For months I have been arguing in my blog posts that the larger banks have already moved beyond the regulators although they have always been far in advance of the politicians. These latter two groups of people are attempting to create a regulatory system that will prevent the events of 2007 through 2009 from happening again.
Would somebody tell them that the big banks are somewhere else.
JPMorgan Chase announced some major changes in their top management structure yesterday. These changes, to me, are just the most visible sign that the banking of the future is going to be significantly different from the banking of the past. But, we’ll come back to this later on.
The management changes also confirm, to me, that Jamie Dimon is the pre-eminent banker in today’s world.
Why?
A long time ago I stopped looking at the “glow” of the person running things, the Chairman, President, or CEO, and I started concentrating on the people around the glorious leader. I found that the fact that the leader of an organization had very, very capable and experienced people around them was a better indicator of the quality of the person in charge than was his or her own sparkling image.
Top people have top people around them. In addition, winners help to make everyone around them perform better.
Jamie Dimon has these qualities.
I believe that Jack Welch also had them.
One person I had contacts with at one time who, I felt, didn’t have these qualities and was a disaster waiting to happen, was Donald Rumsfeld.
Jamie Dimon has a top notch team around him and is positioning them to take on the world. In my estimate, more than one of the individuals that are on this team will be a Chief Executive Officer of a major bank in the United States…or, the world.
Many people that Jack Welch had around him went on to lead major companies around the world.
But, back to the banking changes: JPMorgan is going off-shore!
The New York Times has it right, “JPMorgan Sets Sights Overseas,” (http://www.nytimes.com/2010/06/23/business/23bank.html?ref=business). Dimon has given out the mandate to his closest lieutenants “to start a global corporate banking business and scout out opportunities in Europe, Latin America and Asia.” Mr. Dimon, himself, has recently been in China, India, and Russia and wants to especially focus on these three BRIC countries as well as Brazil and also Vietnam, Indonesia, Malaysia, the Philippines and parts of Africa.
My suggestion: Watch what Mr. Dimon and JPMorgan do. My guess is that they will point the way to the future and will do a good job along the way!
But, what about American and Europe?
In terms of banking and finance, I am not sure the political and governmental leaders in these areas of the world know what they are doing. For one, as I have said over and over again, in terms of financial regulation…they are fighting the last war!
Politically, both areas are split and looking for direction. No one can tell at this time where “direction” will come from.
So, what better time than this to move to where the action is going to be!
If anything, the fiasco going on in Washington, D. C. is going to drive business and finance further off shore. The BRIC nations are becoming wealthier and more savvy in the world. They are also accumulating more power as will be in evidence in the upcoming G-20 meetings. But, as Mr. Dimon indicates, there is a lot more going on if one looks to the other countries he has highlighted in his recent statements.
Moving in this direction will involve acquisitions, something that JPMorgan has already started doing. To build itself into a larger presence in these markets in a timely fashion, the company will have to acquire significant other properties. JPMorgan Chase is going to get bigger.
And, Washington was concerned with the size of the banks in the United States that were “too big to fail” in 2008?
Furthermore, this doesn’t even get into one of my favorite subjects, the “quantification” of finance. What is going on with respect to the “quants” in JPMorgan? My guess is that there has been significant movement in this area as well over the past two years.
The future of banking?
Keep your eyes on the Dimon. I think you will find that it will be time well spent!
Showing posts with label BRIC. Show all posts
Showing posts with label BRIC. Show all posts
Wednesday, June 23, 2010
Tuesday, October 6, 2009
"Europe's Plot to take over the World"
There is an interesting article in this morning’s Financial Times (10/6): “Europe’s plot to take over the world” (see http://www.ft.com/cms/s/0/a47079b2-b1e6-11de-a271-00144feab49a.html.) It was interesting to me because it has always seemed to me that the one who controls the writing of the agenda for a meeting is the one that most often ends up controlling the results that come out of the meeting.
And, according to my reading of Gideon Rachman’s comments, this is exactly what Europe is trying to do.
The thrust of Rachman’s argument ties in with my post of October 5 (see “What’s the dollar’s place in the new financial order”: http://seekingalpha.com/article/164848-what-s-the-dollar-s-place-in-the-new-financial-order.) where I discussed the changing nature of the world’s economic and financial relationships as observed in the changes occurring within the G-20 (and the lessening of importance of the G-7) and the jockeying of nations for position within the World Bank and the International Monetary Fund.
Whereas so much attention has been given to the rising strength of the BRIC countries of Brazil, Russia, India, and China, Rachman focuses on the bureaucratic reality of the evolving organizational structure of the G-20 itself. There are three points the author makes that I think are worthy of consideration.
First, Europe dominates the leadership of the G-20. Whereas Brazil, China, India, and the United States are represented by one leader each, the Europeans had eight positions at the conference table: Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Furthermore, the primary international civil servants at the meeting were Dominique Strass-Kahn, the head of the IMF, Pascal Lamy, the head of the World Trade Organization, and Mario Draghi, the head of the Financial Stability Board and these are all Europeans. The only other civil servant of similar weight was Robert Zoellick, the President of the World Bank, and an American.
Second, the Europeans seem to have a grasp of what is going on in the world than do the other participants at the G-20 conference. Rachman ties this back to the experience of the Europeans at European Union summits. The Europeans seem to be well advanced in the techniques of “bureaucratic paper-shuffling”, a process of introducing issues that they never let go of and which have important political implications in the upcoming years. Rachman argues that the European Union “advanced” from the very start “through small, apparently technical, steps focusing on economic issues.” The method used was to build the union through “the common management of common problems.”
Third, Rachman states that “the kernel of something new has been created. To understand its potential, it is worth going back to the Schuman Declaration of 1950, which started the process of European integration. ‘Europe,’ it said, ‘will not be made all at once, or according to a single plan. It will be built through concrete achievements, which first create a de facto solidarity.’”
The agenda is bigger than forming a G-3, a group of the United States, China and Europe. The world of the future cannot be organized by just these three territorial giants. The world of the future is either going to be integrated in a way that many might conceive of as inconceivable, or, the world is going to collapse into separate blocks with limited international trade and cooperation.
The model for this last scenario is the world at the start of the 20th century. World integration was discussed then for the world was open in the early 1900s in a way that has not been equaled since. Yet, the world conflict taking place in the 1910s split the nations apart leading up to conflicts of the 1920s and 1930s and the second world war that followed.
For the G-20 to help the evolution of the world into something approaching the first scenario the United States is going to have to adjust its attitude. Yes, the United States is still going to be the most powerful nation in the world, both economically and militarily, but it is going to have to change its belief that it can act, either economically or militarily, independently of the rest of the world.
If Rachman is even close to being correct on his view of how the G-20 might evolve, the United States is not going to be able to get away with continually allowing the value of the dollar to decline. The United States cannot have it all! Other countries must adjust their behavior as well (for example, the savings rate in China must fall), but the day is coming when the United States is going to have to accept the consequences of the irresponsible fiscal and monetary policy of the last eight years. And, the current administration cannot continue to add to these policy blunders going forward as they now seem to be doing.
Something new is happening. And, Nicolas Sarkozy and Angela Merkel, and other leaders in Europe are not going to let this opportunity pass them by. They will talk about cooperation with the United States, internationally, but they want the United States to get its shop in order. France, and Germany, and Britain, all went through the economic wringer in the last half of the 20th century as international financial markets took their governments to task for irresponsible fiscal policy and extremely loose monetary policy. They certainly are going to ask for the American government to exhibit a little more discipline going forward.
For people interested in the value of the United States dollar, my view is that the value of the dollar will continue to decline until the United States government stops talking about achieving a strong dollar while running up trillions and trillions of dollars in deficits and actually begins to act to achieve a strong dollar. How long this will take depends upon how much pressure is exerted in organizations like the G-20, the World Bank, the IMF, and elsewhere. This pressure will only continue to grow as the G-20 achieves more influence and these other international organizations are given more and more responsibility to oversee international financial markets. This is not going to happen, however, overnight.
And, according to my reading of Gideon Rachman’s comments, this is exactly what Europe is trying to do.
The thrust of Rachman’s argument ties in with my post of October 5 (see “What’s the dollar’s place in the new financial order”: http://seekingalpha.com/article/164848-what-s-the-dollar-s-place-in-the-new-financial-order.) where I discussed the changing nature of the world’s economic and financial relationships as observed in the changes occurring within the G-20 (and the lessening of importance of the G-7) and the jockeying of nations for position within the World Bank and the International Monetary Fund.
Whereas so much attention has been given to the rising strength of the BRIC countries of Brazil, Russia, India, and China, Rachman focuses on the bureaucratic reality of the evolving organizational structure of the G-20 itself. There are three points the author makes that I think are worthy of consideration.
First, Europe dominates the leadership of the G-20. Whereas Brazil, China, India, and the United States are represented by one leader each, the Europeans had eight positions at the conference table: Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Furthermore, the primary international civil servants at the meeting were Dominique Strass-Kahn, the head of the IMF, Pascal Lamy, the head of the World Trade Organization, and Mario Draghi, the head of the Financial Stability Board and these are all Europeans. The only other civil servant of similar weight was Robert Zoellick, the President of the World Bank, and an American.
Second, the Europeans seem to have a grasp of what is going on in the world than do the other participants at the G-20 conference. Rachman ties this back to the experience of the Europeans at European Union summits. The Europeans seem to be well advanced in the techniques of “bureaucratic paper-shuffling”, a process of introducing issues that they never let go of and which have important political implications in the upcoming years. Rachman argues that the European Union “advanced” from the very start “through small, apparently technical, steps focusing on economic issues.” The method used was to build the union through “the common management of common problems.”
Third, Rachman states that “the kernel of something new has been created. To understand its potential, it is worth going back to the Schuman Declaration of 1950, which started the process of European integration. ‘Europe,’ it said, ‘will not be made all at once, or according to a single plan. It will be built through concrete achievements, which first create a de facto solidarity.’”
The agenda is bigger than forming a G-3, a group of the United States, China and Europe. The world of the future cannot be organized by just these three territorial giants. The world of the future is either going to be integrated in a way that many might conceive of as inconceivable, or, the world is going to collapse into separate blocks with limited international trade and cooperation.
The model for this last scenario is the world at the start of the 20th century. World integration was discussed then for the world was open in the early 1900s in a way that has not been equaled since. Yet, the world conflict taking place in the 1910s split the nations apart leading up to conflicts of the 1920s and 1930s and the second world war that followed.
For the G-20 to help the evolution of the world into something approaching the first scenario the United States is going to have to adjust its attitude. Yes, the United States is still going to be the most powerful nation in the world, both economically and militarily, but it is going to have to change its belief that it can act, either economically or militarily, independently of the rest of the world.
If Rachman is even close to being correct on his view of how the G-20 might evolve, the United States is not going to be able to get away with continually allowing the value of the dollar to decline. The United States cannot have it all! Other countries must adjust their behavior as well (for example, the savings rate in China must fall), but the day is coming when the United States is going to have to accept the consequences of the irresponsible fiscal and monetary policy of the last eight years. And, the current administration cannot continue to add to these policy blunders going forward as they now seem to be doing.
Something new is happening. And, Nicolas Sarkozy and Angela Merkel, and other leaders in Europe are not going to let this opportunity pass them by. They will talk about cooperation with the United States, internationally, but they want the United States to get its shop in order. France, and Germany, and Britain, all went through the economic wringer in the last half of the 20th century as international financial markets took their governments to task for irresponsible fiscal policy and extremely loose monetary policy. They certainly are going to ask for the American government to exhibit a little more discipline going forward.
For people interested in the value of the United States dollar, my view is that the value of the dollar will continue to decline until the United States government stops talking about achieving a strong dollar while running up trillions and trillions of dollars in deficits and actually begins to act to achieve a strong dollar. How long this will take depends upon how much pressure is exerted in organizations like the G-20, the World Bank, the IMF, and elsewhere. This pressure will only continue to grow as the G-20 achieves more influence and these other international organizations are given more and more responsibility to oversee international financial markets. This is not going to happen, however, overnight.
Thursday, July 2, 2009
Is Treasury's TARP Debt Already Monetized? Part III
The discussion continues for one more post. I ended the last post with these words:
“The hope is that as the banking system works through its problems, TARP funds will be returned and the mortgage-backed securities will mature or be sold back into the market allowing the balance sheet of the Federal Reserve to contract back to where it was in the summer of 2008. The banking system is apparently holding onto reserves to protect itself and that is why they are really not lending. The idea is that if they don’t need these excess reserves they will return them. This is what the Federal Reserve is planning to happen. Let’s hope that they are correct!”
On this issue, let me point out the post by Jonathan Weil on Bloomberg this morning, “Crisis Won’t End Until Balance Sheets Get Real” (http://www.bloomberg.com/apps/news?pid=20601039&sid=azsX7o.atu7U). After presenting interesting data on the state of commercial bank balance sheets he argues the following:
“Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.”
And, then Weil closes:
“Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.”
This is the short run problem and it is the one that is going to determine whether or not the Federal Reserve is going to be able to shrink its balance sheet. This has been the point of my last two posts. And why are we facing such uncertainty at this point? Because the Mark-to-Market rule was pulled and because there is not enough openness and transparency in the public financial reporting of financial institutions. If there are going to be regulatory changes in the future, a lot is going to have to be changed as far as the reporting requirements for financial institutions is concerned.
But, this is just the short run problem.
The longer run problem is the projected budget deficits of the Federal government. Even if things work out as the Federal Reserve has planned as far as bank reserves are concerned and Federal Reserve credit retreats back to where it was in August 2008, there is the massive problem facing the country about how prospective government deficits are going to be financed. The bet is that the Fed will finance a substantial portion of the deficits to come. Let the printing presses roll!
The fear? Inflation.
But many say, we are in a severe economic contraction now. The fear should be deflation and not inflation.
The only response to this counter argument is that in the latter half of the 20th century, any nation that has run substantial deficits has, sooner or later, run into problems related to inflation. Monetary authorities are never so independent of their central governments that imprudent fiscal policies are not in one way or another underwritten through some form of monetization. And, since this happens time after time, how can the international investing community sit on the sidelines and do nothing? Yes, the United States is in a severe recession right now, but what are your odds for the monetization of a lot of the Federal debt over the next three years? Over the next five years? Over the next ten years?
Where do you look for such for an indication of market sentiment on this? Look at the value of the United States dollar. The dollar fell by about 15% against major currencies in the latter part of the 1970s as the Carter budget deficits seemed to get out-of-hand. As we know, Paul Volker played the savior there by conducting a very restrictive monetary policy to bring the value of the dollar back in line. However, the Reagan budgets became so severe by 1985 that the value of the dollar began to plummet. In the face of continuing deficits and the realization that this would continue to result in a weak dollar, Volker gave up the reins of the Federal Reserve in August 1987. The dollar did not pick up strength again until fiscal restraint was returned to Washington with the Clinton administration as the value of the dollar rose over 25% from April 1995 until the end of 2000. The massive budget deficits of Bush 43 were translated into another precipitous decline in the value of the dollar which fell by almost 40% between the middle of 2002 to March 2008.
The fiscal policy of a nation does matter to the international investment community!
But, you say, look at all the other major countries having economic problems and their budgets are out of balance as well. Look at England, Germany, Italy, France, and others.
The response to this? This is not the case for many of the major emerging countries of the world, specifically the BRIC countries. Perhaps one leaves Russia out of this, but China, India, and Brazil are going to emerge from this period much stronger relative to the United States than could have been thought even a year ago or so. So is Canada and several other important countries. This world crisis is going to shift world economic power in a way that has not been seen since the shifts in world power that took place in the 1920s and 1930s. And, international investors are realizing this!
Yes, the dollar will still be used as the reserve currency of the world…for a while longer. The Chinese, and the Russians, and the Brazilians, and the Indians all realize this. And, even though they keep talking about establishing a new reserve currency, they seem to back off and say that the dollar cannot be replaced right now. Yet, the Chinese have called for the Group of 8 to talk about a new reserve currency at its upcoming meeting. The issue IS on the table and my guess is that it is not going to go away.
Which brings me back to the deficits. In my mind, the budget deficits of the United States government are out-of-control right now and there is great concern that this administration will not be able to regain control of them in the near future. There is no “reversal” mechanism that is built into these budgets as the Fed has attempted to build in a “reversal” mechanism in its efforts. As a consequence, great pressure will be put on the monetary authorities over the next several years to monetize a substantial portion of the debt that will be created. The history of the past fifty years or so is that the Fed will not be able to avoid the pressure. This is perception that the international investing community will be bringing to the market when it place its bets. This can be translated into higher long term interest rates in the United States and a continuation in the decline in the value of the United States dollar.
“The hope is that as the banking system works through its problems, TARP funds will be returned and the mortgage-backed securities will mature or be sold back into the market allowing the balance sheet of the Federal Reserve to contract back to where it was in the summer of 2008. The banking system is apparently holding onto reserves to protect itself and that is why they are really not lending. The idea is that if they don’t need these excess reserves they will return them. This is what the Federal Reserve is planning to happen. Let’s hope that they are correct!”
On this issue, let me point out the post by Jonathan Weil on Bloomberg this morning, “Crisis Won’t End Until Balance Sheets Get Real” (http://www.bloomberg.com/apps/news?pid=20601039&sid=azsX7o.atu7U). After presenting interesting data on the state of commercial bank balance sheets he argues the following:
“Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.”
And, then Weil closes:
“Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.”
This is the short run problem and it is the one that is going to determine whether or not the Federal Reserve is going to be able to shrink its balance sheet. This has been the point of my last two posts. And why are we facing such uncertainty at this point? Because the Mark-to-Market rule was pulled and because there is not enough openness and transparency in the public financial reporting of financial institutions. If there are going to be regulatory changes in the future, a lot is going to have to be changed as far as the reporting requirements for financial institutions is concerned.
But, this is just the short run problem.
The longer run problem is the projected budget deficits of the Federal government. Even if things work out as the Federal Reserve has planned as far as bank reserves are concerned and Federal Reserve credit retreats back to where it was in August 2008, there is the massive problem facing the country about how prospective government deficits are going to be financed. The bet is that the Fed will finance a substantial portion of the deficits to come. Let the printing presses roll!
The fear? Inflation.
But many say, we are in a severe economic contraction now. The fear should be deflation and not inflation.
The only response to this counter argument is that in the latter half of the 20th century, any nation that has run substantial deficits has, sooner or later, run into problems related to inflation. Monetary authorities are never so independent of their central governments that imprudent fiscal policies are not in one way or another underwritten through some form of monetization. And, since this happens time after time, how can the international investing community sit on the sidelines and do nothing? Yes, the United States is in a severe recession right now, but what are your odds for the monetization of a lot of the Federal debt over the next three years? Over the next five years? Over the next ten years?
Where do you look for such for an indication of market sentiment on this? Look at the value of the United States dollar. The dollar fell by about 15% against major currencies in the latter part of the 1970s as the Carter budget deficits seemed to get out-of-hand. As we know, Paul Volker played the savior there by conducting a very restrictive monetary policy to bring the value of the dollar back in line. However, the Reagan budgets became so severe by 1985 that the value of the dollar began to plummet. In the face of continuing deficits and the realization that this would continue to result in a weak dollar, Volker gave up the reins of the Federal Reserve in August 1987. The dollar did not pick up strength again until fiscal restraint was returned to Washington with the Clinton administration as the value of the dollar rose over 25% from April 1995 until the end of 2000. The massive budget deficits of Bush 43 were translated into another precipitous decline in the value of the dollar which fell by almost 40% between the middle of 2002 to March 2008.
The fiscal policy of a nation does matter to the international investment community!
But, you say, look at all the other major countries having economic problems and their budgets are out of balance as well. Look at England, Germany, Italy, France, and others.
The response to this? This is not the case for many of the major emerging countries of the world, specifically the BRIC countries. Perhaps one leaves Russia out of this, but China, India, and Brazil are going to emerge from this period much stronger relative to the United States than could have been thought even a year ago or so. So is Canada and several other important countries. This world crisis is going to shift world economic power in a way that has not been seen since the shifts in world power that took place in the 1920s and 1930s. And, international investors are realizing this!
Yes, the dollar will still be used as the reserve currency of the world…for a while longer. The Chinese, and the Russians, and the Brazilians, and the Indians all realize this. And, even though they keep talking about establishing a new reserve currency, they seem to back off and say that the dollar cannot be replaced right now. Yet, the Chinese have called for the Group of 8 to talk about a new reserve currency at its upcoming meeting. The issue IS on the table and my guess is that it is not going to go away.
Which brings me back to the deficits. In my mind, the budget deficits of the United States government are out-of-control right now and there is great concern that this administration will not be able to regain control of them in the near future. There is no “reversal” mechanism that is built into these budgets as the Fed has attempted to build in a “reversal” mechanism in its efforts. As a consequence, great pressure will be put on the monetary authorities over the next several years to monetize a substantial portion of the debt that will be created. The history of the past fifty years or so is that the Fed will not be able to avoid the pressure. This is perception that the international investing community will be bringing to the market when it place its bets. This can be translated into higher long term interest rates in the United States and a continuation in the decline in the value of the United States dollar.
Thursday, June 11, 2009
The BRICs Are On The Move!
In the midst of the current economic and financial crisis the world is radically changing. Comparisons are constantly being made between the collapse of the global economy that is now being experienced and the collapse the world went through in the 1930s. Whereas most of the discussion has limited itself to the extent of the downturn and the methods being used by policymakers to avoid a repeat of the severity of the earlier depression, I would like to focus on another area in which comparisons can be made. The specific area I would like to focus upon is the relative shifts that are taking place in economic and financial power in the world.
At the start of World War I there was no question that Great Britain was the number one economic and financial power in the world. The 1920s and the 1930s represented a turning point in the economic structure of the world and a change in the location of the center of financial power. The change in economic structure related to the final triumph of the industrial sector over the agricultural sector in the most advanced countries in the world. This movement favored the United States over Europe. The center of financial power in the world shifted from London to the United States. The changes in industrial structure helped to explain parts of the economic dislocations of the Great Depression that were not fully absorbed until World War II. The shift in financial power was not really recognized until after the war.
An important and interesting history of this period can be found in the book “Lords of Finance” by Liaquat Ahamed. I have written a review of this book for Seeking Alpha and this can be found at http://seekingalpha.com/article/121616-financial-collapse-a-lesson-from-the-20s.
I am bringing up this history because I believe there is a similar shift in economic structure and financial power that is going on in the world at the present time. It is important to understand these changes because they are going to influence what is going on in the world for a long time.
Like the 1920s and 1930s there is an economic restructuring going on. To me, the emerging dislocations in the world are related to advances in information technology and the global changes in energy needs. I have no idea how these dislocations are going to work themselves out but there are huge changes coming. The innovation in financial instruments markets over the past forty years or so are the result of the new information technology and the intense study of what are now called “Information Markets” is going to lead to transactions and trading opportunities that have not fully been realized yet. I believe that the collapse of the auto industry is just one part of the mammoth changes that are coming in the area of energy sources and uses.
The other shift that is taking place is in the location of financial power within the global marketplace. Yesterday it was announced that Russia and Brazil will each acquire $10 billion of bonds from the International Monetary Fund (See Brazil, Russia Trade T-Bills for IMF Clout, http://online.wsj.com/article/SB124463884266502011.html). China is planning to purchase $50 billion in IMF bonds and it is said that India will also make a similar purchase. The BRIC countries are on the move!
The reason given for the purchase of the IMF bonds is to increase the clout that these emerging nations have on world economic and financial affairs. The BRIC nations believe that they have earned and therefore deserve to play a bigger role in what is going on globally. Hence, the movements of these countries are not surprising and are not uncoordinated. The leaders of the BRIC nations have been meeting regularly and communicating frequently. Their next group meeting begins June 16 in Russia.
The important thing for the leadership in the United States to realize is that they must take the world into consideration when making decisions relating to U. S. fiscal and monetary policy. I have gotten comments on my recent posts about the dollar that question the need for policy makers to be concerned about the value of the dollar in their decision making. I agree with Paul Volcker that the most important price in a country is the price of its currency. The United States, even more than in the past, will not be able to afford to ignore what the rest of the world is saying about the direction its budget policy and monetary policy are going. All too often in the past, and especially in the past eight years, American leadership has thumbed its nose at world opinion. The rise of the BRICs indicates that this time is over and real attention needs to be paid to what others are saying and doing. Although the United States will continue, in the near term to be the major financial power in the world, the times are changing and will continue to move in the current direction over the next ten to twenty years.
There are two reasons for saying this. First, Brazil, Russia, India, and China are going to continue to become more powerful economically and financially. Whereas there may not be an absolute shift in world power in these areas, there will be a relative shift with the BRIC nations becoming relatively more powerful. This, in my mind, is not going to stop.
Second, some form of international organization is going to evolve that will oversee global financial institutions and financial markets. The IMF is a natural place to look for such leadership. In the past it has not quite lived up to its possibilities. Now, however, it looks as if there is a new focus on the possibilities it presents. The BRIC nations seem to be eying the IMF as a place where they might be able to exert their growing economic and financial clout to attain the recognition and influence they want and believe they deserve. The IMF is certainly not an unwilling recipient of such attention and is actively seeking more funding.
What does all this mean for investors? I would like to focus on just two points related to the financial issues. First, the United States seems headed for a clash with the rest of the world in terms of monetary and fiscal policy. The current and future budget deficits appear to be unsustainable and the Obama administration has not yet presented any credible plans to reduce the amount of debt the government will be creating. In addition, the Federal Reserve has already put so much liquidity into the financial system that Bernanke’s statements about removing the liquidity as the crisis retreats seem less than serious. The added concern is what role the Fed will play in helping the Treasury place all the debt that it must issue. As I have stated before, history has repeatedly shown that this is not a good combination either for keeping interest rates low or for keeping the value of the currency up. Such movements over time will be brought on by the international markets. The only response that will avoid this is to bring the budget under control and take the pressure off the central bank to support the placing of the debt.
The second point refers to the shift in world economic power. If the BRIC countries find that they can work with the IMF, a new power structure will emerge in global finance. Financial and non-financial companies in emerging markets will become much more relevant. Important financial centers will be distributed throughout the world rather than being concentrated in just one or two cities. As with the evolution of the financial power in the 1920s and 1930s, these changes will not take place overnight. What I am suggesting, however, is that we are seeing the beginning of a shift in financial power in the world that will continue to evolve over the next ten to twenty years.
This has important ramifications for the regulation or re-regulation of the United States financial system. As usual, Congress and the Administration are fighting the last war. Right now the policy makers in charge in Washington D. C. are responding to the populist discontent being expressed in the country. Get rid of greed! Regulate salaries and bonuses! Emasculate the role of derivatives! This is not the way to prepare the economic and financial system for the future.
Yes, the world is changing. The economic base of the global economy is shifting and the resulting need to restructure is the reason for the severity of the current recession. Financial power in the world is being re-distributed and this trend is just beginning to show itself. These movements are going to define the conditions for investment in the coming years. It will require new and creative thinking.
At the start of World War I there was no question that Great Britain was the number one economic and financial power in the world. The 1920s and the 1930s represented a turning point in the economic structure of the world and a change in the location of the center of financial power. The change in economic structure related to the final triumph of the industrial sector over the agricultural sector in the most advanced countries in the world. This movement favored the United States over Europe. The center of financial power in the world shifted from London to the United States. The changes in industrial structure helped to explain parts of the economic dislocations of the Great Depression that were not fully absorbed until World War II. The shift in financial power was not really recognized until after the war.
An important and interesting history of this period can be found in the book “Lords of Finance” by Liaquat Ahamed. I have written a review of this book for Seeking Alpha and this can be found at http://seekingalpha.com/article/121616-financial-collapse-a-lesson-from-the-20s.
I am bringing up this history because I believe there is a similar shift in economic structure and financial power that is going on in the world at the present time. It is important to understand these changes because they are going to influence what is going on in the world for a long time.
Like the 1920s and 1930s there is an economic restructuring going on. To me, the emerging dislocations in the world are related to advances in information technology and the global changes in energy needs. I have no idea how these dislocations are going to work themselves out but there are huge changes coming. The innovation in financial instruments markets over the past forty years or so are the result of the new information technology and the intense study of what are now called “Information Markets” is going to lead to transactions and trading opportunities that have not fully been realized yet. I believe that the collapse of the auto industry is just one part of the mammoth changes that are coming in the area of energy sources and uses.
The other shift that is taking place is in the location of financial power within the global marketplace. Yesterday it was announced that Russia and Brazil will each acquire $10 billion of bonds from the International Monetary Fund (See Brazil, Russia Trade T-Bills for IMF Clout, http://online.wsj.com/article/SB124463884266502011.html). China is planning to purchase $50 billion in IMF bonds and it is said that India will also make a similar purchase. The BRIC countries are on the move!
The reason given for the purchase of the IMF bonds is to increase the clout that these emerging nations have on world economic and financial affairs. The BRIC nations believe that they have earned and therefore deserve to play a bigger role in what is going on globally. Hence, the movements of these countries are not surprising and are not uncoordinated. The leaders of the BRIC nations have been meeting regularly and communicating frequently. Their next group meeting begins June 16 in Russia.
The important thing for the leadership in the United States to realize is that they must take the world into consideration when making decisions relating to U. S. fiscal and monetary policy. I have gotten comments on my recent posts about the dollar that question the need for policy makers to be concerned about the value of the dollar in their decision making. I agree with Paul Volcker that the most important price in a country is the price of its currency. The United States, even more than in the past, will not be able to afford to ignore what the rest of the world is saying about the direction its budget policy and monetary policy are going. All too often in the past, and especially in the past eight years, American leadership has thumbed its nose at world opinion. The rise of the BRICs indicates that this time is over and real attention needs to be paid to what others are saying and doing. Although the United States will continue, in the near term to be the major financial power in the world, the times are changing and will continue to move in the current direction over the next ten to twenty years.
There are two reasons for saying this. First, Brazil, Russia, India, and China are going to continue to become more powerful economically and financially. Whereas there may not be an absolute shift in world power in these areas, there will be a relative shift with the BRIC nations becoming relatively more powerful. This, in my mind, is not going to stop.
Second, some form of international organization is going to evolve that will oversee global financial institutions and financial markets. The IMF is a natural place to look for such leadership. In the past it has not quite lived up to its possibilities. Now, however, it looks as if there is a new focus on the possibilities it presents. The BRIC nations seem to be eying the IMF as a place where they might be able to exert their growing economic and financial clout to attain the recognition and influence they want and believe they deserve. The IMF is certainly not an unwilling recipient of such attention and is actively seeking more funding.
What does all this mean for investors? I would like to focus on just two points related to the financial issues. First, the United States seems headed for a clash with the rest of the world in terms of monetary and fiscal policy. The current and future budget deficits appear to be unsustainable and the Obama administration has not yet presented any credible plans to reduce the amount of debt the government will be creating. In addition, the Federal Reserve has already put so much liquidity into the financial system that Bernanke’s statements about removing the liquidity as the crisis retreats seem less than serious. The added concern is what role the Fed will play in helping the Treasury place all the debt that it must issue. As I have stated before, history has repeatedly shown that this is not a good combination either for keeping interest rates low or for keeping the value of the currency up. Such movements over time will be brought on by the international markets. The only response that will avoid this is to bring the budget under control and take the pressure off the central bank to support the placing of the debt.
The second point refers to the shift in world economic power. If the BRIC countries find that they can work with the IMF, a new power structure will emerge in global finance. Financial and non-financial companies in emerging markets will become much more relevant. Important financial centers will be distributed throughout the world rather than being concentrated in just one or two cities. As with the evolution of the financial power in the 1920s and 1930s, these changes will not take place overnight. What I am suggesting, however, is that we are seeing the beginning of a shift in financial power in the world that will continue to evolve over the next ten to twenty years.
This has important ramifications for the regulation or re-regulation of the United States financial system. As usual, Congress and the Administration are fighting the last war. Right now the policy makers in charge in Washington D. C. are responding to the populist discontent being expressed in the country. Get rid of greed! Regulate salaries and bonuses! Emasculate the role of derivatives! This is not the way to prepare the economic and financial system for the future.
Yes, the world is changing. The economic base of the global economy is shifting and the resulting need to restructure is the reason for the severity of the current recession. Financial power in the world is being re-distributed and this trend is just beginning to show itself. These movements are going to define the conditions for investment in the coming years. It will require new and creative thinking.
Monday, June 8, 2009
BRIC, the Dollar, and U. S. Monetary Policy
Over the past several months I have written regularly that the value of the United States dollar will decline over an extended period of time. The basic argument for this is that over the past forty years or so, any country that has run excessive governmental budget deficits and has not had an independent central bank has seen the value of its currency come under pressure in international financial markets. During this time, country after country has had to regain discipline over its fiscal affairs and see to it that its central bank acted more independently of the government’s budgetary affairs.
The United States has not been immune to this pressure throughout this time period. Of recent note, reference has often been made of the pressure the Clinton administration faced early on that resulted in a fiscal discipline that brought about a surplus in the government’s budget in the latter years of the administration. Of course, that discipline completely disappeared in the Bush 43 years supported by a compliant Federal Reserve System. As a consequence the value of the United States dollar decline in a relatively steady fashion from late 2001 through August 2008.
The rebound in the value of the dollar only came about as the world wide financial crisis created a movement toward United States Treasury securities and credit quality. As this movement has subsided, the dollar has shown some weakness once again.
The bet right now is that given the massive budget deficits projected for the next several years the Obama administration will find itself in the same fiscal stance that the Bush 43 administration was. But, even worse, the Federal Reserve has already liquefied the financial system and now seems to be in a position where it has to provide even more liquidity to banks in order to assist the placement of all the new governmental debt coming to market.
As almost everyone knows the Federal Reserve has more than doubled the size of its balance sheet since the first week in September last year going from about $880 billion in assets to around $2,060 billion on June 3, 2009. Total reserves in the banking system have increased by roughly 1,900% since then and excess reserve in the banking system recently have averaged slightly below the size of the whole Federal Reserve balance sheet in that first week of September last year (up from just $2 billion then). The ominous change, however, is that recently the Fed’s holdings of U. S. Treasury securities has begun to rise once again as the Fed has given more support for the bond market. The increase in the Fed’s portfolio of Treasury securities was almost $46 billion from Wednesday May 6 to Wednesday June 3.
So, the Fed has supplied a tremendous amount of liquidity to the banking system that is just sitting out there waiting to see what further solvency shocks it will have to face. (See my post of June 4, 2009, http://maseportfolio.blogspot.com/.) Even though Chairman Bernanke has promised that the liquidity will be removed from the financial system once the need for it goes away, it is hard to see how all these funds will be taken away in a reasonable period of time. Furthermore, if the Federal Reserve is under pressure to support the forthcoming supply of new Treasury issues it is hard to see how it can both reduce its balance sheet while at the same time provide support to the bond market: especially if it has already started with this support.
It, therefore, seems as if there is some justification for participants in international financial markets to be concerned about a further decline in the value of the United States dollar. The scenario unfolding in the United States has all the components to it that international markets reacted against in the past forty years or so. And, the promises of the Obama administration to bring the federal budget under control with savings resulting from the, as-yet, unknown health care program appear to be grossly optimistic, at best.
There is another factor looming on the horizon that has not been present in earlier discussions about the value of the dollar. Over the past forty years or so there never has been a question raised about the role that the United States dollar plays in the international financial system. Over the past six months this topic, something that was unthinkable before, has been raised by the leaders of several countries.
In my estimation we are a long way from de-throning the United States dollar from its lofty position. However, one must take into consideration the fact that this idea is even being seriously floated in the world today. This points up the fact that the fiscal and monetary position of the United States government is being questioned and this only provides additional evidence of the weakness of the dollar in world markets.
The primary concern is being expressed by the BRIC countries, Brazil, Russia, India, and China. These are the countries that are closing the economic gap between themselves and the United States. Not that the United States will lose its Number One position as an economic power: just that these countries are coming on fast to reduce the difference. And, as these nations become more powerful relative to the United States, more and more attention is going to have to be paid to their economic and financial issues and concerns.
The BRIC countries are in a bind right now and the tension is only going to grow. These countries tend to be exporting countries and therefore must accumulate foreign exchange. The United States dollar has been the currency of choice in the past. Now, however, their large dollar holdings are “at risk” because a decline in the value of the dollar will only hurt them. As a consequence they have kept the dollar from falling further than it would have otherwise by buying large amounts of U. S. dollars. In May, the BRIC countries increased foreign reserves by more that $60 billion in an effort keep the dollar from falling further than it did. In fact, these nations are adding to their dollar reserves at their fasted pace ever.
Yet, at present, there is no alternative for them to chose. One analyst has stated that discontent with the dollar is increasing, yet nobody knows what needs to be done. Hence, the frustration with the situation has been expressed by leaders from Russia, China, and Brazil. This feeling has risen to the surface in Germany where last week German Chancellor Angela Merkel verbally took on the central banks of the United States and England for their loose monetary policies.
This is a situation that is only going to get worse before it gets any better. One can talk all they want to about the possibility of inflation and when or if inflation is actually a fear that should be present in the United States at this time. The problem is that the correlation between excessively large governmental budget deficits and loose monetary policy is too high for participants in international financial markets to ignore. Furthermore, the power of the BRIC countries is growing and their needs and desires are going to have to be accounted for. And, within these latter countries there is the stunning rise of China. Given all the economic and financial turmoil in the world, China is probably going to achieve a more prominent world role even faster than anyone expected.
The world has indeed changed. Whereas the United States has not given enough attention over the last forty years to the value of the dollar in international financial markets, it is going to have to do so going forward. The Obama administration cannot afford to casually claim to want a strong dollar and then ignore the fact that it continually declined in value the way Bush 43 did. The rest of the world will not allow this to happen.
The United States has not been immune to this pressure throughout this time period. Of recent note, reference has often been made of the pressure the Clinton administration faced early on that resulted in a fiscal discipline that brought about a surplus in the government’s budget in the latter years of the administration. Of course, that discipline completely disappeared in the Bush 43 years supported by a compliant Federal Reserve System. As a consequence the value of the United States dollar decline in a relatively steady fashion from late 2001 through August 2008.
The rebound in the value of the dollar only came about as the world wide financial crisis created a movement toward United States Treasury securities and credit quality. As this movement has subsided, the dollar has shown some weakness once again.
The bet right now is that given the massive budget deficits projected for the next several years the Obama administration will find itself in the same fiscal stance that the Bush 43 administration was. But, even worse, the Federal Reserve has already liquefied the financial system and now seems to be in a position where it has to provide even more liquidity to banks in order to assist the placement of all the new governmental debt coming to market.
As almost everyone knows the Federal Reserve has more than doubled the size of its balance sheet since the first week in September last year going from about $880 billion in assets to around $2,060 billion on June 3, 2009. Total reserves in the banking system have increased by roughly 1,900% since then and excess reserve in the banking system recently have averaged slightly below the size of the whole Federal Reserve balance sheet in that first week of September last year (up from just $2 billion then). The ominous change, however, is that recently the Fed’s holdings of U. S. Treasury securities has begun to rise once again as the Fed has given more support for the bond market. The increase in the Fed’s portfolio of Treasury securities was almost $46 billion from Wednesday May 6 to Wednesday June 3.
So, the Fed has supplied a tremendous amount of liquidity to the banking system that is just sitting out there waiting to see what further solvency shocks it will have to face. (See my post of June 4, 2009, http://maseportfolio.blogspot.com/.) Even though Chairman Bernanke has promised that the liquidity will be removed from the financial system once the need for it goes away, it is hard to see how all these funds will be taken away in a reasonable period of time. Furthermore, if the Federal Reserve is under pressure to support the forthcoming supply of new Treasury issues it is hard to see how it can both reduce its balance sheet while at the same time provide support to the bond market: especially if it has already started with this support.
It, therefore, seems as if there is some justification for participants in international financial markets to be concerned about a further decline in the value of the United States dollar. The scenario unfolding in the United States has all the components to it that international markets reacted against in the past forty years or so. And, the promises of the Obama administration to bring the federal budget under control with savings resulting from the, as-yet, unknown health care program appear to be grossly optimistic, at best.
There is another factor looming on the horizon that has not been present in earlier discussions about the value of the dollar. Over the past forty years or so there never has been a question raised about the role that the United States dollar plays in the international financial system. Over the past six months this topic, something that was unthinkable before, has been raised by the leaders of several countries.
In my estimation we are a long way from de-throning the United States dollar from its lofty position. However, one must take into consideration the fact that this idea is even being seriously floated in the world today. This points up the fact that the fiscal and monetary position of the United States government is being questioned and this only provides additional evidence of the weakness of the dollar in world markets.
The primary concern is being expressed by the BRIC countries, Brazil, Russia, India, and China. These are the countries that are closing the economic gap between themselves and the United States. Not that the United States will lose its Number One position as an economic power: just that these countries are coming on fast to reduce the difference. And, as these nations become more powerful relative to the United States, more and more attention is going to have to be paid to their economic and financial issues and concerns.
The BRIC countries are in a bind right now and the tension is only going to grow. These countries tend to be exporting countries and therefore must accumulate foreign exchange. The United States dollar has been the currency of choice in the past. Now, however, their large dollar holdings are “at risk” because a decline in the value of the dollar will only hurt them. As a consequence they have kept the dollar from falling further than it would have otherwise by buying large amounts of U. S. dollars. In May, the BRIC countries increased foreign reserves by more that $60 billion in an effort keep the dollar from falling further than it did. In fact, these nations are adding to their dollar reserves at their fasted pace ever.
Yet, at present, there is no alternative for them to chose. One analyst has stated that discontent with the dollar is increasing, yet nobody knows what needs to be done. Hence, the frustration with the situation has been expressed by leaders from Russia, China, and Brazil. This feeling has risen to the surface in Germany where last week German Chancellor Angela Merkel verbally took on the central banks of the United States and England for their loose monetary policies.
This is a situation that is only going to get worse before it gets any better. One can talk all they want to about the possibility of inflation and when or if inflation is actually a fear that should be present in the United States at this time. The problem is that the correlation between excessively large governmental budget deficits and loose monetary policy is too high for participants in international financial markets to ignore. Furthermore, the power of the BRIC countries is growing and their needs and desires are going to have to be accounted for. And, within these latter countries there is the stunning rise of China. Given all the economic and financial turmoil in the world, China is probably going to achieve a more prominent world role even faster than anyone expected.
The world has indeed changed. Whereas the United States has not given enough attention over the last forty years to the value of the dollar in international financial markets, it is going to have to do so going forward. The Obama administration cannot afford to casually claim to want a strong dollar and then ignore the fact that it continually declined in value the way Bush 43 did. The rest of the world will not allow this to happen.
Friday, May 16, 2008
BRIC is for real!
The world has changed. The change was coming anyway…the United States just helped it along.
Globalization was going to happen. The United States pushed it along for its own benefit…and now the United States is, itself, seeing what globalization is going to mean...for everyone.
Brazil is now riding high…like other emerging countries, commodities are driving the engine. But, Brazil is just one among several.
· BRIC…Brazil, Russia, India, and China...a group of dynamically emerging countries.
· Sovereign wealth funds; Brazil is joining China and Middle Eastern oil states.
· Canada and a few other countries are being recognized as the ‘next wave’ of countries that are emerging economically.
This is the world of the future. It is a world in which the United States is still the super power, but it is a world that cannot be dominated by the one and only super power. And, these people are talking with one another. For example, the countries that make up BRIC are meeting this weekend in Russia. They are “taking awareness of (their) own influence in world affairs.” And, it is expected that this talking will continue and spread.
But, this is a world in which the United States cannot just do as it wants as it pretty much has tried to do over the past seven and one-half years, economically as well as in foreign affairs. The United States is going to have to consider itself as a member of the world community and learn to work with others as well as encourage and help others if it is going to be respected and listened to.
The United Nations is outdated and unrepresentative; the leadership of the World Bank and the International Monetary Fund is too ‘Western’; and the G-7 or whatever does not contain some important players. The world is in transition and the United States is going to have to be an integral partner in the transition. In the past seven and one-half years, in too many areas, the United States has taken the position that if it didn’t like what was going on, it just removed itself from the picture. As a consequence of such action, the United States lost any ability it might have had to influence outcomes. Also, in the process, other countries learned how to ‘go it alone’ and work out the best solution they could. The United States lost respect while other nations gained in wealth and confidence and the knowledge that they did not need the ‘big guy’ around. They would like the ‘big guy’ there, but their work continued without that input.
Economically and financially, the United States is going to have to become a full member of the world community once again. This administration will not do it…they have neither the time nor the will to do it…but the next administration should. Most of all, the United States must start talking with these nations, not as their superior but as their partner. The United States must not be selfish in this partnership, it must help the emerging powers to become strong, but it must do so while strongly advocating its own position.
Where does this process start? The United States must begin the process by bringing under control its monetary and fiscal policy. It must play by the same rules that the rest of the world plays by.
Why is Brazil considered a part of BRIC? It paid the price of bringing its inflation and its economy under control. Brazilian president da Silva ‘bit the bullet’ and made the central bank independent and let it bring inflation under control. Its economy improved, productivity increased, and, financially, Brazilian debt has been rewarded with an “investment grade” rating. It was not easy, but it was done. Now Brazil is riding the crest of the commodities boom and is trying to make good use of the funds coming into the country: hence the formation of a Sovereign Wealth Fund. And, in the last two years or so, the Real, the Brazilian currency, has even outperformed the Euro relative to the dollar. But, Brazil needs the United States to be strong financially…it needs the United States to be a partner.
Brazil is not the only country that has gone through this cycle. Most major nations, as well as many of the emerging nations have made their central banks’ independent and allowed them to contain inflation. And, this does not help the value of the dollar, given the current stance of the United States with respect to its monetary and fiscal policy.
Hear the stern words of Mervyn King, the governor of the Bank of England, at a news conference on Wednesday: England is “traveling along a bumpy road as the economy rebalances. Monetary policy shouldn’t try to prevent that adjustment.” He further stated that inflation is expected to accelerate and the central bank must continue to combat this inflation and this means that the Bank of England will not make further cuts in interest rates. This, of course, does not help the position of the United States and the value of the dollar. But, the Bank of England does not stand alone in taking this stance.
The world has gotten to where it is faster than it otherwise would have. The United States has contributed to this accelerated pace by creating large fiscal deficits underwritten by extremely low interest rates. The mountains of debt, both public debt as well as private debt, that have resulted have been spread throughout the world. The fact that the United States has no energy policy has also played its part in the changing world and has helped along the explosion in commodity prices. Before these events, the world was globalizing…these events just sped the effort along.
Where does this leave the United States economically and financially? It leaves us in a position in which we must stop pointing at others and placing the blame on them. As Steven Covey wrote…”if you think the problem is out there…that is the problem!”
When there is dislocation and dysfunction, behavior must be adjusted to re-establish some form of unity and wholeness. Most often, dislocation and dysfunction come about due to the strict adherence of ‘ideology’. The United States, once one of the more realistically pragmatic countries in the world, has been compromised by a rigid pursuit of an ideology that has had little connection with the real world. It cannot afford to continue behaving in this way.
BRIC is real. The wealth and power of a dozen other countries is real. And, this change is going to continue. If the United States doesn’t accept this fact, and what it means for its own behavior, disruption and volatility will continue in world markets and may even increase. How one constructs an investment strategy for the future depends upon how one sees this situation working itself out.
Globalization was going to happen. The United States pushed it along for its own benefit…and now the United States is, itself, seeing what globalization is going to mean...for everyone.
Brazil is now riding high…like other emerging countries, commodities are driving the engine. But, Brazil is just one among several.
· BRIC…Brazil, Russia, India, and China...a group of dynamically emerging countries.
· Sovereign wealth funds; Brazil is joining China and Middle Eastern oil states.
· Canada and a few other countries are being recognized as the ‘next wave’ of countries that are emerging economically.
This is the world of the future. It is a world in which the United States is still the super power, but it is a world that cannot be dominated by the one and only super power. And, these people are talking with one another. For example, the countries that make up BRIC are meeting this weekend in Russia. They are “taking awareness of (their) own influence in world affairs.” And, it is expected that this talking will continue and spread.
But, this is a world in which the United States cannot just do as it wants as it pretty much has tried to do over the past seven and one-half years, economically as well as in foreign affairs. The United States is going to have to consider itself as a member of the world community and learn to work with others as well as encourage and help others if it is going to be respected and listened to.
The United Nations is outdated and unrepresentative; the leadership of the World Bank and the International Monetary Fund is too ‘Western’; and the G-7 or whatever does not contain some important players. The world is in transition and the United States is going to have to be an integral partner in the transition. In the past seven and one-half years, in too many areas, the United States has taken the position that if it didn’t like what was going on, it just removed itself from the picture. As a consequence of such action, the United States lost any ability it might have had to influence outcomes. Also, in the process, other countries learned how to ‘go it alone’ and work out the best solution they could. The United States lost respect while other nations gained in wealth and confidence and the knowledge that they did not need the ‘big guy’ around. They would like the ‘big guy’ there, but their work continued without that input.
Economically and financially, the United States is going to have to become a full member of the world community once again. This administration will not do it…they have neither the time nor the will to do it…but the next administration should. Most of all, the United States must start talking with these nations, not as their superior but as their partner. The United States must not be selfish in this partnership, it must help the emerging powers to become strong, but it must do so while strongly advocating its own position.
Where does this process start? The United States must begin the process by bringing under control its monetary and fiscal policy. It must play by the same rules that the rest of the world plays by.
Why is Brazil considered a part of BRIC? It paid the price of bringing its inflation and its economy under control. Brazilian president da Silva ‘bit the bullet’ and made the central bank independent and let it bring inflation under control. Its economy improved, productivity increased, and, financially, Brazilian debt has been rewarded with an “investment grade” rating. It was not easy, but it was done. Now Brazil is riding the crest of the commodities boom and is trying to make good use of the funds coming into the country: hence the formation of a Sovereign Wealth Fund. And, in the last two years or so, the Real, the Brazilian currency, has even outperformed the Euro relative to the dollar. But, Brazil needs the United States to be strong financially…it needs the United States to be a partner.
Brazil is not the only country that has gone through this cycle. Most major nations, as well as many of the emerging nations have made their central banks’ independent and allowed them to contain inflation. And, this does not help the value of the dollar, given the current stance of the United States with respect to its monetary and fiscal policy.
Hear the stern words of Mervyn King, the governor of the Bank of England, at a news conference on Wednesday: England is “traveling along a bumpy road as the economy rebalances. Monetary policy shouldn’t try to prevent that adjustment.” He further stated that inflation is expected to accelerate and the central bank must continue to combat this inflation and this means that the Bank of England will not make further cuts in interest rates. This, of course, does not help the position of the United States and the value of the dollar. But, the Bank of England does not stand alone in taking this stance.
The world has gotten to where it is faster than it otherwise would have. The United States has contributed to this accelerated pace by creating large fiscal deficits underwritten by extremely low interest rates. The mountains of debt, both public debt as well as private debt, that have resulted have been spread throughout the world. The fact that the United States has no energy policy has also played its part in the changing world and has helped along the explosion in commodity prices. Before these events, the world was globalizing…these events just sped the effort along.
Where does this leave the United States economically and financially? It leaves us in a position in which we must stop pointing at others and placing the blame on them. As Steven Covey wrote…”if you think the problem is out there…that is the problem!”
When there is dislocation and dysfunction, behavior must be adjusted to re-establish some form of unity and wholeness. Most often, dislocation and dysfunction come about due to the strict adherence of ‘ideology’. The United States, once one of the more realistically pragmatic countries in the world, has been compromised by a rigid pursuit of an ideology that has had little connection with the real world. It cannot afford to continue behaving in this way.
BRIC is real. The wealth and power of a dozen other countries is real. And, this change is going to continue. If the United States doesn’t accept this fact, and what it means for its own behavior, disruption and volatility will continue in world markets and may even increase. How one constructs an investment strategy for the future depends upon how one sees this situation working itself out.
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