Wednesday, January 14, 2009
TOO MUCH OF A GOOD THING
In a remarkably off-kilter story in the January 14 Wall Street Journal (“China’s Capital Outflow Forces Country’s Officials to Try to Rebuild Confidence in Yuan”), Andrew Batson reports sympathetically on Chinese officials’ professed concerns over recent capital outflows and their consideration of a depreciation of its undervalued currency. The article is notable in several ways.
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
Labels: China, Currency, Currency Manipulation, mercantilism
Wednesday, December 31, 2008
GETTING THE RIGHT TOOLS
On his way out the door, Treasury Secretary Hank Paulson gave a plaintive interview to the Financial Times (See “US lacked the tools to tackle crisis, says Paulson, 12/31/08).
Among other things, the secretary is quoted as saying:
• “… we’ve done all this [in response to the financial meltdown] without all of the authorities that a major nation like the US needs.”
• “We’re dealing with something that is really historic and we haven’t had a playbook. The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities …in the US.”
• Future efforts should aim at “better and more effective regulation.”
• “I am sure I am going to look back … and think of all kinds of things I wish I had done differently.”
On a personal level, I feel deep sympathy for the secretary and many of his colleagues who have had to preside over the dismantling of a system that earned them great wealth and sterling reputations. That must be painful and more than a little confusing.
However, I would like to ask Mr. Paulson whether every one of the statements made above might not apply equally to his failed policy to contain mercantilist currency policies. Haven’t the resulting imbalances – trillions of excess currency reserves and other assets in the hands of mercantilist governments – been building for years? Haven’t we lacked the “authorities,” i.e. an effective IMF and WTO as well as national policy tools, to deal with the problem? Don’t we need “better and more effective regulation” to manage the problem?
Paulson’s insistence that he had the tools needed to end monetary misalignment stands in stark contrast to his lamentations regarding financial fraud and failure. He’s wrong on the former for the same reasons as he’s right on the latter. The new administration should scrap this part of Paulson’s playbook and take a fresh approach.
Charles Blum
Among other things, the secretary is quoted as saying:
• “… we’ve done all this [in response to the financial meltdown] without all of the authorities that a major nation like the US needs.”
• “We’re dealing with something that is really historic and we haven’t had a playbook. The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities …in the US.”
• Future efforts should aim at “better and more effective regulation.”
• “I am sure I am going to look back … and think of all kinds of things I wish I had done differently.”
On a personal level, I feel deep sympathy for the secretary and many of his colleagues who have had to preside over the dismantling of a system that earned them great wealth and sterling reputations. That must be painful and more than a little confusing.
However, I would like to ask Mr. Paulson whether every one of the statements made above might not apply equally to his failed policy to contain mercantilist currency policies. Haven’t the resulting imbalances – trillions of excess currency reserves and other assets in the hands of mercantilist governments – been building for years? Haven’t we lacked the “authorities,” i.e. an effective IMF and WTO as well as national policy tools, to deal with the problem? Don’t we need “better and more effective regulation” to manage the problem?
Paulson’s insistence that he had the tools needed to end monetary misalignment stands in stark contrast to his lamentations regarding financial fraud and failure. He’s wrong on the former for the same reasons as he’s right on the latter. The new administration should scrap this part of Paulson’s playbook and take a fresh approach.
Charles Blum
Labels: mercantilism, U.S.Economy; Currency Manipulation
Thursday, December 11, 2008
SECOND KICK OF THE MULE
The outgoing treasury secretary, Henry Paulson, came back from Beijing last week empty handed on the currency problem. Again. He’s tried everything – charm, logic, a magnificent scholarly discourse by Ben Bernanke on currency misalignment as an export subsidy, protests and pressure from Congressional leaders – to convince China to “accelerate the pace” of the appreciation of the renminbi against` the dollar. Nothing’s worked. In fact, the RMB has actually weakened since the opening of the Olympic Games, and some Beijing officials talk about a 6-7 percent further depreciation next year.
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
Labels: China, Currency Manipulation, Henry Paulson, mercantilism
Tuesday, November 11, 2008
THE MERCANTILIST MENACE VS. THE PROTECTIOIST PERIL
This week China finally got around to offering its beleaguered citizens some of the largesse stored up in the State Administration of Foreign Exchange (SAFE). It cobbled together a mammoth economic stimulus package valued at $586 billion. In typical Chinese fashion, details are scarce.
A few things seem clear:
• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).
We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.
But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.
Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.
This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.
Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.
Charles Blum
A few things seem clear:
• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).
We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.
But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.
Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.
This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.
Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.
Charles Blum
Labels: China, mercantilism, Protectionism, Recovery
Monday, September 22, 2008
STOPPING THE MERCANTILIST MADNESS
On September 22, the Wall Street Journal editorial page started apportioning blame for the still unfolding bloodbath on Wall Street. It connected some of the dots that we did on our previous posting ("From Mercantilism to the Meltdown," September 21).
In particular, the Journal lashed out at the Federal Reserve. After questioning the validity of the "savings glut" theory of the US trade deficit, the editorial commented: "The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way into housing markets in the U.S., the U.K. and elsewhere."
Fair enough. There's no question that the world is awash in dollars. But the Fed didn't decide who would get how many of the excess dollars. That decision was left to oil exporters who fix the price of petroleum and the mercantilists who fix the price of their currencies. In effect, the US policy of malign neglect allowed the modern mercantilists to decide how much to take.
But enough of the blame game. What can be done to stop the mercantilist madness before it consumes us? Here's a simple four-part strategy, the first three steps being matters of urgency:
First, enact legislation to make prolonged currency misalignment actionable under U.S. trade laws. Bipartisan bills have been languishing in each house: H.R. 2942 introduced by Reps. Tim Ryan and Duncan Hunter and S. 796, introduced by Senators Bunning, Stabenow and Bayh. Merge them, pass them and challenge the mercantilists to cease and desist.
Second, armed with the leverage of potential trade law remedies, the Treasury should screw up its courage and, for the first time since 1994, name a country for currency manipulation. In fact, it should name them all -- China, Japan, Korea, Taiwan, Malaysia, Singapore and any others who are piling up massive foreign currency reserves through undervaluation of their currencies.
Third, convene a meeting of all those countries in an undisclosed location and don't come out until a series of coordinated currency corrections has been agreed. This will help restore sanity and confidence to the world financial system and give harried policymakers in the U.S. and elsewhere time to develop thoughtful, workable responses to the meltdown.
Fourth, the next administration should begin planning now to ensure that the global monetary system gets a long overdue and thorough overhaul. The IMF needs to be given the tools it needs to maintain discipline among its members. Moral suasion obviously is no match for mercantilism. For the sake of all its members, the IMF needs to be equipped to play a meaningful role in curbing exchange rate abuses and the excessive expansion of credit by any of its members, regardless of their size. In addition, we need to face up to the fact that neither the United States nor any other single country can afford to run trade surpluses indefinitely. The world needs another, more sustainable source of liquidity to complement the role played for so long by the American dollar. It's not by any means premature to start laying the groundwork for a new reserve currency -- perhaps the long neglected SDRs (special drawing rights) that almost 40 years ago were touted for that role and still exist in limited amounts.
Also 40 years ago, Robert Kennedy would conclude his campaign stump speech with this thought: "Some see things as they are and ask, why? I dream of things that never were and ask, why not?" Given the mess of things as they are, isn't it time for us all to ask, why not?
Charles Blum
In particular, the Journal lashed out at the Federal Reserve. After questioning the validity of the "savings glut" theory of the US trade deficit, the editorial commented: "The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way into housing markets in the U.S., the U.K. and elsewhere."
Fair enough. There's no question that the world is awash in dollars. But the Fed didn't decide who would get how many of the excess dollars. That decision was left to oil exporters who fix the price of petroleum and the mercantilists who fix the price of their currencies. In effect, the US policy of malign neglect allowed the modern mercantilists to decide how much to take.
But enough of the blame game. What can be done to stop the mercantilist madness before it consumes us? Here's a simple four-part strategy, the first three steps being matters of urgency:
First, enact legislation to make prolonged currency misalignment actionable under U.S. trade laws. Bipartisan bills have been languishing in each house: H.R. 2942 introduced by Reps. Tim Ryan and Duncan Hunter and S. 796, introduced by Senators Bunning, Stabenow and Bayh. Merge them, pass them and challenge the mercantilists to cease and desist.
Second, armed with the leverage of potential trade law remedies, the Treasury should screw up its courage and, for the first time since 1994, name a country for currency manipulation. In fact, it should name them all -- China, Japan, Korea, Taiwan, Malaysia, Singapore and any others who are piling up massive foreign currency reserves through undervaluation of their currencies.
Third, convene a meeting of all those countries in an undisclosed location and don't come out until a series of coordinated currency corrections has been agreed. This will help restore sanity and confidence to the world financial system and give harried policymakers in the U.S. and elsewhere time to develop thoughtful, workable responses to the meltdown.
Fourth, the next administration should begin planning now to ensure that the global monetary system gets a long overdue and thorough overhaul. The IMF needs to be given the tools it needs to maintain discipline among its members. Moral suasion obviously is no match for mercantilism. For the sake of all its members, the IMF needs to be equipped to play a meaningful role in curbing exchange rate abuses and the excessive expansion of credit by any of its members, regardless of their size. In addition, we need to face up to the fact that neither the United States nor any other single country can afford to run trade surpluses indefinitely. The world needs another, more sustainable source of liquidity to complement the role played for so long by the American dollar. It's not by any means premature to start laying the groundwork for a new reserve currency -- perhaps the long neglected SDRs (special drawing rights) that almost 40 years ago were touted for that role and still exist in limited amounts.
Also 40 years ago, Robert Kennedy would conclude his campaign stump speech with this thought: "Some see things as they are and ask, why? I dream of things that never were and ask, why not?" Given the mess of things as they are, isn't it time for us all to ask, why not?
Charles Blum
Labels: Currency, mercantilism
Sunday, September 21, 2008
FROM MERCANTILISM TO MELTDOWN
Engineers calculate that, for a major accident such as an airplane crash to occur, something like 20 things all have to go wrong. The on-going financial meltdown certainly has multiple causes, too. Greed, bad judgment, mismanagement, lack of effective government oversight, and more certainly were involved. But let’s not overlook the subject of my previous posting (“The Arch Enemy of Free Trade,” September 16): good old-fashioned mercantilism.
For many people, that phrase just doesn’t roll off the tongue, and the connection may not be readily apparent. So, here’s a simple step-by-step connection between mercantilist policies and the currency financial meltdown:
1. Mercantilist countries such as Japan and China use a variety of means to ensure that their currencies are traded at exchange rates well below their true market value.
2. The undervalued (read “cheap”) currency serves as a subsidy to all exports from that country: the exporter gets a bonus of extra home market currency for every international sale. At the same time, an undervalued currency imposes a hidden tariff or tax on all imports: the importer must ante up extra amounts of home market currency to pay for goods from abroad. The result is a chronic trade surplus based on artificial advantages maintained by the mercantilist government. In cash terms, the trade surplus results in an equivalent transfer of funds from trading partners to the mercantilist government.
3. At the same time, cheap currencies induce extra investment. Why? The foreign investor gets more local currency for each dollar or euro. That bonus attracts investment that otherwise would be made somewhere else. So, investment flows are just as distorted as trade flows.
4. The trade surplus and the investment surplus are the main elements in the mercantilist’s current account surplus. Year after year, the cumulative surplus grows. Today, China alone probably has close to 2.5 trillion dollars; Japan, more than one trillion dollars.
5. The problem for the “winners” in this lop-sided current account relationship is to find profitable uses for the money. This has become such a burden that some Chinese openly speak of “unwanted dollars.” They restlessly search the globe for higher returns for their hard currency reserves than mere cash (zero return) or US Treasuries (low risk, low return).
6, That helps explain why Chinese and other foreign investors were easy marks for the Wall Street wizards who churned out new ways to “guarantee” higher and higher returns. Fannie Maes, Freddie Macs, syndicated mortgages – debt was piled upon debt in an elaborate Ponzi scheme that also sucked in pension funds, commercial banks and the proverbial little old ladies like my own mother.
7. In effect, mercantilists, oil exporters and Wall Street wizards got in bed with one another and produced … a huge bubble.
The dots are hereby connected. Mercantilism is not the sole cause of the current crisis, of course, but it one that policymakers around the world have chosen to ignore. Left unchecked, modern mercantilist rigs the game, subverting fair competitive, distorting free markets, and flooding financial markets with funds in search of higher returns.
If monetary authorities in so many countries can cooperate as closely as they have this month to try to stem the tide of imminent financial collapse, why can’t they start cooperating to prevent more, possibly greater, damage from occurring in the future? How to get there will be the subject of my next posting.
Charles Blum
For many people, that phrase just doesn’t roll off the tongue, and the connection may not be readily apparent. So, here’s a simple step-by-step connection between mercantilist policies and the currency financial meltdown:
1. Mercantilist countries such as Japan and China use a variety of means to ensure that their currencies are traded at exchange rates well below their true market value.
2. The undervalued (read “cheap”) currency serves as a subsidy to all exports from that country: the exporter gets a bonus of extra home market currency for every international sale. At the same time, an undervalued currency imposes a hidden tariff or tax on all imports: the importer must ante up extra amounts of home market currency to pay for goods from abroad. The result is a chronic trade surplus based on artificial advantages maintained by the mercantilist government. In cash terms, the trade surplus results in an equivalent transfer of funds from trading partners to the mercantilist government.
3. At the same time, cheap currencies induce extra investment. Why? The foreign investor gets more local currency for each dollar or euro. That bonus attracts investment that otherwise would be made somewhere else. So, investment flows are just as distorted as trade flows.
4. The trade surplus and the investment surplus are the main elements in the mercantilist’s current account surplus. Year after year, the cumulative surplus grows. Today, China alone probably has close to 2.5 trillion dollars; Japan, more than one trillion dollars.
5. The problem for the “winners” in this lop-sided current account relationship is to find profitable uses for the money. This has become such a burden that some Chinese openly speak of “unwanted dollars.” They restlessly search the globe for higher returns for their hard currency reserves than mere cash (zero return) or US Treasuries (low risk, low return).
6, That helps explain why Chinese and other foreign investors were easy marks for the Wall Street wizards who churned out new ways to “guarantee” higher and higher returns. Fannie Maes, Freddie Macs, syndicated mortgages – debt was piled upon debt in an elaborate Ponzi scheme that also sucked in pension funds, commercial banks and the proverbial little old ladies like my own mother.
7. In effect, mercantilists, oil exporters and Wall Street wizards got in bed with one another and produced … a huge bubble.
The dots are hereby connected. Mercantilism is not the sole cause of the current crisis, of course, but it one that policymakers around the world have chosen to ignore. Left unchecked, modern mercantilist rigs the game, subverting fair competitive, distorting free markets, and flooding financial markets with funds in search of higher returns.
If monetary authorities in so many countries can cooperate as closely as they have this month to try to stem the tide of imminent financial collapse, why can’t they start cooperating to prevent more, possibly greater, damage from occurring in the future? How to get there will be the subject of my next posting.
Charles Blum
Labels: Currency, mercantilism, Wall Street
Subscribe to Posts [Atom]