Just a reminder of what falling dollar currently means. Dollar depreciation is clearly part of what is needed to bring the US trade deficit down to a more sustainable level. But what is the case for China — with its $50 billion or so current account surplus and $150 billion or so annual reserve increase — to depreciate against the world as well?
General glut’s weblog nicely reviews today’s events.
And let me take a moment to give Thanksgiving kudos to the Financial Times for their recent coverage of the dollar story. The oped page has run solid pieces by Wolf and Cecchetti. Phil Coggan’s column on Monday said what a lot of what I was trying to say in my post about “large players in large markets” in a lot fewer words. The Wall Street Journal ran a Monday story emphasizing that Asia was accepting dollar depreciation (to a degree). The FT had a set of stories on Monday highlighting the difficulties created by the asymmetries in the way Asia is adjusting: the won and the yen have strengthened v. the dollar and the yuan has stayed fixed (i.e. the won and yen have strengthened v. the Chinese yuan). Hence friction between Korea’s finance ministry and central bank, and Japanese talk of intervention. The WSJ story was OK, but it failed to pick up on the tensions among the Asian countries in the way that the FT’s combined coverage did.
Getting agreement from the Paris Club creditors to write off 80% (in stages) of the $40 billion or so that Iraq owes them is no doubt a good thing — not the least because it lets the US (and Iraq) press the gulf states and private creditors who are owed another $85 billion or so to do a comparable deal. 80% debt relief across the board would cut Iraq’s debt to about $25 billion, or around 100% of its current — depressed — GDP. Iraq also still owes about $30 billion in war reparations.
I even accept the Bush Administration’s spin that this is a sign of the health of the Atlantic alliance — the Bush Administration wisely sought to work through the existing institutions for granting debt relief (the Paris Club), not to work around them. It based its case for debt relief on the grounds that Iraq has more debt than it can pay, not on the harder to win argument that all of Iraq’s debt is illegitimate (If Saddam’s debt is illegimate, why was Russia stuck with the Soviet Union’s debt? Not an irrelevant question since Russia is an important creditor of Iraq). The Evian communique last year even laid the groundwork for a deal by calling for developing new Paris Club rules allowing greater flexibility for middle-income countries.
One of the world’s ironies is that even as John Snow putters on about how currency values should be set by market forces, the market — or at least the private market — is now playing a comparatively small role in defining the dollar’s value (and in providing the capital flows the US needs). True, the dollar’s value v. the Euro is set in the private market, to the current chagrin of Germany’s finance minister. But the dollar’s value v. the Chinese renminbi (yuan) surely is not set in private markets — and the US is likely to import as much from China as the Eurozone this year. The dollar’s value v. the ruble is not really set entirely in the market, given the Bank of Russia’s reserve accumulation. Its value v. the yen? Certainly not set by the private market this spring, when the Japanese government spent $140 billion defending the dollar, and expectations of MOF (Ministry of Finance) intervention still cast a shadow over the market.
For those who want dispassionate economic analysis devoid of politics, read no further. Wait for my next dollar post. This is a center-left response to the Lexington column in this week’s Economist. It claimed the Republicans generally, and W specifically, won not by playing to people’s fears but by capturing their optimistic dreams. W was the optimist both demographically, capturing the votes of fast growing exurbia in the sunbelt (Houston, Atlanta, Phoenix, central valley of CA), and with his policy proposals, notably his call for partial privatization of social security.
I have three problems with this argument 1: While partial privatization and a policy that gives tax advantages to individual health care savings accounts while taking away the tax advantages now given to group health insurance plans arguably reflect an “optimistic” assessment of the ability of individuals to manage risk, they reflect a deeply pessimistic view about our capacity to do things together. They dismiss the values that spring from Bill Clinton’s observation that “we are all in this together.” Don’t count on the government to insure you against the worst risks that come with old age. Don’t count on any company to insure you against massive medical expenses. Etc. That is not necessarily an optimistic vision.
This post is primarily about the implications of partial privatization of social security on the budget, not about its overall merits.
For what it is worth, I personally think good old pay-as-you-go social security has an important role to play in a world where old fashioned welfare capitalism and defined benefit pension plans are giving way to 401 (k) type accounts, and more and more people’s retirement income already depends on what happens in the markets. There is something to be said for not putting all retirement eggs in the same 401(k) basket. The “insurance” aspect of social security is important — insurance against bad financial investments, insurance against living longer than your savings, insurance against just earning less over a lifetime than you expected.
There is a growing sense that the G-7 no longer is the right grouping for discussing today’s major international macroeconomic issues. It is hard to see, for example, how you can discuss “global rebalancing” if one major part of the global economic and financial balance — China — is not at the table.
So — as the comments section on my previous post brought to light — proposals for new groups abound, whether to supplement the G-7 (which is the G-8 when Russia is included, but on many economic issues, Russia is currently excluded, to its irritation) or to replace the G-7. Some, like Larry Summers, suggest that the G-20 provides the right forum — it was created after the Asian crisis, but sort of fell by the way side in the first George W. Bush Administration. Others are calling for a G-4 (Japan, China, US, Europe). Some would add China to the G-7 and consolidate Eurozone representation. And others are calling to add the BRICs (Brazil, Russia, India and China) to the G-7, creating a G-11 … (the current G-10 has 11 members — the US, Canada, Japan and eight, yes eight, Europeans … it is a bit of an anachronism)
Monthly exports set a record sounds better than third highest monthly trade deficit ever, or second highest monthly imports ever. All accurately describe this month’s trade release.
The fact that exports set a record is not an enormous surprise. Exports have been growing strongly all year, and that growth will generate monthly records now and again. Right now exports are growing at 13% y/y pace. I still expect that to slow just a bit in the fourth quarter: the impact of the recent weakening in the dollar won’t be felt for a while, and higher oil prices should imply some slowdown in global growth. But I could be off — still strong global growth and the lagged impact of the dollar’s fall at the end of 2003 might continue to sustain the current pace of export growth.
Reports that Russia and India are selling dollars, as in this FT story, are interesting, even leaving aside the rumors about China.
Unless China uses the move to basket to revalue significantly against the dollar, I personally don’t think all that much will change if China moves to a basket peg. A basket peg just means the renminbi just won’t fall as fast as the dollar against the euro … to support the basket peg, the Chinese central bank will still have to intervene. They may buy a few more Euros as part of a basket peg, but they will still need to buy lots of dollar assets to sustain a peg, basket or their current peg.
Nouriel and I have just posted our updated analysis of US external sustainability, i.e. the United States capacity to continue to run large trade and current account deficits.
The paper is certainly long and perhaps a bit technical, though hopefully it serves as more than just a cure for insomnia. Our conclusion is fairly stark: the US cannot continue on anything like its current path, and won’t be able to continue to place enough debt abroad to be able to finance the trade and current account deficts assocaited with exporting 10-10.5% of GDP and importing 16% of GDP for long. We tried hard to document the analysis behind our conclusion clearly.
If any of you read the earlier version of the paper, we did not change much. Certainly the conclusions are the same. We did update our numbers — notably by increasing out estimate of the 2004 current account deficit to $670 billion, or 5.7% of GDP — and make our oil price assumptions explicit. But otherwise, the changes were modest — a footnote here and there, a critique of Richard Cooper’s thesis, now picked up by some at Morgan Stanley, that the US will be able to import 10% of global savings for a long time, so the current account deficit is sustainable, etc.The key points that emerge from our analysis are:
Isn’t that what a revenue neutral flat tax or a national sales tax implies, particularly one that exempts investment income from any taxation? (as Cheney reportedly is pushing).
In all honesty, it is hard for me to see how a revenue neutral flat tax would be politically viable, since it would almost necessarily raise taxes on many and cut taxes for a few, or how anything other than a revenue-neutral tax reform is economically viable, since a budget busting tax cut under the guise of tax reform would drive up long-term interest rates and drive down US home prices …
Tom Franks’ book What’s Wrong with Kansas attracted my attention because, well, I am from Kansas. Born there, raised there, familty lives there and desperately hoping that a Jayhawks national title run in basketball will take my mind off U.S. politics. The core thesis of What’s Wrong With Kansas is simple: Republicans mobilize their base with cultural issues, and then deliver conservative economic policies that in Franks’ view offer little to their base.