Turkey Day approaches, so let's see who's thankful.
GS to Feds. Goldman Sachs surely is thankful to the federal law enforcement personnel who are so assiduously pursuing suspected insider trading by hedge funds and other money managers. This evidently could be a big case, big enough to make the investing public forget all about ABACUS-2007-AC1 and Fabrice Tourre's juvenile e-mails.
Fed to Ireland. The Federal Reserve may be quietly grateful that Ireland is having such well-publicized debt problems. It's brought Europe's sovereign debt crisis back onto the front page, and if liquidity problems crop up as a result, the Fed will have more justification for its quantitative easing program.
G-20 to North Korea. The gonzo maniacs in North Korea, by revealing their uranium enrichment plant and shelling a South Korean island, have pushed the G-20 and the possibility of a currency devaluation war right out of the news. The potential for a real shooting war in Korea forces the international community to think about what it has in common, at a time when it should give that issue careful thought. Indeed, just days after they acrimoniously failed to reach a trade agreement, South Korea and the U.S. are vividly reminded that they are allies.
Lisa Murkowski to Palin (Bristol). The voting controversy over "Dancing With the Stars" has completely overshadowed any voting controversies in Alaska. For once, a Murkowski may be grateful to a Palin.
Charles Rangel to His Democratic Colleagues. One can't help but suspect that Congressman Rangel might be quietly thankful he's being tried and punished by a House of Representatives controlled by the outgoing Democratic majority. Things could well have been a lot tougher for him if he had stalled the proceedings into the next term.
David Cameron to William and Kate. The prospect of a royal wedding contrasts brightly against the dour grayness of governmental austerity. The prime minister may be grateful for the loss of some front page coverage.
NBA to LeBron. Just about everyone likes seeing a big talker taken down a notch. LeBron has provided this spectacle to basketball fans from sea to shining sea. Schadenfreude spurs growing fan interest with each Miami loss.
America to Salehis. We haven't seen Tareq and Michaele Salehi, the alleged White House party crashers, in the news for quite a while. That's something to be thankful for.
Showing posts with label G-20. Show all posts
Showing posts with label G-20. Show all posts
Tuesday, November 23, 2010
Sunday, November 14, 2010
Fallout From the G-20's Failure
Last week's G-20 meeting in Seoul was a failure. Basically, nothing got done, except for an exchange of volleys of antagonistic pronouncements. The major exporting nations--especially China and Germany--criticized America's profligacy and continued monetary easing. America called for structural change from the exporters, demanding that they boost domestic consumption and depend less on selling in America. U.S. officials scolded China for artificially depressing the value of its currency. The group as a whole issued a statement that muttered something about one for all and all for one. But the casual observer might wonder how many members had their fingers crossed behind their backs when they signed the statement.
As the meeting broke up, France's president, Nicholas Sarkozy, began a one-year term as the leader of the G-20. He immediately announced that the tasks at hand would take more than a year to complete, thereby absolving himself of responsibility for producing results. This inspiring act of leadership made clear that there ain't gonna be much happening soon G-20wise.
Perhaps we shouldn't have expected much. The history of the U.N., and before that the League of Nations, teaches that international organizations are always partial to dysfunction. Nevertheless, some world leaders raised expectations. The potential fallout from the failure isn't pretty.
Cranky Financial Markets. In the last couple of weeks, as it became increasingly clear that the G-20 meeting would be unsuccessful, the financial markets hesitated and then fell. Stocks and bonds are both lower (after anomalously rising together). Commodities have fallen back. This isn't surprising. For the past two years, governments worldwide have been transferring risk and losses from the financial markets to taxpayers. Speculators were probably hoping the G-20 would give them yet another undeserved windfall. But taxpayers in Europe and America have rebelled. Faced with risks that aren't being dumped on innocent bystanders, financial market players have apparently chosen to trim their sails.
Policy Makers, Be Not Proud. One thing is for sure, today's financial and economics policy makers are dead set on avoiding the governmental mistakes of the 1930s, which today's conventional wisdom holds responsible for turning a nasty recession into the Great Depression. Most central bankers and other policy makers seem to think they know what their predecessors did wrong, and how to avoid making the same mistakes. But the failure of the G-20 meeting is disquieting.
The member nations were simply doing what was in their interests. They weren't intent on messing up the world's economy, nor did they want to exacerbate the already rising tensions among them. They simply couldn't levitate themselves above their conflicting national interests to the supranational lovefest that the G-20 is supposed to foster. Each nation's domestic politics dictated its views. With the world economy too small a pie for every nation to get as much as it would like, we're now edging toward an international game of musical chairs.
And that's the way it was in the 1930s as well. None of the central bankers and other policy makers of that era whose mistakes are now so routinely and condescendingly decried meant to create a train wreck. Like their modern counterparts, they consulted with each other and tried to find common ground for constructive action. But they were driven, like today's policy makers, by the interests of their own nations. They looked at the rest of the world from differing frames of reference, each crafted by parochial interests. Yes, they blew it. But they weren't gonzo idiots. They simply did what nations generally do in times of international disagreement.
The G-20's failure last week is a disconcerting reminder of the way things fell apart in the 1930s. The G-20 also failed to find common ground, and their pledge to continue working together seemed like little more than press fodder to divert financial reporters while world leaders caught their flights out of Seoul. Before the Fed, the Treasury Department, and other policy makers in America and elsewhere confidently conclude they know how to avoid the mistakes of the 1930s, they ought to step back and think about what just happened. Human nature hasn't changed in the last 80 years. Even though the Fed is taking a sharply different tack from the Fed of the 1930s, its most recent quantitative easing program may provoke the currency, trade and other economic conflicts among nations that hindered recovery during the 1930s. The doyennes of central banking and fiscal policy should be not proud. Their deep and prolonged studies of the Great Depression, and the advantage of hindsight, may still be insufficient to keep us from falling into the abyss. When a group cannot agree on shared sacrifice for the greater common welfare, divided they will have to make their individual ways in a treacherous world.
As the meeting broke up, France's president, Nicholas Sarkozy, began a one-year term as the leader of the G-20. He immediately announced that the tasks at hand would take more than a year to complete, thereby absolving himself of responsibility for producing results. This inspiring act of leadership made clear that there ain't gonna be much happening soon G-20wise.
Perhaps we shouldn't have expected much. The history of the U.N., and before that the League of Nations, teaches that international organizations are always partial to dysfunction. Nevertheless, some world leaders raised expectations. The potential fallout from the failure isn't pretty.
Cranky Financial Markets. In the last couple of weeks, as it became increasingly clear that the G-20 meeting would be unsuccessful, the financial markets hesitated and then fell. Stocks and bonds are both lower (after anomalously rising together). Commodities have fallen back. This isn't surprising. For the past two years, governments worldwide have been transferring risk and losses from the financial markets to taxpayers. Speculators were probably hoping the G-20 would give them yet another undeserved windfall. But taxpayers in Europe and America have rebelled. Faced with risks that aren't being dumped on innocent bystanders, financial market players have apparently chosen to trim their sails.
Policy Makers, Be Not Proud. One thing is for sure, today's financial and economics policy makers are dead set on avoiding the governmental mistakes of the 1930s, which today's conventional wisdom holds responsible for turning a nasty recession into the Great Depression. Most central bankers and other policy makers seem to think they know what their predecessors did wrong, and how to avoid making the same mistakes. But the failure of the G-20 meeting is disquieting.
The member nations were simply doing what was in their interests. They weren't intent on messing up the world's economy, nor did they want to exacerbate the already rising tensions among them. They simply couldn't levitate themselves above their conflicting national interests to the supranational lovefest that the G-20 is supposed to foster. Each nation's domestic politics dictated its views. With the world economy too small a pie for every nation to get as much as it would like, we're now edging toward an international game of musical chairs.
And that's the way it was in the 1930s as well. None of the central bankers and other policy makers of that era whose mistakes are now so routinely and condescendingly decried meant to create a train wreck. Like their modern counterparts, they consulted with each other and tried to find common ground for constructive action. But they were driven, like today's policy makers, by the interests of their own nations. They looked at the rest of the world from differing frames of reference, each crafted by parochial interests. Yes, they blew it. But they weren't gonzo idiots. They simply did what nations generally do in times of international disagreement.
The G-20's failure last week is a disconcerting reminder of the way things fell apart in the 1930s. The G-20 also failed to find common ground, and their pledge to continue working together seemed like little more than press fodder to divert financial reporters while world leaders caught their flights out of Seoul. Before the Fed, the Treasury Department, and other policy makers in America and elsewhere confidently conclude they know how to avoid the mistakes of the 1930s, they ought to step back and think about what just happened. Human nature hasn't changed in the last 80 years. Even though the Fed is taking a sharply different tack from the Fed of the 1930s, its most recent quantitative easing program may provoke the currency, trade and other economic conflicts among nations that hindered recovery during the 1930s. The doyennes of central banking and fiscal policy should be not proud. Their deep and prolonged studies of the Great Depression, and the advantage of hindsight, may still be insufficient to keep us from falling into the abyss. When a group cannot agree on shared sacrifice for the greater common welfare, divided they will have to make their individual ways in a treacherous world.
Friday, June 25, 2010
Winners and Losers from the Yuan Re-valuation
Winners
China cleverly announced its decision to permit its currency, the yuan, to float more widely and gradually move higher against the dollar shortly before the G-7 and G-20 meetings. It took away the biggest gripe other nations had about it, and leveraged its ability to lecture them about their failings. The Chinese, who are heavily invested in both dollar and Euro denominated assets, have much to say about the profligacy of the West, and much to gain if Western nations get their financial houses in order. The re-valuation was begun just as China is turning to building domestic consumer demand in order to lessen its dependence on exports to the West. It's no accident Chinese authorities didn't interfere when workers at Honda and Toyota plants in China went on strike. Higher wages in China will boost domestic demand. (Henry Ford did something similar in 1914 when he first began paying workers the then astonishing wage of $5 a day.)
China in the long term will win from the re-valuation of the yuan. Its manufacturers will seek to become more efficient and cost effective in order to preserve their export markets. Given China's indisputable prowess in manufacturing, expect many of them to succeed. The same thing happened with Japan. In the early 1970s, the yen traded at over 300 to the dollar. Despite various Japanese government measures to keep the yen down, it rose to the low 200s per dollar by the end of the 1970s. But Japan kept running a trade surplus with the U.S. because its manufacturers continued to improve (and in some cases move their factories to lower cost countries in Asia, but this still helped Japan maintain a surplus with America). In the 1980s, the yen stubbornly remained around the low 200s until a 1985 international agreement called the Plaza Accord led to its devaluation into the low 100s. Nevertheless, Japan's trade surplus with the U.S. remained sizable. It remains sizable to this day (over $44 billion in 2009), even though the yen now trades around 90 to the dollar. Japan's exporters still work hard to improve efficiency and quality. The Chinese will do the same, and their likely success will preserve many export markets. Efficiency improvements will also help them to seize market share in China's growing domestic markets, reducing opportunities for America and other nations to export to China.
Mexico and other low cost manufacturers will also win. America's now chastened consumers, who have rediscovered the virtues of saving, will resist higher prices. As China's prices rise, American retailers will seek out alternative inexpensive sources of supply. These will almost always be in other foreign nations with low labor costs.
Currency traders at big banks, hedge funds and elsewhere will have more opportunities with a more flexible yuan. Traders like volatility, because price movements, whether they are up or down, create larger profit opportunities than stable exchange rates. Big banks will also profit from selling derivatives products to hedge or speculate in the value of the yuan.
Losers
The United States could easily end up on the short end of the stick. A higher yuan will improve American industry's ability to export to China. But long term success is far from certain, as Chinese manufacturers will fight back by vigorously improving their capabilities. America's failure to achieve a trade balance with Japan after the yen more than tripled in value over 30 years is sobering. America needs to concentrate its resources on developing products and services other wealthy nations want to buy. Its last couple of decades of growth have been financed by foreigners purchasing American debt, and that's a trend that won't last. A big recent American innovation, social networking sites, may be fun, and popular overseas as well as here. But these sites are not noticeably profitable, and won't add much to our national income. Investment in basic research and development, bio tech and high tech should be favored. We don't need more financial engineering. We need more science-based engineering. Long term economic growth can't rest on the hoped-for continued escalation of real estate or any other asset. It should come from making things other people want to buy.
EU nations are also likely losers. The still unfolding sovereign debt crisis reveals that Western Europe, like America, used debt instead of productive capability to foster "prosperity." Europe is less innovative than America, and its prospects for growth are correspondingly lower. (EU per capita income is already about 30% lower than America's and Europeans should worry about whether or not that comparison will worsen.) As the rising yuan strengthens China, and American industry seeks to riposte, Europe will be caught in the cross-fire. Germany, with its famed discipline, might maintain relative parity. But the rest of Europe may have to rely increasingly on the quaintness of its tourist sites to pay the bills.
Political Winners
While we've been focusing on economics, the yuan re-valuation eases tensions between America and China, and makes it easier for them to work together on common problems. China wants to become wealthier and stronger. But it would not want America to become weaker. America is the world's police officer, and is taking the brunt of the load of dealing with international nut cases like North Korea's Communist government and the radicals in power in Iran. If the U.S. were to weaken and reduce its level of engagement in Asia, China would be stuck with a lot of nasty problems. The Chinese benefit economically from a prosperous South Korea, so they'd have the primary burden of constraining the loonies in Pyongyang, a job now largely performed by the U.S. troops on the 38th parallel. The Chinese would also have to greatly increase their involvement in the Middle East, a crucial source of petroleum for them and many of their Asian trading partners. The U.S., at great cost in lives and money, currently ensures a steady outflow of oil from the Middle East. And the U.S. war against Islamic radicalism in Afghanistan and elsewhere suits China's purposes. The same radicalism has seeped into the Muslim populations of Chinese Central Asia, creating unrest and occasional violence. The Chinese know they would become a primary target if America withdrew from the field of fire. America, in turn, needs China's cooperation with its many problems in Asia and elsewhere. Thus, both nations are political winners from the yuan re-valuation.
China cleverly announced its decision to permit its currency, the yuan, to float more widely and gradually move higher against the dollar shortly before the G-7 and G-20 meetings. It took away the biggest gripe other nations had about it, and leveraged its ability to lecture them about their failings. The Chinese, who are heavily invested in both dollar and Euro denominated assets, have much to say about the profligacy of the West, and much to gain if Western nations get their financial houses in order. The re-valuation was begun just as China is turning to building domestic consumer demand in order to lessen its dependence on exports to the West. It's no accident Chinese authorities didn't interfere when workers at Honda and Toyota plants in China went on strike. Higher wages in China will boost domestic demand. (Henry Ford did something similar in 1914 when he first began paying workers the then astonishing wage of $5 a day.)
China in the long term will win from the re-valuation of the yuan. Its manufacturers will seek to become more efficient and cost effective in order to preserve their export markets. Given China's indisputable prowess in manufacturing, expect many of them to succeed. The same thing happened with Japan. In the early 1970s, the yen traded at over 300 to the dollar. Despite various Japanese government measures to keep the yen down, it rose to the low 200s per dollar by the end of the 1970s. But Japan kept running a trade surplus with the U.S. because its manufacturers continued to improve (and in some cases move their factories to lower cost countries in Asia, but this still helped Japan maintain a surplus with America). In the 1980s, the yen stubbornly remained around the low 200s until a 1985 international agreement called the Plaza Accord led to its devaluation into the low 100s. Nevertheless, Japan's trade surplus with the U.S. remained sizable. It remains sizable to this day (over $44 billion in 2009), even though the yen now trades around 90 to the dollar. Japan's exporters still work hard to improve efficiency and quality. The Chinese will do the same, and their likely success will preserve many export markets. Efficiency improvements will also help them to seize market share in China's growing domestic markets, reducing opportunities for America and other nations to export to China.
Mexico and other low cost manufacturers will also win. America's now chastened consumers, who have rediscovered the virtues of saving, will resist higher prices. As China's prices rise, American retailers will seek out alternative inexpensive sources of supply. These will almost always be in other foreign nations with low labor costs.
Currency traders at big banks, hedge funds and elsewhere will have more opportunities with a more flexible yuan. Traders like volatility, because price movements, whether they are up or down, create larger profit opportunities than stable exchange rates. Big banks will also profit from selling derivatives products to hedge or speculate in the value of the yuan.
Losers
The United States could easily end up on the short end of the stick. A higher yuan will improve American industry's ability to export to China. But long term success is far from certain, as Chinese manufacturers will fight back by vigorously improving their capabilities. America's failure to achieve a trade balance with Japan after the yen more than tripled in value over 30 years is sobering. America needs to concentrate its resources on developing products and services other wealthy nations want to buy. Its last couple of decades of growth have been financed by foreigners purchasing American debt, and that's a trend that won't last. A big recent American innovation, social networking sites, may be fun, and popular overseas as well as here. But these sites are not noticeably profitable, and won't add much to our national income. Investment in basic research and development, bio tech and high tech should be favored. We don't need more financial engineering. We need more science-based engineering. Long term economic growth can't rest on the hoped-for continued escalation of real estate or any other asset. It should come from making things other people want to buy.
EU nations are also likely losers. The still unfolding sovereign debt crisis reveals that Western Europe, like America, used debt instead of productive capability to foster "prosperity." Europe is less innovative than America, and its prospects for growth are correspondingly lower. (EU per capita income is already about 30% lower than America's and Europeans should worry about whether or not that comparison will worsen.) As the rising yuan strengthens China, and American industry seeks to riposte, Europe will be caught in the cross-fire. Germany, with its famed discipline, might maintain relative parity. But the rest of Europe may have to rely increasingly on the quaintness of its tourist sites to pay the bills.
Political Winners
While we've been focusing on economics, the yuan re-valuation eases tensions between America and China, and makes it easier for them to work together on common problems. China wants to become wealthier and stronger. But it would not want America to become weaker. America is the world's police officer, and is taking the brunt of the load of dealing with international nut cases like North Korea's Communist government and the radicals in power in Iran. If the U.S. were to weaken and reduce its level of engagement in Asia, China would be stuck with a lot of nasty problems. The Chinese benefit economically from a prosperous South Korea, so they'd have the primary burden of constraining the loonies in Pyongyang, a job now largely performed by the U.S. troops on the 38th parallel. The Chinese would also have to greatly increase their involvement in the Middle East, a crucial source of petroleum for them and many of their Asian trading partners. The U.S., at great cost in lives and money, currently ensures a steady outflow of oil from the Middle East. And the U.S. war against Islamic radicalism in Afghanistan and elsewhere suits China's purposes. The same radicalism has seeped into the Muslim populations of Chinese Central Asia, creating unrest and occasional violence. The Chinese know they would become a primary target if America withdrew from the field of fire. America, in turn, needs China's cooperation with its many problems in Asia and elsewhere. Thus, both nations are political winners from the yuan re-valuation.
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