Mandel is right, to a certain extent.

But physical locations are not the issue anymore. The levers can be anywhere, including Cayman Islands, which, by the way does very nice chump change.

We have moved into an era where individual countries are slowly losing control–and, I would put China in that boat as well.

Big money, big investments, big companies–both financial and otherwise–can be and are being located anywhere it best suits them. Whatever place offers the best enticements–off they go.

Over a year ago I raised this issue. Once companies in the states set up bidding wars among towns and cities. Now those bidding wars are among countries. Who really is control?

Mandel is right about strong international institutions; they are needed. Right now, those extant haven’t a clue–neither do the politicians who keep the fiction of nationalism alive.

Good post.

As an aside, I bet a lot of people are surprised to see Mexico City on the list. I don’t. (A further aside: Bet few people have an actual image of what Mexico City looks like. They have images of Moscow, New York, Tokyoto, etc.)

It ain’t the lack of savings that the US lacks. The US lacks production. Without production, we all work in a restaurant for tips.

Interesting that Mandell chose to focus on venture capital investment:

“India Inc is coming of age it appears. On one hand, it is attracting huge equity investments from private equity funds, and on the other, it is now acquiring global companies like never before… According to a Grant and Thornton report, private equity fund in flows from January to October this year have touched $6 billion, a whopping 250 per cent increase from last year and more than 200 private equity deals have been struck this year. “…what we are now looking at is the infrastructure and real estate sectors which are poised for significant growth especially once the regulations ease up and more foreign investments comes into the sector…,” …And with the Tata Corus deal leading the way, Indian companies have made $15.72 billion worth of cross border M&A deals, which accounts for over 60 per cent of the total $24 billion worth of M&A till October this year…” http://www.domain-b.com/finance/general/20061109_investment.html

re: “Bet few people have an actual image of what Mexico City looks like.”

What is North America’s Spanish speaking population? And what is the value of annual remittances flowing from the US to Mexico? And how (extensively) are Canadian banks involved in Mexico?

“The shock felt here this week after three bombs exploded in various parts of Mexico City was partly calmed by the communiqué delivered late Monday. “We take full responsibility…” wrote the Revolutionary Co-ordination… Why was a Bank of Nova Scotia branch bombed?…” http://www.globeinvestor.com/servlet/story/GAM.20061110.IBLETTER10/GIStory/

re: “Globalization has overwhelmed Washington’s ability to control the economy.”

was there a ever a time when Washington could accurately ‘measure’ or ‘control’ the economy?

“…at its frontiers economics is changing dramatically in exciting and challenging ways. But almost all economics as it is actually taught and practised lags many years behind…” http://www.ft.com/cms/s/d0cd9ee2-6d3b-11db-9a4d-0000779e2340.html

…along with the person who is dedicating all of his time to provoking a conflict.

“Far better that than Chinese global hegemony. That truly would be a fate worse than death for the vast majority of people on the planet.”

Wow! Alarm bells go off when I see things like this. Isn’t this what Al Qaeda woud say regarding US involvement in Middle East? Scary what this world is coming to.

Mandel didn’t explicitly call for super-sizing the imf and turning it into a true global central bank — another institution could play that role. what he did argue is that the global contect (low policy rates in japan/ dollar reserve growth/ savings glut) has muted the impact of the fed’s tightening on its own …

of course, one response to the fact that higher-short-term rates haven’t pushed up long-rates is to hike short-rates even more — offsetting the impact of other forces. I am not sure that the fed is impotent.

finally, “fate worse than death” style language also strikes me as extreme.

LC — we are a long way from a world where either the fed or the PBoC cede control over global money to a new institution … tho we are in a world where the PBoC has by virtue of a policy choice (the de facto $ peg) lost much of its autonomy, and where the transmission channels of fed policy are changing as the global context changes. but i suspect coordination will be tried as a solution (assuming folks decide they want one) before some form of strengthened international institution (i.e. a global central bank).

“The US cannot finance domestic investment in the US – let alone foreign investments – out of its own savings”.

Brad – The truth of that sentence depends upon what the definition of savings is. If Savings refers to the -35 billion reported in the National Accounts as Personal Savings, then the sentence is correct. If Savings refers to the 1.8 trillion dollars of savings that is equal to the trade deficit plus investment, then the sentence is true.

If “savings” in that sentence refers to monies or assets produced in a year by the U.S. economy that is not consumed in that year, then the sentence is false. The Net Operating Surplus of Private Enterprises records, each year, an approximation to profits. In 2005, the amount was 2.9 trillion dollars. It is this amount, plus inflation in the value of financial assets, which produced the Net gain of Net Worth in 2005 of around 4 trillion dollars in 2005. This gain in financial assets each year is more than enough to pay the 2005 domestic investment bill (both private and public)of 2.5 trillion.

But this money is not what is used to pay the domestic investment bill each year. Domestic investment is paid from retained earnings (included in the numbers shown as gain in Net Worth) and loans and equity investment and government financing.

The bottom line. Lack of savings as reported by BEA does not show the creation and retention of financial assets each year that are available in the U.S. to finance domestic investment.

I realize that I am arguing with the conventional wisdom, not just you.

I write this because I think a lot of false conclusions are drawn from a lack of understanding of the role of profits and inflation in values of financial assets in creating U.S. wealth (savings in the broad sense as defined above).

re: “the role of profits and inflation in values of financial assets in creating U.S. wealth”

Are ‘financial services’ part of CPI – and if not, shouldn’t this category be included? It would be interesting to see an estimate of inflation in that category (whether or not it includes certain types of legal and accounting services?):

“…Inflation, as measured by the consumer price index, rose 84.3% over the 20-year period ended September 2006, or 3.1% a year, according to the Bureau of Labor Statistics. Some expense categories, however, have significantly outpaced the overall rate of inflation. The following are the most notable: College Tuition (289.5%); Hospital Services (280.4%); Drugs (177.6%); and Energy (131.9%)…” http://www.ftportfolios.com/index.aspx

This ramble only to ask if we have to pay closer attention to just what exactly all the saving and spending is achieving or how it’s accounted for. Mandel’s suggestion that some (parts) of the above categories may be classified as ‘investments’ may be somewhat misguided, given the magnitude of spending misallocations to advertising, medical treatments at the expense of prevention and abuses of insurance programs, to name a few, in healthcare alone.

Commitment to the idea that a good education is something that requires more spending: “We still need to spend more on education” might also be somewhat misplaced when there is so little understanding of the economics of this category, except that the returns seem to be diminishing as the costs rise: “real wages for young Americans with a bachelor’s degree have declined by almost 8% over the past three years”.

Mandel’s brief mention of tax related distortions doesn’t seem to acknowledge the full extent of how tax is impacting capital flows and asset valuations – including currencies. Global differences in property and shareholder rights also loom large, as the economic health and power of citizens, governments and corporations seems to be less dependent on employment and increasingly dependent on asset bases which can be diversified across many legal systems. Also interesting to see the common assumption that more dedicated r&d spending is good when the economics of intellectual property in general is still not well understood.

As we speak of globalizing institutions, also have to ask if we need to better understand the relationships between emerging powerful players and entities – the oligarchs, ‘hedgefunds’, mutual and pension funds, corporate entities and the banks with their respective governments? Khodorkovsky is one reminder that the oligarch ultimately enjoys, usually his, wealth and power with the cooperation of a home state.

As for globalizing regions outside of the US, interesting that Gulf investors seem to be increasing their investments abroad, http://www.bloomberg.com/apps/news?pid=20601087&sid=aYWA6Qhvb2.U&refer=home, while the Dubai Financial Market has suffered a 63% slump since the turn of the year making it the world’s worst performing gauge, according to Bloomberg and the Gulf region’s markets suffer their worst year since 2001, according to menafn.com. In this example and thinking back to previous posts, if there may be some value in relating discussions about Gulf currency pegs and reserve diversification to the very international flavour of the Gulf’s main financial hub, one indication of that in the closest example I can grab:

“Offshore Trust Services will be offered through a separate and wholly owned offshore company known as National Bank of Dubai Trust Company (Jersey) Ltd. This has been established with the support of NBD’s alliance partner Royal Bank of Canada’s trust company in Jersey… This alliance thus combines the presence of one of the Middle East’s strongest regional banks with Royal Bank of Canada Global Private Banking, the international private banking arm of Royal Bank of Canada… [Royal Bank of Canada] Global Private Banking is a North American leader and one of the top 15 providers of global private banking services internationally… National Bank of Dubai… is regarded as one of the most prominent banking institutions in the [UAE]…” – National Bank of Dubai introduces Offshore Trust Service, United Arab Emirates, 02/18/02 (The Dubai Bullion Desk was established and is managed by ScotiaMocatta at the National Bank of Dubai, Ref: ScotiaMocatta website)

I apologize for the double entries. I do not know why it is happening.

As for the new bill Balanced Trade Restoration Act of 2006, my comment is it is about time. Finally, some legislator has the guts to propose the goal of equal trade.

I do not think the Buffett proposal is the best way to reduce the size of the U.S. trade deficit, but that is unimportant. What is important is that a Senator has laid on the table a bill that is intended to interfer with foreign trade with the objective of moving toward equal trade. No more allegiance to free trade. Acceptance of the goal of equal trade instead. That is a giant step forward.

I need to read up on keynes’ international clearing union …

I do like the basic insight of Keynes that lay behind his initial vision of the imf — namely that adjustment requires symmetrical changes in both surplus and deficit countries (at least when the deficit countries are big enough to impact the global balance).

As for Buffet’s import certificate proposal, I tend to prefer exchange rate adjustment to various substitutes for exchange rate adjustment, such as auctioning off the right to import. So I would at least like to see exchange rate adjustment tried before heading off on alternative paths (import certificates, unilateral tariffs, etc) …

Ray — yep, we disagree. If you convert rising asset values into cash by selling the asset (or by borrowing against it), you create funds for new investment … and to a degree, that is what the US is doing. But the process of borrowing against the rising value of existing US external assets requires savings from the current income that the rest of the world is generating. Capital gains on existing assets are not the relevant metric for many purposes.

last thought – on education and r&d spending, NACUBO’s 2005 survey of reporting North American institutions estimates the total value all endowments at $299 billion, Harvard well in the lead with over $25 billion. I haven’t seen anything that provides a combined estimate for total revenues from endowment investments along with public funds and tuition income. But interesting this significant, globalizing, growing sector doesn’t generate more commentary.

Brad – I don’t understand why someone must sell a preexisting asset to generate funds for new investment. Can’t banks just loan money – create new money? Can’t businesses sell bonds to generate funds for investment? And the fat cats that have the “preexisting assets” buy those bonds, converting assets from one form to another without the intermediation of foreigners? Equity investors provide funds for investment in the U.S. without borrowing from abroad beause they have the assets and can convert them into whatever form is needed.

There must be some equation relating in and out flow of funds to the U.S. that I don’t understand – or perhaps more likely – refuse to believe.

More – Bernake’s conclusion that the developing countries are lending money to the developed world because they have a trade surplus is just wrong. Their trade surplus results in financial assets flow in to them to pay for their exports in excess of imports. They have the financial assets. Whether or not they choose to lend them to anyone else is a separate matter and does not depend upon the existence of the trade deficit of the U.S. What the trade deficit of the U.S. requires is that we send financial assets overseas to pay for our imports in excess of our exports. And it is because of the ease of creating financial assets in the U.S. (the gain of 3.8 trillion in Net Worth in the year of 2005)that the U.S. has been able to sustain the trade deficit thus far while maintianing a growing value of the dollar (from 1994 to 2005).

More – The expectation (or perhaps hope)that foreigners will become saturated with dollars and start to sell dollars ignores the possibility that our tradimg partners are routinely adjusting the volume of dollars held as cash to suit their preferences. Others are willing to buy dollars from them because the purchaser expects to get in on the process that created a net worth addition of 3.8 trillion last year.

All this may change. The Net Worth in the U.S. did not increase in the second quarter of 2006. If Net Worth continues to stall, the value of the dollar should go down. But not necessarily immediately. In 2001, the dollar continued stubbornly to increase while the Net Worth plunged downward.

Look at the growth in values of foreign stock markets compared to U.S. stock markets for predictions of the future of the value of the U.S. dollars – with lags. Why the lags I don’t understand.

i feel that the model of global finances in most economists’ heads is still in terms of equations. the financial flows of the global community are in effect circular, like the gulf stream and the deep ocean currents – thus for example, a rise in the price of oil sucks more dollars out of the united states. but get the full picture and the extra money spent by the japanese and europeans on oil, goes to the oil producers, and then a high proportion of their oil expenditure (and that of the u s itself) gets deposited and invested back in the u s.
thus in the wider picture, the higher oil price feeds more dollars into the u s than it sucks out ? ? the more dollars leave the u s, the more dollars re-enter.
i suspect that the central banks are aware of the significance of the global financial flows. private, selfish, offshore speculators are the greater danger to the system than any central bank.

He says; she says. The trade deficit requires that the U.S. transfer financial assets to foreign countries. Alternative perspective –The trade deficit requires that the U.S. sell a debt instrument to foreign countries.

Only difference – intergenerational transfer consists of 1) less financial assets inherited or 2) debt inherited.

Less financial assets better because the same generation that reduced total financial assets by a trade deficit also created new financial assets at the same time. A debt can become onerous; less financial assets is merely a reality to be lived with.

From a selfish point of view, why should the U.S. be unhappy if the Chinese economy follows the Japanese example? If I remember, there was a collective sigh of relief when the Japanese economy ceased growing so rapidly.

Your last sentence is closer to my feelings, that the Chinese Communists have beaten the Western devils at their own game.

I do not agree with your prediction that China may follow the example of Japan. Many differences, including Japan leadership aware of the problem you state and the willingness of the leadership to use their power to whip other elements, such as banks, into a shape that the leadership approves.

The Chinese are good at manufacturing goods for export. That is where they have beaten the U.S. at their own game. But obviously, where we are did not have to be. Germany and Japan have found a way to co-exist with China. We have not. Mainly because we were not willing to change our habits to deal with the existence of Chinese manufacturing goods.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7mSK5HyfiQc&refer=home

BOOOOMM! A metaphoric nuclear bomb on those who believe that Central Banks’ direct intervention has a major, overwhelming role in keeping the dollar low against the Yen, Euro, Pounds and SSFF.

CBs have been selling the dollar for about a month now (Russia since more), but the dollar started to decline only a few days ago, when rumours of CBs’ dollar sales started to spread. Implication: net of rumours, the private sector was still willing to provide more flows (or at least enough flows) into the dollar than it is necessary to cover US Current account needs: when the dollar was falling from 1,25 to 1.28 against the Euro, it was the private sector who was buying!

Now: the dollar is at 117:57 Yen and 127:70 Euro at the time of writing this post. Now it will accelerate its depreciation and break the old trading range: of course! Fundamentals have turned against the dollar (interest rates starting to converge across OECD countries) + CBs are speaking against the dollar . All this = dollar down.

This, in my interpretation, is rather a proof that the dollar was not badly priced until this summer (before a battery of macro news came out all against the dollar), and that the private sector was behind CBs in keeping the dollar “high”.

Now the last proof that our view was right will be the hardest: a coming wave of dollar depreciation that (a) will not cause a bond collapse in the US, and (b) that will not overshoot: the coming wave of depreciation will be about 10-12%, not 30%, not dramatic): it will be only a “jump” on its new equilibrium path after fundamentals have changed. But the latter is of course uncertain… currencies do overshoot sometimes!

Have fun, dollar shorts!

Of course those institutions are needed. IT s self evident. It s also self evident that people are only asking for them now that boom years are done.
Think about it all the international institutions so far have favored free trade, little has been done recently to avoid financial booms on the global level, especially financial booms on the back of devaluation policies from emerging countries.

PS – On the Yen: we’d have to check whether the Yen started to recover (a) not right when the CB Yen buying started, but rather a few (couple) of weeks later, when the leak about the CB buying came out (this would be Gheorghius-supportive), or (b) immediately when CBs started to buy (this would be Setser-supportive). Frankly, I’m not sure.

Yes, CBs matter, in many ways. Policy matters a lot. On major $ crosses, I feel CBs direct intervention in forex mkts (only part of their influence) matters for their turnover share, as the private sector matters for its turnover share. We’re not that far away…

Michael — apologies if i overstated your argument. I was struck by this passage:

“Finally, a Big Big Idea–probably too big to even consider right now–would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.

But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: “There’s no policy mechanism for bringing together the countries that really matter in the global economy.” The best solution would be some sort of global central bank with real powers–but that’s not going to happen until there’s a big enough financial crisis to truly scare people.”

“Finally, a Big Big Idea–probably too big to even consider right now–would be the creation of global institutions for governing the world economy.”

a week or two ago – ‘lets talk to iran and syria, and ask them nicely to help us pack up and leave without too much fuss . . . .” – would have been a ‘big idea.’

as with iraq – the turning point may be psychological rather than driven by events. the fragility of the global economy is in the back of all our minds. one day it will be in the forefront of our minds. tipping points are mysterious. one day it is 51%/49% and the next day you wake up and it has tipped over to 49%/51%. predicting or naming the 50/50 point is neither possible nor useful. a guy stepped off the back rail of the titanic as it slid under. he didn’t even get his hair wet. what looks like shrewd calculation is often unbelievable luck. most lotteries have that winning ticket in the drum somewhere.