Are you suggesting that Gulf States will have to raise interest rates, where bye drawing capital away from the U.S.?

Off-Topic:

British business launches $100 million festival of Chinese culture
LONDON, Jan 15 (AFP) Jan 15, 2008
http://www.sinodaily.com/2006/080115141915.wvf1nwe8.html

Britain will host Europe’s biggest-ever celebration of modern China starting next month, an 800-event festival of art, film, food and much more, organisers said Tuesday.

China Now, which gets under way in February to coincide with the start of Lunar New Year, comes amid heightened British interest in China, largely due to the 2008 Olympic Games in Beijing, they added.

The festival has been organised by British business rather than government, but those behind it say the event, which will cost in excess of 50 million pounds (66 million euros, 100 million dollars), aims to promote cultural links.

Highlights of the six-month programme include a major exhibition at London’s Victoria and Albert Museum on contemporary Chinese design, a themed Hong Kong day at Ascot racecourse, west of London, and Lunar New Year celebrations in the capital.

Simon Heale, China Now’s chief executive, told reporters that the idea was “to inform, to educate, to enthuse as many people as possible in this country about China”.

“I have a great belief that if we want to do better business, we have got to understand a country’s culture,” Alan Parker, co-vice chairman of the festival and chairman of financial public relations firm Brunswick, told AFP.

China Now is chaired by Stephen Green, group chairman of HSBC Holdings, while James Hughes-Hallett, chairman of The Swire Group and a director of Cathay Pacific Airways, is another vice-chairman.

note the calls for ending the peg come when Bush is in Riyadh trying to get the Saudis to increase production- that’s called a stealth reval- very untransparent. Pegs exist precisely to counter rigged currency markets.

DC –

this isn’t a post about china. but suffice to say that i disagree strongly with Dr. Keidel. Tis true that most of China’s 10% plus growth can be attributed to domestic demand growth (notably investment). unless your current account goes from 10 to 20% of GDP in a year, net exports won’t generate 10% GDP growth. It is also true — as someone like jon anderson recognizes — that net exports have contributed between 2 and 3% of gdp to china’s growth over the past three years, and that is an unusually large amount.

I agree Twofish,

The Iraq war represents a massive misallocation of capital in the trillions of dollars that sadly most Economist pundits avoid speaking about. The multi-trillion dollar estimate includes direct and indirect costs including the future medical bills for the over 30,000 seriously injured US Soldiers.

Re — Twofish on 2008-01-16 05:27:25

I agree with what you wrote on the Iraqi invasion. But I think the original mistake happened even before that. I think that the US answers to the 9/11 terrorist attacks were disastrous. Not just the wars, but the way they kept the economy artificially going by setting and holding the interest rate too low.

“if it doesn’t come through currency revaluation, it will come through inflation.” China is also a US creditor and seemingly has a similar inflation problem. However, it may be different. It is interesting to see the USDA data on meat production. In 2007 there was a huge drop in pork meat production in China, beacuse of a disease breakout. Supply dropped well below demand, no wonder leading to huge food inflation. When meat production goes back to normal, most of this will be solved. The question is if they can keep inflation from spreading to other sectors.

Brad,

The argument on whether China’s economy is overly dependent on exports to the US Economy will be settled in the not too distant future. If China’s economic growth significantly tanks along with the US Economy, I will owe you a lunch. With the implosion of the credit driven US Housing bubble, it is almost inevitable that the US Economy tanks into severe recession. Nationwide, US Housing prices have at least another 30% downward correction as measured by Robert Shiller that will destroy $6 trillion of paper wealth. Americans will collectively learn that a house is a place to live in; it should never have been an ATM cash machine for conspicuous over consumption.

I just called Moody’s NY and was told the potential downgrade is a ten-year or so projection. In other words, it is troubling, but nothing more serious than one of Mr. Setser’s posts.

So getting back on topic, I think that what’s going on in the GCC right now is very interesting. The comments from the UAE governor a while back that the cause of inflation wasn’t the dollar don’t really seem to indicate that the Gulf States have any desire to allow their currencies to move. But as Brad nicely graphs above, the end result is inflation and negative real interest rates. Which should only encourage more fixed asset investment in places like Dubai. The liquidity has been good to global managers who have allocations to Gulf stocks, which have done rather well in the past six months. At some point, though, you would think that inflation would turn into a political issue, and the governments, lacking legitimacy already, would almost be forced to do something about it. I am intrigued by the comment that the Saudis think they are doing us a favor by keeping the peg, and that Paulson ought to signal he is ok with a repeg

Anonymous — thanks for the support.

SK — the oil exporters balance of payments is primarily a function of demand and supply (don’t forget demand) in the oil market — which determines exports. the exchange rate doesn’t matter.

it also though is a function of:

a) fiscal plans — i.e. what fraction of the oil windfall is spent and what fraction is saved by the government.
b) the exchange rate. a stronger exchange rate would increase the external purchasing power of all local currency revenue streams, including government salaries.

i find it hard to think that if the riyal doubled in value, more Saudis wouldn’t buy more imports — or travel abroad.

that is one linkage.

the other is the fiscal/ XR nexus. if the Saudis don’t want more inflation (for social stability reasons) and don’t want to change the peg to the dollar, the only policy tool left is fiscal — and a fiscal consolidation in the face of higher oil revenues would raise gov. savings, national savings and the current account deficit.

it would also mean more fees for those managing SAMA’s assets, or those managing the new sov. wealth fund.

it isn’t clear though that this produces a better result for ordinary saudis than more spending (i.e. higher local currency salaries) or, better in my view, a stronger currency and more external purchasing power for the same salaries.

Brad,

As these countries are forced to de-peg isn’t that perhaps the most dollar negative event we can have? Won’t the effect be dramatic on the dollar?

I increasingly find it difficult to agree with the short term dollar bulls in light of rising global inflation in emerging markets. Their arguments seems to be only that the dollar will rally short term only because it has gone down so much. I also fail to see deflationists’ arguments that the dollar must rally since debt is being repaid as credit contracts.

Could you comment?

thanks for your outstanding work,
ST

ST- I think what you saw today in the EUR/USD cross is what the near term dollar bulls have been talking about. Europe has been bearing the brunt of dollar weakness, and now it appears that the ECB is going back on its hawkish rhetoric with the EUR a very long way above fair value. So after the comments were released, the EUR immediately tanked, taking commodities down with it, and the DXY rallied.

I believe most American are innocent people. Generally Americans are very hard working and intelligent people. But sadly the mainstream US media exclusively represents and works for Wall Street bankers, extremely rich people, and corrupt politicians (ie. the Robert Rubin’s and Hank Paulson’s have totally looted the US Economy in various fraud schemes: Enron, Worldcom, Tyco Corporation, Fannie Mae, Freddie Mac, subprime mortgage fiasco, etc). Oh well, the Chinese media works for the Chinese government so it’s no better there, but a few corrupt officials are executed one in a while

Investing in China: Fool’s Gold?
http://www.thomaspalley.com/?p=95

Americans tend to disregard history. Henry Ford declared bluntly, “History is bunk,” while Gore Vidal calls the U.S. “the United States of Amnesia.” Usually, this disregard has few consequences, but sometimes not. That may be so with investing in China, where history suggests profits will be far below expectations, possibly making those investments fool’s gold.

China’s history is completely different from that of the United States and it has left deep imprints on China’s politics. Therein lies the trap for investors and policymakers who ignore history and wishfully think market forces will inevitably make China just like the United States.

One critical factor is China’s attitude to foreigners. That attitude is captured by the Great Wall of China, which provides a metaphor for China’s long history of isolationism and xenophobia. A second critical factor is the legacy of China’s humiliating defeats in the unjust 19th century opium wars with Great Britain. At the time, Britain was importing large amounts of tea and silks from China, and demanded the right to sell Indian opium in exchange. As the opium trade grew, not only did it cause massive addiction, it also caused a damaging monetary outflow of silver from China. That prompted China to stop the trade, and Britain then turned to military force to keep China’s market open.

This historical experience has made China nationalistic and profoundly averse to foreign exploitation, which is why history is so relevant for investing in China. As a result, China will never allow itself to be exploited by foreigners. For investors, the trouble is that China views making profits from the Chinese market as a form of exploitation.

When foreign investments are for exports, China has viewed the profits as being earned abroad. Difficulties only arise when the goal is production for the domestic market. This explains why profitability on such investments has historically been so low, and why so-many joint-venture investments with Chinese partners have failed.

People should learn from history, but one lesson of history is that people and nations can change if they really want to. Three hundred years ago Sweden and Turkey were the terror of Europe, for example. The other lesson of history is that you shouldn’t draw simple lessons from history.

In the case of China, most people nowadays think of most foreign investment as a “win-win” situation. There is some nationalistic unease under the surface but it is blunted by the fact that China has gained tremendously by foreign investment and interaction and that the earlier periods of xenophobia and isolation left China much poorer than before.

Guest: Difficulties only arise when the goal is production for the domestic market. This explains why profitability on such investments has historically been so low, and why so-many joint-venture investments with Chinese partners have failed.

I don’t know about most joint venture investments failing, but if you want to do business in China you *really* want to avoid doing it as a joint venture since JV’s have a rigid legal structure that almost guarantees that the partners will end up hating each other.

You really should set up shop as a “wholly foreign owned enterprise” and then enter into contracts with your partners. The only reason for ever considering a JV is if there is some legal requirement to do so.

DC: But sadly the mainstream US media exclusively represents and works for Wall Street bankers, extremely rich people, and corrupt politicians.

Not really. The mainstream US media exists primarily for entertaining people, so that they get eyeballs to sell advertising. There is no desire or duty to inform so they don’t.

“I think this is a very stereotyped view of the Middle East”

I think it is too. I’d like to add that the undercurrent of a lot of these high falutin economic arguments, what seems to be driving them, is that some non-white people are now financially well-off and are now making investments around the world- kind of overturning the world order where colored folks are supposed to be house servants or some form of second class citizen or some guy/gal working behind the scenes. And that seems to disturb some people.

Two fish:There is no inherent culture of innovation
Don#t get me wrong. During the ending antique and all through medivial aera islamic/ME was the keeper and proliferator of science (scholars would translate the work of greek scientist/ philosophers and contributions to pharmacy, early chemistry botany and medicine were made that you had to sought after for in europe of that time. Iran rests on an 2500 year old empire). But if you look at the family ruled oelstates in ME innovation is not the fundament of their economic well being at the moment. I am fully aware that a lot of effort is being made to change this. But if you put yourself into the shoes of ME countries the question is, will once oel is gone or seriously diminished foreign investment and innovation at home be enough to sustain their economy. I don#t know.
As to the woman question. Again I am fully aware of the fact that things are changing. Had I quoted Sheika Haya (http//www.un.org/apps/news/story.asp?NewsID=22782&Cr1=haya – 13k- you would probably not have referred to my post as beiing stereotyped.
( As to guest with your non-white people with money being disturbing (to white supremacists?)-stuff. This is pointless at least for me. I am clearly not into male chauvinism or any kind of chauvinism but this is not a question of colour and when it comes to the middle east my personal experiences are somewhat limited to people from iran who emigrated to Europe/USA. if this experience would result in a stereotype it would be spelled: These are highly intelligent, cultivated and often stricingly beautiful people ).
To get back to economics: oilproducing tribal ruled ME countries might face economic trouble in the future partly because of a non decoupling scenario partly for intrinsic reasons.

@twofish: Thanks for the reply
Interestingly there are two articles in the weekend edition of the Harold Tribune International on topics discussed on this thread:

Mohamed Shafik Gabr, Chairman of the arab business council of the World economic forum
in his oped article ” Time to relaunch” discusses causes for the minor role ME plays today in global economics and than elaborates what needs to be done to improve the situation:

“The most telling statistic in the World Economic Forum’s latest Global Competitiveness Report is that not a single Arab state made the top 25.
It is another stark reminder that, for all its billions of oil dollars and huge reserves, the Arab world remains a net importer of foreign technology and services. Even the mighty Kuwait, ranked 30th, lags behind minnows like Estonia”

He names low levels of foreign and intraregional investment as causes for

“low growth, high unemployment and poor economic development 20 years of Arab economic stagnation”.

He goes into strategies that need to be implemented to “increase (Arab business) competitiveness within the global economy”.

He views the politic instability as an obstacle in achieving this goal

“Our region’s political instability is a significant, but not exclusive, obstacle to economic regeneration.”

“To kickstart a revival of the Arab world’s social and economic fortunes – our second renaissance, or, in today’s parlance, a relaunch – we need to remind ourselves that our region has a rich cultural and scientific heritage.” ( as I mentioned on my 2nd post)

“We need to foster a culture that celebrates entrepreneurship, research, innovation and technology – all essential to sustain growth and development in the Arab world. The expansion of more competitive export sectors, other than those based on natural resources, is no longer a luxury, but an imperative.”

He adresses the need of a more open society and the role women would have to play in this society
“Arab leaders simply have to develop more business-friendly policies and to initiate structural reforms at a faster pace. Greater investment in local research and development, female empowerment in the workplace and job creation schemes for skilled workers and graduates would be a good start in defusing the demographic time bomb that awaits countries like Egypt and the Kingdom of Saudi Arabia.”

He adresses the problem of strategic foreign investment ” Far too often, we conform to the stereotype of the rich Arab and play into the hands of cynical business commentators. But as long as we are involved piecemeal in the apparently random acquisition of expensive Western corporate trophies, allegedly in the name of strategic economic diversification, who can disagree with them?”

He states money was not the issue
“Money, of course, is not the issue. After 9/11, many Arabs repatriated some of the $1 trillion of money then believed to be invested outside the region. This sudden liquidity, coupled with record oil prices, means that greater capital sums are now available for investment.”
( I am not sure about that, money is alwas an issue. From what one can read in the press the question of currency appreciation and dollar depegging seems to be a hot topic in the arab financial/ business/political circles- To achieve the above mentioned goals they need high skilled people. These people are not going to to a good job if all there earnings are being eaten up to pay for a place to live and something to eat. So inflation needs to be adressed on a short term basis. Appreciation of the currency means that assests in form of other peoples debt ( US-treasuries) loose value, which means less money to invest in needed projects. Also the arab business world should be contemplating a worst case scenario regarding dollar depreciation and/ or default on debt issued by the US-Government. The evolving pattern of the subprime/financial crisis is, that at the end of the day all the bad credit finds its way onto the balance sheet of the US government. This is not going to improve the rating of debt issued by the US government. In this scenario it is only prudent to diversify away from assets that are the debts of the counterside to tangible assest like shares of a company. I would do the exact same thing and I am not a ” state lacking democratic legitimation”)

He ends by stressing the importance of a political will to implement economic/social reforms

“But if we are to become masters of our own destiny in shaping an economic future that is not based solely on a finite supply of national resources, we need to harness the political will to step up our reforms now.”

Basically it would be hard to find arguments to make the ME responsible for the current dire situation of the US-society. And the argument towards the need of “political will to step up reforms” could and should be picked up by the U.S..

The other article “The construction site called Saudi Arabia” by Jad Mouawad describes how far the vision has allready been materialised using a large petrochemical plant as an impressive example.

“The Saudi economy was in idle mode for 20 years,” said John Sfakianakis, the chief economist at SABB, formerly known as the Saudi British Bank, who is based in Riyadh, the Saudi capital. “Today, the feeling here is, ‘We’ve won the lottery; let’s not waste it.’ ”

“Despite all the recent headlines about Middle East investors bailing out troubled American banks like Citigroup, a growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East.”

“… while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed. The kingdom, which has a population of 24.5 million, including nearly 7 million foreigners, has what one analyst called a “human time bomb.” About 40 percent of Saudis are under 15, and because the country has one of the world’s highest birth rates, the population is expected to reach nearly 40 million by 2025.”

” But while oil-rich states are still buying American Treasury bonds or military hardware from the West, analysts say the more significant trend is for a growing share of their investments to be pumped into local projects.”

“”The vision is to turn the kingdom into a major industrial power by 2020,” said Jean-François Seznec, a professor at Georgetown University who is a specialist in industrial policies in the Gulf. ”

Both articles are worth to be read in full length.

BMH

Why shouldn’t the Gulf countries just alter their methodologies for calculating inflation?

A little bit of hedonics, and the problem’s solved!