reduction

in the U.S. current-account deficit"

----- see he thinks the asians offer us a nice exit strategy --------------

" An interesting implication of our approach

is that, after a large initial appreciation

of the euro against the dollar,

this important exchange rate

will remain relatively stable

during the long adjustment period"

------ here is another kettle of fish

the difference

between the chinese product invasion of north america

and western europe

creating secondary tensions between the US and the EU ----------------

"There will be bumps along the road "

------ BUT NO CRISIS ???

TOO BAD WE CAN'T PLACE OUR

FINAL BETS NOW ---------

--------------------------------

" how can events we can't yet identify

deflect us from this underlying adjustment scenario"

------ he really needs to think about that

since his theory

is claiming he doesn't need to ---------------

brad

i got more if you want ?????

* * *

Neither seems to have materialized. This year's U.S. current-account deficit will be far larger than last year's, and next year's budget deficit will be larger than this year's.

"The nice, slow real depreciation in the dollar against Asian currencies

needed to bring the U.S. trade deficit down

in a nice, safe, orderly and relatively pleasant way

over your extended time frame (30 years, a 1% real depreciation a year?)

has yet to really start"

" Interest rate differentials now favor the dollar"

"The euro-zone is attracting significant inflows from China

and the world's oil exporters,

helping keep euro-zone rates low.

But rather than generating a continent-wide

housing boom and a continent-wide consumption boom

low rates seem to be prompting

a boom in European capital flows to the U.S"

"part of the answer is that many investors do have short-time horizons.

To date, no one has made money betting against

the People's Bank of China in the Treasury market"

". Most seem to expect Bretton Woods II

will last at least until they get this year's bonus"

Still,

" net private financial flows

are not large enough to finance a $800 billion-plus U.S. current account deficit"

" with $600 billion or so in global reserve accumulation this year

the private sector doesn't have to."

" private investors put about $150 billion

more into emerging economies last year

than they took out."

" Emerging economies are financing the U.S.

because their central banks want to finance the U.S.;

private investors are quite willing

to finance the emerging world"

What worries me is that flows to the U.S. -- both private and official -- rest on rather shaky foundations, and as Brad Delong has argued, the markets seem to be pricing in virtually no chance of a bad outcome. Private investors finance the U.S. at low rates because they expect central banks to continue to finance the U.S. -- and even to step up their intervention if private flows falter.

" Since the markets are not demanding any adjustment now

the underlying imbalances keep getting bigger

In any standard model

the bigger the deficit and debt today

the bigger the needed dollar depreciation tomorrow "

" The amount China has had to spend to keep the yuan from rising

has grown every year for the past four years

; it will reach 15% of China's GDP this year.

If China continues to intervene at that pace

, its reserves would reach $2 trillion,

or 75% of its GDP, by the end of 2008"

"is the U.S. is politically prepared

to sit still as Chinese exports

to the U.S. double between 2004 and 2008,

as will happen even if a slow appreciation

of the yuan leads China's export growth

to slow to around 20%?

" Is the U.S. willing to accept the financial dependence on China

implied if the stability of the financial system requires

$300 to $400 billion in Chinese reserve growth every year?"

" a natural development for the system... (would be for)

... another periphery, seeing that this was a successful development strategy,

taking their place"

" the system lasts for a very long time

but the China part of it gradually fades"

"What will last"

" for the foreseeable futures the U.S. role as the center country in the system"

". In some periods this will generate large net inflows

of savings from the periphery to the U.S.

; in other periods, none at all or reversals."

" Clearly there was no effective periphery for 20 years

after the demise of Bretton Woods I

and the U.S. built a net asset position in international markets"

" When a new periphery emerges

we will have to carefully evaluate

the incentives and constraints faced by the system at that time"

" the policy community is unanimous in the view that the U.S. must adjust".

"Your argument rests on the assumption

that the U.S. current-account deficit

is driven by the U.S. fiscal deficit."

" If so, why have European and Japanese fiscal deficits,

which are higher still

in the presence of much lower growth,

not generated current-account deficits?"

" if U.S. fiscal deficits are pulling in foreign savings

, why are they doing so at very low rates?"

" Is it in the self interest of the governments

that now feed the international monetary system

with their savings to continue to do so? "

"our framework suggests they will -- not forever,

but for a long time.

It isn't because they like us

or have an irrational attachment to dollar assets.

They would like to look like Japan in 10 years"

" China's goods are cheap with the yuan at eight yuan to the dollar;

they would still be cheap at six."

" Imagine how receptive the U.S. would be to Chinese goods with the interest rate at 7%"

". The currency policy regime

has the effect of keeping the interest rate low,

splitting the interests of productive factors

in the U.S."

" and putting off the date

that the protectionist political coalition

might organize."

" The real threat to the U.S.

is that the liberal economic world

that is emerging will crumble

under the weight of massive global excess labor"

* * *

setser:

"the periphery is maintaining undervalued real exchange rates

building up reserves

, and in the process keeping interest rates

in the center lower than they otherwise be"

" corporate sectors.. are saving rather than investing"

" Our disagreement is simple:

You see the system as fundamentally stable,

both politically and economically. I don't."

" compare two different international systems.

In one, the periphery builds up its reserves,

those reserve flow through finance capital outflows

from the center to the periphery,

and no one runs either a current-account deficit

or a current-account surplus

Think $50 billion in foreign direct investment flows

from the U.S. and Europe to China,

off set by a $50 billion buildup in Chinese reserves"

"That roughly characterizes Bretton Woods I

and, incidentally, also describes reasonably well

Europe's relationship with the "periphery" right now"

". That system collapsed

when De Gaulle got tired of financing

the American corporate takeover of France."

" stable, so long as China and India

are willing to subsidize

U.S., European, Japanese and Korean multinational corporations"

" In the current system,

the periphery runs a large current-account surplus

and builds up its reserves,

financing a large current-account deficit

in the center country.

Actually, in the past few years,

the U.S. current-account deficit

and the current-account surpluses

of the periphery have all grown

, both absolutely and as share of GDP.

Reserve accumulation by the periphery

went from $116 billion in 2001 to $517 billion in 2004

and maybe $600 billion this year,

while the U.S. current-account deficit went from $390 billion

to $800 billion."

"the U.S. must reduce its dependence on foreign savings

, whether by saving more or investing less,"

" the best way to bring about that adjustment

is through cutting the fiscal deficit"

". Would you all rather see a fall in private investment

, or a surge in household savings?"

" the core reason

why the U.S. has to adjust

is that the trade and transfers deficit

(6.5% of U.S. GDP)

is now large relative to the U.S. export base (10% of GDP).

Current exchange rates

and U.S. growth rates imply

a widening trade deficit,

and I don't think that deficit

can continue to increase for much longer"

"keeping the U.S. current-account deficit constant

implies a fall in the U.S. trade deficit over time."

" implications."

"The periphery will not be able to rely on exports

as much as it has until now

to support growth."

" Real interest rates in the center cannot fall further"

" U.S. consumption won't be able to keep on growing

faster than U.S. income "

" The fun part of Bretton Woods II -- even in your vision -- is close to over"

" China has to keep on intervening

not to support an expanding export sector,

but just to hold on to its existing export sector.

The U.S. needs continued reserve inflows

from China not to allow housing prices to keep on rising,

but to keep them from falling. Yuck."

"But even a less fun system could be a stable system

-- that, I take it, is your argument."

" China's workers will keep on accepting low real wages;"

" China's taxpayers will keep on adding to the amount

that they eventually will have to spend

to bailout their central bank (and their banks); "

"U.S. and other firms will continue to make

so much in China that they will sustain

the political consensus

for open markets

, despite opposition from U.S. manufacturing workers,"

"• The winners from the current U.S.-China trade

don't realize that U.S.-China trade is responsible

for their success.

Home owners in Orange Country

and real estate brokers in Florida

are not lobbying for China to hold on to the yuan peg.

The U.S. Treasury -- the biggest winner of all in some sense --

is lobbying China to change the peg."

"• The upper Midwest is the epicenter of the (very troubled) U.S. auto industry.

China's auto sector is developing fast.

A slowing U.S. economy, no matter why the economy is slowing,

will increase, not decrease, demands for protection."

"• China (and others) may not be willing to continue

to accept low-yielding U.S. assets,

and so far, the U.S. has been willing

to trade Treasury IOUs for Chinese goods,

but not to trade U.S. oil companies for Chinese goods.

A Chinese de Gaulle would rail at the inequity.

• The transition from a win/win (fast growing exports/falling real rates) system

to a don't lose/don't lose (existing exports/relatively low rates)

may prove difficult.

* * *

dooley

. "U.S. can't take it story" and invoking protectionism

as the main threat.

We agree completely on this as a serious threat.

Indeed, the thrust of the whole system

is to spread around sufficient payouts

to undermine this threat.

6. You are telling a "Europe is resilient story"

in that it passes through the inflows.

But some of the deflationary pressure

must be sticking to Europe.

Europe has grown only unemployment in the last few years.

" You believe "that the U.S. must reduce its dependence

on foreign savings."

We still do not understand the basis for this belief.

" Our view is simple: It is in their interest to lend

and in our interest to borrow

. Asia won't wake up one day

and decide this is a bad deal

because it is not a bad deal.

Also informative was your nonresponse to several points that I think are important. For example, the U.S. has a fiscal deficit that is little different from those of the other industrial countries and better in several cases, even after factoring in the Katrina one-off.

No more definitive experiment on the current account

could have been run to prove

to prove current accounts are not mirror images of fiscal deficits

" Would it not be fruitful to spend some effort

working on filling in the model of how disturbances

work themselves through a model of Bretton Woods II dynamics?"

* * *

steser

" concern is that U.S. fiscal deficits are too large

for an economy whose households don't save."

" China has been more able than I expected to absorb

a massive reserve increase without excessive credit growth

or domestic inflation."

" By curbing lending growth with controls,

the central bank created a captive market

for low-interest rate sterilization bills."

" reserve diversification matters less than the overall pace of reserve accumulation"

" Since the renminbi needs to appreciate against both the dollar and euro,

borrowing in renminbi

to buy either still strikes me as losing bet.

There is a reason why Zhou has been pushing for change".

" as the rest of Asia stepped down,

the Middle East and Russia stepped up

Most oil exporters still peg to the dollar "

" Russia and OPEC into U.S. debt securities --

the oil exporters either have huge offshore dollar deposits,

or bought in ways that don't register cleanly in the U.S. data."

concerns:

The small size of the U.S. tradables sector

likely implies very large falls in the dollar will be needed

to bring down the very large gap

between what the U.S. imports

and what the U.S. exports

(a key point made by Rogoff and Obstfeld).

There may be a gap between the capital stock

the U.S. has

and the capital stock the U.S. needs

to respond quickly to dollar depreciation

(see DeLong).

Suburban housing doesn't generate export revenue.

"The U.S. is going to have large external financing needs

for some time. Suppose the U.S. trade and transfers deficit peaks

at 7.0% in the fourth quarter

and falls by 0.5% of GDP each of the next three years,

a major shift, bringing the trade and transfers deficit

to 5.5% of GDP in 2008.

Rising interest payments still imply

a current account deficit of a 6.5% of GDP

-- more than in 2004."

"Net private flows don't come close

to covering the U.S. external deficit now,

even with large interest rate differentials

in the dollar's favor.

If the U.S. slumps and U.S. rates fall,

the official sector may need to step up its intervention

from its current, very high pace,

to keep the dollar from going into free fall."

"The U.S. exposure to an external interest-rate shock keeps rising.

Gross U.S. external liabilities are around 100% of U.S. GDP,

most of that is debt,

and much of the debt is short-term.

The IMF forecasts they will rise to 150%

of U.S. GDP in 2010,

even if the U.S. starts to adjust.

Superpowers in the past

have generally been net creditors

and net lenders,

not net debtors and big borrowers.

The U.S.'s biggest financier -- China --

is viewed by many in the U.S.

as a strategic rival.

One international monetary system,

two very different political systems.

U.S. policy makers are not accustomed to the constraints

that a big net debtor often faces

. You all don't think the center faces any constraints

; I am not so sure.

In the initial Bretton Woods system,

U.S. policy was constrained by the dollar/gold parity.

What happens if U.S. policy makers are perceived to ignore

the concerns of our foreign creditors,

and they want to introduce a few constraints into Bretton Woods II?

what should be done?

• The U.S. should close the structural gap

between tax revenues and government spending.

• China should let the renminbi rise more now,

and the rest of Asia should follow

It also needs to get off a dollar peg for real,

and take a series of steps

to boost consumption.

Less government savings would help,

as would a modern social-insurance system.

• The Middle Eastern oil exporters should stop pegging

to the dollar.

Surpluses countries should not peg

to the world's biggest deficit country.

• The evidence from Germany suggests

that labor-market reforms

, on their own, are as likely to drag down

European domestic demand

as raise it.

I wouldn't bank on them to spur global rebalancing.

But steps to make German consumption more responsive

to low euro rates would help

. More generally, macro policies in Europe

need to be stimulative

* *

Posted by pinky at January 5, 2007 02:46 PM

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