US Dollar Victimization of Japan and China

Writes Henry CK Liu, Japan is a classic case of a victim of monetary imperialism. In 1990, as a result of Japanese export prowess, the Industrial Bank of Japan was the largest bank in the world, with a market capitalization of $57 billion. The top nine of the 10 largest banks then were all Japanese, trailed by Canadian Alliance in 10th place. No US bank made the top-ten list. By 2001, the effects of dollar hegemony have pushed Citigroup into first place with a market capitalization of $260 billion. Seven of the top ten largest financial institutions in the world in 2001 were US-based, with descending ranking in market capitalization: Citigroup ($260 billion), AIG ($209 billion), HSBC (British-$110 billion), Berkshire Hathaway ($100 billion), Bank of America ($99 billion), Fanny Mae ($80 billion), Wells Fargo ($74 billion), JP Morgan Chase ($72 billion), RBS (British-$70 billion) and UBS (Swiss-$67 billion). No Japanese bank survived on the list.

China is a neoclassic case of dollar hegemony victimization even though its domestic financial markets are still not open and the RMB yuan is still not freely convertible. With over $1.4 trillion in foreign exchange reserves earned at an previously lower fixed exchange rate of 8.2 to a dollar set in 1985, now growing at the rate of $1 billion a day at a narrow range floating exchange rate of around 7.5 since July 2005, China cannot spend much of its dollar holdings on domestic development without domestic inflation caused by excessive expansion of its yuan money supply. The Chinese economy is overheating because the bulk of its surplus revenue is in dollars from exports that cannot be spent inside China without monetary penalty. Chinese wages are too low to absorb sudden expansion of yuan money supply to develop the domestic economy. And with over $1.4 trillion in foreign exchange reserves, equal to its annual GDP, China cannot even divest from the dollar without having the market effect of a falling dollar moving against its remaining holdings.

Thus China is trapped into a trade regime operating on an international monetary architecture in which it must continue to export real wealth in the form of underpaid labor and polluted environment in exchange for dollars that it must reinvest in the US. Ironically, the recent rise of anti-trade sentiment in US domestic politics offers China a convenient, opportune escape from dollar hegemony to reduce its dependence on export to concentrate on domestic development. Chinese domestic special interest groups in the export sector would otherwise oppose any policy to slow the growth in export if not for the rise of US protectionism which causes shot-term pain for China but long-term benefit in China’s need to restructure its economy toward domestic development. Further trade surplus denominated in dollar is of no advantage to China.

Even as the domestic US economy declines since the onset of globalization in the early 1990s, US dominance in global finance has continued to this day on account of dollar hegemony. It should not be surprising that the nation that can print at will the world’s reserve currency for international trade should come up on top in deregulated global financial markets. The so-called emerging markets around the world are the new colonies of monetary imperialism in a global neo-liberal trading regime operating under dollar hegemony geopolitically dominated by the US as the world’s sole remaining military superpower.

The one power that the IMF really has is to organize a bailout in a crisis. No crisis means no bailouts are necessary, in which case what the IMF thinks is pretty irrelevant. Suppose the IMF declares China’s currency policy to be the work of the anti-Christ….. Now what?

2fish — you are right, the imf’s real leverage comes from its lending. China has no need to borrow. Nor does the US. That allows both to ignore its analysis. However, the IMF’s analysis of the US conceivably could shape Chinese policy toward the US, and the IMF’s analysis of China could shape US policy toward China. That interaction gives it a small amount of influence.

What I don’t get though is why the IMF is unwilling to use the (limited) leverage it has. Who knows whether or not the IMF has an ability to persuade those with undervalued exchange rates to change if it won’t even indicate that their exchange rates are undervalued …

Dave, please make me a favour. If you have the chance, please tell Chinese authorities to sell all this Euro Stuff which is happily flowing to China.
Suggestions: Buy German Cars, Italian Clothes, Spanish oranges, send some million chinese to Europe. It’s not so bad. They can simply sell Euros in the market asking for RMB (Are there?) or any other currency, except the $, you know, they have so many.

I’m Frightened to think I could become the new “monetarian imperialist”, so please, if you can, tell the chinese TO SELL Euros.

Thank you

Carlo

Bush Administration relying on China to solve Iranian and North Korea problems
http://www.nytimes.com/2007/10/07/weekinreview/07myer.html?ref=asia

GEORGE W. BUSH, embattled at home, tied down in Iraq and watching the clock run out on his presidency, has found a diplomatic crutch in an unlikely place: China.

Last week’s agreement by North Korea to disable its nuclear facilities — announced in Beijing, tellingly — showed just how much Mr. Bush’s foreign policy has come to rely, for better or worse, on the help of the Chinese. They might just be the administration’s best hope for peacefully resolving the next big crisis on the horizon, Iran’s refusal to give up the right to enrich uranium. Or so some in the administration are hoping.

Mr. Bush, who spent most of his presidency with a swaggering, go-it-alone style, has increasingly turned to China on problem after problem: from North Korea to Darfur to the demonstrators in Myanmar.

“China has become the first stop for any American diplomacy,” said Christopher R. Hill, the American negotiator in the North Korea talks.

Steven Clemons of the New America Foundation, a bipartisan research organization in Washington, said that China has already played an active role in trying to resolve tensions that could lead to another military conflict in the Persian Gulf.

He credited what he said were quiet Chinese efforts to win the release of four Iranian-Americans jailed by the authorities in Iran this summer.

China, by virtue of its permanent seat on the United Nations Security Council, has always been an important diplomatic player. But its importance to the Bush administration has grown for two reasons: it has become more assertive around the globe and the administration has exhausted a lot of its options.

“I think we need China almost everywhere in the world because we’ve disengaged from the rest of the world,” Mr. Clemons said, criticizing the administration’s initial disdain for concerted international diplomacy and citing its preoccupation with Iraq.

Meanwhile, China has steadily expanded its diplomatic and economic ties far beyond Asia. Mr. Clemons suggested that that has caused a subtle tectonic shift in how nations view it and, conversely, the United States. “They see China as an ascending power,” Mr. Clemons added, “and they don’t see us that way any more.”

re: a veritable Wild West of tarriffs, taxes, and other protectonist barriers “IMF Urges Countries Against Using Capital Controls” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aR.3H.nnxuJw

re: “in line with fundamentals” – if there is any consensus as to what this means

“…We go by logic and fundamentals. Well, sort of … who said gold was an inflation hedge? The price today is around $730… When the Aden sisters were on the case it hit $875. Adjusted for US inflation, the price has fallen 60%…” http://www.ft.com/cms/s/0/fc32fe32-7538-11dc-892d-0000779fd2ac.html

A lot of protectionist talk during the Republican debate last night.

‘the fundamentals’ – “…there looms a potential conflict over depleting water reserves…” http://www.pinr.com/report.php?ac=view_report&report_id=695&language_id=1

I tend to think maybe (if that is qualification enough) that it might be a good thing for the US to impose 20% tariffs on Chinese imports…to break the logjam of the present situation and force some movement (ie changes) in the present regime. While not desirable in itself it might force China to revalue, etc.

Sorry,

I forgot to say this bunch of cowboys acting however they want, shouldn’t impose veto rights to a few oldish strong cowboys, in the same way that Alistair Darling wants to screw some outsiders who live in London without voting rights.

And although his Budget will have a hole the size of the Andromeda Galaxy, as Cassandra says, London’s days as a Tax Refuge are limited, it seems. I doubt it, but they are thinking on it.

Power is power, money is money, and votes are votes. In the middle of the triangle, mafia orchestrating the vertices. And in the center… some employee complaining… of what? Capitalists taxes?

I’d like to see people working in London Exchange in demonstration on the streets of London. After watching to bishops and priest demonstrating in madrid against the gays weddings, I’m ready to any kind of demonstration anywhere. A taught decision, anyway.

Best regards,

Macroman: So what all these countries need to decide is whether they want to create a forum, whether the IMF or something else, as a forum to resolve/mediate disputes, or whether they want every cowboy to shoot his revolver wherever he damn well likes.

That’s the purpose of the WTO, and it works pretty well for trade. The thing about WTO is that you need to get about 150 countries to coordinate actions, and so you need some sort of institutional mediator. In the case of currencies, you have at most five people that matter and there is no need to create some sort of forum.

Since the subject is the IMF, does anyone have an idea why Rato is leaving early? Possible frustration with alleged US domination of the organization?

And what do you informed observers think of Strauss-Kahn’s chances to revive the IMF? It is said that he wants emerging economies to be more influential and more active. Since I live in France, I have observed him in action for a number of years and have a positive impression. He is perhaps a better politician than economist, but maybe that is what is needed.

Also I understand Martin Wolf criticised the choice of Strauss-Kahn quite strongly – Didn’t see the article.

Nobody knows why Rato is leaving the FMI, and nobody believes in Spain his familiar reasons.

Farrar,

Rato was the best prime minister of Aznar and the probably the man who got Aznar to be president for a second mandate, because Spain economically “was well”, as Aznar used to say.

With the memory of a big industrial crisis, that had been corrected by Solbes, Rato went to government with Aznar, and collected Solbes reforms.

Then he made private the most important public companies among aznar friends (sort of Telefonica, Endesa, etc), and “Spain goes well” was Aznar’s main syntax and wording. Spanish growth was sound and spanish fascist were “sacando pecho” (showing off their breast, literally).

But after the demonstrations against Iraq war, he was the only man in government town saying “is would be an imprudent step and very unpopular”.

Aznar never forgave him, but he went from Aznar’s lost government (do you remember march 13th), directly to IFM in the weakest moment of Aznar’s Gov.

He say’s for familiar reasons (his wife is about to 25 years younger than him, and could be), but nobody believes it.

I think that after some years of leash, first with Aznar and then with Bush or some slave of him, he decided to be out of Gov. and news and enjoy a healthy and wealthy retirement without troubles.

Anyway, he lowered next year spanish growth Gov. ratio (as IMF pres.), and pissed-off all journalist asking stupid questions against current Gov.

Some news expected he to be the next pres. of spain. That’s totally off-question today.

So, who knows.

PS.: I think he’s saying piss off to everybody.

Adiemuso,

I think that Stiglitz, Krugman, Dean Baker, and our beloved Brad, and a few economist more, each in their way, tell their mind openly and with sound arguments about what is happening in the world economy (and I love Mark Thoma’s work, or econbrowser, or Y. Smith from nakedcapitalism or even Macroman and his humor). But very few dare to tell their mind speaking to politics or the media.

I’d liked that NYT or WaPo or The Economist offered a well-paid column on sundays to Brad, just to show his hard data to general people. No hope.

MSM is eating us.

I remember that P. Krugman was proud to say that he can say what he wants because he’s a professor in a USA university.

The banker Jerome a Paris, above, is a banker in business working with corporations in structured lending of hi-cost projects on energy. He knows a lot about energy. But he blogs, with a big success.

“For a “fair” and “democratic” organization you need to have voting rights for all members not just a privileged few.”, you say.

But now a days…

Last of Stiglitz:

The House of Cards:

There are times when being proven right brings no pleasure. For several years, I argued that America’s economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990′s. But no bubble can expand forever. With middle-class incomes in the United States stagnating, Americans could not afford ever more expensive homes.

As one of my predecessors as chairman of the US President’s Council of Economic Advisers famously put it, “that which is not sustainable will not be sustained.” Economists, as opposed to those who make their living gambling on stocks, make no claim to being able to predict when the day of reckoning will come, much less identifying the event that will bring down the house of cards. But the patterns are systematic, with consequences that unfold gradually, and painfully, over time.

There is a macro-story and a micro-story here. The macro-story is simple, but dramatic. Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years.

Booming home prices gave Americans the confidence, and the financial wherewithal, to spend more than their income. America’s household savings rate was at levels not seen since the Great Depression, either negative or zero.

With higher interest rates depressing housing prices, the game is over. As America moves to, say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with it, the economy.

The micro-story is more dramatic. Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more – there was already excess capacity. Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital.

It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge. But this is what Alan Greenspan encouraged Americans to do. When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages – at a time when interest rates had nowhere to go but up.

Predatory lenders went further, offering negative amortisation loans, so the amount owed went up year after year. Sometime in the future, payments would rise, but borrowers were told, again, not to worry: house prices would rise faster, making it easy to refinance with another negative amortisation loan. The only way (in this view) not to win was to sit on the sidelines. All of this amounted to a human and economic disaster in the making. Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income.

Globalisation implies that America’s mortgage problem has worldwide repercussions. The first run on a bank occurred against the British mortgage lender Northern Rock. America managed to pass off bad mortgages worth hundreds of billions of dollars to investors (including banks) around the world. They buried the bad mortgages in complicated instruments, buried them so deep that no one knew exactly how badly they were impaired, and no one could calculate how to reprice them quickly. In the face of such uncertainty, markets froze.

Those in financial markets who believe in free markets have temporarily abandoned their faith. For the greater good of all (of course, it is never for their own selfish interests), they argued a bailout was necessary. While the US Treasury and the IMF warned East Asian countries facing financial crises 10 years ago against the risks of bail-outs and told them not to raise their interest rates, the US ignored its own lectures about moral hazard effects, bought up billions in mortgages, and lowered interest rates.

But lower short-term interest rates have led to higher medium-term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures. It may make sense for central banks (or Fannie Mae, America’s major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity. But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions. Equity owners in banks should not get a free ride.

Securitisation, with all of its advantages in sharing risk, has three problems that were not adequately anticipated. While it meant that American banks were not hit as hard as they would otherwise, America’s bad lending practices have had global effects.

Moreover, securitisation contributed to bad lending: in the old days, banks that originated bad loans bore the consequences; in the new world of securitisation, the originators could pass the loans onto others. (As economists would say, problems of asymmetric information have increased.)

In the old days, when borrowers found it impossible to make their payments, mortgages would be restructured; foreclosures were bad for both the borrower and the lender. Securitisation made debt restructuring difficult, if not impossible.

It is the victims of predatory lenders who need government help. With mortgages amounting to 95% or more of the value of the house, debt restructuring will not be easy. What is required is to give individuals with excessive indebtedness an expedited way to a fresh start – for example, a special bankruptcy provision allowing them to recover, say, 75% of the equity they originally put into the house, with the lenders bearing the cost.

There are many lessons for America, and the rest of the world; but among them is the need for greater financial sector regulation, especially better protection against predatory lending, and more transparency.

Sorry, Brad, enough for today!

koteli — somewhat shorter comments please; it generally isn’t helpful to paste in entire columns from other sources. thanks.

“…it is worth asking why…(Sama) chose instead to ignore and defy the pressure coming from outside its borders. First, a revaluation would reduce Saudi Arabia’s oil income as currency appreciation would lead to less riyal income when converted from US dollars… Finally, it could be that other Gulf Co-operation Council economies opt to revalue and depeg as Kuwait did, even though Kuwait’s decision was motivated by a desire to signal its disquiet about the proposed 2010 currency union rather than to leave the US dollar axis. In the event of a GCC economy revaluing its currency, Saudi Arabia will not necessarily follow…” http://www.ft.com/cms/s/0/4ba6456e-775f-11dc-9de8-0000779fd2ac.html?nclick_check=1