naked capitalism

Anonymous says:

http://www.timesonline.co.uk/tol/comment/columnists/camilla_cavendish/article5569343.ece

“This week, two gurus prophesied such an outcome. On Monday Jim Rogers, co-founder of George Soros’s Quantum Fund, proclaimed that sterling was “finished” and that everyone should get out. On Tuesday, the hedge fund manager Crispin Odey declared Britain “bankrupt”. We can be pretty sure that both men are profiting handsomely by shorting, or betting against, sterling. But the nervy media gave their words considerable prominence, partly because a British bankruptcy is a ghoulishly fascinating possibility.
The parallels with Iceland are surprising. That country failed last year because its leaders ran large current account deficits, believed they had abolished boom-and-bust, and let their banks and households take on staggering amounts of debt. Sound familiar? Iceland’s household debt was 200 per cent of its GDP last year. Britain’s was 170 per cent. Iceland’s banks became too big to rescue because their foreign debts alone were $120 billion, six times GDP. In Britain, the gap between loans and deposits held by banks grew from almost nothing in 2000 to £720 billion in 2008, or half of Britain’s GDP. UK banks have £4,400 billion of assets on their balance sheets, or three times GDP. “

D

Anonymous says:

Jim Rogers would always make great comments about this. Something like, “Hank Paulson had a reasonably good education, he’s a man who should have at least the appearance of knowing what he’s talking about, but he walks around talking about the ’strong dollar’ policy and making an absolute fool out of himself.”

A few months ago he was also referring to Geithner as “that idiot from the New York Fed,” heheh.

k says:

Geithner, you naughty boy, didn’t Grandpa Wen told you not to do such thing when you last met him three months ago?

Check out where our golden boy is seated in this picture.

http://news.xinhuanet.com/english/2008-09/25/content_10108686.htm

Yves Smith says:

bg,

After Geithner’s tax nonsense, and his high handedness at the Bear hearings, I regard him as fair game. The contradiction between the “strong dollar” policy and our prodding of China has been finessed better in the past. This is a new Administration, boldly repudiating the ways of the Bushies….but not here, except perhaps for a bit of optics. And the “strong dollar” part of the optics could have been handled better.

Anonymous says:

If Red China is seeing things clearly why did they take a stake in Blackstone?

The US has not guaranteed Red China’s GSE purchases so they unload into short term treasuries.

It’s the blind leading the blind with civil unrest an underlying current in both Countries.

Using Geithner’s past as the new Fed head, he may just fail to payout and worry about it later.

ndk says:

The irony is that on the surface, this gambit looks like it could pay off. The Chinese can’t use their nuclear option of dumping dollar assets, or merely purchasing less of them. That would drive the RMB upwards, the very last thing they want.

While we’re being cynical, China has more interesting and subtle nuclear options than that one. Just two that come to mind are “diversifying” dollar holdings heavily into other currencies while maintaining the dollar peg, driving them down, and diversifying excessively into commodities.

WTO fights would probably become very partisan, as well.

If Red China is seeing things clearly why did they take a stake in Blackstone?

I believe there was a long period during Paulson’s tenure when there were earnest attempts at cooperation. Far more disturbing to me than Geithner and Summers trying to thread this needle is the way it seems that partnership is weaker now.

I really hope these two critical nations can work in collaboration to defuse these economic tensions. Trade is still not a zero sum game.

Anonymous says:

ndk

….but its the children. They have to keep them alive long enough to work off their debt. This is in China’s interest too.

Anonymous says:

The problem with your 3 options Yves is that none of them entail action resulting in an unwinding of existing imbalances.

However we reached the point (hear Martin Wolf singing in the background) where these imbalances must begin to unwind.

Much hot air is vented about the need for China to grow to provide jobs for its people. Such touching concern! More imperative for Obama, however, is how the American voter will feel after months of million plus job losses.

As Atrios would say, whee!

Anonymous says:

Appointing someone with issues makes them easier to control…….like a yes man following orders.

Anonymous says:

Sorry but I think Geithner is way behind the ball on this and would go along with Albert Edwards assessment that China’s economy is shrinking and the Yuan would devalue if left to its own endeavours. It’s the Yuan to Euro currency rate that is important not the Yuan to dollar one. It seems like posturing by someone who ought to be but is not fully up to speed.

Obama seems keen on addressing a perceived problem that worker conditions and rights in emerging countries or lack of, pose an unfair commercial advantage. While this may be true emerging markets will never emerge unless they have mechanism for developing trade. This all looks very much more inward focusing and a case of putting up walls. Perhaps one day we will talk about the fall of the Canadian wall in a similar way to the Berlin wall.

The US held a strong card in being able to curtail imports of Chinese goods whilst the Chinese held an important card in being able to withdraw purchases of US treasuries. Both those cards are out of the window with the US not importing from China and US banks buying up treasuries with bailout treasury money. The one card China has left is to allow its currency to sink, so that trade with Europe can be jump started, which may be bad news for the US. I guess China has finally got used to the petulant child tantrums of the US and could rightly argue that the US distorts and meddles even more than they do.

Pot calling kettle black comes to mind.

Richard Kline says:

Unlike most responders here, I see Geithner’s comments as primarily for domestic rather than international consumption. These are, first of all, Pres. O.’s comments; Geithner is just the mouthpiece. Really: this was O.’s boilerplate on the stump, and Timmy G-man is just mouthing the team cant: that’s what a Senate confirmation is for, to see if he knows the team song. You didn’t think that any substantive policy statements would actually surface in a Sham Show context like this, didya’ll? Geithner will prove to be a scrub in a varsity jersey, but he’s not the real issue here.

Was this done with ‘a lack of finesse’ by ‘a team not up to speed?’ Yes, surely. The new folks have been in office less than 48 hours, and don’t have this kind of thing down yet. Now, Pres. O. is a Democrat, and there is a large constituency in that particular party which has long wanted to ‘punish China on trade.’ Sooooo to me, these remarks are simply a nod of the head at O.’s boilerplate and constituency, like much else in his first couple o’ days. He needs his team to sound tough and committed, so a little “You Ess Ay, Numba Onnne!” is to be expected. Except, of course, _this_ particular issue is a little to sensitive for that kind of posturing, as the new team will find. But don’t think that O. is committed to a harder line on trade; I doubt that HE knows what he is committed to, to be frank.

As to why the Chinese seem to ‘throw tantrums,’ the complete unwillingness of the US to engage in any sustantive _negotiations_ may have something to do with that. When have we EVER had a real negotiation with China on trade issues, as in we give something and they give something? We have unilateral statements and surmises, in the US, in the media: that is how we choose to conduct our trade policy, not by negotiation. We expect that we will be able to act, and the Chinese can only react. Which has long since ceased to be the reality. It is the US who is behind the curve. China has to shout to be heard across the Pacific since we can’t seem to bring ourselves to sit down at the table and negotiate with them. Which would require real concessions on our part which we are obviously completely unwilling to make.

I think that the domestic political consequences for any major trading nation from making concessions in _bilateral_ negotiations are sufficiently severe than no country’s leadership can make concessions of any kind in this way; regardless how desirable or necessary the compensatory concessions of the other country might be. And has been discussed in the past, I think any ‘rebalancing of trade’ is _un-_negotiable. What to me seems likely achievable is a large conference of major countries on currency, where no one makes direct concessions to others but all agree to a broad regime. Which of course will de facto support a trade rebalancing, but that will not be stated as a goal.

If we are fortunate, the US will exert some leadership to this end during the next 18 months, a currency conference. Do I think that that will happen? No. I don’t see anyone on The New Team with that kind of vision and determination. We are likely to get such a conference only after a major currency crisis has already happened. . . . So let’s get on with it, already. Limbo is nowhere, baby. The real thing to fear is for the US to spend the next 18 months trying to coddle the American wealth class with trillions in entailed future tax receits and spiraling unemployment, only to attempt an exit position after we are prostrate. Now, we still have maneuvering room; not much, The Old Team wasn’t good enough to leave much field position. We need to nationalize the major financial zombies, put a funding prop under local government spending from the Federal Guvmint, and convene a currency conference, and at that conference of another one also secure a stable position on our public and private dollar denominated debt with other countries who hold and will continue to fund it. If we don’t get these things in the next eighteen months, and preverable the next nine months, we will have many more pieces to pick up, all of which will be smaller and more jagged than the ones we contend with now from the crumbling false front of our former prosperity.

Larry says:

Perhaps Mr. Geithner’s “tax mistake” was intended to direct attention away from his apparent lack of competency for the job.

Anonymous says:

Before our at worst incompetent and more likely just plain corrupt government is done here the missiles will be flying.

Markel says:

Perhaps no one sees the elephant in the room because it has already sat upon our heads.

A lot of wise head-nodding about what is, and isn’t, possible in dealing with the Chinese ignores one fact. The Chinese mercantalist model, which includes destroying the purchasing power of an essential target market–American consumers–and then lending them money they can’t repay to make up the difference, has already collapsed. Past tense. And it’s not coming back.

Perhaps it’s a matter of habit, the way so few acknowledge this fact. Many economists are used to chin-stroking about trade imbalance and current account deficits around symposium tables, as if it were some sort of academically troubling but ultimately unavoidable problem, like the decline of Sami language speakers in Lapland.

Well, it’s no longer a theoretical possibility. Something that couldn’t go on forever, didn’t.

Memo to China: Deal.

polit2k says:

pissant posturing. intended strictly for domestic consumption (aka noise to be ignored)

tyaresun says:

Turbo Tim is simply repeating what the computer is asking him to say.

Anonymous says:

Yves,
I’m anon of 2:51 am, above.

I looked at your El-Erian post of last summer. Interesting. But it seems dated to me: he thought that unbalances would unwind as a result of high commodity prices and rising wages in the developing world, e.g. China. Those were the days! Back then, many thought the source of change in this unbalanced world economy would come from the developing world, whose consumption would rise, rather than from a collapse in the first world consumer. But the latter is what we have: a more serious malady, I think.

It seems to me the old model could be paraphrased thus: the engine on the (world economy) train was the first world consumer. Over time, this train would develop 2 engines, and even 2 trains. The consumer economy of the west would clone itself in the developing world (given correct policy choices): there you have the multiple engines.

What has happened is that the engine on the train is giving out before this cloning has happened. The train is simply slowing down. The path towards cloning consumer economies in the developing world now seems much harder to get to, given the overall fall in demand.

I think another change from last summer is that I’m not sure we have a prisoner’s dilemma. (I probably would not have agreed with this then, either.) Basically the interests of Europe and the USA are aligned and China is the odd one out, in terms of global imbalances. If the world economic picture is as dark as I expect it to be over the next 9 months or so, I think the EU and USA could strike some sort of political deal. I suspect the trust will be enough, between these parties. China would be the loser.

Terrific blog!

Avl Guy says:

” Adrem said, ‘… the Chinese… are very, very hard-working, realistic and patient and if anybody can knuckle down and work through this crisis they can. …. why do so many imagine that China is in dire straits?”

They/we dwell on it because it’s psychologically more comforting (and less threatening) to focus our attention on the perceived travails of another, rather than on our own troubles. You’re right; by most measures at the end of the day, China is in a better position to come out of these inter-locking global economic messes less damaged, proportionately, than the US.

Anonymous says:

Markel,

Hear, hear!

My understanding of economics is quite basic, but your point about the mercantalist is spot on. The export driven, low internal consumption, high savings model requires, first and foremost, a market to export into. In many ways, it’s a parasitic economic model: eventually the exporter will kill off the importer (it may have been somewhat self-correcting in a gold based currency regime, but isn’t in a fiat based one).

I don’t understand why the US has, since the end of the Cold War (now almost 20 years ago), permitted the continuation of the mercantalist model. We can bow out (absent the quasi-religious belief in free trade) if we desire; ultimately who would be more damaged? China or the US?

The greatest danger to the world economy is that the US pulls back from trade. The US is, or can be, largely self-sufficient ex Oil; I suspect that the ROW needs the US as an export market more than the US needs the ROW as its import supplier (not meant jingoistically).

Finally, I’m not so sure that the lack of a social safety net is the benefit to China that it appears to be. Does China save because it is inherently thrifty or because many Chinese are completely on their own (e.g. no health insurance, no old age insurance, etc). In essence, the lack of the safety net forces excessive individual risk preparation; this drives consumption down (and savings up). What exactly will China do with toy/shoe/plasma tv factories if it is only willing to buy a fraction of the output?

Anonymous says:

The U.S. ran large current account surpluses throughout the 1920’s and smaller surpluses every year of the Great Depression. This may have put it in a better position to borrow during the 1930’s, but surely did not alleviate most of the suffering.

CoRa

bg says:

“As an aside, why do the Chinese think it’s OK to throw public temper tantrums so regularly? I can’t think of any other nation that regards this as a reasonable way to conduct diplomacy.”

Yves,

you imply symmetry. The US is a democracy that requires its lead money guy to speak on the record. And it is the big gorilla that everyone watches. I can guarantee you there are far more temper tantrums in China that simply fall below the threshold of diplomacy. For us, we sneeze and the world catches diplomacy.

Blissex says:

«Chinese peasants will not perpetually be exploited to support American consumption patterns.»

This comment really misunderstands the strategy of the Chinese government, which is not really one of exploitation.

The strategy is very simple indeed…

China was labor-rich and productive capital-poor. That is many people and little plant/tools/…

So the Chinese decided to import a lot of productive capital from abroad, and to to do this they needed to “bribe” foreign capitalists to invest a lot in Chinese factories etc.

The bribe took the form of a low exchange rate, so that USA capital would be attracted to China both by the prospect of huge export sales and low costs of setting up factories in China.

In other words China have had a a “strong dollar” policy, one they have pursued for a long time. And the USA have had a “strong dollar” policy because the USA financial and political elites have been financed with very cheap loans from China. The tax cuts and the Iraq war and other madness have been financed by the Chinese (and Japanese and Saudis) buying USA debt at ridiculously high prices; it has been Chinese financing that has supported the election of conservative Democrats or of Republicans in the past 10-15 years.

And the Chinese have been wildly successful: China now has a gleaming new industrial base, transferred from the USA (and the UK), with lots of factories, know how, supply chains, sales channels, ownership of natural resources, that they did not have before.

They also have a lot of not so valuable IOUs from the USA, but why should China care much about paper wealth? They are not the factory of the world, and soon will be the innovation centre of the world, and the financial centre of the world too.

While the USA economy has been hollowed, and much of what was left was playing around with shuffling IOUs.