US-China “Balance of Financial Terror” Game. A Prisoners Dilemma Game: hard landing MAD or Chinese pre-emption as the likely solution?
Can we think of Bretton Woods 2 as a Prisoners Dilemma Nash Game between the US and China? Certainly Larry Summers referred to it as a “balance of financial terror” game. So, will the outcome be cooperation for global rebalancing or hard landing mutually assured financial destruction, i.e. MAD or MAFD?
The cooperative solution – beneficial both to the US and to the world at large is for the US to agree on a serious fiscal adjustment (reverse some tax cuts for the rich and and give up on social security privatization and/or fix social security without financially reckless privatization) and for China to agree on adjusting its peg, say by 20% plus. Then, the other Asian will follow China in cooperative appreciation step as China is the large Stackelberg leader whose currency value affects the currency policies of the rest of Asia. Then you get cooperative orderly global rebalancing of current accounts with sustained global growth.
The non-cooperative game is one where the US sticks with its train-wreck fiscal policy that leads to a twin wreck of unsustainable current account while China not only refuses to revalue but also gets tired of financing cheaply the US. Usually it is argued that China has no interest of pulling the plug on the US as this would hurt China a lot: stopping the US financing is risky and costly as: a) the renmimbi woul appreciate and slow down Chinese growth; b) hard landing of US dollar and US bond market would lead to a US and thus global recession that is not in China’s interest. So, according to the three smart BW2 Deutsche Bank musketeers, BW2 is a stable cooperative equilibrium of another sort: the Summers balance of financial terror ensures that the US current account deficit and the rest of the world surplus is maintained for two decades with easy Chinese and Asian financing of it.
But, as the forthcoming paper by Brad and me will make clear, China may tire of financing the US for lots of reasons: eventual capital losses on holding of forex reserves are massive; partially sterilized intervention causes dangerous credit and asset bubble, excessive real investment and even larger NPLs with risk of China hard landing down the line; it also causes higher inflation as if you repress fundamental real appreciation driven by relative productivity growth by avoiding nominal appreciation, you will get that real appreciation via higher and socially dangerous higher inflation; and everyone in Asia is free riding on China that is thus overfinancing the US deficit.
So, the point is that, at some point China may pull the plug as the cost of continuing BW2 become too high or, equivalently, it is enough that it starts to accumulate less US dollar reserves to trigger the unraveling and have everyone else in BW2 periphery jump off the sinking BW2 titanic. In that non-cooperative game, US keeping its fiscal and China and the rest of BW2 pulling the plug on the US we get US and global hard landing: dollar crashes, US bond market crashes, all risky assets including equities, housing, EM debt and high yield crash…and we end up with a US and global recession.
The US is using this threat to convince China not to defect. Ideally, US would want to fool China twice: have them appreciate once now and take a big capital loss and then keep on accumulating more reserves and get more losses down the lines as lack of US adjustment means further need for foreign accumulation of US – by now junk – treasury bonds. In the absence of full Chinese twice masochism, the US is comfortable for now with China not appreciating as long as they keep on intervening at faster rates and thus keep the 10 year Treasury bond close to a 4% yield; a not so bad second best for the US that is a lousy deal for China and the rest of the world.
So, the US game is the typical pre-emption capacity game with Stackelberg leadership first move. I.e. knowing that China may defect, it is better for the US to pre-emptively say that it will not change its fiscal policy to the world liking – i.e. US pre-committs as it has to make tax cuts permanent and to privatize social security – as a way to force China and the world to keep on keep on financing the US as the alternative of not to is too ugly. If the US can credibly pre-committ to reckless fiscal and China knows it, it may be better for China to cooperate and finance rather than defecting and cause MAD.
So instead of a cooperative game with US fiscal adjustment and China currency adjustment, a pre-emptive US step forces the world to keep on financing it under the credible threat of mutual assured destruction if you get non-cooperative US reckless fiscal and non-cooperative BW2 vassals of the US empire defecting.
Will this US threat work? It has so far and it has maintained the US-does-not-cooperate while China-cooperates-to-finance-the-US threat equilibrium. But it is a reallylousy deal for China and the world as they export goods to the US and they get in exchange promises to pay – bonds – that will be wiped out in real value via the eventual real devaluation of the US dollar. So, the argument that it is a first order benefit for China to dance to the US tune is not correct: it makes sense if you sell goods today and you get repaid in goods down the line; but if you sell goods and the debtor effectively default on you with a dollar sharp fall down the line, it is not in your interest to play along as you would be a foolish sucker who is fooled all of the time; first order losses for short-term gains.
So, what could be solution different from the hard landing MAD or the pre-emptive US ripoff game? China, Japan, Europe and the world should take the leadership of the Stackelberg game and threaten to stop financing the US. If they can credibly do so, the US that is in a policy flux now in terms of its fiscal policy may panic and relent. Of course, for the threat to be credible and reverse the current US first-move fiscal-doom threat, China & Co. must show the willingness to take some short run pain. Stop intervening for a month, desert a couple of Treasury auctions and signal with actions, rather than just token words, your displeasure with the US always-blaming-others-game. It is a dangerous game for China and the wolrd to take the Stackelberg role and force the US to adjust its fiscal under the threat of the plug being pulled nasty, but it may be the only way to shift the pre-emption game for a better outcome. Who is holding the knife should change as the US emperor has no clothes. Chinese/creditor threats are more credible than US/debtor ones. It is risky because the US may not relent out fanatic supply side ideology and then the fully non-cooperative outcome is hard landing MAD; but this is the only way for China and the world to impose some credible fiscal discipline on the US. If then the US gets scared and relents and comes to its senses, then it will join the cooperative table where the global optimum of US fiscal adjustment and Chinese currency adjustment is agreed; this outcome will be best for all and the world.
Instead, currently accepting supinely the US pre-emption game forces China and the world to keep on financing the US and just pospone the eventual hard landing in time; it does not prevent it, it pospones it and creates greater imbalances that will make the hard landing nastier when it does occur..and be assured that hard landing would eventually occur…
So, central banks of the world: you got my point on how to play this prisoner dilemma’s game to your benefit and to the benefit of a US that does not know or understand better now…the US needs fiscal parental discipline and you are the only ones that can provide it as you are the bond vigilantes around who do not provide discipline so far…So, Alea Tracta! Start the first pre-emptive move…The US taught to the world the doctrine of geo-strategic pre-emption. It is now up to the world to teach to the US the game of geo-macroeconomic pre-emption. You got the upper hand…
46 Responses to “US-China “Balance of Financial Terror” Game. A Prisoners Dilemma Game: hard landing MAD or Chinese pre-emption as the likely solution?”
http://news.ft.com/cms/s/881eb29e-6e78-11d9-b058-00000e2511c8.html Editorial comment: Dollar dilemma Could a country with a de facto dollar peg diversify its reserves without appreciating against the dollar? Many assume not. In fact the answer, as so often in international economics, depends on whether the country in question is “small” or “large” in this context. A “small country” with medium-sized reserves, such as Thailand, Malaysia or even India, could continue to absorb surplus dollars on the bilateral currency market, but sell its stock of dollars for euros. The effect would mainly be to push the euro up against the dollar. The central bank’s own currency could remain pegged. A “large country” – Japan or China – could also embark on the same strategy. But the scale of the dollar sales would probably cause a generalised dollar collapse, with private buying disappearing altogether, demanding still greater central bank purchases. The central bank would lose control over domestic money supply, resulting in soaring inflation that would in turn push up the real exchange rate. In practical terms, Japan and China probably cannot diversify to a meaningful extent without letting their currencies rise. So keep an eye on the other Asians. Who will break ranks first?
I have read several commentaries in various places that seem to indicate that there is almost certainly a severe crisis on the immediate horizon. Most of the comments are based a limited view of the alternatives available to China and the US. In my opinion there are several ways where the crisis can be averted, and two seem very possible: 1. A set of incremental changes adding up to a big impact. These would include somewhat higher US interest rates which spawn higher somewhat higher US savings; a somewhat improved federal deficit that reduces the US need to borrow; and mild protectionism that slows import growth. While these items cannot solve the problem individually, they can halve it together. 2. China decides to stop buying US debt and start buying more assets. They could buy stocks or purchase hard assets outright such as natural resources. Please keep in mind also that the US tax holiday on repatriating overseas profits will provide some deficit support in 2005. Although this is a only a short range support, it gives some breathing space until China feels better about allowing the currency peg to move.
we are going to need those repatriated profits. if consumer confidence stays high, imports stay high. if oil is above 41 (average) in 05, our oil import bill also rises. the US could easily need MORE than $800 b in financing. I would be very interested if any one has a clear breakdown of where this financing will come from — something like $400 b = central bank dollar reserve accumulation, $100 b (too high i suspect) profit repatriation, $100 b middle east petro dollars, $100 b Japanese insurance and pension funds (+ other asian private investors), and $100 b europeans buy us bonds … (all this assumes net FDI and net equity flows are zero, so there is no net outflow nor a net inflow)
excellent comment Just to show how unstable this radioactive mess is, I was speaking with a large hedge fund yesterday who basically said that they can’t find a single asset that hasn’t been levered up due to current cheap cost of debt capital (read: not only cheap treasury bonds, but cheap agency-like debt). This fund as doubled in size with 10-figure equity capital. My greatest fear is that all-in gearing is so incredibly high that any unexpected correlation between asset quality and short-term rates kicks off the leverage domino effect. So now I will go through your reasoning again with respect to Fed rate raises and MAFD on the asset level as well.
yardeni sez $200-$500bn in repat, but i can also see it at the low end and below; like it’s not like it’s just sitting there… http://www.yardeni.com/pub/a_050124.pdf The data suggest that corporations have kept roughly 50% of their overseas profits overseas since 1980 (Figures 13-16). The Federal Reserve actually reports quarterly foreign earnings retained abroad by nonfinancial corporations in the Flow of Funds Accounts.3 Since 1980, the accumulated total is $1435 billion. Most observers expect $200 billion to $500 billion to come home this year. 3 See “Flow of Funds Accounts,” Table F102, Line 6, at http://www.FederalReserve.gov/releases/Z1/current/Z1.pdf
Brad, You say that “the US could easily need MORE than $800 b in financing.” Well, yes, but all you are really saying is that some portion of the bell curve lies beyond $800B. This is not a very bold statement, and I certainly agree with it. However, the real question is “where is the mean?” In my opinion, in complex systems where there are many players with many options, there is a strong tendency for change to revert to the mean. At least that is what I have observed. It is very rare for any party to act clearly against their best interests, and some milder version of the status quo is currently in everyone’s best interest. So I expect it to continue in the short to intermediate term. So, my guess for the 2005 financing is $500B. I don’t know how this will be financed, but so long as it is in everyone’s interest to keep the US economy going, then it is likely to continue. Note my opinion changes when we get further out, say 5 years. Then Asia may start having enough economic strength that they care less about the US.
In my most recent post I meant to say “there is a strong tendency for change to revert to the trend” rather than “there is a strong tendency for change to revert to the mean.”
“So, the argument that it is a first order benefit for China to dance to the US tune is not correct: it makes sense if you sell goods today and you get repaid in goods down the line; but if you sell goods and the debtor effectively default on you with a dollar sharp fall down the line, it is not in your interest to play along as you would be a foolish sucker who is fooled all of the time; first order losses for short-term gains.” It is misguided to recommend a collapse or change to the current system. Currently the Chinese have given the U.S. Fed control of their economy, for good reason as history shows. You are suggesting the Chinese CB take back some of the control at a point in time where China’s economy is still in its infancy. The “first-order” is to crawl then walk etc. Without the current system’s ability to transfer technology in an orderly manner, China would be stuck in the Stone-Age. Future depreciation of Tsy Bonds is a small price to pay for massive infrastructure investment that is currently occurring throughout the developing world. The development is occuring without the accumulation of debts denominated in foreign currency and with relatively easy access to world commodity markets in relative peace. Overheating of the Chinese economy is the greatest threat to world stability which could lead to a mad scramble for resources. Scarcity could pit America against, China, Europe or Russia. U.S. Bonds are one tool currently being used to spread prosperity to the masses of underutilized labor. Scarcity of important resources is our real enemy as those masses come online. Is our Fed capable of regulating the world economy so as to allow our world’s policeman to maintain peace?
I enjoyed and agree with Nouriel’s Prisoner’s Dillema analysis (1/25) but think it misses one point: How does China weigh the costs of the status quo (risk of loss of value of its dollar-denominated reserves, some inflation etc.) against the costs of RMB appreciation: possible bank collapse, increased unemployment, etc. A decline in the value of China’s reserves seems like an issue with little political impact (few outside the intelligentsia understand it) and unclear economic impact (with a strong economy, China’s need for reserves to, e.g., stave off a speculative attack is low). Yet a bank collapse and rising unemployment would presumably have a big political impact in China, which is far from a stable political system. To me this implies that even if the long-run equilibrium is RMB appreciation, the long-run could be long.
This post is great. Once again. I just would like to mitigate the “blame game”. Who has preempted here ? The US with their reckless fiscal policies ? Or the chinese with their we will not unpeg our currency (I.e. we will provide with all the financing needed). I believe the chinese are opting for MAD. It might even be a plot against capitalism … And Bush is opting for MAD, it might even be a plot against democracy. Whatever the reasons, I would like to add this : Things do not happen just because it is in everybody’s interest. Somebody has to take charge of things, somebody has to realize that it is in everybody’s interest. Come back in 1929 it was in the interest of the USA to help great britain in overvaluing its currency. The USA financed GB’s deficits. They kept low interest rates at home creating a bubble that was a major cause of the crash and the crisis that followed. So 1 China may enter in Crisis before the USA 2 The crisis may start in the US economy before any problem appear in external financing (consumers may stop to increase spending). In fact internal problems may force external adjustments just as likely as external imbalances may force to fix internal imbalances.
there is a palpable sense of currency ‘ endgame ‘ in the air -and everyone blithely assumes that the accident waiting tohappen is the dollar collapse. here is a tentative different collapse scenario emphasis on tentative. a conversation stimulant. it is never quite like you think it will be. . . 0000000000000000000000000000000000000000000 1 confidence cracks. we all wake up to the realisation that the endgame of the 1945 to – ? – period has begun in earnest. 2 something – whatever it is – has moved in a direction not anticipated by the speculators. perhaps peaking property prices have tipped the american public from re-mortgaging to madly paying off their debts and reducing consumption in order to do so. paying off debts is a form of saving – climbing the mountain from a starting point down a deep coal mine. america begins to save . . . 3 greenspan, or successor houdini, lowers interest rates in a desperate attempt to stimulate house prices and general irrational consumption. . . 4 but the rush to savings and safety has gathered momentum. instead of the dollar it is property and shares which take the dive – suddenly bad debts, saving, a rush to cash, are actually stacking money away from circulation. people freeze like rabbits in the headlights. 5 greenspan / houdini wildly promises that the dollar printing presses are to roll, but the punters – like japanese – happily save any extra and wait as the deflation cuts the price of everything that has ‘ bubbled ‘ for years past, as if a global january sales has begun. gordon brown retires to run a b and b in the lothians. 6 although the interest rate is close to zero – with deflating asset bubbles – the real interest rate is still good. inflation is at minus five. 7 so the dollar strengthens. people are looking to real assets, and the united states is still a big country with grain, land, forests, mines, illegal mexican wage slaves, ships, and every other kind of stuff in quantity. 8 countries with less real estate per capita suffer in comparison. the renminbi and yen fall against the dollar and thousands of speculators are caught facing the wrong way. more billions are wiped off hedge funds. buffet takes up gardening and golf. soros cancels book signings and gets a job. the speculative billions leave china for home. china holds on tight to her dollars as the renminbi is falling against the dollar. 9 price of oil crashes. o p e c breaks up in discord. 10 global unemployment leads to competing demands for protectionism, and trading nations suffer badly in comparison with less developed but more self sufficient countries. 11 everywhere people, in surplus, are willing to do anything for cashflow, which is scarce. money seems unable to circulate, however great the volume printed / given away. people hoard as in wartime. people who have cash, hold it. people who have no cash seek to sell assets even as values dive. van goghs unsaleable. sadlers wells colts sold to belgian butchers. second homes in connemara sold to farmers for conversion into sheds. 12 finally gold, which has run up to a peak, crashes. the reason is the search for income – which gold does not provide. the world begins a new phase – nothing glitters. 13 bush says no policy changes envisaged. everything is going well. – but no one is listening. gillies
Fascinating stuff, Gilles. Seems mildly plausible too. I wonder what the chink in your argument armor is. I hope some of the more deep-thinking economists here will tell us. It’s fascinating (and frightening) to be in a place where severe inflation and severe deflation both seem very possible, and it’s tough to know which is coming.
Relatively new reader, excellent blog! However, I have a question that I figured you all should be able to answer: Assume for a moment that we get a hard landing to this game, how does the Fed react? Could they at all feasibly loosen to ameleorate the effects? If they did, what precisely would the be effect? (In my limited knowledge of macro-economics it seems that a Fed loosening would provoke a futher rout in the USD and U.S. bonds, rinse and repeat)
If the debt/GDP ratio falls, I can’t see how inflation is possible. Most of the money around is related to credit. Deflation is the only logical future when that debt/GDP ratio will fall. Do any of you Know if the ratio M1/M3 has changed in the last 20 years ? I think I’ve already looked for that one and seen that it did not move significantly. I’m sure the ratio cash (bills and pennys)/M3 has fallen. ANd I’m sure it will reveal a problem. Sylvio Gesell is bound to maket its come back.
gillies – interesting thesis. and not unreasonable — though i suspect that the fed can avoid a japanese style liquidity trap where newly minted dollar are saved rather than spent, limiting the more extreme outcome. but the low-interest rate adjustment scenario is certainly a plausible alternative to the high-interest rate adjustment scenario (goldman looked at both, by the way). in the high interest rates scenario, the US demand for financing grows (fallin savings, rising consumption, rising investment) beyond the available sources of cheap external financing (central bank $ reserve accumulation), leading to upward pressure on int. rates to slow the pace of growth in US private consumption/ private investment (since the government does not seem like it will adjust, the private sector has to do more). In the low-interest rates scenario, the US consumer finally slows down, higher oil prices start to bite, and the us consumer grows leery of new debt and tries to rebuilt its balance sheet with more savings. consumption falls. If that triggers a fall in the price of risky assets, then you get a reverse wealth effect. the uS economy slows, the trade deficit falls and b/c national savings is rising rapidly, there is plenty of room to finance us fiscal deficits domestically and for the fed to keep rates low. I think the first scenario is more likely, but the second is not out of the question (note high yield bonds do badly in both scenarios, but treasuries do very differently).
Very good set of exchanges and reactions to my blog. I am currently out of town and buzzzzy; i will reply in more detail when i am back over the weekend…thanks..Nouriel
“1 confidence cracks. we all wake up to the realisation that the endgame of the 1945 to period has begun in earnest. 2 something – whatever it is – has moved in a direction not anticipated by the speculators.” What are candidates for an exogeneous trigger? Mr Roubini has cited here the emerging conflict with Iran and a subsequent energy shock that rapidly lifts prices forcing the Fed’s hand. A domestic guerilla attack against infrastructure may be another. [See jrobb.mindplex.org] Is there evidence that those contingencies are priced?
I still don’t get how high nominal rates could be sustainable. High rates would force a depression and in so doing deflation. No doubt high real rates are ahead. The question is deflation or inflation. How could savings not rise.
glory — alas, from what i have gathered, most of the $ abroad that get repatriated are just that, $ — and to get the fx inflow you need firms to convert euro and yen and pound assets into $. Otherwise, they take a $ held offshore for tax reasons, which no doubt is invested in an onshore US asset (see caribbean islands). They move the offshore dollar onshore, but it stays invested in a US asset. I need to sit down and do all the BOP transactions, but to really use offshore $ to finance a current account deficit, you basically need to trade an offshore $ (an existing one) to say china in return for chinese goods. China ends up with an external asset (a caribbean bank account). the uS ends up with one less asset (the caribbean bank account) and the same liabilities. Net debt goes up, as it must … keith — $500 b in reserve financing? or total financing? There is a big difference …
I just passed throught the site, the problem is the idea that monetary authorities can increase money supply at will. They cannot. Money is related to debt. If debt goes down, then the money available goes down. No stagflation is possible now.
Current debt/gdp ratio is up to 300 % in the USA, it has gone up in all OECD throughout the last 15 years. Households are especially heavily indebted. That debt has to be cleared. That ratio has to fall. Could it fall inside an inflationist environnment ? CAn it fall without creating a deflationnist environment ? Let’s look at different scenarios… imagine there’s 100 GDp 300 debt. 1 Imagine a general strike, wages go up, so do prices. Inflation increases without any additions to the monetary supply. In fact money from asset markets (financieal sphere) flows into the real economy sector. Result, this wipes out X% of the debt around in real terms. So you may say, well, inflation can happen in the same time as the debt/GDP ratio falls. Well yes, but only as long as there is no money creation. What happens is that the asset prices deflation is so great that it matches good price inflation. In fact in the process, some cash has probably disappeared. 2 The central bank starts to try to get out of the crisis by creating more money. The only way it can create money is through lending more. If the lending activity is higher than the GDP growth, then the debt /GDP ratio increases. Therefore the crisis is only postponed One thing is clear, the money available is related to the debt level. If the debt level is to go down, some cash has to be destroyed. May be some inflation in good price is possible in the short term (if wages rise), but the money stock will fall and the prices of (goods and assets) will fall too.
DF, Read a bit more about money creation at www.mosler.org to find out about the 3 types of money and how they are created and destroyed. fiat money (gov money) bank money (which you refer to) nonbank money (which you refer to)
I’ll go watch the site, but you must know of course that fiat money is way below the two other types of money. THe ratio is around 1/10. So you can’t match a 10% decline of bank created money and other type created money without a doubling of fiat money. I believe the debt ratio has to go down by 4 or 5 to bring us back to a new start. And I mean worlwide. THe world is too leveradged. THe ony way to do that is through deflation first (and bankrupcies) and inflation then (when the fiat money to other type money ratio has made higher, then the inflationist effect can happen, the other point being, inflation in goods can only happen when wages increase faster than productivity, when labor is strong, which is not the case now, if you add 100 now to the money base, 90 goes to asset prices, and not enough to inflate prices, when labor was strong, the other relation was true, when labor will be strong, monetary creation will have a stronger impact on inflation in good prices).
The link posted is not working. I landed here http://www.cfeps.org/contact/ and there’s no sign of the paper wether in the what’s new or in the publication part of the website.
And I just thought of this. If K can move and not labor. Let’s say productivity ratio is 10/1 US vs China. But wages are 15/1, because remnibi is undervalued and labor is so week in China. Then US companies invest in China and make higher profits. THis is a wise bet for CHina as productivity and wages rise along the way. In the mean time, wages in the USA are under pressure and do not follow productivity. Even inside the USA there’s a widening gap, as the minimum wage does not grow, nothing forces overall productivity up, there’s a widening productivity gap and it is equally profitable to invest in low productivity sectors. In those sectors were productivity growth is high, wages do not follow. Anyway you explain it, wages do not keep up with productivity world wide, demand is increasingly relying on debt.
I read most of your money and inflation paper. And found you should agree with most of what I posted. as wages have recently lagged way behind productivity, this has increased profits and asset prices, and should now push good prices down. With severe consequences on the debt burden (some deflation depression expected) http://www.cfeps.org/pubs/wp-pdf/WP12-Wray.pdf I’d like to know how post keynesian consider asset prices (housing stocks). Can housing and stocks be seen as a proxy for production (or investment) goods prices ? How come everybody uses the inflation concept, which is the change of an index of consumption good prices. WHy is there no measure of the change of the prices of production goods ? I d like to know also what post keynesian think of the trends in debt/GDP ratio. How can you prevent deflation without increasing debt/GDP ratio ? And if there is some max to that debt/GDP ratio, isn’t it logical to see some deflation at some point. The aim should then be to stabilise the debt/GDP ratio around some sustainable level in order to prevent the severe deflation-depression scenario. In short, it’s too late to prevent the current crisis, but we can learn from 1929 and 2005 and force the debt/GDP ratio down when it is still manageable to do so in an orderly manner, instead of postponing deflation adjustment until some huge crisis cleans it up all.
DF, It’s not my site but http://www.mosler.org/wwwboard/wwwboard.html and http://www.mosler.org/index_docs.htm has many interesting papers. I do agree with much that you have written, though it seems that PKE’s seem to think the whole thing is sustainable as long as “saving desires” are met with sufficient deficit spending. The main problem with the current system, is the ability to fluctuate “fiat money” creation quickly enough to accomodate fluctuating “saving desires”. This is why some PKE’s promote a flexible “labor pool” to create flexible deficit spending rather than government directed programs which tend to become fixed. The “labor pool” BTW is being tested in Argentina.
It seems to me one of the primary ways the US can correct its current account deficit is to enforce international intellectual property rules. I go through some “back of the envelop” numbers below but enforcement could make a differnce — it doesn’t appear to be a total solution, but it can take a meaningful chunk out of the deficit. I was in Moscow recently and DVD’s of American movies can be bought on nearly every street corner for less than $2. I have been to India and the same story exists there, and China is famous for not honoring IP. It seems to me the theft of US software, movies, music, pharma, printed material is widespread. Some numbers: If 500M people use intellectual property illegally worldwide, if US co’s could collect $100 from each person, then this would represent $50Bn. This is a bit small, but it is a start. Get the number up to $1000 per person — representing payment mainly, I think for software and pharma, then movies and music — then the deficit is corrected. This is most likely too high, but something like $200 per person per year for middle classes in China, India, the FSU, and other areas is a good number. This would be around $100Bn. Anyway China is phasing in the WTO and several countries of the former Soviet Union are planning to join the WTO. This should result in some — the degree is debateable — of closing down of intellectual property theft. Also, US firms should be more vigilant in preventing copying of software, music and movies — I am not an expert in this area, but it seems more can be done.
I’ve long said, things will really get nasty once CHina gets out of ADPIC and refuses to pay for intellectual rights. After all, it’s not in their interests. Once Asia will have most of the world industrial base, I think they should declare patents an obstacle to world growth, some capitalist scheme and so on, and refuse to pay them. In response to winslow, I don’t see how ever growing debt levels are sustainable. May be I did not understand you. I think you imply that if private agents (households and companies)want to save more, then the government should stop saving. But what if the country itself is in debt externally ? And what if the government is really overindebted in relation to its tax base ? What if wages lag too far behind productivity ? This is not some small conjonctural crisis we’re facing. It’s not another 1971, 1973 1979 (end of gold standard, oil shocks). We’re talking about something big. And scary. Something like 1991, but not the little recession in the USA, no, something like the collapse of the sovietic system. In 10 years, they lost 50% of their GDP, life expectancy minus ten years. From where I stand, this should be the scale of the crisis we’re heading in, given the size of the imbalances. I just pray so we’ll escape a war.
In response to winslow, I don’t see how ever growing debt levels are sustainable. *Growing debt levels are sustainable as long as “reserves” are created from an infinite resource. Gold was not, but Tsy Bonds are. May be I did not understand you. I think you imply that if private agents (households and companies)want to save more, then the government should stop saving. *Right, and in fact gov needs to dissave. Savings of financial assets can be infinite as long as governments are willing to create them. Banks do not create reserves, the government does through deficit spending. But what if the country itself is in debt externally ? *No problem (of repayment) as long as debt is denominated in their currency. And what if the government is really overindebted in relation to its tax base ? *Possible under a gold standard, not possible under a fiat system, read Soft Currency Economics. What if wages lag too far behind productivity ? *A political choice, with hopefully a political solution This is not some small conjonctural crisis we’re facing. It’s not another 1971, 1973 1979 (end of gold standard, oil shocks). We’re talking about something big. And scary. *It is scary and amazing to see so many people come online economically, in such a peaceful manner. As long as those with nonfinancial assets are willing to trade for financial assets, the system will continue to function. Something like 1991, but not the little recession in the USA, no, something like the collapse of the sovietic system. In 10 years, they lost 50% of their GDP, life expectancy minus ten years. *Doesn’t have to be. Scarcity of nonfinancial resources is the “real” potential problem. The “money problem” is not the problem, as long as governments have the ability to tax. From where I stand, this should be the scale of the crisis we’re heading in, given the size of the imbalances. I just pray so we’ll escape a war. *Governments have a much tougher time solving nonfinancial asset shortages (oil shortages etc.). Yes, war is often how these shortages are solved. I would prefer a vigilent Fed.
I don’t follow you. You’re basically saying, bubbles can never burst, as long as the government is willing to fuel them with liquidity. I think this has been proven false by history. And it brings us back to the discussion of relative levels. Given the small size of fiat money and government deficits, relative to the overall money creation and debt level, the government sooner or later loses control of the bubble. I believe concentration of financial assets and debt can be a real problem. Once too few own the assets and are creditors to too few over indebted people, THEN the creditors with non financial assets refuse to trade them for a debt coming from those overindebted, they refuse to trade them for any financial asset. On an aside not, the ability of governments to tax is precisely what is coming under question in the globalisation era. Tax reduction moves have been initiated also in a competition for access to (freely moving) capital. Political choices, do not have a political solution, as if it was a matter of reasonning. That would be too simple. Political choicies are also the result of balance of power and cultural impregnation. Try to explain to the business community that wages are too low, try to enforce a raise in wages. You’ll have trouble to pass any legislation. That is another reason why crisis happen. Crisis happen so people realise that they NEED to do something, fix something that they knew or could have known was necessary before. Crisis solve freeriding problems. On an aside note again, countries have been overindebted in relation to their tax base historically. It was often because their debt was labeled in another currency. Labeling the debt in another currency is the next step for USA if they go on with deficits in this way. I think you’re saying states do not default internally. In fact they don’t need to, it is enough that investors think they could. The problem here is that internal debt is owned by foreigners, and has said very often around here, they could stop investing in the US government, that US government would face a currency crisis and a need for cash, it would raise rates, and so doing would create the deflation-depression circle. Or it could try to finance all of its deficit with fiat money, but it would destroy in this case the dollar and lose the priviledge of it being the international currency. London 29 or US 05 look very much the same. Gold standard or not.
Looke at following debt/GDP ratios : From 1980 to 2003 : Household debt 60% to 100% Federal debt 25 to 62% according to official figures from 60 to 80% if you follow the calculations of the grandfather economic report (includes projected medicare and social security trust funds deficits) Household debt has been rising continuously throughout these last 25 years. Anyway you see it, if the household debt ratio is to fall, and if the federal budget was to compensate for this fall, then deficits would have to double. Please also rememnber that companies debt and financial debt have also risen along these last 25 years. I don’t think the federal budget could alone force the debt/GDP ratio up, if all the others were in a deflation mood. Government cannot always win against the markets. In fact they often follow.
Seems we agree on most. 1 You’re basically saying, bubbles can never burst, as long as the government is willing to fuel them with liquidity. *Isn’t this self-evident? No. Not if liquidity is itself backed on credit. My point is fiat money creation can not match bank money destruction. Examples in history : Japan central bank has provided lots of liquidity with 0 interest rates. But so far deflation has been going on. Wages fall faster than prices so I don’t see it ending. US federal bank provided lots of liquidity back in the 30′s. That was not enough. I doubt any number would have been enough. Liquidity injection can only postpone a deflation crisis. In fact it can be efficient only if there are severe control on credit expansion. If you can inflate prices faster than debt load, then you escape the debt crisis, but so far the liquidity injection policies have achieved exactly the opposite, they have increased the debt load and had little effect on inflation (and this has been seen as a victory !!) On an aside not, the ability of governments to tax is precisely what is coming under question in the globalisation era. *True, though foreign CB’s and offshore entities can be ‘taxed’ through inflation. what you mean ? *If the U.S. wants some nonfinancial asset (oil), and another country won’t sell it for our financial assets (fiat money), the U.S. would roll over? I see inflation as an “international tax” for the ‘services’ the U.S. currently provides. The last time we collected was in the 70′s (excluding Gulf War) though Iraq may be a start. I Don’t understand. May be my english is not good enough. Oh OK. I believe you’re saying the dollar being the world currency, inflation is equivalent of a tax for the USA government. Granted. But then deflation is tax refunds ? Ough. Pray it won’t happen. I think you’re too focused on good prices. Inflation in asset prices has had exactly the same effect as inflation of good prices. The development of world trade is also a positive factor as it props up the use of dollars (the tax base widens). I see all these falling and tax refunds very high… The reasons for deflation have been pointed out : wages lag productivity, fiat money expansion has lagged credit money, low interest rates have led to deficits and dollar devaluation in nominal terms more than rising inflation and dollar devaluation in real terms. The USA are exporting deflation not inflation. 3 London 29 or US 05 look very much the same. Gold standard or not. *I’d give the U.S. at least 10 more years before they start sharing power. No other country is currently ‘willing or able’ to share the responsiblity of being the “reserve” currency. Nobody was willing or able either back in 1929 if you remember. Well the US had a huge share of gold stocks, bigger than the chinese share of world reserves … But they had not the power to take over. That’s precisely why a crisis happened. My bet is that this time around, the next reserve currency will be world backed. No country ought to own the reserve currency.
Gee … a huge post of mine got lost. I spend about an hour on it. I was wondering if 1 of course global inflation is good for the country issuing the reserve currency 2 could asymetric inflation be even better ? And in these way, could it be that it is rational for the country issuing the reserve currency to seek deflation at home in order to sell fiat dollars worth a lot at home (to max its taxation of the rest of the world) I got confused about the asset prices as usual. Because in fact as we all know, money creation has not stopped in the 90′s, money as flown from good prices to stock prices then housing prices, but the money stock never stopped to increase. ANd i doubt the federal reserve is responsible for where the money goes. Can the fed reserve be held responsible of wether its money creation goes abroad or at home ? dunno. But I keep wondering if it might be wise for the USA to moderate its money supply internally (and inflation as a whole) in order to max its “taxation” of the rest of the world. ¨ Phrased in another way, if the USA were to try to inflate their money supply in huge numbers, directing a biggest share of their money supply towards the US economy, then the foreigners would drop the dollar as a reserve, would stop borrowing in dollars, would adopt the euro … And this would have a very negative impact on the USA.
US federal bank provided lots of liquidity back in the 30′s. That was not enough. I doubt any number would have been enough. Liquidity injection can only postpone a deflation crisis. *Banks cannot ‘inject’ liquidity because they do not directly purchase nonfinancial assets, though the gov can. Japanese banks can only lower rates to zero to move spending forward. 1 of course global inflation is good for the country issuing the reserve currency *Good, or justified? Few economists seem to think the U.S. should be ‘paid’ to be the world’s policeman. 2 could asymetric inflation be even better ? *To maximize taxation of foreign entities through inflation, the U.S. would maximize the amount of financial U.S. savings (tsy secs) held by foreigners, and discourage nonfinancial U.S. savings by foreigners possibly through tax policy. The devaluation could then come from SS reform which benefits wall street, or raising the minimum wage which benefits main street.
I think we agree that deflation inflation is mostly a real phenomenon. When wages are higher than productivity, there is inflation (in consumption goods), asset prices fall. ANd vice versa. The central bank mostly has an influence on the amount of money created but not where it goes. That’s the basic. ANd that’s why inflation is not possible, not with Bush in power, not with the unions and the labor laws as they are, not with asymetric mobility in favor in capital etc. 2 American politicians may think it be good or not that the US get paid to be the world policeman. From a rest of the world point of view this is absolutely not the correct phrasing. The USA are extracting a tax by force, and looking for their best interest. the question was is it good for the USA if there is inflation ? Conversely, if other countries all engage in monetary policies with severe control of their monetary base, is it for them a way to reduce the taxation coming from the USA ? 3 I was mentionning asymetric inflation between inflation in the USA and inflation outside the USA. I m saying that if the one dollar the government sent abroad is still worth one dollar at home 10 years later, it has taxed the world for one dollar. It’s pretty cool. If ten years later it’s worth 10 cents, then it has only won 10 cents. The correct phrasing, is then ten years later, you need to send 10 dollars abroad to tax the world for the same amount. I’m saying the best situation is a situation in which the rest of the world’s inflation is infinite, and inflation in the USA is zero, so that the central bank can create infinite numbers of dolars sent abroad and make lots of things with the cash it makes (lend it to the government) You’re pointing at asymetric inflation between different goods, consumption goods (wages) stocks and bonds. You’re saying that it is possible to rip off foreign investors by having them to invest in uninteresting assets.
I think we agree that deflation inflation is mostly a real phenomenon. When wages are higher than productivity, there is inflation (in consumption goods), asset prices fall. ANd vice versa. *I agree they cause micro wealth effects. Inflation/Deflation of basket of goods? Increase/decrease in prices are temporary and only made permanent with increased monetary base. Long-term trend is if deficit spending grows faster than savings we have inflation, if deficit spending grows slower than savings we have deflation. The intermediate trend may fluctuate due to many micro factors. The central bank mostly has an influence on the amount of money created but not where it goes. *CB has ability to move spending forward or backward but with little or no net gain by flucuating interest rates. Moving spending forward can keep the economy going during a time of restricted borrowing due to low tech development. That’s the basic. ANd that’s why inflation is not possible, not with Bush in power, not with the unions and the labor laws as they are, not with asymetric mobility in favor in capital etc. *We don’t have inflation because of current large saving desires of foreign CB’s. Mosler believes we are headed towards deflation. 2 American politicians may think it be good or not that the US get paid to be the world policeman. From a rest of the world point of view this is absolutely not the correct phrasing. The USA are extracting a tax by force, and looking for their best interest. the question was is it good for the USA if there is inflation ? *You sound like a libertarian. What about paying for a functioning WORLD SOCIETY? Conversely, if other countries all engage in monetary policies with severe control of their monetary base, is it for them a way to reduce the taxation coming from the USA ? *Yes but what a waste unless all their peoples are employed. Maximizing labor resource potential has distinguished the U.S. from most countries, though this is changing. 3 I was mentionning asymetric inflation between inflation in the USA and inflation outside the USA. I m saying that if the one dollar the government sent abroad is still worth one dollar at home 10 years later, it has taxed the world for one dollar. It’s pretty cool. *This has allowed the world to save one dollar, no tax. If ten years later it’s worth 10 cents, then it has only won 10 cents. The correct phrasing, is then ten years later, you need to send 10 dollars abroad to tax the world for the same amount. *Disagree, rethink. I’m saying the best situation is a situation in which the rest of the world’s inflation is infinite, and inflation in the USA is zero, so that the central bank can create infinite numbers of dolars sent abroad and make lots of things with the cash it makes (lend it to the government) *You promote allowing foreigners to save U.S. financial assets and not pay for the privilege. Most economists agree with you. You’re pointing at asymetric inflation between different goods, consumption goods (wages) stocks and bonds. You’re saying that it is possible to rip off foreign investors by having them to invest in uninteresting assets. *I’m saying tax foreign investors for investing in uninteresting assets through inflation, or if you like, match interest rates on tsy secs to inflation so their return is ZERO. Reduce the incentive to save fiat money.
I don’t understand yoU. Sorry. May be we have different backgrounds. Or I don’t get the meaning of the words you use. Long-term trend is if deficit spending grows faster than savings we have inflation, if deficit spending grows slower than savings we have deflation. what do you call deficit spending ? Is it deficit from the government ? are you saying that if deficits grow faster than savings, then you have inflation ? Look around, in the 70′s inflation was high, savings were high, deficits low. That’s for history. And then logically, I see absolutely no link. May be you can explain me. From where I stand, the impact of real wages is very strong and very long term. If you have a given amount of money around, and a given production. If you add another given amount of money it can either raise the prices of goods or assets. If wages grow slower than productivity then the cash boosts asset prices. I don’t see either how the foreign central bank savings could lower inflation. Imagine they would stop their savings, then there would be interest hikes, depression, deflation and the like, see the posts on this website. Paying for a functionning world society would be OK. That’s why next international reserve currency need to be linked to a world government, the way Keynes wanted it to be back in 1945. About the inflation again, I think we see the things from a different point of view. Your basically saying, if the world can trade back the dollar it got for one dollar of american products, then it lost nothing. It has saved. But that’s not the point. At least not where I stand. That’s not the point because that dollar can not be traded back, it is necessary to allow transactions. That dollar will never be traded back as long as transactions grow, and no new reserve currency is created. This is why there is a “tax”. There is a tax because this saving is forced. It’s the same with gold, Imagine gold standard back in 1900, you could trade your dollars for gold. But what were the chances you’d do it as long as you needed dollars to do your business. If there were 1 ton more of gold in the central bank, the ideal of that bank is that 1 an infinite number of dollars is created out of that amount of gold, 2 one dollar is worth the same amount in gold. (because no one will trade it back) I m not saying the foreigners should buy any US assets (unless you call dollars US assets). I’m saying they need dollars for transactions (it s a kind of fractional reserve interest rate 0), so they buy them, and they can NEVER sell them back (unless there is a huge recession deflation of course). The best situation would be to sell dollars and not bonds. As for the US government, all it wants is export as many real dollars abroad as possible, as long as they will never come home. I think I understand what you’re pointing at, and I agree with it, it is very close to what Silvio gesell would say. What I’m saying is that there are other problems : 1 excess debt 2 asymetric situation in favor of the USA with its reserve currency. 3 excessive concentration of wealth and revenues. some people can not spend the cash they have, that’s why they store it, this cash is in the wrong hands. And others can not spend and borrow, leading to the excess debt.
It seems like a blind spot to dwell exclusively on the exchange between China and the U.S. As Eric asks, “What are candidates for an exogeneous trigger?” As a non-economist, I don’t start with models full of variables and exponents and derivatives. I start with a checklist of every major trading power. I look at each one and ask, does this country have the capacity to destabilize the dollar? And would that be in its interest? To fulfill the first, a country needs substantial holdings of dollars, T-bills, CMBSs, or other debt-backed securities, denominated in dollars. Basically, oil states and countries that export a lot to the USA. To fulfill the second, countries can’t rely on exports to the USA in order to survive (like China). Best would be a country that imports more from the USA than it exports. Maybe Russia? I don’t know about their dollar reserves, but they have already stated that they want more Euros. If they start auctioning their oil and gas in Euros and ditching their dollars, could that be enough to destabilize the dollar (and give Russia some cheap wheat flour)? I honestly don’t understand this stuff, I’m self-taught and I appreciate all of you having patience for neophytes like me. I hope this post isn’t too close to kindergarten; if so just reply off-list.
In fact as usual there’s several debates at the same time. One is how to fix international imbalances. In fact the debate is more, what are the risks of not fixing them. China has no interest of ending the game, neither does the USA, the problem is that they can not play it forever. It’s a lose lose game in the end.
what do you call deficit spending ? Is it deficit from the government ? are you saying that if deficits grow faster than savings, then you have inflation ? Look around, in the 70′s inflation was high, savings were high, deficits low. That’s for history. And then logically, I see absolutely no link. May be you can explain me. *The “deficit” is gov spending in excess of taxation. C/A surplus is “saving” by foreign entities. If you remember the 70′s the French and German CB’s were not inclined to “save” the U.S. dollar. If you look at U.S. gov debt growth in 1975 it was growing at 23.9% compared to 8 or 9% today. See Fed’s Z1. *I also agree with what you write, though you are seeing the effects (wealth effects) as the cause. If you look at the effects (micro economic) rather than the cause (savings exceeding deficit spending), you will miss the solution (macro economic).
Well I think you are looking at the effects and not the cause. Besides I don’t call the variation of wages relative to productivity a “wealth effect”. I call wealth effect the fact that variation in asset prices leads to variation in spending. That’s the way I’ve always seen people talk about wealth effect. The fixation of wages is both micro and macro. Just to make things clear, you’re saying … inflation in a country, is related to government deficit growing faster than foreign savings (what the hell could be C/A ? current account or capital account ?) Capital account sounds the most logical, capital account tracks investments and loans in and out of the country) And I m not sure to understand if you include national savings in this, or may be only the part of national savings going into government bonds … Still unclear. But already I think I disagree. I Guess I understand where you are hinting, whatever spending is not backed by real cash, has to be backed by inflation, based on what you refer to as priviledge (seigneuriage in french). but. 1 from a pure logical point of view, 1 a. It does not always work. Some times the state wants ex ante to spend, it start to spend indeed, and then at the time it wants to create inflation it does not work. If this never happened, there would have never been delays in payment of civil servants in lots of countries. The ability to create that inflation depends on the ability to create enough fiat money, and encourage the creation of other type of money. If confidence is not there bank money and market money are destroyed faster than fiat money is created, ex ante wishes of government spending do not happen. 1 b the “inflation” you refer to, could be purely in asset prices, with no “inflation” as the common word has it (inflation in common goods). For example if you look at the last 20 years, you find that world wide inflation is slower in good prices and higher in asset prices. How do you explain it ? For examples if I shorten the duration of maturities, and if lots of people borrow short term to invest in long term bonds, the government can increase its deficit, with no excess savings. WHat happens is that interest rate falls, and bonds rise. That’s just what is happening. And Some of this may be seen in M3. It does not create inflation in good prices as long as most of the gains are invested in other assets. 1 c I see no reason to restrict the deficit to the government deficit. Why not government + private sector + household. 2 I need a clearer understanding of what exactly you mean (sometimes you mention the rate of increase of deficit, and not the deficit itself), to look for counter example. On an aside note, I do not share the view that interest rates only move spending forward or backward. AS far as I can see, some projects are profitable in a low interest environment, and not in a high one. Low interest increases lending and borrowing. And tech development has nothing to do with it. to comment on older posts, you have not commented on the asymetric inflation stuff I posted. The way I see it, a bank is to barters, what a central bank is to banks, what the USA are to the rest of the world. It creates a common mean of exchange. This by itself is a tax (for a service, the possibility to exchange, lend and borrow …). If there is inflation, it is great for the bank, it creates lots of bank notes. Deposits in the bank have a negative real return. If the bank does not need more central money, or any other thing it needs to buy (if its own inflation is low) it makes lots of cash. If say in t0, there are 10 different products, 10 items of each, each is declared worth 1. Let’s say transactions require 10% of the total worth, or the creation of 10 bills of one. Comes in inflation : each is now worth 2. the bank emits 10 new bills, lends them for a profit or trade them for real goods. Those holding bills, lost 50 percent of their value. IF there is inflation in bank money, it’s great for the central bank, it creates lots of central money out of nothing, and bank money reserves have a negative return (unless it’s own inflation rises, for example if it needs gold, if printing or controlling costs get high). The same goes for the USA. If inflation in other countries is high, the USA create lots of dollars out of nothing, they sell them, lend them etc. But if the value of these dollars are worth less internaly (in real goods), then more need be sold outside to buy the samethings inside. The question is not how much will the foreigners get in US products for one dollar. They never do that. No economic agents asks what will I get out of one unit of cash in the bank’s products or liabilities (the price of the bank building, the wage of the bank employees is irrelevant to most). THe unit of cash is traded against goods. The question is how much do i get with one unit of bank money in goods. No bank asks, how much do I get with one unit of my money in the thing the central bank has, the question is how much do I get with one unit of central bank in units of banks money. The bank wants to expand credit. For the very same reason, foreign user of the dollar as a transaction currency do not care what it can buy in the USA. They care about what it can buy in their country. If inflation is high in their country, and if the dollar is only a reserve currency, then the dollar is worth less and less in their country (there are more and more around for the same amount of goods). Of course the “problem” is that the dollar is also the money of a country, there are exchanges between the USA and other countries. Therefore if there is no inflation in the USA and a high inflation in other countries, then the dollar will appreciate in nominal terms and remain stable in real terms. One item traded for an american product, will remain traded the same, it s price in dollar being the same, the same dollar will buy the same abroad. The other currency will buy less in the USA. I m sure the fact that the money of the USA is both its own currency and the reserve currency of the world is creating problems and defective adjustment processes by the markets.
Not being an economist myself, I am suggesting we keep the conversation somehow close to Nouriel’s layout: a prisoner trilemma. In addition to the US and China we also have Europe. Then, I suggest we make a step forward and include in our conversation the need for security of the various entities. It is only then that we make the conversation less technical and closer to reality. Cooperation may be the name of the game given the skeletons in each of the above entities’ closets. The EU is probably the closest to a position in which to challenge the status qvo. Yet, in many respects, EU is still a dream. Do you recall Timothy Garton Ash’s recent story in which President Bush asked him if it was in the US interest for EU to succeed? Probably, President Bush asked him so for he has something on the Europeans. To return to cooperation, the US has to adjust the way it conducts itself internally and externally, monetary and fiscal policies included. Just because it’s been like this, and we seem to enjoy buying on credit while others seem to like to sell for credit, is no guarantee in and of itself things will stay put no matter how much everybody likes to cooperate. So, cooperation doesn’t mean status qvo. It only means the large (3) entities of the world need to come together and reshape most everything we know, from Breton Woods to NATO and to the way we keep each other honest. It is foolish to think we can keep it uni-polar with props in NYC and Wash. DC… fCh http://chircu.com
USA discovered that asian countries have cost effective and good manufacturing capacity; therefore, USA outsourced manufacturing activity to asian countries USA discovered that asian countries are very good (cost effectve & good quality) in IT and IT enabled services. So many software services, call centres, medical, legal, financial, insurance and other logistical services were outsourced m(smartsourced!) to many of the asian countries. USA discovered that its citizens are spendthrift and do not save. So it outsourced the savings functions to central bank governors of many of the asian countries.(think of the official dollar reserves held by these asian countries in USA’s future potential junk treasury bonds). USA pays 4% on their treasury bonds and invests them in asian markets with a ROE of more than 10%! It will not be too late that USA will discover that asian countries are governing their countries better and it is better than the best to outsource the ‘governing’ functions of U.S.A. to asian countries in future! very very happy smartsourcing!
China will want to be cautious. They can repeg their currency to a weighted average of dollars, yen, and euros, and slowly over time adjust the proportions in the weighting and the exchange rate. That way they avoid sudden disruptions that could be detrimental for their economy.
I agree with you about the way you view the issue. I remember, long time ago, Jack London said something like “Everything positive has a negative side; everything negative has a positive side.” I also find it interesting to see different points of views and learn useful things in the discussion. Posted by: Richard Hill at June 04, 2005 08:59 AM