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Thread: "America's economic policy mix is a threat to the world"

  1. #1

    Default "America's economic policy mix is a threat to the world"

    America’s economic policy mix is a threat to the world

    Philippe Legrain
    2 November 2010

    While the debate over global imbalances often focuses on China, this column argues that the biggest threat to the world economy comes from the other side of the seesaw – the US.

    Countless column inches are devoted to the supposed wickedness of China’s currency policy (Bergsten 2010, Krugman 2010, Wolf 2010, Yiping 2010). But the biggest threat to the world economy comes from the US. Its policy mix – fiscally passive, monetarily aggressive – is ineffective domestically and dangerous for everyone.
    Seen from Washington or London, the economy remains weak. But from a global perspective, it is advancing by some 4% a year – almost as fast as before the crisis. China and other emerging economies account for the bulk of this growth. In effect, Chinese investment has taken over from US consumption as the locomotive of global growth (Reisen 2010).

    Yet because it has a current-account surplus, China is widely perceived to be a drag on the global economy. This is misleadingly simplistic.

    Its imports grew by 24% in the 12 months to September, creating jobs and growth elsewhere.
    Its trade surplus is shrinking.

    And, lest critics forget, even Chinese exports have their benefits. Assembled from parts made in other countries, they provide cheap inputs for businesses everywhere. They spur companies outside China to innovate and become more competitive. And they increase consumers’ welfare – why else would people buy them?
    Basing conclusions on accounting identities can obscure the more complex, dynamic economic relationships that underlie them (Legrain 2010).

    Put simply, if China were to vanish overnight, the world would be in much worse shape. And while it may be desirable for China’s currency to appreciate gradually to accommodate and accelerate a shift towards higher-end production and greater domestic consumption, a higher renminbi is unlikely to do wonders for the US economy (Auerbach and Obstfeld 2010).

    For the most part, the alternative to cheap Chinese imports is not goods “made in the USA” but goods made in other emerging economies. Reshaping the US economy to cater more to the needs of emerging economies would do far more to boost US exports. Above all, trying to force the renminbi up with protectionist threats – as the US Congress demands and many respectable and ostensibly liberal commentators now seem to advocate – is to invite a trade war that would beggar us all.

    Instead of threatening others, the US should put its own house in order. The Federal Reserve helped cause the mess we are in and is now sowing the seeds for the next crisis. Having wrecked the US economy by encouraging a huge debt-fuelled bubble to inflate, the Fed now finds itself unable to ensure recovery. Even with near-zero interest rates, indebted consumers don’t want to borrow and fragile banks don’t want to lend. Businesses that could generate growth are either starved of credit or too uncertain about the future to invest. As the Fed pumps out ever more money, banks invest it in higher-yielding Treasuries, pocketing easy profits and paying out ill-deserved bonuses, while much of it leaks out overseas. The net result? Hardly any additional US growth.

    Since the monetary transmission mechanism is broken, injecting ever more money into the system does not get the wheels of the economy spinning faster. It floods the engine. A better way to stimulate the US economy would be fiscal measures that promote its restructuring and enhance its productive potential – for instance, investment in its dilapidated infrastructure, cuts in payroll tax and retraining subsidies to get people into work and, in the absence of a carbon tax, measures to promote venture capital in the clean-tech industries of the future.

    Current US policy is not just ineffectual, it is also dangerous. Banks that ought to fold are kept on life support. Homeowners who ought to default and move to where the jobs are cling on to their depreciated houses in depressed areas. Bubble-prone investors believe in a Bernanke put. Money gushes out of the US and into emerging economies that don’t need it and can’t cope with it. This is economic vandalism.

    The strategic rationale for printing money – sorry, “quantitative easing” – may be to force Beijing’s hand on the renminbi. Yet protected by capital controls, adept at sterilising monetary inflows and loath to give in to US pressure, China is unlikely to move much. Carrots – such as a bigger role at the IMF and the opportunity to convert some of its dollar reserves into special drawing rights (SDRs) – might work better than sticks. The victims are instead the Eurozone, Japan, Australia and other advanced economies whose currencies are soaring, as well as emerging economies such as Brazil and Thailand that cannot do much to stem the tide of US cash.

    Do Barack Obama and Ben Bernanke really want a repeat of the 1997/98 Asian financial crisis, this time writ-large across emerging economies that account for half the world economy and most of its growth potential? Do they want to pick up the pieces for US investors and financial institutions? Do they not worry that investors might eventually lose all confidence in the devalued dollar and depreciated not-so-safe US Treasuries? Or are they so narrowly focused on the here and now, so blind to alternative policies, and so reckless in abusing American monetary power that they don’t care?

    References
    Auerbach, Alan J and Obstfeld, Maurice (2010), “Too much focus on the yuan?”, VoxEU.org, 23 October.
    Bergsten, C Fred (2010), “China’s currency and the US economy”, VoxEU.org, 1 November.
    Krugman, Paul (2010), “Taking on China”, New York Times, 1 October.
    Legrain, Philippe (2010), Aftershock: Reshaping the World Economy After the Crisis.
    Reisen, Helmut (2010), “Global imbalances, the renminbi, and poor-country growth”, VoxEU.org, 1 November.
    Wolf, Martin (2010), “How to fight the currency wars with stubborn China?”, Financial Times, 5 October.
    Yiping, Huang (2010), “A currency war the US cannot win”, VoxEU.org, 19 October.
    http://www.voxeu.org/index.php?q=node/5736


    QEII or the Bernanke put? Money gushing, wealth extraction? (Decided to go with the author's title instead, even though it's dramatic.) For all the talk of our economic problems, wealth re-distribution or bad policies in DC, shake-ups in elections, changing powers in the House.....there should be just as much talk about this. IMO.


  2. #2
    Yes, the GOP "credit card economy" philosophy has been devastating. This doesn't exonerate China, but agreed we should look to our own mess. The GOP had 6 years of total power, and look what they created. I say give the Dems a chance for a decade. Too bad the electorate is so stupid.

  3. #3
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    Yeah the rest of the world isn't going to like this much; the US is inflating itself out of its debts. They may have a closer look at Weimar to get an idea of how dangerous that is.
    Congratulations America

  4. #4
    Quote Originally Posted by Hazir View Post
    Yeah the rest of the world isn't going to like this much; the US is inflating itself out of its debts. They may have a closer look at Weimar to get an idea of how dangerous that is.
    I call bullshit! Long term inflation expectations are pretty low in the US. QE2 changed that a little, but even so they're still pretty steady and well within the Fed's target range. The concern is not hyperinflation but rather deflation.

  5. #5
    investment in its dilapidated infrastructure

    Just because we don't have trains everywhere, does not mean that the US has a dilapidated infrastructure. That's where this guy lost me.

  6. #6
    Quote Originally Posted by ']['ear View Post
    Yes, the GOP "credit card economy" philosophy has been devastating. This doesn't exonerate China, but agreed we should look to our own mess. The GOP had 6 years of total power, and look what they created. I say give the Dems a chance for a decade.
    They extended Bush's trajectory, keeping Bernanke. "The markets were comforted". Then Geithner was appointed. "The markets liked that". Summers and Rubin come from the revolving door between Wall St. and K St. They all do, mixed in with academics like Romer (who left). Now what?

    Too bad the electorate is so stupid.
    I'd say uninformed, not stupid. To be fair, the Federal Reserve and the Treasury do a lot of things the public never reads about. Like meeting at the Willard with all the Big Bank CEOs to "discuss goals". Or it's complex and interventions are full of acronyms, much easier to tune out.

  7. #7
    Quote Originally Posted by agamemnus View Post
    investment in its dilapidated infrastructure

    Just because we don't have trains everywhere, does not mean that the US has a dilapidated infrastructure. That's where this guy lost me.
    More like collapsing bridges, crumbling dams, exploding gas lines, corroded water lines. Some of these things were built in the 30's or 50's and are way beyond their life expectancy. Patch jobs only go so far.

  8. #8
    True, true... but perhaps that is more of a TV news thing than a real trend. Anyway, it seems that the US Stimulus construction part mostly went into adding on-ramps that were unnecessary.

    It's not like dams and bridges and gas and water lines blow up every day. To say they are dilapidated is some sort of far-fetched story told by euro-liberals to their kids at night...

  9. #9
    Quote Originally Posted by agamemnus View Post
    True, true... but perhaps that is more of a TV news thing than a real trend. Anyway, it seems that the US Stimulus construction part mostly went into adding on-ramps that were unnecessary.
    A tv "news thing"? There are infrastructure geeks, engineers and such, that follow these things closely and publish reports. We had an Infrastructure thread [at the other place, I think] with a well researched and documented piece from Popular Mechanics. Maybe you missed that one.

    It's not like dams and bridges and gas and water lines blow up every day. To say they are dilapidated is some sort of far-fetched story told by euro-liberals to their kids at night...
    They don't have to blow up daily to be dangerously outdated. They're wake up calls, though. Remember Katrina and New Orleans? Those were outdated levees not built for Cat 4 hurricane, or a 100 year flood.

  10. #10
    Popular Mechanics? Really?

    Not that you're wrong, but please. Don't insult us.

  11. #11
    Quote Originally Posted by wiggin View Post
    Popular Mechanics? Really?

    Not that you're wrong, but please. Don't insult us.
    I'm pretty sure it was Popular Mechanics. Don't be such a snob. It was very detailed by sector; transportation structures, barrier structures, water delivery and waste disposal, sea ports, etc.



    Here ya go: http://www.popularmechanics.com/tech...merica/4258053

  12. #12
    Back on topic. I stumbled on this article about QE2, written for the "average reader" like a FAQ.

    What the Fed's $600 Billion Plan Really Means

    Posted Nov 03, 2010 04:19pm EDT by Daniel Gross


    The Federal Reserve Wednesday announced its latest effort to spur economic growth: a plan to purchase up to $600 billion of government bonds through June 2011.

    Why is the Federal Reserve buying bonds?

    It wants to lower interest rates, in the hopes that doing so will loosen the supply of credit and spur more economic activity. The central bank’s main tool for reducing rates is to slash the short-term overnight lending that banks charge to one another, the so-called Federal Funds rate. Bring short-term rates down, and long-term rates tend to follow. In normal times, that’s as far as the Fed usually goes. In the past three years, the Fed has reduced the Fed Funds target rate 10 times, from 5.25 percent to between zero and .25 percent. It’s been at that extremely low level since the fall of 2008.

    Once the Fed Funds rate can’t get any lower, what else can the Fed do?

    It can buy assets, or engage in what’s known as quantitative easing (QE). Adjusting the Fed Funds directly influences short-term rates. The Fed can also influence long-term rates by purchasing (or selling) long-term debt in the open market. When lots of people -- or one big buyer -- buy bonds at the same time, it drives prices up and interest rates down. As the nation’s central bank, the Fed can create money and simply announce that it will buy large quantities of bonds.

    Hasn’t it done something like that already?

    Yes. In its first effort at quantitative easing, the Fed in 2009 and early 2010 bought more than $1 trillion in mortgage-backed securities in an effort to reduce interest rates on home mortgages. Partially in response to the purchases, mortgage rates fell to historically low levels.

    So what is it doing now?

    This is a smaller effort. The Fed says that, as part of an effort to lower interest rates, it will buy $600 billion of Treasury bonds between now and the end of June 2011, at a rate of about $75 billion per month. (The New York Fed has the details of the purchases here.)

    But the market reacted at first by pushing interest rates on the 10-year and 30-year government bonds higher. What gives?

    The Fed said it would focus its buying power on bonds that mature in four to six years,
    with more than 85 percent of the purchases concentrated in bonds that mature between 2.5 and 10 years from now. Investors were expecting that the Fed might spend more on longer-dated Treasury securities, and sold them once they learned of the Fed’s plans.

    Will these purchases alone guarantee that interest rates will fall?

    No. Investors love to repeat the mantra: Don’t fight the Fed. But as much firepower as the central bank possesses, the Fed isn’t the only powerful economic force in the world. And interest rates can be impacted by all sorts of factors. If China’s central bank cuts back sharply on its purchases of U.S. government bonds, interest rates will rise. Investors’ attitudes about the pace of growth, or inflation, play an important role in determining market interest rates.

    Whom is this good for?

    In theory, it should be good news for borrowers of all types, but in particular corporate ones. If mid-term borrowing costs fall across the board, more companies should be able to refinance existing debt at lower levels, or take on new debt at lower cost. In theory, lower rates for big borrowers (i.e. banks) should mean credit will be more plentiful, or available on easier terms to businesses and individuals. And of course, any move the Fed makes to reduce interest rates tends to be a positive for stocks.

    Whom is this bad for?

    Savers. In this low-interest-rate environment, people who live on fixed incomes have had great difficulty finding safe instruments that deliver significant returns. To the extent this effort succeeds at holding longer-term interest down, it makes that task all the more difficult.

    Government bonds are risk-free investments. What are the risks the Fed runs by taking more government bonds onto its balance sheet?

    There are a couple of risks. First, low interest rates and the expansion of the Fed’s balance sheet tend to weaken the dollar. But the second -- and larger -- risk is that it won’t work. Interest rates are already exceedingly low, and it’s unclear how lowering them a bit more will induce companies and individuals to change their behavior significantly. Quantitative easing doesn’t directly address the underlying problem in the economy: that demand is too weak to fuel satisfactory growth. To combat weak demand, fiscal policy -- e.g., tax cuts, rebates, a payroll tax holiday, jobs program -- is often more effective than monetary policy. But fiscal policy remains paralyzed. Ideally, fiscal and monetary policy should be working in tandem. In the current situation, Bernanke is cranking up the volume while the political system is sitting on its hands. Imagine a two-engine jet trying to fly with only one engine revving.

  13. #13
    Quote Originally Posted by wiggin View Post
    Popular Mechanics? Really?

    Not that you're wrong, but please. Don't insult us.
    Does this help?

    American Society of Civil Engineers Report card for America's Infrastructure

    2009 Grades

    Aviation D
    Bridges C
    Dams D
    Drinking Water D-
    Energy D+
    Hazardous Waste D
    Inland Waterways D-
    Levees D-
    Public Parks and Recreation C-
    Rail C-
    Roads D-
    Schools D
    Solid Waste C+
    Transit D
    Wastewater D-


    America's Infrastructure GPA: D
    Faith is Hope (see Loki's sig for details)
    If hindsight is 20-20, why is it so often ignored?

  14. #14
    <That report card by ASCE is in the Popular Mechanics article, in one of the series links. Bad grades since 2001.>

    So how 'bout that QEII? Is that ship gonna sail, sit at the dock, or sink?

  15. #15
    Quote Originally Posted by GGT View Post
    <That report card by ASCE is in the Popular Mechanics article, in one of the series links. Bad grades since 2001.>

    So how 'bout that QEII? Is that ship gonna sail, sit at the dock, or sink?
    I'm betting that even if it does manage to lower interest rates it won't make much difference to main street. Demand is low because worker stability is in question. I bet tax holidays wouldn't even put much of a dent in that doubt.
    Faith is Hope (see Loki's sig for details)
    If hindsight is 20-20, why is it so often ignored?

  16. #16
    Sounds like doing the same thing, over and over, hoping it will work. Good for banks, bad for savers.

  17. #17
    Quote Originally Posted by GGT View Post
    Sounds like doing the same thing, over and over, hoping it will work. Good for banks, bad for savers.
    Savers are the problem, didn't you get the memo?
    Faith is Hope (see Loki's sig for details)
    If hindsight is 20-20, why is it so often ignored?

  18. #18
    Quote Originally Posted by Being View Post
    Savers are the problem, didn't you get the memo?
    Yeah. SSDD. Kiss your children and go shopping! Eleventy billion intarweb cookies for naming the source of that quote. No cheating.



    To avoid double posting, here's an even gloomier assessment:

    http://www.realclearmarkets.com/arti...ide_98740.html

    The question being asked all across the world of business news is: Will QE2 be successful? Because this policy is literally economic suicide, the question becomes: Will the Federal Reserve be successful in the assisted economic suicide of the U.S. government? I find this an utterly appalling question -- which highlights the intellectual bankruptcy of government policymakers and the bankers who goad them onward.

    Quantitative easing is nothing more than a euphemism for printing money out of thin air. Its one-and-only purpose is to destroy the currency being printed. It is pure dilution and absolutely no different than a corporation vowing to improve its fiscal performance simply by printing a lot of new shares.

  19. #19
    Gee if America's drinking water is D- I'd hate to see what an F is.

  20. #20
    Quote Originally Posted by Lewkowski View Post
    Gee if America's drinking water is D- I'd hate to see what an F is.
    Haiti, for one. Drinking water with parasites and cholera bacteria.

    But who needs an FDA or EPA, or a Safe Drinking Water Act? puh, that's for big gummint sissy sssocialists.

  21. #21
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    Quote Originally Posted by wiggin View Post
    I call bullshit! Long term inflation expectations are pretty low in the US. QE2 changed that a little, but even so they're still pretty steady and well within the Fed's target range. The concern is not hyperinflation but rather deflation.
    And I call double bullshit; the effects of QE are totally unpredictable. The short-term concern is deflation, but once the presses start turning you don't know where it will stop. And neither does Bernanke.

    Also; who really needs that money in an economy that is heavily deleveraging. Many people have learned how you can burn your fingers by having any debt. Cheap debt isn't as attractive as it was 7-8 years ago.
    Congratulations America

  22. #22
    May be a wiki fist, but just look at that list of references.

    http://en.wikipedia.org/wiki/Federal_reserve

  23. #23
    Another thing. This "stimulus" doesn't require any legislative or executive approval. They just Do What They Do.

    After all the GOP and Tea Party hype about stimulus spending and big government debt, or big government intervention, shouldn't this have been a larger part of the conversation?

  24. #24
    Quote Originally Posted by agamemnus View Post
    investment in its dilapidated infrastructure

    Just because we don't have trains everywhere, does not mean that the US has a dilapidated infrastructure. That's where this guy lost me.
    Dude. Come to Michigan, drive through Ohio and Indiana, and see dilapidated infrastructure. Roads, rail, bridges, electrical.... hell, the US can't even get its shit together to provide decent broadband, especially after a decade of Neo-Cons "leaving it to the Market" which effectively left the US behind the rest of the world.

    Quote Originally Posted by GGT View Post
    I'd say uninformed, not stupid.
    I'd say misled and deceived. Money = speech, ya know? Secret speech at that...

    Quote Originally Posted by Lewkowski View Post
    Gee if America's drinking water is D- I'd hate to see what an F is.
    Mexico? Drinking water that smells faintly of outhouse and gives you diarhea for a week....

    Quote Originally Posted by GGT View Post
    After all the GOP and Tea Party hype about stimulus spending and big government debt, or big government intervention, shouldn't this have been a larger part of the conversation?
    These guys only wanted power back. Stop everything they can in the first 2 years and demonize anything that gets past, truth not required. The actual needs of the nation are a secondary issue.
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  25. #25
    Quote Originally Posted by Hazir View Post
    And I call double bullshit; the effects of QE are totally unpredictable. The short-term concern is deflation, but once the presses start turning you don't know where it will stop. And neither does Bernanke.
    Uhm, that's not true, we absolutely know what QE will do. We have very quantitative measures of the market's expectation of inflation (the spread between a normal Treasury and a TIPS) at different points. Furthermore, we've done QE (and QE-like things) before and the results are pretty straightforward. Yes, inflation increases, but we're well below our target rate and have some room to maneuver. The purchases aren't that large, and there's already a large contingent at the Fed that will restrain out of control QE due to inflation concerns.

    Furthermore, the Fed has a lot of tools at its disposal to rein in inflation but very few other tools to control deflation. If inflation starts rising too much, it's easy to put on the brakes by raising the federal funds rate, stopping QE turnover (i.e. stopping the practice of reinvesting the proceeds of QE in more securities), etc, etc. I fail to see why you think the Fed wouldn't do that, when it's been the main debate at the FOMC meetings and heavily studied by their economists. They aren't interested in making US government debt depreciate; frankly, that's not their job. Their job is to keep steady and predictable inflation and relatively low unemployment.

    Also; who really needs that money in an economy that is heavily deleveraging. Many people have learned how you can burn your fingers by having any debt. Cheap debt isn't as attractive as it was 7-8 years ago.
    We need cheap money specifically because people are heavily deleveraging - well, honestly, the problem isn't people so much as businesses that are sitting on big piles of cash and not investing/expanding/hiring. Obviously the consumer market is only going to be marginally helped here (maybe a slight uptick in the housing market due to cheaper loans?), but that's not the point. The hazards of deflation are the real concern, and it's a very big one - the US looks a lot more like Japan than it does Zimbabwe.

  26. #26

  27. #27
    I'd say uninformed, not stupid. To be fair, the Federal Reserve and the Treasury do a lot of things the public never reads about. Like meeting at the Willard with all the Big Bank CEOs to "discuss goals". Or it's complex and interventions are full of acronyms, much easier to tune out.
    While that reeks of corruption it's also important since the banks are major vehicles and tools needed by the Federal Reserve. At the same time, it doesn't sit well with me either.

  28. #28
    Quote Originally Posted by Being View Post
    Savers are the problem, didn't you get the memo?
    Savers aren't the problem. Bloated banks are!!

    DISMANTLE THE BANKZ

  29. #29
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    Quote Originally Posted by wiggin View Post
    Uhm, that's not true, we absolutely know what QE will do. We have very quantitative measures of the market's expectation of inflation (the spread between a normal Treasury and a TIPS) at different points. Furthermore, we've done QE (and QE-like things) before and the results are pretty straightforward. Yes, inflation increases, but we're well below our target rate and have some room to maneuver. The purchases aren't that large, and there's already a large contingent at the Fed that will restrain out of control QE due to inflation concerns.

    Furthermore, the Fed has a lot of tools at its disposal to rein in inflation but very few other tools to control deflation. If inflation starts rising too much, it's easy to put on the brakes by raising the federal funds rate, stopping QE turnover (i.e. stopping the practice of reinvesting the proceeds of QE in more securities), etc, etc. I fail to see why you think the Fed wouldn't do that, when it's been the main debate at the FOMC meetings and heavily studied by their economists. They aren't interested in making US government debt depreciate; frankly, that's not their job. Their job is to keep steady and predictable inflation and relatively low unemployment.


    We need cheap money specifically because people are heavily deleveraging - well, honestly, the problem isn't people so much as businesses that are sitting on big piles of cash and not investing/expanding/hiring. Obviously the consumer market is only going to be marginally helped here (maybe a slight uptick in the housing market due to cheaper loans?), but that's not the point. The hazards of deflation are the real concern, and it's a very big one - the US looks a lot more like Japan than it does Zimbabwe.
    Funny that you claim to know better than the FED what their QE under present circumstances will do.
    Congratulations America

  30. #30
    We need cheap money specifically because people are heavily deleveraging - well, honestly, the problem isn't people so much as businesses that are sitting on big piles of cash and not investing/expanding/hiring. Obviously the consumer market is only going to be marginally helped here (maybe a slight uptick in the housing market due to cheaper loans?), but that's not the point. The hazards of deflation are the real concern, and it's a very big one - the US looks a lot more like Japan than it does Zimbabwe.
    And part of the issue is regulatory uncertainty causing businesses to be cautious with their money. A prudent and wise choice with a president bent on putting the heavy hand of government force on business. Add to that an unstable global economy and it would be extremely foolish to make risky capital investments. Now if the President comes out saying no new taxation or regulation while he is in office that would create an immediate boon to the economy (assuming business leaders believe him).

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