Yale School of Management's Jeffrey Garten, in the Financial Times:
"The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the US and the shift of economic power from west to east.... Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out.
There is another factor pushing America towards a weaker dollar: lacking the domestic consumer demand that came with the unrestrained credit of the past 15 years, the US is desperate to find buyers abroad, especially in emerging markets where the middle class is growing and infrastructure requirements are soaring. A cheaper dollar could make US products and services more competitive."
It will also have numerous negative personal effects on Americans, to compound their future problems with rapidly increasing taxes that pay for fewer and lower quality services. Abroad, the question is whether we're going to see what is, in effect, a cycle of competitive devaluations. There is already early movement to that effect in Vietnam (affected by the Yuan's peg to the dollar) and Russia. Future protectionism may not look like Smoot-Hawley, though outright protectionism triggered by currency policies deemed predatory is definitely a possibility. Either way, the effects on global trade could be very interesting, in a Chinese sense. The Chinese already find it a bit too interesting, judging by their recent comments.
Beyond that, there's the issue of yet another Fed-spawned bubble, and its consequences. From Doug Noland's "Reflation Issues Heat Up" in the Asia Times:
"To be sure, the Fed has been accommodating bubbles for many years now. With each bursting bubble came policy reflation and only larger bubbles.... Ultra-aggressive US policy stimulus ensures ongoing dollar debasement, which feeds already massive financial flows to "undollar" assets and markets. Only aggressive policy tightening would contain bubble excesses in China, Asia and the emerging markets. There appears no stomach for such an approach anywhere - and this is no "mini" predicament.
...It is fundamental to credit bubble analysis to appreciate that the unfolding reflation is going to be altogether differently than previous reflations. As I've repeatedly tried to explain, the epicenter of reflationary forces have shifted from the core (US) to the periphery (China, Asia, and the "emerging" markets). The dollar and sophisticated Wall Street credit instruments have been supplanted by non-dollar assets and markets as the inflationary asset class of choice.
....It is my thesis that there is no alternative other than a major transformation of the underlying structure of the US economy. In simplest terms, we must produce much more, consume much less and do it with a lot less credit creation. The objective of current policymaking, however, is to quickly rejuvenate housing and asset prices with the intention of sustaining the legacy economic structure.
Zero interest-rate policy is key to this strategy..... The nation's housing markets will remain rather impervious to low rates, while the household sector is punished with near-zero returns on its savings. At the same time, monetary policy will continue to play a major role in dollar devaluation and higher consumer prices for energy and imports. Financial sector profits have already bounced back strongly, but there is little market incentive to direct new finance in a manner that would fund any semblance of economic transformation.
The focus remains on financing the old structure. Indeed, I would argue that the current course of policymaking and market interventions only works to delay the unavoidable economic adjustment process.
I believe the unfolding risks to the US and global economy are enormous.... Or let's look at it from a different angle. From the perspective of stock market valuation - massive credit growth, the resulting flow of finance, and the course of policymaking basically created no additional wealth over the past 10 years. We now appear determined to repeat this dismal performance over the next decade."
That's certainly the way it looks. Elsewhere in the Asia Times, Julian Delasantellis thinks Ben Bernancke's coming December 3rd testimony to Congress has the potential to be very heated. The headline "Bernanke's neck on the line" tells you all you need to know. Julian is not exactly a fan of the Fed skeptics - but is dead-on in noting that its support is growing, quickly, on both the right and the left.
The trends, and the growth of this reaction, are solidifying some things I've been wondering about for a while.
I'm not a big fan of Ron Paul. "Bong-hit reality" doesn't even begin to describe the depth of his foolishness when it comes to international relations - "idiotarian" does. Having said that, America's financial bankruptcy is going to play an increasingly sharp role in curtailing its options, and pushing the USA toward a much less engaged position around the world. A neo-isolationist combination of "not our problem" retreat, coupled with a shift toward the Navy as a major form of presence, and a resurgence of punitive expeditions as a concept, strikes me as likely.
In that environment, the Ron Paul wing's policy liabilities decrease. And what's coming on the economic front does make me think that Ron might play a Barry Goldwater kind of role in the GOP's future, in the sense that many of his economic views are going to find their way into the hands of a more capable, popular, and balanced future champion.
Time will tell. On all fronts.
So much for Globalization, the Service Economy, Wars without Taxes to pay for them, Outsourcing your Industrial Capacity and your Pollution Problems, the idea that Capitalism would bring Democracy and Openness and a whole lot of other idiotic ideas that came out of economists mouths over the past 20 years.
I doubt that the world trade regimen that has been put in place over the past 25 years can survive politically anywhere (Well, China may still be on the bandwagon), fears of a new Smoot-Hawley or not.
I'll tell you- one of the things the Chinese majorly have on us is patience. We're willing to take hatchets to some of the pillars of our economy when we have a few bad quarters or even (gasp) a year or two. The reality is if we needed to we could rebuilt our industrial base in the better part of a decade it we really wanted to (rolling back the murderous environmental and labor laws that make it so expensive to make anything etc).
Politically it seems impossible (again because we think in months instead of decades), but I suspect the Chinese know that if they really pushed us into a corner we would make it happen pretty quick. Everything we've done to ourselves to make us uncompetitive we could undue even faster if the political will coalesced. That's one of several very good reasons China isn't likely to push us too hard.
Just how is a country with an economy awash in worthless dollars, disastrous environmental problems, social unrest within their periphery, no real presence in the Indian Ocean, through which their lifeline runs, 1 Billion people at or below the poverty line, an inferior infrastructure, no blue water navy going to push us.
Stop accepting dollars? Think that one through.
On top of that, the Chinese have imported 6 million people a month for the past few years from the provinces to the cities as the main fuel for their growth. if their is a downturn of any size their you will see unemployment on a scale that is simply unimaginable. Following that social unrest on a massive scale as well.
China' problems are similar to ours, in that they are intertwined in a world economy that is very sick. And China's leaders know that. China's problem is that they realize that they, like the Japanese and the Arabs before them find themselves caught in the Bretton Woods trap.
The dollar is the worlds resolution currency and the Americans have a carte blanche when it comes to minimizing the impact of their debt. We print more money.
I do not agree with this but I do think that in any war over the value of the dollar, the Chinese lose big, big time.
I wonder why it is that people puff China up as this massive threat, somehow immune to the laws of economics?
toc3 is right that China is not immune to the laws of economics. Mark's right that the Chinese have more patience, or at least more commitment to a straightforward ethic of growth.
China's response in a weak dollar world has been simple: keep the yuan pegged and ride it down. That's what's setting off rumbles in Asia, because it's ultimately a mercantilist move that will create de facto protectionism in China, while hollowing out neighbouring states' manufacturing. Hence Vietnam's devaluation recently, to keep pace.
Commodities, as a more stable store of value, tend not to follow on this ride. Instead, they seem to "rise" in price. In reality, they simply don't take the high-dive plunge alongside paper currency. The problem with that divergence is what it does to those price balances, and the effect that has on the people in one's economy - especially the lower (or aspiring) middle class.
There are a number of potential responses to that of course. One of which is to take a mercantilist approach again, focus on locking down resources via cozy agreements with dictators, and fragmenting the global market for key goods by keeping part of that market "walled off" on favorable terms.
Not easy to pull off, but possible for some, and the pattern of the attempts are already emerging to those who look.
toc3 is probably right that many of the things The Economist likes to treat as undiscussable givens, like Globalization, the Service Economy, Wars without Taxes to pay for them, Outsourcing your Industrial Capacity and your Pollution Problems, etc. will indeed fade. Some key economic pressures look likely to be tilting against. And then there's the possibility that it happens for reasons that have little to do with economics, per Cicero's Threshold.
I really miss that guy...