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
Monday, September 15, 2008
CREDIT WHERE CREDIT IS DUE
You have to hand it to the U.S. Department of the Treasury. On a day (September 15) when the Dow Jones dropped more than 500 points, Wall Street began to triage the survivors from a weekend massacre, and nervous money skittered around the world in search of a safe haven, Treasury chose to announce the launch the following day of a new campaign “aimed at combating the issue of financial illiteracy among young adults.” The aim is to “teach young adults about credit.”
Tellingly, Treasury is conducting its multimedia, bilingual campaign in conjunction with the Ad Council. The latter presumably knows a thing or two about how less than fully literate Americans of all ages were duped into sub-prime loans they could not afford, into investing in securities issued by Fannie Mae and Freddy Mac “backed by the government,” and into zero-interest balance transfers from one credit card to another – with a lead balloon attached. Yes, they should know what they’re talking about.
Now I have nothing against financial literacy among young adults. Seems like a splendid idea. My question is when will Treasury launch a financial literacy campaign for:
• the surviving Wall Street hot shots to ensure that, MBA or not, they might never again be so blinded by greed as to repeat the foolish Ponzi-schemimg of this decade?
• America’s credit-card gougers so that they might learn that jacking interest rates on struggling customers only helps top hurtle them toward bankruptcy?
• America’s off-shoring multinationals so they might learn how to make a profit without accepting huge bribes in the form of subsidies, targeted tax holidays, and undervalued currencies?
• the budget experts at the Office of Management and the Budget to ensure that they might finally produce balanced budget proposals without accounting gimmickry?
• the members of Congress who collectively seem to have no clue as to how they or the country might live within their own means?
• high government officials and so-called experts who argue that deficits “don’t matter,” because we can always borrow more?
I could go on, but you get the point. Nothing against financial literacy for the few, but dare we stop there? If the US and the world economies are to be righted any time soon, we need a crash course in adult literacy for Wall Street and Washington, starting at the top.
Charles Blum
Tellingly, Treasury is conducting its multimedia, bilingual campaign in conjunction with the Ad Council. The latter presumably knows a thing or two about how less than fully literate Americans of all ages were duped into sub-prime loans they could not afford, into investing in securities issued by Fannie Mae and Freddy Mac “backed by the government,” and into zero-interest balance transfers from one credit card to another – with a lead balloon attached. Yes, they should know what they’re talking about.
Now I have nothing against financial literacy among young adults. Seems like a splendid idea. My question is when will Treasury launch a financial literacy campaign for:
• the surviving Wall Street hot shots to ensure that, MBA or not, they might never again be so blinded by greed as to repeat the foolish Ponzi-schemimg of this decade?
• America’s credit-card gougers so that they might learn that jacking interest rates on struggling customers only helps top hurtle them toward bankruptcy?
• America’s off-shoring multinationals so they might learn how to make a profit without accepting huge bribes in the form of subsidies, targeted tax holidays, and undervalued currencies?
• the budget experts at the Office of Management and the Budget to ensure that they might finally produce balanced budget proposals without accounting gimmickry?
• the members of Congress who collectively seem to have no clue as to how they or the country might live within their own means?
• high government officials and so-called experts who argue that deficits “don’t matter,” because we can always borrow more?
I could go on, but you get the point. Nothing against financial literacy for the few, but dare we stop there? If the US and the world economies are to be righted any time soon, we need a crash course in adult literacy for Wall Street and Washington, starting at the top.
Charles Blum
Labels: budget, U.S. Economy, Wall Street
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