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parvati_roma
Joined: 30 Mar 2004
Posts: 8432
Location: Italy
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 Posted: Mon Mar 23, 2009 7:27 pm Post subject: |
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First - a hopeful  YAY! from me for the US's toxic-securities buyup scheme and its tonic effects on US and world markets = a terrific confidence-booster, regardless of finer-print nitpicks. This really does feel like a turning-point: if the US govt. had done something like that back in October 2008 instead of messin' around laying that inconclusive TARP-egg it might have saved itself - and the world - quite a bit of pain?
Now for a couple of v. interesting reads:
Brad Setser: Financial de-globalisation, illustrated (= with lotsa charts)
| Quote: | (...) Both private and official demand for US financial assets has collapsed. Gross inflows are close to zero.
How then can the US still run a large current account deficit if the rest of the world isn’t buying its financial assets? There is only one answer: Americans have pulled funds from the rest of the world (call it deleveraging, call it a reversal of the carry trade or call it a flight to safety) faster than foreigners have pulled funds from the US market. Words cannot really capture the sheer violence of the swings in private capital flows that somehow produced a rise in (net) private demand for US financial assets. The modest change in net flows reflects an enormous contraction in gross flows. (...)
To put in in plain terms, Lehman’s collapse had a bigger impact on cross-border flows than 9.11. (...)
The enormous withdraw of private US lending to the world was offset, in part, by a surge in US official lending to the world. It was just the Fed, not the Treasury, that did all the heavy lifting. (...)
. A crisis may come when the US government cannot play a similar stabilizing role. But that crisis would be marked by a run out of the dollar — not a global scramble for dollars. The current crisis has constrained the United States’ ability to be the world’s importer of last resort, but not its ability to be the world’s lender of last resort. Not so long as the the world is scrambling to find dollars, the one currency the Fed can create. Here, my earlier concerns haven’t been born out.
Still, it is hard to look at these charts and conclude all is well in the world. Cross-border financial flows rose to crazy heights during the credit boom. Thank the shadow financial system. Over the past year those flows have collapsed with stunning speed.
Had the collapse in inflows and outflows not offset, there would now be talk of a sudden stop in capital flows to the US. But so long as the fall in demand for US assets is matched by a fall in US demand for foreign assets, a collapse in gross flows need not to lead to a collapse in net inflows. To date, the United States “sudden stop’ has manifest itself as a credit crisis not a currency crisis.
The “great contraction” in private capital flows actually started in the summer of 2007. The pressure that led to Lehman’s failure — and the near-failure of a host of other financial institutions, not the least AIG — had been building for a while.
And it is also striking, at least to me, that financial globalization collapsed of its own weight, not because of any political decision to throw sand into its gears. That may yet happen. The political reaction to the financial excesses of the past few years is just beginning. But the fall in financial flows to date largely reflects the unwinding of a a host of leveraged bets made by the City and the Street — not demands from Whitehall or Washington.
Indeed, without government intervention, the collapse in cross-border flows would have been far larger. If the government hadn’t stepped in, a host of financial institutions would have collapsed, leading to an even sharper contraction in capital flows. That is something that often seems to be lost in the debate over financial protectionism. (...)
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2) Even more interesting official speech/position statement by Chinese central bank megahoncho Zhou Xiaochuan published today in English on the People's Bank of China's website:
Reform the International Monetary System
| Quote: | (...)When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies. ....
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... proposed solution being gradual transition from reserve-currency use of national currencies (USD, euro, sterling, yen, swiss francs, renminbi, rubles, whatever...) to use of IMF Special Drawing Rights for central bank reserves and international trade and finance purposes...
| Quote: | ...the basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value...
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... read all about it, it's a very interesting proposal - I'm all for it, definitely a step in the right direction!
Helluva US-centric but fairly sharp-eared WaPo commentary:
What's the big idea?
The End of Dollar Dominance?
| Quote: | (...) Calling the use of the dollar as the world's benchmark currency "a rare special case in history," Zhou urged the "creative reform of the existing international monetary system towards an international reserve currency." Zhou said the reserve currency, managed by the IMF, should be "disconnected from individual nations and is able to remain stable in the long run." Talk about a vote of no confidence on the future of the U.S. economy!
China's leaders are worried that actions taken in the United States to yank the U.S. economy out of recession could hurt China. As such, they have voiced fears about the estimated $1.4 trillion [???] China holds in U.S. Treasuries. On March 13, Premier Wen Jiabao told reporters he was concerned about the safety of China's U.S. dollar assets and floated the idea that the United States should guarantee China's investments.
Chinese officials were further miffed a few days later when Federal Reserve Chairman Ben Bernanke announced that the Fed would buy hundreds of billions in Treasury securities -- which, China's leaders fear, could trigger inflation, thereby further decreasing the value of China's portfolio. (China's foreign portfolio apparently already has taken a huge hit. Major foreign stock plays and investments made in 2007 and 2008 have, by all accounts, lost billions.)
So, as they say, if I owe you $1,000, it's my problem. But if I owe you $1 trillion, it's our problem.
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A cooler, wider-perspective overview from WSJ, despite the headline: China Takes Aim at the Dollar
| Quote: |
Monday's proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update "the obsolescent unipolar world economic order."
Chinese officials are frustrated at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. The size of those holdings means the value of the national rainy-day fund is mainly driven by factors China has little control over, such as fluctuations in the value of the dollar and changes in U.S. economic policies.
(...)In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance.
"The re-establishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time," Mr. Zhou said. In remarks earlier Monday, one of his deputies, Hu Xiaolian, also said the dollar's dominant position in international trade and investment is unlikely to change soon. Ms. Hu is in charge of reserve management as the head of China's State Administration of Foreign Exchange.
Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.
Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, since it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates.
(...)
John Lipsky, the IMF's deputy managing director, said the Chinese proposal should be treated seriously. "It reflects officials' concerns about improving the stability of the financial system," he said. "It's interesting because of China's unique position, and because the governor put it in a measured and considered way."
China's proposal is likely to have significant implications, said Eswar Prasad, a professor of trade policy at Cornell University and former IMF official. "Nobody believes that this is the perfect solution, but by putting this on the table the Chinese have redefined the debate," he said. "It represents a very strong pushback by China on a number of fronts where they feel themselves being pushed around by the advanced countries," such as currency policy and funding for the IMF. (...)
"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr. Zhou said. The increasing number and intensity of financial crises suggests "the costs of such a system to the world may have exceeded its benefits."
Mr. Zhou isn't the first to make that argument. "The dollar reserve system is part of the problem," Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the world's cash was funneled into the U.S. "We need a global reserve system," Mr. Stiglitz said in the speech. (...) |
... and my bet is, sooner or later we'll get one - won't be tomorrow, won't be next month, probably won't be next year either.... but that's the way the world is heading.
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“Against barbarity, poetry can resist only by confirming its attachment to human fragility like a blade of grass growing on a wall while armies march by.” Mahmoud Darwish |
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johnwilkins
Joined: 15 Apr 2002
Posts: 4862
Location: West Coast
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| Posted: Mon Mar 23, 2009 9:47 pm Post subject: |
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| mr_yak wrote: | | Exactly what is deflating? CPI was up 0.4% last month. Energy prices up ... what ... maybe 10%?? |
Adjusted for food and energy, 0.2%... that's 2.4% annually. Look at BLS statistics.
The compound annual rate for the three months ended February 2009 for everything was -0.5%. The unadjusted 12-month rate is 0.2%--that's pretty damned close to zero for an entire year, I'd say.
| mr_yak wrote: | | I guess you could say wages are deflating as they are staying stagnant. It's not so much deflation but a reluctance to get back in the game. |
Assets and equities have certainly deflated. That doesn't show up in CPI numbers.
| mr_yak wrote: | | Now Congress has made that prospect even more remote by setting a precedent of contractual nullification, retro active rule changes and politically motivated punitive sanctions. |
The Democrats are getting exposed for the frauds that they are. They put the AIG bonus provision into that porkulus bill and voted on it--of course, none of these losers read the bill and they should probably be thrown out of office for that reason alone. The circus is good theater, because they cannot blame that stuff on George Bush. Retro-active tax increases were ruled constitutional--a precedent set under Lyndon Baines Johnson--provided it occurs within the same calendar/fiscal year.
| mr_yak wrote: | | Other than the value of the dollar, I don't really see much deflation lately. |
That's probably because you weren't in the heart of bubble territory. In California, real estate prices are well off their highs, unemployment is at 10%, and I see 8.5x11 sale signs at Safeway in Alamo, CA--which is a pretty tony little suburb. High end restraunts are repricing, etc.
| mr_yak wrote: | | The real elephant in the room here is that, despite the best efforts of our braintrust in Washington, the bubble is simply NOT going to re inflate. |
In real estate, I completely agree. This happened before though. In the late 1980s we had a real estate bubble, it was offset by an equity bubble. When the equity bubble burst, it was offset by a real estate bubble. That money has to go somewhere.
| parvati roma wrote: | | 2) I'm strongly opposed to the US's record + current practice of nconditional support of Israel for reasons both of justice and of ME-alienation-and-potential-destabilisation, |
The US doesn't support a one-state solution, and Palestine will not recognize Israel.
| parvati roma wrote: | | 3) above all, like practically ALL non-Americans everywhere I opposed-and-continue-to-oppose the (relatively recent, afaik still-extant?) US "doctrine" of attempting to impose perpetual military and political "full spectrum dominance" over the entire planet, backed by "preventive" wars at its own say-so. |
Hmm... "Full spectrum dominance" only means that we will have the best military equipment available. It doesn't mean we will have a presence everywhere. Most of what passes for arguments that we have bases everywhere are a few score of marines guarding non-embassy consulates and such. To date, we've fought only one preventive war, the war with Iraq. We removed a dictatorship and put a democracy in its place with opposition from the world's democracies, ironically.
| parvati roma wrote: | | since the US signed the withdrawal-agreement aka SOFA with the Iraqi govt. I have no further objection, provided it keeps strictly to the letter of that agreement and respects the verdict - whatever it may be - of the Iraqi referendum to be held on the agreement in July. |
Have we done otherwise that you know of?
| parvati roma wrote: | | I'm opposed to NATO in its current form - I think it should become a normal treaty-alliance amongst friendly nations, not a pretext for the biggest country plopping foreign troops and military hardware onto the smaller ally-countries' soil from here to eternity. |
What if that's what the smaller country wants? Smaller countries effectively externalize their defense budgets and are able to use resources otherwise spent on defense for business development. What's the problem with that? You don't seem to have a problem with the EU in its current form imposing all sorts of regulations on non-members as pre-conditions for admission--effectively imposing your laws on them.
| parvati roma wrote: | | what I have taken issue with is excessive/indiscriminate use of airstrikes thereby alienating the all-important locals, |
What do you mean by "indiscriminate." They use almost exclusively smart bombs.
| parvati roma wrote: | | I believe the fact my own country is contributing several thousand troops to the Afghan war at considerable expense to Italian taxpayers + anxiety re Pakistan aspect should at least entitle me to speak my thoughts on the conduct of the war and its pitfalls without being constantly accused of "anti-Americanism", especially as I believe Americans-as-a-whole are as non-eager as Europeans-as-a-whole to find themselves militarily stuck in the place for the next half-century or so?? |
I don't know anybody who really wants to be fighting these wars, but it always seems like there are more threads attacking the US and its allies and only a fraction thereof attacking terrorists. I can't imagine you aren't able to estimate the incalculable expense of these know-nothing Islamist types who have no use for science, technology or human rights for that matter.
| parvati roma wrote: | | ... proposed solution being gradual transition from reserve-currency use of national currencies (USD, euro, sterling, yen, swiss francs, renminbi, rubles, whatever...) to use of IMF Special Drawing Rights for central bank reserves and international trade and finance purposes... |
The IMF is just a corporation--like Coca Cola. The world doesn't have to subscribe to it. A global currency is a huge problem for countries with written constitutions. I can already tell you the problem of the US subscribing to it... the constitution of the United States clearly states that Congress has the power to coin money and regulate the value thereof. To subscribe to a foreign currency, we'd likely have to change our constitution--a very unlikely occurence.
| parvati roma wrote: | | ... and my bet is, sooner or later we'll get one - won't be tomorrow, won't be next month, probably won't be next year either.... but that's the way the world is heading. |
Maybe, but my guess is you'd see a world war before that happens and 50-100M dead first. China is grousing because they finally figured out that their dumbsh1t export only policy didn't work. All they had to do was look at Japan. Not exactly rocket science. What happens if foreigners stop buying US debt? The US prints money, that's what... duh? This is not the gold age. It's not the mercantilist age. If China wants to rebuild those schools, etc. from the quakes, they should be buying construction supplies from the US. That's what good trading partners do. With China, it's a one way street. They want to sell, they want us to buy... little reciprocity. Well, that has consequences too. A global currency? I doubt it will come in to fruition. China and Russia... hmmn... and what ideology pray tell... would be behind their little schemes?
_________________
"A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away."
--Antoine de Saint-Exupery |
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mr_yak
Joined: 17 Apr 2002
Posts: 3083
Location: Louisville, Colorado
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| Posted: Mon Mar 23, 2009 10:13 pm Post subject: |
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| johnwilkins wrote: | | mr_yak wrote: | | Exactly what is deflating? CPI was up 0.4% last month. Energy prices up ... what ... maybe 10%?? |
Adjusted for food and energy, 0.2%... that's 2.4% annually. Look at BLS statistics.
The compound annual rate for the three months ended February 2009 for everything was -0.5%. The unadjusted 12-month rate is 0.2%--that's pretty damned close to zero for an entire year, I'd say.
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Yes we adjust for food and energy ... but it doesn't negate the fact that crude oil has gone up by close to 30% in the past month or two does it? You don't think this has the potential to create at least some inflationary pressure? Sure the past year has been a roller coaster wash, but the past year is in the past. Now we are trotting out a plan to auction off assets with technically a zero value (because no one wants to touch them) for 6-7 cents on the dollar. Granted it's presented as a fire sale, but in fact it could be a bidding war ... particularly because the only individuals taking the risk here are the American tax payers. I realize how odd it sounds that selling assets at thrift store prices might create inflation, but if/when things start moving according to 'plan' ... it seems like a strange possibility. We have doubled the monetary base in a very, very short period. Just how is all that cash supposed to get "mopped up" when things seem like they are starting to move again? And even worse ... if things don't start moving for a long while ... 
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b5d
Joined: 17 Jun 2005
Posts: 628
Location: Sunny San Diego
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| Posted: Tue Mar 24, 2009 2:10 am Post subject: |
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(Re: China's currency proposal) First of all, to kind of state the obvious, that was a curveball, and it's totally their style to throw something like this out there and see where the cards fall.
I think we're starting to see how China plans to transform this crisis to its political advantage. It wasn't just a chance to implement huge (internal) public works projects that have been waiting on the shelf for the right political and economic climate. China is taking a somewhat credible internationalist, and at the same time anti-American, stance. Though the implementation is a big question, if the US resists this proposal for purely domestic/political reasons, like what John brought up, it will only work to China's benefit.
| pavarti_roma wrote: | | Helluva US-centric but fairly sharp-eared WaPo commentary: |
Pomfret knows a whole lot about China, and one gets the sense that he just says some stupid things every once in a while just to stay relevant, or something. Was it this line that you objected to?
| Quote: | | Talk about a vote of no confidence on the future of the U.S. economy! |
I would have said, Talk about a direct attack on the the dominance of the dollar! No less US centric, but then at least everyone knows exactly what's going on.
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When the best rulers achieve their purpose
Their subjects claim the achievement as their own. - Lao Tse |
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parvati_roma
Joined: 30 Mar 2004
Posts: 8432
Location: Italy
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| Posted: Tue Mar 24, 2009 10:11 am Post subject: |
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| JW wrote: | The IMF is just a corporation--like Coca Cola.
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One of your most hilariously wacky statements ever, JW:
http://en.wikipedia.org/wiki/International_Monetary_Fund
compare:
http://en.wikipedia.org/wiki/The_Coca-Cola_Company
lol! 
| JW wrote: | | A global currency is a huge problem for countries with written constitutions. I can already tell you the problem of the US subscribing to it... the constitution of the United States clearly states that Congress has the power to coin money and regulate the value thereof. To subscribe to a foreign currency, we'd likely have to change our constitution--a very unlikely occurence. |
Seems you haven't understood what the proposal is actually about? Here's a clear n' handy "concise version" rundown of its essential features from FT that you may find helpful:
| Quote: | (...) To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.
Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.
China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.
Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.
Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.
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So as you can see, the object is not to replace the US dollar as national currency of the USA, subject as such to the power of your Congress "to coin money and regulate the value thereof", with a new "foreign currency" as legal tender in the USA itself, but to gradually replace the direct use of all national currencies - yours, ours, theirs... - for international reserve and major foreign trade purposes by progressively extending the scope and use for such purposes of an already-existing international financial instrument known as IMF Special Drawing Rights - almost as a kind of carefully weighted "synthetic gold standard"? - which for reasons explained by the Chinese central banker would actually enhance the real-life freedom of action of your Congress and other governments to "regulate the value" of your and their own domestic currencies without excessively self-destructive/systemic-destructive consequences.
| JW wrote: | | Maybe, but my guess is you'd see a world war before that happens and 50-100M dead first. |
JW, This remark is every bit as ... could call it "thoughtlessly self-embarassing"? ... as your preceding outbursts. You seem to be unaware of the fact that the US holds veto power in the IMF? 'Course as long as the US feels the "real world" disadvantages of the Chinese proposal - or whatever other proposal for international financial system reform ends up winning the widest international consensus - seriously outweigh its advantages from its own national economic-and-financial POV, it can and will block it, with no need to bring its military hardware into the equation; point is, with the ongoing rise in its level of debt the US govt. will need to be able to depreciate its currency in a controlled and progressive manner in the coming years without thereby bringing the entire internationally-interwoven global trade-and-finance system down on its/its citizens' head in the process - as the author of the proposal is well aware. He's an expert on international monetary issues, well aware of the ins-and-outs: the object of launching the proposal is to arrive at a "win-win" damage-control solution for the present financial mess with its helluva-strong probability of even-more-devastating-messes-ahead for all concerned, if the present system remains unchanged; as a central banker and a Chinese one to boot, the very last thing he's interested in is triggering off some kind of "lose-lose" international armageddon.
| b5d wrote: | | China is taking a somewhat credible internationalist, and at the same time anti-American, stance. Though the implementation is a big question, if the US resists this proposal for purely domestic/political reasons, like what John brought up, it will only work to China's benefit. |
I agree on China's desire to win internationalist credibility aka a reputation for ...call it "responsible leadership potential" via this proposal? Which means taking not only its own but other countries' needs, problems and concerns into account in crafting it, and launching it not as some kind of aut-aut diktat but as a "basis for further discussion". The Chinese proposal certainly wins points on all these aspects - and amongst other things, great care has been taken with its wording and conceptual approach to avoid any appearance of anti-Americanism. Zhou himself - as he has clearly stated - does not expect rapid agreement from the US/IMF/G20 to the proposal "as is": what he aimed to do - and IMHO has already succeeded in doing - is to "frame the discourse" on international financial-system reform by authoritatively (thanks both to China's own "weight" in the international economy and the nature and quality of the proposal itself) providing a rational, carefully balanced starting-point text to "set the ball rolling" re the very real need to retool the current reserve-currencies system in an international framework.
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Re JW's reiterations of assorted pre-Iraq/pre-AfPak US dogmas and statements-of-faith on FP/military issues - can't be bothered/don't have time to deal with 'em now but must admit I'm very tempted to pick 'em off one by one in the cold-light-of-reality on a more appropriate thread ... 
_________________
“Against barbarity, poetry can resist only by confirming its attachment to human fragility like a blade of grass growing on a wall while armies march by.” Mahmoud Darwish |
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parvati_roma
Joined: 30 Mar 2004
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mr_yak
Joined: 17 Apr 2002
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johnwilkins
Joined: 15 Apr 2002
Posts: 4862
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| Posted: Tue Mar 24, 2009 6:09 pm Post subject: |
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| b5d wrote: | China is taking a somewhat credible internationalist, and at the same time anti-American, stance. Though the implementation is a big question, if the US resists this proposal for purely domestic/political reasons, like what John brought up, it will only work to China's benefit.
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You said yourself the proposal was a "curveball." In fact, it is whacky. A big part of the economic problem is of Chinese origin--pegging the Yuan to the US Dollar. They can remove the structural imbalance any time they want to. However, they don't want to. It seems like China is trying to say that the problem is of US-origin. Actually, the US is running trade deficits because there is a major comparative advantage to doing so. That comparative advantage is artificially created by the Chinese government's peg. So I have so say that US resistance to it does not nothing to help China. In fact, what China is now realizing, according to their own leadership, is that they are getting hurt by it. Well... maybe a much easier solution is for China to rethink that currency peg. Why should the entire world have to rethink how it does business, just because China wants to retain a structural trade imbalance?
| parvati roma wrote: | | One of your most hilariously wacky statements ever, JW: |
It has members and its job is to help members. Many are calling for it to be disbanded in favor of some Bretton Woods II.
| IMF wrote: | | JW, This remark is every bit as ... could call it "thoughtlessly self-embarassing"? ... as your preceding outbursts. You seem to be unaware of the fact that the US holds veto power in the IMF? |
Except for a commodity-based currency like gold, there is no way to implement a global currency without a global government. I think the more likely outcome is war. The whacky and self-embarrasing remarks are coming out of China and Russia these days. If you take a credit currency in payment for goods and services, and all you do is bank them, there is no opportunity for the payor to recoup in kind. So the currency devalues. Why is that so hard to understand?
BTW... your beloved post-WWII NGO also noted,
| parvati roma wrote: | The crisis will push millions into poverty and unemployment, risking social unrest and even war, and urgent action is required, IMF Managing Director Dominique Strauss-Kahn said.
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"All this will affect dramatically unemployment and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and may be for some cases it can also end in war," he said. |
| parvati roma wrote: | | So as you can see, the object is not to replace the US dollar as national currency of the USA, subject as such to the power of your Congress "to coin money and regulate the value thereof", with a new "foreign currency" as legal tender in the USA itself, but to gradually replace the direct use of all national currencies - yours, ours, theirs... - for international reserve and major foreign trade purposes by progressively extending the scope and use for such purposes of an already-existing international financial instrument known as IMF Special Drawing Rights - almost as a kind of carefully weighted "synthetic gold standard"? |
The whole point of the Euro was as a counter-weight to the dollar and to reduce transaction costs. The Euro has been helpful to lowering interest rates for Europe. Same benefit the US gets. Why would the US, Europe, the UK, etc. give that up just because China wants to retain a currency peg to the US dollar. If they want to do that fine, but they will get repaid in debased currency. They only way around that is to put the money back into circulation--a very easy thing to do. But China is resisting that too--even while running a massive stimulus. Why not just buy every bit of construction materiel the US can supply with those reserves?
| parvati roma wrote: | | He's an expert on international monetary issues, well aware of the ins-and-outs: the object of launching the proposal is to arrive at a "win-win" damage-control solution for the present financial mess with its helluva-strong probability of even-more-devastating-messes-ahead for all concerned, if the present system remains unchanged; as a central banker and a Chinese one to boot, the very last thing he's interested in is triggering off some kind of "lose-lose" international armageddon. |
No. It is inherently win-lose and intentionally so. The problem in the global financial system, which you've rattled on about too, is that China maintains an artificially low currency. What are they so pissed off about? Well... what do you think they are pissed off about? The US is debasing its currency too. So the US is doing what China is doing, and China is pissed off about it. Go figure.
| parvati roma wrote: | | I agree on China's desire to win internationalist credibility aka a reputation for ...call it "responsible leadership potential" via this proposal? Which means taking not only its own but other countries' needs, problems and concerns into account in crafting it, and launching it not as some kind of aut-aut diktat but as a "basis for further discussion". The Chinese proposal certainly wins points on all these aspects - and amongst other things, great care has been taken with its wording and conceptual approach to avoid any appearance of anti-Americanism. |
It is anti-Americanism, and it is entirely intended to weaken the US dollar as a reserve currency. And why? For what purpose? Perhaps so that China can change the subject. The subject being that global trade imbalances are almost entirely the result of China keeping an artificially low price for its currency so that it can obtain currencies of real value and store them.
See, I don't mind the anti-US lamentations so much. However, when I look at mr_yak's humorous take on the US dollar, and you chiming right back in, the thing that utterly blows my mind is that you can't for the life of you see the same humor in a picture of the Yuan, and its artifically low price. You cannot see the irony in China complaining about the US devaluing its currency. How do you miss that? If China wants to solve the world's problems overnight, it can just let the Yuan float freely. They won't do that, because that will collapse their export-led growth. The idea that China gets to devalue its currency, but others do not is absurd. Nobody is going to play by those rules.
| mr_yak wrote: | | Just how is all that cash supposed to get "mopped up" when things seem like they are starting to move again? |
The Fed just reduces its balance sheet. Selling those bonds back into the market reduces money supply. Creating money is no more complex then the Fed buying Treasury Notes. Reducing money supply is no more complex than selling it back into the market and taking the cash out of the system.
I liked this article on China--China's Way Forward
Although, I am still unsure how it will materialize after the crisis. There are structural problems and corruption in China. For example, the recent earthquake saw 60k deaths in modern buildings--clearly the buildings weren't up to standard. I've heard anecdotes from people who have done business in China--e.g., that if the spec calls for 1-inch rebar, sometimes 1/4-inch gets substituted instead. Nobody knows until an earthquake hits.
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parvati_roma
Joined: 30 Mar 2004
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| Posted: Tue Mar 24, 2009 7:17 pm Post subject: |
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Thanks for the China's Way Forward link, JW - classy! Amongst other things, it confirms some of my own impressions/hunches plus adds the high-tech development dimension I'd read some mentions of here and there but hadn't brought up in debate.
Re Zhou's proposal - my bet is that although the US and UK will certainly be able to fence it off for now, very few countries other than your own will see it as "wacky" - all the BRICs and suchlikes are in favour and amongst other things, it was immediately preceded by a UN panel report that points exactly in the same direction. Don't forget that not only the BRICs, S. Korea, assorted other Asians and Latin Americans (all of which have greeted the Chinese proposal with great interest) but IMHO practically the entire planet - including many if not all Eurozone countries and ALL our immediate non-Eurozone neighbours - are extremely POd with the current system and with good reason, angered not only by the idiotic but devastating US subprimes crash and its totally disproportionate repercussions on hard-working businesses and populations far and wide but also by the totally out-of-control volatility of exchange rates and commodities prices even at the "best of times" under the current system, so are on the look-out for a path towards something a lot more balanced, stable and predictable from a real-economy POV. Consequently, Zhou's proposal will certainly not be widely discounted as "wacky", it will achieve exactly what he intended it to do: set the international ball rolling towards the adoption of a more stable, well regulated and far less monocentric international financial system "further down the road".
Anyway/whatever - the G20 will be very interesting to watch.
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Ah btw - re the IMF:
| JW wrote: | | Many are calling for it to be disbanded in favor of some Bretton Woods II. |
Dunno quite how you managed it, JW - but it sure seems you got that wrong too! Here's a sample of those "Call for a New Bretton Woods" docs....
UK-FR version calling for an enhanced supervisory n' regulatory role for the IMF:
Bretton Woods II – five key points on the road to a new global financial deal (Guardian, Nov. 2008)
Here's a BRIC-friendly one calling for IMF reform-not-abolition plus crucial role-expansion:
All talk little action - G20 finance ministers meeting - Bretton Woods Project
(March 2009)
Even this US version from WSJ - written back in Oct. 2008 - foresees a greatly expanded role for both China and the IMF....
A 21st-Century Bretton Woods
... in the light of the new Chinese proposal it makes kinda-ironical reading today:
| Quote: | (..) Today the idea of another monetary rebirth has much to recommend it. The credit bubble that has wreaked havoc on the world's financial markets has its origins in a two-headed monetary order: Some countries allow their currencies to float, while others peg loosely to the dollar. Over the past five years or so, this mixture created a variation on the 1930s: China, the largest dollar pegger, kept its currency cheap, driving rival exporters in Asia to hold their exchange rates down also. Thanks to this new version of competitive currency manipulation, the dollar-peggers racked up gargantuan trade surpluses. Their earnings were pumped back into the international financial system, inflating a credit bubble that now has popped disastrously.
Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.
If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.
It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.
There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope." ( )
Today it is the rising power that pursues mercantilist policies via its exchange rate. China's leadership, which sits atop an astonishing $2 trillion in foreign-currency savings, could trade a promise to help recapitalize Western finance for an expanded role within the IMF. But China may simply not be interested. The future of the global monetary system depends on whether China aspires to play the role of Roosevelt -- or whether it prefers to be a modern Churchill.
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I'd say it's already answered that question... leaving it up to you-all - as IMF veto-wielding major debtor - to bargain overtly-or-covertly for your desired quid-pro-quo??
Btw, if you can find some "Bretton Woods II" links calling for the IMF to be disbanded, please proffer - I'd be curious to see them.
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b5d
Joined: 17 Jun 2005
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| Posted: Wed Mar 25, 2009 2:54 am Post subject: |
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| john_wilkins wrote: | | Why should the entire world have to rethink how it does business, just because China wants to retain a structural trade imbalance? |
Ha ha. What can I say?
Life isn't fair. 
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parvati_roma
Joined: 30 Mar 2004
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| Posted: Wed Mar 25, 2009 4:27 am Post subject: |
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| JW wrote: | | ...the thing that utterly blows my mind is that you can't for the life of you see the same humor in a picture of the Yuan, and its artifically low price. |
Find me one, eh? First mental image that comes to mind is the Yuan as a hulking great greenback-gorged Mme. Frankenfly - or better/worse still, a transvestite Peking Opera singer with bound feet?? - demurely struggling to keep her/his/its exuberant protruberances tightly pegged into eentsy Victorian-type corsets, with Zhou in person as tight-lipped lady's-maid pressing a high-heeled boot into the small of her-etc back as he wrestles with simultaneously bursting peg-strings and unravelling foot-rags? If the drawing's anywhere near as hilarious as that sinisterly cute wee bernanke in Mr. Yak's effort I guarantee I'll laugh till I fall off my chair.
| JW wrote: | | You cannot see the irony in China complaining about the US devaluing its currency.... |
'Course I can, it's a real hoot! Trouble is that there's such an overload of ironies around these days I get distracted - must remember to spend more time equitably distributing my schadenfreude-schedule.
| JW wrote: |
If China wants to solve the world's problems overnight, it can just let the Yuan float freely. They won't do that, because that will collapse their export-led growth. |
They want an orderly and gradual transition from cheapo sweatshop to added-value quality provider, not a US-style boom-bust-boom-bust trick-cycling circus that would terminally alienate their populace. And if they let the Yuan float freely with the existing system still in place it'll soar stratospherically thanks to speculative global capital flows and the dollar will plunge correspondingly - thereby further devaluing China's sweatily accumulated dollar holdings. If you read that proposal again + Setser's commentary, you'll see it would allow not only the value of the dollar but that of the yuan to readjust gradually, bypassing all that massively speculation-driven forex turmoil so many countries/regions have been subjected to in the last few decades.
| JW wrote: | | The idea that China gets to devalue its currency, but others do not is absurd. Nobody is going to play by those rules. |
See above. Noting it hasn't devalued its currency, just kept it "virtuously" more-or-less pegged to that of the planet's major reserve currency. Cultural-differences-or-whatever fact that the Chinese have been such gluttons for hard work and mattress-savings while you-all have been jubilantly channelling your consumers' collective gluttonies towards the undiscriminating delights of endless debt-fuelled spending sprees at Walmarts and those of your businessmen and investors into raking extra-fat profit margins off the tireless sweat of toiling Chinese rural migrants can hardly be laid entirely at their door, I'd say?
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mr_yak
Joined: 17 Apr 2002
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| Posted: Wed Mar 25, 2009 10:10 am Post subject: |
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| b5d wrote: | | john_wilkins wrote: | | Why should the entire world have to rethink how it does business, just because China wants to retain a structural trade imbalance? |
Ha ha. What can I say?
Life isn't fair. |
Moot point ... The idea has been rejected!! Rejected I tell you!!! That's IT man ... game over!
jw,
I'm still a little hazy on "selling it back into the market and taking the cash out of the system" ... how exactly do those mechanics work? Does it actually involve paying off the incurred debt in any way?
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johnwilkins
Joined: 15 Apr 2002
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| Posted: Wed Mar 25, 2009 12:25 pm Post subject: |
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| parvati roma wrote: | | Amongst other things, it confirms some of my own impressions/hunches plus adds the high-tech development dimension I'd read some mentions of here and there but hadn't brought up in debate. |
I think China is capable of moving into high tech, but the problem with it is that China engages in massive intellectual property infringement. I'm not sure that they could capitalize on high technology until they reform their IP system and actually start to enforce patents and copyrights. I'd expect their efforts to be mostly hardware bound, as that takes real cost to infringe. So if China is to maintain its comparative advantage, I don't think they'll be a software, biotech, or other intangible powerhouse until they reform IP.
| parvati roma wrote: | | Re Zhou's proposal - my bet is that although the US and UK will certainly be able to fence it off for now, very few countries other than your own will see it as "wacky" - all the BRICs and suchlikes are in favour and amongst other things, it was immediately preceded by a UN panel report that points exactly in the same direction. |
There has to be more to it than that, pv. There is no reason that the private markets couldn't put together a currency basket. They do with just about everything else. It sounds like these guys want all transactions to be conducted in an international currency as a matter of law. But even that is a bit hokey. If you weight the currency by GDP and balance of trade, what do you get? I assume China would want to be able to peg its currency to this international monetary unit.
| parvati roma wrote: | | Don't forget that not only the BRICs, S. Korea, assorted other Asians and Latin Americans (all of which have greeted the Chinese proposal with great interest) but IMHO practically the entire planet - including many if not all Eurozone countries and ALL our immediate non-Eurozone neighbours - are extremely POd with the current system and with good reason, angered not only by the idiotic but devastating US subprimes crash and its totally disproportionate repercussions on hard-working businesses and populations far and wide but also by the totally out-of-control volatility of exchange rates and commodities prices even at the "best of times" under the current system, so are on the look-out for a path towards something a lot more balanced, stable and predictable from a real-economy POV. |
US bashing aside, what exactly do you think an international currency unit would accomplish? Why do you think it would make things more stable? Why do you think the BRIC economies would ultimately want this? They are much worse offenders with respect to seignorage than the US. How many times has the ruble crashed in comparison, the real, the rupee, etc. If an international currency unit is based upon national currencies, ask yourself this question: first, why would it be any less volatile than the underlying currencies? Second, why can't this be done as a basket created by the financial markets themselves. They already have indexes for everything. As I understand it, the currency would not have a corresponding taxation power--although, the UN clearly wants to tax oil/carbon fuels. So unless they are going to do something like a gold standard, on what basis would everyone agree, and how would it be different if it were merely a derivative of fiat currencies?
| wrote: | | Consequently, Zhou's proposal will certainly not be widely discounted as "wacky", it will achieve exactly what he intended it to do: set the international ball rolling towards the adoption of a more stable, well regulated and far less monocentric international financial system "further down the road". |
Thirty years of post-Bretton Woods didn't do that. We all know what happens under a gold standard, and I'm more than sure that the major powers, including the EU aren't about to give up their seignorage powers. That is really what we are dealing with anyway. China wants to continue to hold US reserves, and doesn't want to spend them. I have said this many times now: if they don't spend it, the money has to come back to the US in one way or another. The way it has come back is in the form of debt. The problem now is that the debt is approaching our ability to repay it and China doesn't want to purchase US goods and services or allow anyone else to do so by using the dollars in global financial transactions--with the possible exception of oil purchases. So the US prints money, which is in effect a tax on China's holdings. China can EASILY avoid this tax: buy things with their dollar reserves. The bottom line is that China's central banking mission is hurting China now worse than the US. Had they understood things without all the Marxist hullaballoo, they might have avoided this situation. But if China were to store up an international currency, what debt instrument would they use to store the value? There is no corresponding government to tax. How would they support the currency or pay debts or issue debt instruments? And also consider... why does it need to be universal? The Euro isn't universal. I see no reason why the Asian powers can come up with an Asian currency.
The Euro is ten years old and already it is strained. The Latin Monetary Union failed. Bimetalism fails too, because the supply of two different metals varies over time. Nations cooperate when there is an advantage to doing so, and they compete when there is an advantage to doing so. Nothing has changed in that respect.
| b5d wrote: | Ha ha. What can I say?
Life isn't fair. |
I'm not sure what you mean. Obama has already rejected it. Geithner put his foot in his mouth ex-post facto and said he'd entertain the idea, but the bottom line is that other than enhancing special drawing rights, there is no chance of a global currency coming out of this right now.
| parvati roma wrote: | | Noting it hasn't devalued its currency, just kept it "virtuously" more-or-less pegged to that of the planet's major reserve currency. |
Which is more or less the same thing--as you noted, if they let it float freely, it would soar against the dollar. So China's peg effectively devalues their currency. But I see you characterize it as "virtuous" if China does it, Brazil does it, Russia does it, etc. But if America does it, why... it is profoundly reckless. Sauce for the goose...
| parvati roma wrote: | | Cultural-differences-or-whatever fact that the Chinese have been such gluttons for hard work and mattress-savings while you-all have been jubilantly channelling your consumers' collective gluttonies towards the undiscriminating delights of endless debt-fuelled spending sprees at Walmarts and those of your businessmen and investors into raking extra-fat profit margins off the tireless sweat of toiling Chinese rural migrants can hardly be laid entirely at their door, I'd say? |
Quite as easily as you lament everything US. If China had allowed a free floating currency for the last 20 years, we clearly would not have this situation right now. The violins aren't quite that heart-tugging. China is not a democracy, and its citizens aren't given the choice as to whether they'd prefer a hard-work-matress-saving culture or something a little more balanced. The Chinese government has deliberately pegged their currency at a very low value to the dollar so that China can export to the US and accumulate dollars. The US operates on the comparative advantage principle. So it buys and borrows, because there is a comparative advantage to doing so. Once there is no longer an advantage, it will no longer do so. By engaging in quantitative easing, the US is taking away the advantage of long-term dollar holdings--ultimately forcing large exchange holders to begin letting the money back into the markets to buy goods and services. That will get the flow of funds going in the real economy.
| mr_yak wrote: | | Moot point ... The idea has been rejected!! Rejected I tell you!!! That's IT man ... game over! |
Yeah, I don't quite see how the suggestion was even marginally constructive. What I see is that the US is doing some of the things--to a much lesser degree I might add--than third world countries have done with respect to quantitative easing. When they do it, it is a-ok as they are repudiating debts to the US and Europe--those nasty imperialists. When we turn around and return the favor...well, that's because we're nasty imperialists, and we should be doing the things that they do.
| mr_yak wrote: | | I'm still a little hazy on "selling it back into the market and taking the cash out of the system" ... how exactly do those mechanics work? Does it actually involve paying off the incurred debt in any way? |
It doesn't do anything to pay off the debt. When the Fed buys government bonds or commercial paper, it is effectively expanding the money supply. You had said that this would be a harbinger of inflation in a major way, and you didn't see how they could reverse the policy. The Fed just sells the government bonds and private notes back into the market, which reduces the money supply--thereby tamping down inflation. They often call it a "mopping up" operation, as in mopping up liquidity. The debts the government incurs, however, remain on the books. The other thing they do to mop up the liquidity is raise taxes--read, the 1970s. I'm not ready to take bets on it, but I hear a lot more people talking about Obama as a one-term president.
Anyway, I think Obama is finding himself in a real pickle. His Wall Street bashing (for those of you who don't know, Wall Street is a bastion of very rich liberals) is separating him from his financial supporters. The budget deficits he's running require tax increases in the long run, and he cannot afford to raise them in the short run. By putting the Iraq War supplementals on budget, he's being more "honest," but it also means that he's not likely to get his health care plan passed. Obama's willingness to cap mortgage deductions, charitable deductions, etc. has given many of his most ardent supporters pause.
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mr_yak
Joined: 17 Apr 2002
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| Posted: Wed Mar 25, 2009 2:11 pm Post subject: |
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| johnwilkins wrote: |
Anyway, I think Obama is finding himself in a real pickle. |
That depends ... he's already apparently found a clever way to bypass Congress ... with endless public funding, maybe he can find a way around the dirty necessity of all that wicked nasty 'private' money as well?
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parvati_roma
Joined: 30 Mar 2004
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| Posted: Thu Mar 26, 2009 12:22 pm Post subject: |
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| JW wrote: | | So China's peg effectively devalues their currency. But I see you characterize it as "virtuous" if China does it, Brazil does it, Russia does it, etc. But if America does it, why... it is profoundly reckless. Sauce for the goose... |
The intent of the term in inverted commas was ironical, JW - and why I used it is that imposing a peg aka "fixed exchange rate" is not only a recognized-and-perfectly-respectable device on the international financial scene with a long-long history - but financially and politically weak sprats-with-strong-neighbours have often been encouraged to use it, afaik? and with the exception of pegging to a non-paper valuable such as gold, it also has "hierarchical" implications as it at-least-theoretically "vassalizes" the pegger-nation's currency=monetary policy to that of the issuer of the reference currency.
http://en.wikipedia.org/wiki/Fixed_exchange_rate
| Quote: | A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. This facilitates trade and investments between the two countries, and is especially useful for small economies where external trade forms a large part of their GDP.
It is also used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
Overview
A former president of the Federal Reserve Bank of New York described fixed currencies as follows:
Fixing value of the domestic currency relative to that of a low-inflation country is one approach central banks have used to pursue price stability. The advantage of an exchange rate target is its clarity, which makes it easily understood by the public. In practice, it obliges the central bank to limit money creation to levels comparable to those of the country to whose currency it is pegged. When credibly maintained, an exchange rate target can lower inflation expectations to the level prevailing in the anchor country. Experiences with fixed exchange rates, however, point to a number of drawbacks. A country that fixes its exchange rate surrenders control of its domestic monetary policy.
—[1]
In certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was improved by the fixed exchange rate of the Chinese renminbi, and the IMF and the World Bank now acknowledge that Malaysia's adoption of a peg to the US dollar in the aftermath of the same crisis was highly successful. Following the devastation of World War II, the Bretton Woods system allowed all the 44 Allied nations of latter World War II to have fixed exchange rates until 1970 with the US dollar. [1]
(...)
Countries adopting a fixed exchange rate must exercise careful and strict adherence to policy imperatives, and keep a degree of confidence of the capital markets in the management of such a regime, or otherwise the peg can fail. Such was the case of Argentina, where unchecked state spending and international economic shocks disbalanced the system and ended up forcing an extremely damaging devaluation (see Argentine Currency Board, Argentine economic crisis, and the 1994 economic crisis in Mexico). On the opposite extreme, China's fixed exchange rate with the US dollar until 2005 led to China's rapid accumulation of foreign reserves, placing an appreciating pressure on the Chinese yuan.
The main criticism of a fixed exchange rate is that flexible exchange rates serve to automatically adjust the balance of trade.[2] When a trade deficit occurs, there will be increased demand for the foreign (rather than domestic) currency which will push up the price of the foreign currency in terms of the domestic currency. That in turn makes the price of foreign goods less attractive to the domestic market and thus pushes down the trade deficit. Under fixed exchange rates, this automatic re-balancing does not occur.
Fixed exchange rate regime vs. Capital control
Usual belief that the fixed exchange rate regime brings stability is a misconception. Almost all speculative attacks are targeted on currencies with fixed exchange rate regime, and in fact, the stability of the economy system is mainly due to Capital control. (...)
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http://en.wikipedia.org/wiki/Capital_control
| Quote: | In economics, capital control is the monetary policy device that a country's government (i.e., sovereign power) uses to regulate the flows into and out of a country's capital account, i.e., the flows of investment-oriented money into and out of a country or currency. Capital controls have become more prominent in the years since the Clinton administration blessed the efforts of the world community to create the World Trade Organization (WTO), primarily because globalization has increased the acceleration of currency domain strength, in other words, giving some currencies utility far beyond their physical geographic boundaries.
One characteristic of developed economies is liquid debt markets. Countries that have not built up sufficient savings in their domestic economies are not able to fully realize the complete cycle of capital allocation through markets. This means that when the sovereign governments of those countries need to raise money in order to build infrastructure and otherwise invest in the modernization of their countries, they are unable to sell bonds in their own currencies because there is not enough investment capital available. This leads to what is called "Original Sin (financial)", whereby a developing country finances itself in Dollars (usually), but deploys that capital in its own country and generates tax and other income revenues in its own currency, thus taking on a very dangerous currency risk, that history has shown leads to decades of economic instability and dependence.
The decade since the Asian Currency Crisis in 1997-1998 has rekindled debate over the wisdom of developing markets having capital controls. As globalization advanced with the formalization of the World Trade Organization and Uruguay Round of General Agreement on Tariffs and Trade (GATT), developing countries were urged by the International Monetary Fund and others to liberalize their capital controlled environments.
As it became clear that countries doing this, including Malaysia, Thailand and Mexico, essentially ceded control of their economies to external forces, namely international capital movements, hot money and capital flight; and countries that did not, like China and India, retained control and were not nearly as vulnerable to the volatility of international capital movement, some argued that capital controls were advisable for smaller economies to use, and to transition away from them only over long, general evolutionary timelines. Malaysia is an example of a country that switched regimes, from open in the late 1990s, to closed. Economists supporting capital controls in certain cases were not only from the left, but also pro-globalization economists like Jagdish Bhagwati [1] and news publications like The Economist[2].
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More interesting feed-in on the "does the world=global economy need a supranational reserve currency" issue - from a neutral viewpoint in relation to the current China vs US rivalry-spattery and which I think can help to answer some of JW's queries in his last post - from John Foley in the (conservative-zone) UK Telegraph, noting I found the link via RGE, which gave Foley's views a lot of space in their latest rundown:
Paper Gold - nice idea, shame about the politics
| Quote: | The greenback has been the world’s dominant reserve currency – equivalent to a financial lingua franca – since the end of the Second World War. Countries hold it in spades to back their own currency. The IMF reckons that two-thirds of the $7 trillion of foreign currency holdings worldwide are in US dollars. The euro, the second most-held currency, makes up just a quarter.
Were international trade switched instead to an IMF-managed currency – Zhou suggests a little-used device called a “special drawing right” or SDR – Uncle Sam would have a real headache. America’s borrowing and trading costs would spike. After all, the US saves by rarely needing to convert its own money – a perk known as “seigniorage”.
But in the long term, the US would benefit. Being the currency of choice has made it unnaturally cheap for the US to borrow and fund its consumers’ profligate habits. Besides, as Zhou points out in a scholarly flourish, hetre’s the Triffin Paradox to consider. This says that so long as the US agrees to feed the world with dollars, it can’t successfully control its own currency.
Having a central currency – let’s call it the Zhou-Triffin Doubloon (ZTD) – managed by a supra-national organisation would make it more difficult for any one country to get into too much debt to another. If the supply of ZTD in issue were controlled properly – say by expanding it in line with global GDP – it would serve as a steady store of value, with little risk of devaluation.
Moreover, a credible ZTD would have many of the advantages of the now-defunct gold standard. It would be strictly limited in supply and ready acceptability everywhere. Indeed, it would be even better than the yellow metal, which is after all too cumbersome for a modern economy and too scarce to serve as a measure for international trade.
In sum, the ZTD would add much needed ballast to international finance. And China would not be alone in promoting this single currency. Russian authorities have been thinking along similar lines.
So why not get cracking? There are many obstacles: most notably getting the IMF up to the task. Nor is China in any position to move quickly. A truly global reserve currency would have to be based on a basket of world currencies, which would include the renminbi. China would have to make its tightly controlled currency freely convertible – which it shows no desire to do.
Indeed, China probably has other things in mind than financial stability, such as augmenting its global financial sway. Right now, the Middle Kingdom has only a 3pc vote in the IMF, no more than Belgium, because votes are linked to each country’s contribution to the fund. Were China able to claim credit for its prodigious foreign reserves, it could replace the US at the top of the table.
At best, China’s proposal is self-serving. At worst, it could be merely another manifestation of growing hostility towards the US – to be filed alongside recent protectionism, naval skirmishes and Chinese criticism of US spending habits. That political undercurrent is a shame. Paper gold looks like one of the best ideas to come out of the financial crisis.
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I agree with Foley - also well aware that the progressive introduction of any such doodah would have to be a very gradual, cautious step-by-step process, with formation-and-use procedures carefully hashed out amongst all relevant "players" at both central-bank and IMF levels, but I still believe its progressive introduction and gradually-expanding use should be considered a valid medium-to-longterm objective for international finance and trade-flow purposes - as Geithner himself had spontaneously recognised before his chain got sharply yanked for purely US-domestic soundbite-politics reasons.
...............
P.S. another small, non-partisan YAY-at-step-in-right-direction from me at this newsbite:
Geithner Calls for Major Overhaul of Financial Rules
| Quote: | WASHINGTON — The Obama administration on Thursday detailed its wide-ranging plan to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street, to potentially strict new government supervision.
(...)
The plan outlined in broad strokes by Mr. Geithner would require Congressional approval. It would give the government new powers over “systemically important” banks and other financial institutions that are so big that their collapse would jeopardize the economy as a whole.
“Our hope is that we can work with Europeans on a global framework, a global infrastructure which has appropriate global oversight, so we don’t have a balkanized system at the global level, like we had at the national level,” Mr. Geithner said.
(..)
But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital — hedge funds, private equity funds and venture capital funds — and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.
Hedge funds and private equity funds manage money for wealthy individuals and institutions like pension funds. They operate almost entirely outside the regulation of either the Securities and Exchange Commission or the Federal Reserve.
Under the administration proposal, hedge fund, private equity and venture capital fund advisers would for the first time have to register with the S.E.C. They would be required to provide the government — on a confidential basis — information on how much they borrow to leverage their investments as well as information about their investors and trading partners.
The S.E.C. would then share those reports with a new “systemic risk regulator.”
(...)
There is likely to be an even bigger fight over the proposal to regulate financial derivative products. Some derivatives, like stock options and interest rate futures, are already regulated because they are traded on exchanges like the Chicago Board of Trade.
But the administration would regulate trading in more exotic derivatives that trade privately, like the credit-default swaps that were used both to hedge against and to speculate on high-risk mortgage-backed securities. These more exotic products have been traded almost entirely in the informal, over-the-counter market that lies outside regulatory scrutiny.
The administration would require that all standardized derivatives be traded through a regulated clearinghouse. Traders would be required to provide documentation on their collateral and borrowings. They would also be subject to new eligibility requirements, and their trading and settlement practices would be subject to new standards. |
Unfortunately, back in the "real world" ...
| Quote: | ...the proposals are all but certain to provoke criticism from all sides — traders who say the rules are too intrusive and policy experts who say the approach is too vague.
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Which - seen from here - means continuing pressures/transatlantic spattery re need for helluva-robust n' extensive toxicity-shields to be raised, if not internationally at-very-least at Eurozone-level ... aka further "financial deglobalisation" ?
http://online.wsj.com/article/BT-CO-20090325-701965.html
| Quote: | PARIS (Dow Jones)--European Countries won't increase stimulus plans on the demand of the U.S., Luxembourg Prime Minister and Finance Minister Jean-Claude Juncker, who also chairs the Eurogroup of euro-zone finance ministers, said Wednesday.
"It is out of the question that we increase our economic stimulus plans," Juncker said in an interview on French radio Europe 1.
(...)
Juncker also said Europe must be as firm with the U.S. as the U.S. is with Europe on financial regulation and tax havens.
"At the end of the G20 there must be rules clearly applicable to everyone - no financial product, no financial operator, no financial exchange should be able to work without control and supervision," he said. |
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“Against barbarity, poetry can resist only by confirming its attachment to human fragility like a blade of grass growing on a wall while armies march by.” Mahmoud Darwish |
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