I felt a little uncomfortable following the Chairman’s trip to China with the high profiled “Paulson” entourage. Maybe this discomfort is misplaced, but doesn’t it make one wonder whether the Federal Reserve Board’s independence is being effectively preserved?

This US Fed / Treasury visit to China is typical of US naivity and suggests again, that American leadership believe that the rest of the World is as stupid as they are; which they are not (well some maybe), especially not China. China as I have written previously is a dynamic emergent economy of ~1.3 billion peoples and is in a state of the most rapid and accelerating socio-economic change.  The US, as the rest of the World knows (excepting the Americans) is a spent force driving itself off the end of the Bell Curve and into a state of rest or static decline.   The US needs comprehensive reorganization and restructuring and come to the realization that those of Leadership utilizing “utopian ideology” to plot the future in lieu of intellect are nothing more than raving mad fanatics and zealots defaulting to genocide and murder in order to enforce their lack of intelligence.  Moral Hazard.  Indeed the USA will arise again and Yes, a better power as its people throw off the ignorance of its ruling elite and see that the Policies du jour are nought but applied primitive superstition.  At the negotiating table, China is correct and will extract both its pound of flesh and pint of blood, but will never put at risk, its own delicate socio-economic balances, in rapid growth, to maintain the US status quo.  If there was ever a sign that the US is in its death throes, in terms of the socio-economic conditions, it is this visit by the USA (Leadership) to China. The World laughs and is aghast at the deplorable state of US elitist Leadership. However, fortunately, the state of ethics, intellect, integrity, morality and intelligence of the American peoples, is not correctly typified by its leadership, which is more representative of a jihadist religious right – a force, which it pits itself against in other quarters of the Globe – in acts of primitive brutality and muscular aggression. Are we that ignorant we must ask? The answer is, indeed not; but Leadership remains here for that is from where its politicians emerge.  The US system is broken and it need fixing; indeed it needs replacement but not reform. I add, that America has many fine people of courage, integrity and intellect but the problem remains that none are in Leadership or in the position where they can be heard or taken seriously.   That is to say, for sake of clarification,the current US imposed socio-economic system sucks and its ‘swan song’ is being sung by the Fatt Lady.  Moral Hazard.

I think Marco is right (may be he can forgive me if I translate from Italian).  I also think that currency is, for China (but also for US and EU), a weapon.  You know that in these unrestricted warfare times everything can be a weapon and that battles and wars can be very long (Infinite Wars, Enduring Freedoms, millenium empires and long lasting things like those).  

One has to take your hypothesis that ” this Chinese currency policy is highly beneficial to US consumers and that it is keeping US inflation lower than otherwise.” as true, per se. This is really the point of basic disagreement between yourself and those that would limit Chinese imports. Many US citizens, rightly, equate the low prices with the loss in income to American workers as a result of the labor arbitrage.   The US is facing a significant slowdown in economic activity that will expose the depth of the job and income loss in America that is attributable to Chinese subsidization of the US consumer. That is really what is reversing inflation that was revving up as a result of Greenspans attempt to fight import caused deflation. Whatever subsidy semantic we choose to call it, it is massive anti-competitive foreign government intervention.   Bernanke spoke straight with the Chinese and their multi-national corporate handlers. The US is sagging under the weight of the macro-economic distortions caused by the Chinese opportunistic trade policies. Bernanke is under the gun to monetize the asset bubble (inflation) or to embrace a US recession as the cure. The world will not escape the consequences. For Bernanke to talk turkey with the Chinese seems rational to me and gutsy too.   If you are correct about the looming US recession, the Chinese will not escape. Their response will be to try to increase exports and really ignite the “protectionist” forces that will force a violent rebalancing, made possible by the Chinese stalling. The time is now for Asia to adhere to the rules of trade.

Not so fast folks.   Lets remember that the United States has one of the most flexible and adaptable economies in the world. When one part of the economy slacks off, another part is ready to take up the slack.   For instance, residential construction is falling off a cliff – no doubt – but at the same time there is a substantial backlog of deferred public works projects that will come on line as soon as the availability and cost of labor and material returns to reasonable levels.   Also bear in mind that while MEW is less today than last year, it is still high from historical levels – about the same as in 2004. We are probably fortunate that high oil and gas prices muted the effects of the extraordinarily high levels of equity withdrawl. How will the sudden drop in interest rates and the dollar in November play out? Some favorable exports and domestic substitution for imports should materialize. We are seeing already the results of the interest rate drop in the number of mortgage applications for purchasing and refinancing.   Yes a number of subprime mortgages will end in default. However a number of mortgages will also be refinanced or owners will work out – or at least defer – the consequences of subprimes through second jobs, shift to credit card debt, etc.   Regarding housing prices, while they are falling from the bubble levels of last year, they also are still at historical highs. Not everyone who could refinance did so during the last couple of years. I suspect that, even with falling housing prices, a significant number of homeowners are still in a position where they can tap the ATM.   How much are consumers simply shifting from MEW to SEW (Stock equity withdrawl)? Corporations are repurchasing shares in lieu of dividends (or investment) and stockholders are selling off portions of their holdings to finance their consumption habits. (I can personally testify to this)  Will we have a recession? I don’t have a clue and I do not think anyone else does either. Economic circumstances never repeat and they do not even rhyme very well for that matter. However, I am beginning to lean towards the soft landing side as more economic events unfold.  We humans too easily filter rational data to justify our positions – particularly when there is a strong emotional attachment. I feel I have seen this from a number of economic bloggers recently – while the markets incidentally appear to be saying something else.   Does our “socio-economic system suck”? Not hardly!

Hi Guest,  ’Stock equity withdrawal’ can’t compensate for Mortgage Equity Withdrawal when there’s no Stock Equity to withdraw. That is, we still have to take ownership concentration into account. Now it’s true that over 50% of U.S. households own stock but “What is less often advertised is that as of 2001 the bottom 90 percent of households own only 23 percent of all stock and just 12 percent of all directly held stock, which confers direct control (voting) rights on stockholders (Wolff 2004, Table 13a; Kennickell 2003, Table 10).” http://www.press.uillinois.edu/journals/irra/proceedings2006/buchele.html  Hmm, how about wages taking up the slack? No, guess not as even in nominal terms median household income, excluding capital gains, was lower in 2005 than in 1999 and, with the slowing upon us, it’s not likely that this will reverse. Consider also that inflation adjusted hourly wages remain well below their 1973 peak and labor’s bargaining power is, being kind, very weak.  Would also add that stock market indices are not indicative of real economy conditions.    

Interesting, if True?  http://www.rense.com/general74/report.htm  Moral Hazard  I notice that the “keyword” to post here, is “Is CH”. Is this a subtle hint to get into Swisse Francs?

“When the world’s debt and commodities are denominated in dollars that only the US can print, the US essentially owns all the financial wealth of the world.”  What? You must be kidding? I would be inclined to take such nonsense more seriously if all Americans were millionaires and we had no deficit. Grow up my friend.

perhaps china wants to be more than a us financial colony.

So the protectionists in the newly entering Democratic Congress (Schumer et al) end up imposing tariffs on China. As a result, China buys less treasuries (not to mention selling off ones they already own).  How is this not a lose:lose scenario for the US economy? Prices will go up and the dollar will go down.

I do think the purpose of the U.S. visit to China was to tell China USA is able (?) to do something to rescue a slowing U.S. economy.  

I’d like to comment on two things – first the idea that it is good for China to let their currency appreciate and then secondly a thought on the benefits to the American economy of a low Chinese currency.  I agree with professor Roubini that a higher valued RMB would benefit China in the long-run. It would reduce the Chinese economy’s reliance on exports as their sole driver of growth and allow them to focus more attention on creating domestic demand for products. Whether this needs to happen now or after a few more years of world sponsored growth, I am not sure is clear – but there are definitely long term benefits to letting the currency appreciate.  As for low priced Chinese goods helping the US economy. It seems to me that this is not the first time, the US is trying to create protectionist policies that hinder long term growth. As with Mexican immigrants – the US is putting up walls that take away the benefits of a reduced pressure on import (labor or other imports) prices in favor of protecting jobs that probably should be sent abroad anyway. It would seem to me that by allowing an in flow of cheap imports, this would allow the Fed to keep interest rates low which would benefit the US worker both in the short and long run. 

The ship is sinking fast, and you all are talking about rearranging the deck chairs.  Come on, George–you got us into this mess–now get us out!!!

Ben,  My argument is not that we should always remove protectionist measures (at least not here) – my argument is more that if we face inflationary pressures – rather than increasing interest rates which will cause job reductions across the board. Why not let down the protectionist walls in a degree equivalent to the tightening of the interest rate?   By increasing the interest rate, we reduce aggregrate demand for goods. Thereby definitely reducing the number of jobs – which we justify by less inflationary pressures. By removing some of the protectionist measures to reduce the inflation rate instead – we keep aggregrate demand high, but we push the supply curve out – so that we are still able to reduce inflation, but not through a reduction in demand. This would seem to allow us to have our cake and eat it to.

Jon G – I agree with you completely. When China and others subsidize our consumer goods and the interest rates on our long-term debt, are they not simply 1) accelerating the on-going shift of basic industry from developed to emerging nations and 2) providing cheap capital to the USA that in turn is invested in long term assets that will improve the quality of life (housing, public works), capital expenditures that will improve the productivity of our economy (equipment & systems) and research and development in higher value arenas that create new industries, new jobs and much more wealth than is found in the commoditized industries that are being sent abroad?

Dear Anonymous,  just keep drinking the Kool-Aid.

 How many chinese are sent (exported )over to Dubai for their building boom?  How many migrants flood into shanghai yearly looking for work? (10′s of millions 100′s of millions?(cbc.ca) How does one have a civil discussion when the civilians can’t take part in the conversation? How can anyone have a meaningful discussion based on indexes (numbers)no one trusts? The conversation sounds are more like chattel much like cattle talk rather than having meaningful dialogue with sentient beings…. I say boo to this approach not moo;^> hum…. that American tv show where wives trade places hopefully to have a better understanding on how the other family lives — maybe the writers should go further and have them trade countries to capture the real experience of being chinese. Perhaps Mr. Chavez’ acknowlegement of Mr. Chomskys’ definition:” The term “globalization,” like most terms of public discourse, has two meanings: its literal meaning, and a technical sense used for doctrinal purposes. In its literal sense, “globalization” means international integration. Its strongest proponents since its origins have been the workers movements and the left (which is why unions are called “internationals”), and the strongest proponents today are those who meet annually in the World Social Forum and its many regional offshoots. In the technical sense defined by the powerful, they are described as “anti-globalization,” which means that they favor globalization directed to the needs and concerns of people, not investors,financial institutions and other sectors of power, with the interests of people incidental. That’s “globalization” in the technical doctrinal sense. Latin America is now exploring new and often promising paths in rejecting the doctrinal notions of “globalization,” and also in the remarkable growth of popular movements and authentic participation in the political systems. How successful this will be is more a matter for action than for speculation.”   Playing High-Stakes Media Games in China Topics: human rights | international | journalism | public relations  Source: The Wall Street Journal (sub req’d), December 15, 2006 As the 2008 Olympic Games in Beijing approach, “the Chinese government knows cameras and notebooks are just as likely to record angry farmers protesting, practitioners of the banned Falun Gong discipline clashing with police, or Hollywood stars campaigning for Tibet’s independence — if reporters have the access.” While China has 31 journalists in jail — more than any other country — the government has “pledged to temporarily relax limits on foreign journalists” reporting on the Olympics. (China has declined to extend the new freedoms to domestic journalists.) For a gentler approach to media control, the Beijing Olympics Organizing Committee has put the PR firm Hill & Knowlton on retainer, while “Ogilvy Public Relations Worldwide has been conducting training sessions for local governments.” “I think it is a part of the process of reform for them,” said the president of Ogilvy’s China office. Sun Weide, the Beijing Olympics Committee’s “message man” who “works extensively with Hill & Knowlton,” stressed, “The Olympic charter says very clearly that the Games are about sports, not politics.”  http://www.prwatch.org/spin http://bermuda-online.org/intcoys.htm (us tax outsourced havens)  Why blame George? Isn’t US democracy participatory? Why keep repeating histories nightmare when all one has to do is wake up.

I think the simple question that many have been deliberating upon is:  1/ How long can US consumers get something for nothing?  2/ Has the American consumer gotten something for nothing and if so, For how long?  Anecdotally, I would wager that the animal spirits of speculation and the green-eyed monsters of envy and greed have had the field to themselves for too long, too completely and without contest.   It’s like when N. Talib wrote about, induction traps. That because you’ve never seen a black swan doesn’t mean the don’t exist and that a black swan isn’t going to show up some day.   Consquently the most important question of what (economic hazard ahead) is substituted for when (timing). Thinking about Pascal’s wager I’d offer that the what (an economic event) is sizeably more important that the When, because if the proverbial Sh** does come about, it really doesn’t matter which quarter it does!   However, the green-eyed monsters play havoc with our feeble mortal minds and convince many that the When is the paramount issue. It isn’t. We see this silliness every time Dr. Roubini posts on his Blog, the green-eyed fairies spout and thrash about.  However, few have specifically tried or been about to refute Dr.Roubini’s central asserations, other than the easiest and probably the most moral argument one can employ on behalf of the soft-landing crowd, it is: American is a great country it is a strong and amaziningly diverse and dynamic entity that has shown that it can re-invent itself every generation or so to maintain its economic pre-eminence. Betting against America has been a failed wager for most of the last 300 years and nothing has fundamentally changed in the US over the last 5 years. Problems-Yes, but fixable.   I can’t wait to see what ’07 holds, ironically as a matter of discipline I’m fully in and long US Value stocks, because as student of Ben Graham, I’m greedy when others are fearful and fearful when others are greedy (perhaps now!). Cheers. 

workers movements and the left (which is why unions are called “internationals”), and the strongest proponents today are those who meet annually in the World Social Forum   That is only a “side” of the left in term(left/right bs) you can get. You forget about the 19th/early 20th century reactionary left that was anti-Christian,Anti-Bourgeois however VERY Western influenced men either from the pre-Christian era or scientific rationalism. White centric, masculine focused Nationalism that turned into Fascism in its authoritarian forms in the 20th century and was a surprising underside of the 60′s counterculture that lead headbanging against the Culture Marxists during that same time period. Yet, that history has been pretty much muted out by the system.   The future of Socialism isn’t Internationalism and direct materialistic crusades, but Cultural Nationalism and return to Pre-Christian identity the Western man began losing 2000 years ago. My view is, if the “Right Wing” doesn’t see this, revolution is possible.

Peter,   I find it interesting that I can find nothing about threats (from U.S. or China) in the standard (for lack at this moment of a better word) media , but neither did I believe the retail sales number from the Goverment reports.   Interesting if true.

Why is it a surprising that the economy continues to do well? There has been way too much drinking of the kool-aid around this blog vis-a-vis the housing market and the overweening desire to find data that will fit the hypothesis that the housing sector is poised to pull-down the overall economy. Macro and micro-economic data-mining for any little validation to thinly support the years-old lament that the current state of the economy is anything less than a boom evidently never gets old with some.   For a reality check look through the bear masks and see a fairly strong economic foundation: growing real wages, crazy-strong corporate profits, an export boosting weak dollar.   If one fixates on the troubles in housing, it is not too hard to find statistics that promise 45% declines, etc. What is missing in most of the discussion is that RFI is roughly 5%-6% of the economy, and the biggest problems are in a very narrow segment of the market – subprime lending, which is roughly 7% of the housing market. Hence, we are looking at 7% of 5% of the economy: 0.35%. If housing impacts 15% of the economy because of sympathetic spending, that roughs out to a 1% GDP decline. That is IF the doomsday bear scenario plays out as meticulously scripted – which it has not.    One thing is certain: If you have been anything but long and strong you’ve been wrong (investing wise). From a trader’s perspective, fighting the tape is always a losing battle. The trend remains up, momentum is positive, seasonal strength is upon us, and the bears and shorts have been vanquished.   Notice the strong run-up in home prices in preceding years (limiting the impact of modest near-term price declines for most consumers), the impact of demographics and second home buying (sure it’s an asset, but it is also where many are deciding to spend their golden years), and the fact that interest rates are falling in tandem with housing prices (raising affordability), you have the makings of less dramatic outcome in housing.   While I enjoy the blog, I am amazed that so many so-called “smart” folks are so focused on such a narrow slice of the economy, and are shocked, shocked! that the economy has not fallen into the abyss. 

Call me an optimist, but I’d like to believe that Paulson has the best interests of both the US and the global economy in mind. He took on an extremely challenging role and is taking a proactive approach to US economic discussions with China.   Everyone is so quick to criticize him but who the heck would want his job? What a nightmare. There is little upside and I think he has the expertise and the ability to make a real difference. He’s not a yes man. He doesn’t need this job.   He’s brilliant, pragmatic, and is no stranger to tough decisions. He’s a banker and economist; of course he realizes the impact that an appreciation of the yuan would have on US inflation. It’s going to happen eventually. It’s all about timing. Let’s hope that it’s a somewhat controlled appreciation and $1 trillion USD doesn’t hit the market at once. Paulson’s not only concerned about US inflation. At the recent G7 meetings he emphasized China’s need for expanded foreign investment and competition in its domestic financial markets.   Call me naïve, fine. But I do believe Paulson has the ability and desire to truly address a number of our economic problems.   

Ya gotta love this, material weaknesses in the Government’s accounting; http://fms.treas.gov/fr/06frusg/06frusg.pdf 

Subsidy of exports? Beyond just the RMB?  Of course. One aspect barely noticed is the reduced taxation on the primary exporters: foreign nationals.   They are taxed at 15%, not 30%. If those foreign companies comprise 60%+ of China’s exports, that is a healthy subsidy.  Odd that we never discuss facts like this.   Let’s see: If taxation is halved, what appreciation would the RMB have to have to make up that difference?

I read Roubini like a hawk and as an admirer I can only say this is specious:    speaking of “export subsidies” in the context of currency policy is loaded and dangerous: export subsidies are illegal within the WTO rules. And arguing that a weak currency is effectively an export “subsidy” could even give legal cover to those in the US who may pursue protectionist legal action against China because of its alleged export “subsidies”. This is not an idle threat: when I was at the White House’s CEA in the late 1990s we had to fight non-stop bone-headed protectionist proposals by the Dept. of Commerce … to change US “dumping” rules to include low import prices due to the weakening currency values of some of our trading partners (for example the Asian currencies in crisis). …  He is comparing criticism and challenge of the Chinese peg to Dept of Commerce pushing to change rules about dumping with regards to countries whose currencies were in crisis during the Asian currency crisis.  Faulty comparision:  How long has the Chinese peg been going on? How massive has the impact of the Chinese peg been on the American economy? How much productive capability have we lost to the Chinese because of the peg? What impact does the Chinese peg have on other Asian currencies relative to the dollar?  In all these cases, the effect on the American CA deficit and the American economy of the Chinese peg dwarfs by several *orders of magnitude* the effect of Asian currencies in crisis during the period in question.  It’s propaganda to put the apple and elephant in the same basket!

Thanks Guest, fictitious capital is a useful category for our understanding of the capital system.   It’s been some time since I read Capital Vol III but my recollection is that one primary distinction between real and fictitious capital has to do with the fact that the former is, as actual means of production and labor, the only moment in the system which is able to create/generate surplus value and with this the potential for greater accumulation of the real, i.e. growth. On the other hand there is the issuance of claims to that surplus, of shares, bonds, etc. Real and surplus creating on one hand, claims on the other. As this progresses, some – then many – come to confuse the two, believing the claims to be the real when they are no more than a representation standing next to the real and representations which depend on what they are claims too.  Credit expansion enters as a means to support these claims, as a means to perpetuate fictitious capital, even as/because their basis in the real proves unable to provide a suffiency of surplus value — the struggle by each firm to accomplish such creation is also seen in the reduction of labor-power used and the greater rate of exploitation of remaining employees, which – for the system as a whole – negatively effects the mass of new surplus value created so further undermines fictitious capital’s basis. As the mass of claims expands and available surplus value is constant or contracting, it’s evident that fictitious capital should be destroyed but, as I was saying, credit expansion comes to the rescue as it increasingly substitutes for actual profit of production; a portion of credit can then be seen as a form of fictitious profit.  For the universe of claims, of fictitious capital, to sustain, we are left with the need to increase both rate and mass of profit from production relative to claims and provide permanent credit inflation…the two are contradictory.  Of course there’s much more to it. The more than a century ago move to neoclassic theory has – as it was supposed to – mystified such relations and categories away.  Su amigo

Velocity M-2 last peaked in 1997 but its yoy rate of rise peaked roughly two years earlier…a bottom was made in 2003 with rise since, but its rate of increase stalled in 2004. Looking at the whole 1959-2006 period, it appears that rate of change in velocity may be a better indicator than velocity itself, though obviously the two are related. See what you think, Chart: http://www.economagic.com/em-cgi/charter.exe/var/vel-gdp-per-m2+1959+2006+3+1+1+500+1200++0  Here's same for Velocity M-1: http://www.economagic.com/em-cgi/charter.exe/var/vel-gdp-per-m1+1959+2006+3+1+1+500+1200++0 (a slightly different picture)  Flight to quality, and to cash, seems reasonable to me.

Guest:  Here’s a section from a recent Tony Smith paper re. the world market:  Uneven development  Cross border flows of commodities do not necessarily tend to balance automatically in the world market. Trade surpluses arise in some countries, while trade deficits emerge in others. Equilibrium could be approached if deficit countries imposed restrictive policies and surplus countries increased public spending and allowed higher wages. Deficit countries would then import less, while the stimulation of domestic consumption in the surplus countries would lead them to import more and export less. The logic of the capital/wage labor relation in surplus countries, however, necessarily tends to discourage this sort of symmetrical adjustment. Domestic industries are generally able to block reflationary policies on the grounds that higher wages would hurt profits. And political elites in surplus countries generally prefer to accumulate foreign reserves instead, on the grounds that this enhances the position of surplus states within the interstate hierarchy. These reserves can then be loaned to deficit countries.  As long as debtor nations can tap global credit markets, this situation can persist for an extended period. But the structural tendency to uneven development in the world market is reinforced in four major ways. First, a steady stream of reverse capital flows from debtor to creditor countries is put in place. Second, debtor countries are far more burdened than would be the case with a more symmetrical response to trade imbalances in surplus and deficit countries. Debtor countries become increasingly vulnerable to capital outflows, which are more likely to occur with low interest rates and redistributive social policies. And so interest rates tend to be high and austerity programs severe, whatever the political regime in place. Third, the need to repay capital imports leads debtor countries to concentrate more and more on production for exports. For reasons discussed above, these exports will tend to be industrial and agricultural commodities that do not embody product or process innovations. As more debtor countries export these sorts of commodities, world market prices tend to stagnate or decline, reinforcing the tendency to uneven terms of exchange. Fourth, while imbalances are allowed to build up for a long time, the asymmetry between excessive indebtedness and excessive surpluses regularly if unpredictably erupt in crisis, forcing brutal adjustments on the weaker debtor nations (Guttmann 439-40)  There is one exception to the general tendency for deficit countries to bear adjustment costs: when a hegemonic state falls into deficit, it is generally able to avoid these costs for an extended period of time. This brings us to the concept of “seigniorage,” another essential determination of the world market. We have already noted that at the very beginning of Capital it is implicit that all currencies must ultimately be defined in relation to world money. Considering the essential determinations of the world market from the perspective of the interstate system allows us to develop this thesis more concretely.  What is world money? Whether or not commodity money is socially recognized in a given epoch, there is in capitalism a general tendency for credit money and paper currencies to become increasingly central. Given the hierarchy of states that is an essential feature of the interstate system, not all forms of paper money are created equal. The currency of the hegemonic state necessarily tends to play a privileged role in the world market; this currency necessarily tends to become the main de facto form of world money. As a result that hegemonic state necessarily tends to enjoy certain privileges in the world market. For one thing, it will not face limits on the ability to create credit money that are imposed on other nations. For another, it will be able to fund massive trade deficits without significant loss in the value of its currency, at least for an extended period of time. These privileges rest on the need and desire of foreign agents to obtain the dominant reserve currency of the world market for the sake of international payments and investments. As long as credit flows into the hegemonic state continue, that is, as long as loans are rolled over by new loans, trade deficits can become ever more massive, with the result that more and more of the world’s output is consumed in the domestic market of the dominant region. The only costs for maintaining this state of affairs are the fees involved in the new loans. From a moral point of view there is certainly something quite troubling about this situation. Institutionalized austerity in the poorest regions of the world economy is systematically connected with hyperconsumerism within the wealthiest sectors of the wealthiest region, which happens to be the greatest debtor in the world economy as well.  Overaccumulation and financial crises   Seigniorage does more than exacerbate the systematic tendency to uneven development in the world market. This determination of also allows us to re-think the systematic tendencies in the world market to overaccumulation and financial crises in a more concrete and complex fashion. The expanded ability to create credit money enjoyed by the hegemonic power, combined with inflows of foreign capital, allows the build-up of excessive capacity in leading sectors of the dominant economy to proceed far beyond the point it would otherwise attain. The relevance of this systematic feature of the world market to recent economic history is straightforward:  With its own currency having a monopoly status as world money, [the U.S.] was the only country whose capacity to run external deficits was not restricted by its available foreign exchange reserves. We could therefore run much more stimulative policies and escape recessionary policy adjustments much longer than would otherwise have been possible (Guttmann 1994, 114-15).  As a direct result the systematic tendency to an overaccumulation of fixed capital in the world market is greatly exacerbate. The greater the overaccumulation of capital in the world market, the more brutal the devaluation of capital that must eventually follow in its wake (Brenner 1998).  Regarding financial crises, the first point to note is the “normal” state of affairs that follows from the above:  There is a contradiction between being the issuer of the key currency [in the world market] and at the same time also the world’s largest debtor nation. The former status depends on maintaining a stable currency, whereas the latter encourages lower exchange rates. (Guttmann 1994, xx)  One manner in which the law of value operating on the level of the world market subsumes even the hegemonic state under it is by forcing that state to ping pong back and forth between these two contradictory policy objectives. Increasing levels of bets on currencies and volatility in foreign-exchange markets becomes the “normal” state of affairs, as international investors devote greater resources to “hedging” against currency risk and speculators detect more opportunities for gains.  If the hegemonic state retains its ability to foster innovations promising surplus profits in the future, financial flows in the world market become yet more complex. Whether this is the case or not is a contingent matter. But if it is the case, there is a certain amount of systematic necessity in how the situation tends to unfold. The excessive credit money creation and capital inflows that are the benefits of seigniorage systematically tend to exacerbate the tendency to capital asset inflation discussed above. Inflows of financial capital reinforce the tendency for the value of the fictitious capital of new innovative sectors to increase in a self-sustaining dynamic
that breaks off from any reasonable assessment of future profits in those sectors. In this manner seigniorage contributes to speculative bubbles in the pricing of capital assets far beyond what would otherwise occur. The benefits of seigniorage allow the day of reckoning to be put off. But sooner or later it becomes clear that the accumulation of fixed capital exceeds what is likely to be valorized by future profits (that is, future surplus value production). The greater the imbalances that have been built up prior to this point, the greater the social disruptions that follow, both for the hegemonic power in particular and for the world market as a whole. A massive flight out of the world currency may occur at this point, paralyzing the international monetary system. These considerations show that however mistaken extreme neoliberals may be when they proclaim the “death of the state,” recalcitrant nationalists are equally mistaken. The state form is inserted within the systematic totality of the world market. Even the hegemonic power in the system of states cannot escape the law of value governing the world market (Smith forthcoming).”  Whether Tony is specific or not, point is that the hegemonic nation is most able to appropriate an unequal share of global surplus value via processes of unequal exchange…equally, no nation can attain permanent hegemonic status which rises and decays. Immanuel Wallerstein makes a case that U.S. hegemony peaked in the late 1960s and began decline towards the end of the 1990s. NB that his is not simply economic but a multifaceted consideration.

Hi again Guest,   Since you mention serfdom, what was that relation but a coerced exchange of labor for the right to subsistance production on a plot belonging to lord of the manor. That is, there was no wage and was an outright, very evident, appropriation of part of the serf’s product, usually that of two or more days/week, the remainder of time being necessary to allow the serf and his family to create sufficient product for their own material reproduction, to stay alive.  Clearly then. the serf’s labor was divided into that which was for the manor’s lord and that which was required for the serf’s material survival.  Push the serf off the land, remove his only means to subsist, and what do we have? An individual with nothing to sell, nothing to allow for survival, other than the sale of his labor power. The serf has become wage worker, and on the surface all is freedom and equality as the owner of capital and the new wage worker enter into an apparent exchange of equivalents. The worker obtains a wage and the owner of means of production legally appropriates the product of that workers labor, it has been alienated from he who produced it. But why would the owner of capital bother with this if he was not able to profit from it; if beneath the surface the exchange was not equal but the contrary? This capitalist must, if he is to stay in business, be able to accomplish what the manor lord did.  The wage paid need only be sufficient to allow the wage worker to survive, not equivalent to the total value that his labor creates over any given period. The working time can, somewhat like that of the serf’s, be divided between that necessary to create a value equivalent to the wage paid and along with this, a value in excess of that necessary amount, a surplus value. Such unpaid labor and its appropriation is neatly masked by the wage…but without it there could be no profit from production, no accumulation of production capital, no growth but just distribution and redistribution which is clearly unproductive. This is where markup theories of profit falter since they place the source of surplus and of profit in the market which logically cannot produce anything.  Superficially, capital and labor may exist as equals but substantively this has never been the case.  Value, as a socioeconomic category, traces back at least so far as Adam Smith and/or the Physiocrats. Most all of the early political economists recognized labor as the sole source of new value but it was left to Marx to explain surplus value…a category which was disappeared by neoclassic economists whose theoretic basis was primarily a subjective one, based on dgrees of need rather than the actual process of production.   Undoubtedly not clear but that’s what happens when trying to condense a much more involved analysis into a few sentences.  ’half the world goes starving’ since, in the capital system, the only demand/need which is recognized is monetarily effective demand. This system does not exist to satisfy needs but to maximize profit. Those with no or insufficient money and no ownership of the means to produce are abandoned to swell the ranks of the absolutely impoverished. Only in capitalism do we have a system of simultaneous overproduction and starvation.  Production of means of destruction, of so-called defense, is related to the existance of competing national states and the dynamics of inter-imperialist rivalries. As well, this production, mediated by governments, makes up an allocation type economy in which public funds are directed into private production and essentially guaranteed profits. It is an offense.  as your examples make clear, there is no shortage of funds but an ongoing misdirecting of very large amounts. To reiterate, capital is in the profit – not the save the planet – business. But, in its drive to gain ever more it necessarily creates the bases of its own elimination.  ’In the end’, this is system of social relations, of human beings, and no one but us can save the day.

Sure there are funds using market neutral strategies, the idea is fairly intuitive,,,try to maximize relative and absolute return while reducing portfolio volatility through, e.g, long-short pairings and leverage. As a relative price method, this is one step beyond those which are purely directional. I believe that in most cases neutral is a misnomer as it implies a type of stasis or equilibrium rather than the actual movement which takes place. It’s my impression that many or most of those who practice this depend on statistical analysis of historic price movement but this can miss what a solid political and economic analysis does not. For example, I don’t believe that a strict statistical analysis could have predicted the Brazilian stock markets large rise from its later 2002 bottom, since that type of analysis would not have incorporated knowledge of the changed political position of the ‘wild left-wing former union leader’ who won the presidency that year. It would not have known that da Silva (“Lula”) had been moving to the center for years and would follow moreless conventional policies. So, lets say you had done the analysis and had a good degree of certainty of outcome…you would have purchased a shares in a number of the most evidently underpriced Brazilian firms. Now, at the same time, it was evident that U.S. markets had further downside and that gains could be had via leveraged short positions against the major U.S. indices. OK, the two – the long Brazil/short U.S. – are combined and as a combination, a pair, gain was maximized while overall portfolio risk was knocked down…which can also be seen as a form of arbitrage. The only thing that was complicated in this thing was the original, then ongoing, economic and political analysis which was necessarily not just of Brazil but the entire Southern Cone, its internal and external relationships, so also a global analysis. From my experience, modern econometric and/or statistical analysis miss way too much, make what is fairly simple more complex than need be and contain too many false assumptions.  What I usually find when I’ve tried to explain this before are responses such as ‘but don’t the two sides simply negate each other, creating a zero’; but this is to ignore process in favor of a static snapshot-type perspective, to confuse risk reduction with elimination of gain.  From a system-wide perspective this sort of thing is zero-sum, but not from the perspective of each particular ‘player’. That is, no matter how large the quantitities involved, no matter how knowledgable the gamblers, the game-in-itself creates absolutely no new value, remembering that price and value are not identities. Differently, and to the extent that the game is entirely within secondary markets, it fails to contribute to development and can become a drag on such. Still differently, no society can REproduce itself on a gambling basis and, as the gamblers must be fed, they also come to appropriate from the productive side…it is parasitic.  On the subject of commodification (of everything), you might find Guy Debord’s 1967 book, The Society of the Spectacle to be interesting. Here’s the Wiki about it:  http://en.wikipedia.org/wiki/Society_of_the_Spectacle  And here’s the book:  http://www.bopsecrets.org/SI/debord/ —-  ”But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence . . . truth is considered profane, and only illusion is sacred. Sacredness is in fact held to be enhanced in proportion as truth decreases and illusion increases, so that the highest degree of illusion comes to be the highest degree of sacredness.”  —Feuerbach, Preface to the second edition  of The Essence of Christianity —- 

“to confuse risk reduction with elimination of gain” is not at all the same as ‘risk reduction with elimination of gain’ though often the latter is less than would be the case with with a one-sided and purely directional bet. It’s relational.