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On selling your reserves, babies and other Banana Republic schemes…a follow-up on my Swiftian “Modest Proposal”…
Somehow, based on email feedback from many, the sarcasm and ironic nature of my recent blog’s “Modest Proposal” for the US Treasury to sell US reserves and government foreign assets as a way to finance our budget deficit – given the shrinking willingness of the world to do that – was missed by many, even otherwise sophisticated, observers; all this in spite of the obvious Swiftian allusions of my blog’s item title.
Many took seriously what I thought was obvious irony and asked me: “But we do not have so many reserves, right?” or “For how long could we play this treasures’ fire sale game?” or “The whole problem is attributable to a loss of confidence in the dollar. The only possible solution is to restore that confidence.That would not happen if the US starts selling its foreign assets. On the contrary, such acts could further undermine the dollar.”
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Imitation is the Sincerest Form of Flattery…the FT on Social Security…
As they say, imitation is the sincerest form of flattery….
A senior economist sent me this morning the following email:”Hope you enjoyed reading your blog (on Social Security) as an editorial in the FT today!”
I then opened my very favorite paper – the Financial Times – and I indeed found a brilliant and thoughful editorial on why social security privatization is a bad idea that followed all the arguments of my recent blog on Social Security privatization. But more likely, rather than imitation as my colleague was suggesting, one can assume that “great minds” think alike…And I happen to find the FT as the most thoughful daily newspaper on international macroceconomic, geopolitical and global issues (together with the weekly Economist), many notches above the Wall Street Journal that excels in business information but is totally inadequate when it comes to economic analysis (and is arch-partisan in its editorial board).
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Dubya has found the magic way to eliminate our trade deficit: assume it disappears….
In another example of the economic brilliance of our MBA President (who taught him economics and when?) and of his economic team, Dubya just found out today the Holy Grail that will eliminate in an instant our trade deficits.
Bush told reporters that the trade deficit was “easy to resolve. People can buy more United States products if they’re worried about the trade deficit.”
Very deep and profound concept and idea…and altogether wrong on all matters of economic substance. As any freshman in Economics knows, the current account deficit is, by definition,equal the excess of the country’s expenditure relative to its income; so if a country spends more than its income, it will have a current account deficit, regardless of its preferences for domestic or foreign goods. If we spend more than we earn, if we have lower savings (because of the huge budget defitics) than our real investment, the current account will be and remain in a large deficit. Also, the demand for imports depends mostly on relative growth rates across countries and relative prices of foreign goods relative to foreign goods (i.e. exchange rates). So, assuming the trade deficit will disappear will not change it by a iota. And too bad that the masses of red state evangelicals on their way to join the social and economic lumpenproletariat crave and can only afford the good and cheap Chinese goods that made the fortune of Wal Mart.
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Trade deficit is up; foreigners willingness to finance it is down! A “Modest Proposal” for the US Treasury to follow its own brilliant advice….
As yesterday’s figures on the trade deficit showed, the October trade deficit was sharply up, to $55.5 billion (and not only because of oil). While today’s TIC report on Foreign purchases of US assets suggests that the foreigners willingness to finance our trade and current account deficit is down as International investors bought in October a net $48.1 billion of Treasury notes, corporate bonds, stocks and other financial assets, well below the $67.5 billion level in September. For a FAQs on TIC see this Morgan Stanley report today.
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Social Security Privatization as the Mother of All Con-Man Smoke-and-Mirrors Shell-Games
As widely reported by the press, a partial privatization of Social Security via the creation of private accounts is one of the top policy priorities of the Bush II administration.
But when you carefully look at the facts, it becomes clear that the proposed partial Social Security privatization is literally a Con Man Smoke-and-Mirrors Shell Game that – in the form it has been proposed – will not lead to any of the alleged benefits argued by its supporters. It is amazing the amount of misinformation that one reads about social security privatization; apologists argue that:- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.
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Systemic Risk Concerns: NY Fed vs. IMF. Is the Fund behind the Curve?
Tim Geithner – NY Fed President and formerly Under Secretary for International Affairs at the US Treasury and head of the IMF’s PDR department – has warned again this week about hedge funds and systemic risk. As his first speech as NY Fed Prez last March was on systemic risk, this is the third time since March that he has spoken on the subject (see also his October speech on systemic risk). Would that be a veiled suggestion that he, the NY Fed and the Fed Board are concerned about the issue? One may infer – from the frequency with which he has publicly spoken about the subject – that the issue of systemic risk may be on his mind. As he was at Treasury when LTCM blew up and as he is a leading expert – and crisis manager – of financial crises in emerging markets, his concerns are well justified.
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Social Security Privatization as as the Mother of All Con-Man Smoke-and-Mirrors Shell-Games
As widely reported by the press, a partial privatization of Social Security via the creation of private accounts is one of the top policy priorities of the Bush II administration.
But when you carefully look at the facts, it becomes clear that the proposed partial Social Security privatization is literally a Con Man Smoke-and-Mirrors Shell Game that – in the form it has been proposed – will not lead to any of the alleged benefits argued by its supporters. It is amazing the amount of misinformation that one reads about social security privatization; apologists argue that:- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.
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Speculative Central Bank Reserve Diversification as the End Game Trigger for BWII?
The news today (see the FT story) that some central banks – India, Russia and “other petrodollar-rich Middle Eastern investors” – are starting to dump dollars to avoid the capital losses from further weakening of the U.S. dollar, may be the starting trigger – discussed in my paper with Brad – for the end of the so-called Bretton Woods Two (BWII)regime. As reported today by the Bloomberg columist Andy Mukherjee who cited my comments:
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The Upcoming Twin Financial Train Wrecks of the U.S.
With the election now over, the most essential question facing the U.S. and global economy is what will be the fiscal and financial policies of the Bush II administration? The simple answer is that no one has a clue, not even the economists close to the admnistration as reported by the FT yesterday. The President has spoken of tax reform and partial social security privatization but the most crucial issue ahead will be how to fix the fiscal deficit mess of the last four years and how to reduce the unsustainable current account deficit. On those basic issues, the stated objectives of the administration imply twin – fiscal and external debt – financial train wrecks down the line: serious financial distress from unsustainable fiscal and current account deficits cannot be ruled out at this point. Clearly, reducing the budget deficit will not be a priority of Bush II.
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New Global “Soft Patch” or the Beginning of a “Deep Murky Swamp”?
While markets are waiting for the third quarter US GDP figures, everyone’s attention is now concentrated on the fourth quarter and 2005 growth prospects for the US and the global economy. In Q3 the US recovered from the Q2 soft patch (as GDP growth is expected to end up in the 4% range for the past quarter); but now, with oil prices above $50, the concern is not any more that we are in a “soft patch” but rather falling in a deep murky swamp of global growth slowdown. The most alarmed are folks such as Steve Roach who is now predicting that the US , Europe and Japan will reach a stall speed of 1.5% growth by the beginning of 2005. And indeed the US flow of macro news has been poor: continued weak job numbers in september, falling consumer confidence while retail sales are holding, falling housing markets, weak industrial production, slow income/wage growth, increased inventory build-up, soft durable goods figures, large and growing trade deficit, mixed signals from inflation (with now core up more than expected).
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Thomas Grennes
Thoughts From Across the Atlantic
Thomas Grennes is a professor of economics at the North Carolina State University and a former visiting faculty member at the Stockholm School of Economics in Riga. His research has dealt with various aspects of international economics, including open economy macroeconomics, international finance, and international trade in agricultural products. Recent research topics have included macroeconomic aspects of the Great Moderation, offshore outsourcing, sovereign wealth funds, and the relationship between government debt and economic growth. Earlier work dealt with emerging market issues in the Baltic countries and Russia and trade and macro policies in Sub-Saharan Africa. Economic history topics include the Columbian Exchange of plants and animals, the effects on food markets of introducing mechanical refrigeration, and the integration of Tsarist Russia into the world grain market. When he is not involved in economics, he enjoys mountain hiking.
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