Category Archives: Money

Economic posts

China is not looking for assurances, they are giving a warning

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From The New York Times…

The Chinese prime minister, Wen Jiabao, spoke in unusually blunt terms on Friday about the “safety” of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to offer assurances that the securities would maintain their value.

If that does not worry you, read the Wall Street Journal article…..

The Obama administration rejected China’s concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.

In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

“There’s no safer investment in the world than in the United States,” said presidential spokesman Robert Gibbs.

Every time during this current crisis someone has claimed that something was safe, it has run into trouble within six months. But such worries are old hat. If all there was to this story was somebody expressing worry about the ability of the Untied States to handle its debt load I would not even bother posting it. But what is more interesting about this story is how everyone seems to be willfully misinterpreting it.

This story has been all over the news, and yet everywhere I go people are talking about how China is looking for assurances. But that does not come close to passing the smell test. You don’t have a leader of a country seek assurances. You do that through private diplomatic means. When a leader of a country speaks, it is to shape public perception and to warn the world about actions that might be forthcoming.

Yet everyone is bending over backwards to convince themselves that this is nothing more than China looking for assurance. Every article on the subject is filled with experts who assure us that China has not real choice and that it must continue to buy US assets. I think Brad Setser falls into this trap when he says…..

1) China both wants to maintain the RMB’s link to the dollar and avoid adding to its already large dollar exposure. Yet so long as China pegs to the dollar and runs a sizable current account surplus, it is hard to see how China can avoid adding to its dollar holdings.**

2) China is torn between its interest as a creditor and its interests as an exporter. China’s commercial interests would be best served by an even larger US stimulus, one that helped spur US demand for China’s goods. China’s reserve managers though worry that the US won’t be able to finance a large stimulus and thus are worried that a rise in Treasury supply would reduce the value of China’s existing Treasuries.

The problem with Mr. Setser’s analysis is that he assumes that the question of what is best for China’s economy and the question of what is best for the value of China’s reserves are two separate issues in the minds of China’s policy makers. But while this was certainly true is the past, there is no reason to assume that this is true today.

In the past it was clear that China was willing to sacrifice the value of its reserves in order to facilitate economic growth. But that was back when China was exchanging the value of its reserves for a booming trade surplus. Today China’s trade surplus is falling like a rock. In January, China’s trade surplus was $39.1 billion dollars. In febuary, its trade surplus was only $4.84 billion dollars. If China’s trade surplus keeps falling at its current rate, China will swing into a trade deficit next quarter. If that happens, China will need to sell some of its dollars assets to fund its imports.

This scenario is currently regarded as unthinkable by most commentators. But it is the logical result of China trying to stimulate domestic demand. In fact, if China wants to prop up domestic demand (like it has promised to do) without running a huge fiscal deficit (like it has promised not to do) then they have no choice but to engage in a massive sell down of their reserves.

So the reason that China is making it very public that they expect the US to insure the value of China’s investments may have something to do with the fact that China is starting to think that it may need those assets to keep its own economy afloat.

Regardless of whether I am right or not, the idea that that Prime Minster of China is looking for assurance is bunk. The US government has already committed to standing behind the agency debt. The treasuries have it in writing that they are backed by the full faith and credit of the US government. How are more words going to assure the Chinese? There is something more going on here.

China to run a trade deficit?

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From The Times….

The global financial crisis has taken its toll on China, sending exports from the workshop of the world tumbling in February, slashing its trade surplus and raising the possibility of a deficit.

Exports in February slid 25.7 per cent from a year earlier, dwarfing forecasts of a 5.0 per cent fall, while imports dropped 24.1 per cent, close to projections of a 25.0 percent decline.

The resulting trade surplus was only $4.84 billion (£3.5 billion), a three-year low, compared with $39.1 billion in January and a record $40.1 billion in November, the customs administration said.

That was far short of market expectations of a figure of $27.3 billion.

Brad Setser has a more nuanced take.

A Good Week For The Economist

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In the last couple of weeks it has seemed like the Economist was not worth the time it took to read. But this week I was reminded of why I read the magazine. Some of the highlights…..

The article on Japan called Rebalancing act. The article suffers from the usual Economist foible of trying to spin something as positive what is a total disaster. Take this paragraph, for example. . .

JAPANESE households used to be among the world’s biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan’s trade balance moved into deficit last year (see top chart). A long-overdue—and painful—economic rebalancing is under way.

Rebalancing is such stupid word for spending down your savings in the face of economic disaster. For years I have had to suffer through listening to fools arguing that Japan’s problem was that its people saved too much. Now that the savings rate in Japan is practically zero (see the charts in the article) things are going just dandy, right?

But if you can get past the fact that the facts presented in the article are completely at odds with the idea that Japan is going through some kind of positive “rebalancing,” the article is a very interesting read.

Another interesting read is the article entitled The bees are back in town . You can read the article as both refuting some of the wilder fears about the collapse of the honey bee population and as a warning on the dangers of extreme mono cultures. Though it is clear that the writer’s intent is only the former and not the latter.

The article entitled About face was also interesting. It made me wonder how creditworthy I looked. It also made me think of Abraham Lincoln’s famous contention that after a certain age you could blame a man for how he looked (meaning their moral character would start to show through, not that people should all be handsome. He had enough self knowledge to know that nobody could accuse him of being handsome).

Those are only the highlights of this week’s Economist. There were other articles that I found interesting as well. But you can scan what is in this week’s edition for yourself if you are so inclined.

My apologies for anyone who struggled through reading this before I whacked off his worse grammatical errors. Please remember that even the brilliant Albert Einstein occasionally forgot where he lived; just because our Ape Man cannot always remember the difference between “passed” and “past” does not necessarily indicate he is in the habit of drooling. We apologize for the technical difficulties, and we hope that you will find his ideas worth reading in spite of his occasional struggles with coherency.

Sincerly,

The Troll

One Reason Eastern Europe Has A Demographic Problem

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From the New York Times….

Alina Lungu, 30, said she did everything necessary to ensure a healthy pregnancy in Romania: she ate organic food, swam daily and bribed her gynecologist with an extra $255 in cash, paid in monthly installments handed over discreetly in white envelopes.

She paid a nurse about $32 extra to guarantee an epidural and even gave about $13 to the orderly to make sure he did not drop the stretcher.

But on the day of her delivery, she said, her gynecologist never arrived. Twelve hours into labor, she was left alone in her room for an hour. A doctor finally appeared and found that the umbilical cord was wrapped twice around her baby’s neck and had nearly suffocated him. He was born blind and deaf and is severely brain damaged.

Just in case you thought defense spending was about defense

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From the Washington Post….

It was Democrats who stuffed an estimated $524 million in defense earmarks that the Pentagon did not request into the 2008 appropriations bill, about $220 million more than Republicans did, according to an independent estimate. Of the 44 senators who implored Defense Secretary Robert M. Gates in January to build more F-22 Raptors — a fighter conceived during the Cold War that senior Pentagon officials say is not suited to probable 21st-century conflicts — most were Democrats.

And last July, when the Navy’s top brass decided to end production of their newest class of destroyers — in response to 15 classified intelligence reports highlighting their vulnerability to a range of foreign missiles — seven Democratic senators quickly joined four Republicans to demand a reversal. They threatened to cut all funding for surface combat ships in 2009.

Within a month, Gates and the Navy reversed course and endorsed production of a third DDG-1000 destroyer, at a cost of $2.7 billion.

The Real Problem

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The Belmont Club has a couple of posts up that are critical of Obama. The first examines his “I am so tried” excuse for miss handling the the visit Gordon Brown. The second post examines the signs that his honeymoon may be coming to an end.

Both of these posts are worthwhile if your only object in life is to repay Obama with the same kind of treatment that was given to Bush. But as far as addressing the real issues of the day, these posts miss the mark by a wide margin. The real problem is articulated by Obama himself in a recent interview with The New York Times….

As he pressed forward with ambitious plans at home to rewrite the tax code, expand health care coverage and curb climate change, Mr. Obama dismissed criticism from conservatives that he was driving the country toward socialism. After the interview, which took place as the president was flying home from Ohio, he called reporters from the Oval Office to assert that his actions have been “entirely consistent with free-market principles” and to point out that large-scale government intervention in the markets and expansion of social welfare programs began under President George W. Bush.

No fair minded person could deny that what Obama is doing is largely the continuation of the polices that Bush pursued. To the extent that markets seem to be punishing Obama’s every missteps harder it is because they thought that Bush’s plans were only there to keep everything from collapsing until Obama arrived with a real plan. Now that everyone can see that Obama’s plan is just an expanded version of Bush’s plan, it is harder for the markets to convince themselves that some magic fairy is going to arrive and save us.

But this realization is not likely to do Republicans (or the nation) much good until a credible alternative to Obama/Bush’s economic rescue plan is put forth. Right now, few people really believe that Republicans would behave all that differently then Obama if they still held the presidency. Nothing that either McCain or Bush has said or done offers any kind of real contrast to how Obama is behaving. And in my experiences this is widely realized among the blue collar white males who form a key part of the traditional Republican governing coalition. This post from Rod Dreher talking about a recent conversation he had with a blue collar conservative reflects a lot of conversations that I have heard. Toward the end of the post Rod Dreher says…..

A couple of things were clear to me. One, this working-class conservative voter had bitter contempt for the Republican Party in particular, and the political and financial elites in general. He believes, quite correctly in my view, that they’re looking out only for themselves, that they will avoid a just reckoning for the disaster they’ve caused. And two, there’s no telling what kind of backlash is brewing once people lose faith in the institutions of politics and finance. This is just one repairman in Texas on one day in the spring of 2009. But I am sure he’s not alone.

The key point that a lot of conservatives seem to be avoiding in their critiques of Obama is that the only alternative to what he is trying to do is the complete destruction of the existing system. In fact, many of them go so far as to argue that Obama is trying to remake the existing system and that is why is so dangerous. But the truth of the matter is that failure of the existing system is what is going to happen and that is going to change the American economic/poltical system in ways that are far more radical then anything Obama could dream of accomplishing. Acting as if Obama’s program is an attempt to bring about radical change instead of an attempt to prevent radical change is not really productive.

In the end, I think that the failure of Bush/Obama approach is a forgone conclusion. In fact, I think that by trying to head off the collapse Bush/Obama plan is making things worse. When you factor in the strain on government finances that will be brought about by retirement of the baby boomers and I just don’t see how the current system can keep functioning.

I am not alone in thinking this, of course. In fact, on both the right and left of the political system, you can find people who salivate over the prospect of a collapse because they believe that the forces that would be unleashed could be stage-managed to produce the society that they desire.

But if we are honest with ourselves, both liberals and conservatives would have to admit that there is no guarantee that the system that would arise out of such a collapse would be more to our liking then the current system. The problem with collapses is that they are inherently unpredictable and uncontrollable. A collapse could lead to huge increases in government power. It could lead to a sharp rise in racism and the oppression of minorities as a matter of government policy. It could lead to a rise in prominence of religious groups that are not even on the radar right now (economic problems have historically been good for the creation of new cults). It could lead to war and strife.

That is why everyone wants to attach huge importance Obama’s every little misstep and mistake. People would like to fool themselves into thinking that a trip into the unknown could be postponed if only our political leaders would do things right. Obama himself has this belief. That is why he is working himself into such a state that his aids worry he is not getting enough sleep. He thinks that if he just tries hard enough he might be able to make a difference.

But the truth is that the plane we are on is going to go down over unknown terrain. You can argue about which way would be the best way to crash land if you want. Or can try to fool yourself into thinking you can keep the plane in the air with positive thinking. But in the end, you can’t escape the fact that we are going to crash.