There are growing signs that the United States is losing its financial clout. One of these signs is the growing talk about adding other currencies to the list of currencies used as international reserves. The Premier of China has been raising this issue for quite a few months now. French President Nicolas Sarkozy gained attention last week by not only supporting discussions on the issue but also suggesting that France and China work together in developing such a change. The proposed venue: the upcoming G-20 talks in Seoul, South Korea.
There has also been talk within the International Monetary Fund about the need for change, both in terms of representation (the governing body of the IMF is heavily weighted toward the Europeans) and the makeup of international reserves.
The fact is that these initiatives are becoming more and more credible. A change is not imminent, but it is expected that discussions will grow about more co-ordination between countries or the inclusion of other currencies as international reserves.
The United States continues to attack the foreign-exchange policies of the Chinese, but Chinese leaders have worked hard behind the scenes to build relationships and to act in a way that is supportive rather than divisive. A recent example is the announcement that China will buy Greek government bonds to show support of the effort being made in Greece to restore confidence in the economic policies of that government.
“The U. S. plans to use IMF meetings and sessions of the Group of 20 in October and November as venues to coordinate international pressure on Beijing, rather than press its views unilaterally.” (See “IMF Talks on Currency Restraints,” http://online.wsj.com/public/page/news-business-us.html.)
Yet those that seemingly support a broader base for international reserves are getting most of the press and any real publicity condemning the actions of the Chinese appear to be mostly coming from the United States. The support the United States does get seems half-hearted, at best.
The United States seems to be losing its relative position in the financial world. Yes, it is still “Number One” but the fifty years of credit inflation that has weakened its economic base (http://seekingalpha.com/article/227990-monetary-warfare-can-nations-have-independent-economic-policies) coupled with growing strength in the emerging nations has resulted in changes in the relative position of countries in the world. The United States continues to act as if it were still the “sole act” on the stage, while many of the emerging nations, especially the BRIC nations, are finding their relative strength and their voice. (France’s Sarkozy, with no place else to go, seems to be leaning to the BRICs to show he still has some clout in the world.)
The growing conflict comes from the fact that the financial world has become increasingly interconnected. Capital mobility is greater now than many believed possible forty years ago. But, the existence of this mobility limits the choices available to countries: they can either have fixed exchange rates or they can have independent governmental economic policies.
Many, like the United States, have opted for independent governmental economic policies. This has resulted in the internal economic problems in the United States mentioned in the Seeking Alpha post cited above. The consequence of this has been a decline in the value of the United States dollar. Other countries have had to follow various paths in order to protect themselves from what they consider to be a “competitive devaluation” on the part of the United States.
These other countries are not particularly happy.
The call has gone out for nations to join in greater co-ordination: “the Institute of International Finance, the global top bankers’ club, is calling for renewed global co-ordination to address the trend towards unilateralism on macroeconomic, trade, and currency issues. Likewise, Chinese Premier Wen Jiabao has also been calling for global policy co-ordination.” (See the opinion piece by John Plender, http://www.ft.com/cms/s/0/295e207a-d09a-11df-8667-00144feabdc0.html.)
The likelihood of achieving some form of greater co-operation and co-ordination in the economic policies of member nations seems to be slim and none. This is especially true given the leanings of a majority portion of the voting body of the Federal Reserve System and the Chairman of the Bank of England concerning the use of “quantitative easy” to spur on their economies. In fact, the calls for greater “quantitative easy” at central banks has grown over the past several weeks which, of course, has had a negative impact on currencies.
In my view, we are in this conflict for the long haul. To me, the stage is set for the emerging nations to continue to press their point. There seems to be a growing sense their time is coming and that the United States is only going to become relatively weaker…although still Number One.
The model broke in the European sovereign debt crisis earlier this year and the European Union pulled together for a long enough period of time to keep things from totally falling apart. Some people had suggested that this European model of “coming together” be used in the G-20 and in the IMF.
I don’t think this is going to happen.
Greater global co-operation and co-ordination is going to have to come about someday. It is just not going to happen any time soon.
Showing posts with label U. S. economic policy. Show all posts
Showing posts with label U. S. economic policy. Show all posts
Wednesday, October 6, 2010
Tuesday, May 26, 2009
Known Unknowns
It is still too early to think that we are near or past the bottom of this economic downturn. However, in my mind, we are in the “working out” stage of the downturn, especially in the current economic restructuring we are going through, and we cannot expect this stage to be a short one.
The problem with many analysts and policy makers is that they continue to see our economic problems in Keynesian terms and think that the difficulties being experienced in banking and financial markets as a liquidity issue. Hence the search for evidence pointing to “green shoots” and for an “easing of credit.” Every day we hear when new statistics are released that the numbers just presented are “less bad” than before and this indicates that the economy is getting worse at a slower pace. An obvious sign that we are near the bottom!
In my mind, the two major issues facing the United States (and the world) are the structural problems in industry and finance and the debt problem. I have said all along that the basic cause of the financial collapse and the following economic dislocations comes more from the supply side of the economy than from the demand side as assumed by the Keynesians. And, because our problems are primarily supply side problems, governmental stimulus plans and deficit financing are not the incentives needed for restructuring the economy and putting people back to work.
In fact, demand side stimulus can even exacerbate the problems and slow down the changes that need to be made. Furthermore, treating the debt problem as a liquidity problem, as the Federal Reserve and the Treasury seem to be doing, can do the very same thing.
The “good news” is that most organizations and institutions have identified the major problems they will be facing in the near future. However, the “bad news” is that no one knows the depth or breath of the problems. The difficulty facing these organizations and institutions going forward is that these problems must be “worked through” and “worked out”. This “working through” and “working out” will take time and, since the problems are related and interconnected, the outcomes will be dependent on just how systemic and cumulative they are.
For example, greater unemployment due to structural reductions in the workforce who were employed making cars, producing parts, or selling cars will lead to more foreclosures on “prime” loans. (See “Job Losses Force Safer Mortgages to Foreclosure” in New York Times, http://www.nytimes.com/2009/05/25/business/economy/25foreclose.html?_r=1&em.) This will have further ramifications for the financial sector, housing construction and so on. The repercussions will continue on throughout the economy.
In the area of foreign trade, declining incomes lead to reductions in imports, but these imports are the exports of other countries. Countries that have built their economic growth and prosperity on their export trade face worsening times because of the decline in their exports. And, with the slowdown in these countries world trade declines. (See “Trade and Hard Times” in the New York Times, http://www.nytimes.com/2009/05/26/opinion/26tue1.html?ref=opinion.) There are more and more calls to prevent, if possible, further reductions in foreign trade in the world, especially relate to tariffs and other means of protectionism.
These are just two examples of situations where problems exist but where there is no real understanding of how far the cumulative interactions will take us. Many more situations like these exist at the present time. They are not problems that will be resolved through fiscal stimulus and the creation of government debt. There are three major problems with this response.
First, fiscal stimulus does not eliminate structural dislocations in the economy. The government (or no one else for that matter) does not know what the future structure of the economy will look like. Existing organizations, including financial institutions, can “re-tool” themselves, but this takes time and the exploration of different models for companies to find what works best. In terms of innovation, governmental funds can be made available for the next generation of energy sources and transportation systems and so forth, but no one knows exactly how these sources and systems should be put together. Restructuring and creative innovation take time and experimentation. One cannot “will” the right structure or the best innovation.
Furthermore, who wants to invest in something the government is the driving force in? Current events attest to emerging problems related to governance, decision making, and “the rule of law” when the government gets involved with a company or an industry.
Second, when the solvency problem is treated as a liquidity problem, the issue of solvency does not go away. The “toxic asset” program (P-PIP) developed by the Treasury and the efforts by the Federal Reserve to shore up various segments of the financial markets is just a “round-about” way of allowing the federal government to pay for the bad debts that are on the balance sheets of financial institutions. That is, the programs just allow the financial system to transfer financial losses to the government so that the tax payer will eventually end up with the bill for any insolvency that exists. Still, the question of the solvency does not go away.
Third, the government assumption that both problems, those related to economic restructuring and the amount of debt outstanding, can be solved by creating more and more debt is laughable if it were not so potentially tragic. International financial markets understand that in one way or another and at some time in the future, excessive amounts of government debt will end up being monetized. How this monetization works out in each particular case cannot be foretold. History has shown, over and over again, that at some time this connection between large amounts of debt and money creation becomes a reality. It cannot be avoided; it is just the timing that is uncertain.
The conclusions that can be drawn from this analysis are very straight forward. First, economic growth, even when it becomes positive again, will stay low for an extended period of time. My reading of the 1930s has lead me to believe that this decade was a time of industrial and financial restructuring (not helped very much by the government) and technological change. It was not a time that demand-side stimulus could help very much. The restructuring had to take place and World War II did not contribute to the recovery because of the added spending but because of the re-focus and restructuring of industry it forced on the nation. I believe that, like the 1930s, we may be facing an extended period of time in which we need to re-focus and restructure industry. One hopes that we do not need a world war in order to finally achieve this re-structuring.
Second, the continued creation of debt is not going to help. The government debt is going to be monetized at some time. The realization of this, I believe, has become a reality to the bond markets and the foreign exchange markets. To me, the yield on long term U. S. Treasury securities will continue to trend upwards in the foreseeable future and the value of the U. S. dollar will continue to trend downwards. The trends will continue unless some financial “miracle” takes place that eliminates the projected upcoming deficits in the government budget—perhaps an amazing recovering in tax receipts or massive savings discovered in the health care industry.
Third, whereas paper assets from the United States will not be that desirable internationally, physical assets will. For much of the two years or so ending in August 2008, the weak dollar allowed foreign countries and investors to buy U. S. companies at a record pace. With the rising strength of China, India, and Brazil, I believe that with the continued slide in the United States dollar, more and more U. S. companies and their physical assets will come into foreign hands. That is, until the U. S. Congress bans such transactions.
The problem with many analysts and policy makers is that they continue to see our economic problems in Keynesian terms and think that the difficulties being experienced in banking and financial markets as a liquidity issue. Hence the search for evidence pointing to “green shoots” and for an “easing of credit.” Every day we hear when new statistics are released that the numbers just presented are “less bad” than before and this indicates that the economy is getting worse at a slower pace. An obvious sign that we are near the bottom!
In my mind, the two major issues facing the United States (and the world) are the structural problems in industry and finance and the debt problem. I have said all along that the basic cause of the financial collapse and the following economic dislocations comes more from the supply side of the economy than from the demand side as assumed by the Keynesians. And, because our problems are primarily supply side problems, governmental stimulus plans and deficit financing are not the incentives needed for restructuring the economy and putting people back to work.
In fact, demand side stimulus can even exacerbate the problems and slow down the changes that need to be made. Furthermore, treating the debt problem as a liquidity problem, as the Federal Reserve and the Treasury seem to be doing, can do the very same thing.
The “good news” is that most organizations and institutions have identified the major problems they will be facing in the near future. However, the “bad news” is that no one knows the depth or breath of the problems. The difficulty facing these organizations and institutions going forward is that these problems must be “worked through” and “worked out”. This “working through” and “working out” will take time and, since the problems are related and interconnected, the outcomes will be dependent on just how systemic and cumulative they are.
For example, greater unemployment due to structural reductions in the workforce who were employed making cars, producing parts, or selling cars will lead to more foreclosures on “prime” loans. (See “Job Losses Force Safer Mortgages to Foreclosure” in New York Times, http://www.nytimes.com/2009/05/25/business/economy/25foreclose.html?_r=1&em.) This will have further ramifications for the financial sector, housing construction and so on. The repercussions will continue on throughout the economy.
In the area of foreign trade, declining incomes lead to reductions in imports, but these imports are the exports of other countries. Countries that have built their economic growth and prosperity on their export trade face worsening times because of the decline in their exports. And, with the slowdown in these countries world trade declines. (See “Trade and Hard Times” in the New York Times, http://www.nytimes.com/2009/05/26/opinion/26tue1.html?ref=opinion.) There are more and more calls to prevent, if possible, further reductions in foreign trade in the world, especially relate to tariffs and other means of protectionism.
These are just two examples of situations where problems exist but where there is no real understanding of how far the cumulative interactions will take us. Many more situations like these exist at the present time. They are not problems that will be resolved through fiscal stimulus and the creation of government debt. There are three major problems with this response.
First, fiscal stimulus does not eliminate structural dislocations in the economy. The government (or no one else for that matter) does not know what the future structure of the economy will look like. Existing organizations, including financial institutions, can “re-tool” themselves, but this takes time and the exploration of different models for companies to find what works best. In terms of innovation, governmental funds can be made available for the next generation of energy sources and transportation systems and so forth, but no one knows exactly how these sources and systems should be put together. Restructuring and creative innovation take time and experimentation. One cannot “will” the right structure or the best innovation.
Furthermore, who wants to invest in something the government is the driving force in? Current events attest to emerging problems related to governance, decision making, and “the rule of law” when the government gets involved with a company or an industry.
Second, when the solvency problem is treated as a liquidity problem, the issue of solvency does not go away. The “toxic asset” program (P-PIP) developed by the Treasury and the efforts by the Federal Reserve to shore up various segments of the financial markets is just a “round-about” way of allowing the federal government to pay for the bad debts that are on the balance sheets of financial institutions. That is, the programs just allow the financial system to transfer financial losses to the government so that the tax payer will eventually end up with the bill for any insolvency that exists. Still, the question of the solvency does not go away.
Third, the government assumption that both problems, those related to economic restructuring and the amount of debt outstanding, can be solved by creating more and more debt is laughable if it were not so potentially tragic. International financial markets understand that in one way or another and at some time in the future, excessive amounts of government debt will end up being monetized. How this monetization works out in each particular case cannot be foretold. History has shown, over and over again, that at some time this connection between large amounts of debt and money creation becomes a reality. It cannot be avoided; it is just the timing that is uncertain.
The conclusions that can be drawn from this analysis are very straight forward. First, economic growth, even when it becomes positive again, will stay low for an extended period of time. My reading of the 1930s has lead me to believe that this decade was a time of industrial and financial restructuring (not helped very much by the government) and technological change. It was not a time that demand-side stimulus could help very much. The restructuring had to take place and World War II did not contribute to the recovery because of the added spending but because of the re-focus and restructuring of industry it forced on the nation. I believe that, like the 1930s, we may be facing an extended period of time in which we need to re-focus and restructure industry. One hopes that we do not need a world war in order to finally achieve this re-structuring.
Second, the continued creation of debt is not going to help. The government debt is going to be monetized at some time. The realization of this, I believe, has become a reality to the bond markets and the foreign exchange markets. To me, the yield on long term U. S. Treasury securities will continue to trend upwards in the foreseeable future and the value of the U. S. dollar will continue to trend downwards. The trends will continue unless some financial “miracle” takes place that eliminates the projected upcoming deficits in the government budget—perhaps an amazing recovering in tax receipts or massive savings discovered in the health care industry.
Third, whereas paper assets from the United States will not be that desirable internationally, physical assets will. For much of the two years or so ending in August 2008, the weak dollar allowed foreign countries and investors to buy U. S. companies at a record pace. With the rising strength of China, India, and Brazil, I believe that with the continued slide in the United States dollar, more and more U. S. companies and their physical assets will come into foreign hands. That is, until the U. S. Congress bans such transactions.
Monday, July 14, 2008
"And, another one bites the dust..."
One more major American company has been acquired by foreign interests. As Anheuser-Busch has agreed to being purchased by InBev, we see the relentless march to foreign ownership proceed. While the turmoil in the financial markets and the ‘bail-out’ of Fannie Mae and Freddie Mac dominate the headlines…reverse globalization takes over the United States.
I call what is happening ‘reverse globalization’ because, for Americans, globalization was a good thing when the United States was dominating the world, spreading into more and more corners of the globe, and investing in more and more foreign companies. Now, the shoe is on the other foot and the question of concern is over American attitudes to world trade…to further globalization.
We see trade agreements are in danger in Congress. We hear Presidential candidates claim that firms that transfer jobs off shore will be punished. And, we see more and more American Companies being purchased or invested in by foreign companies or national wealth pools. The question is how long will the voters in the United States support open trade and world economic evolution?
The problem is that in an inter-dependent world, countries cannot act as if they are isolated from other nations and international financial and economic markets…even if they are the sole remaining superpower. And, as we see in economic affairs, what has been started and supported historically must play itself out. It has taken us a long time to arrive at the situation we are now in and there is plenty of blame that can be passed around to all who have been involved.
The fact is, we are in the situation we are now in and we must deal with it in the best way we can. And, whether we like it or not…we must accept the fact that the current administration in Washington…the “Gang that couldn’t shoot straight”…is going to play a role in how we get to the future. The sad thing to me is that both candidates for the presidency are concentrating on programs that they are going to put into place once they are elected…and fail to recognize that the situation is not one in which they are going to be able to enact any of these programs.
Furthermore, more and more people are beginning to realize that the situation is continuing to unfold…the economy has not felt the full impact of the financial upheavals and the collapse of the housing market…and, that Americans are not just “whiners” who have a mental depression.
The good thing is that things are proceeding and being dealt with. There are going to be more assets written down. There will be more losses. There will be more financial institutions taken over by the regulators. But, situations are being identified and people are moving to resolve the problems. I believe that this will continue, if we can just keep attention-seeking Senators from sending out letters that set off panics at financial institutions.
It seems to me that two major changes in the way the United States does business is needed in the current situation. First, we need to make sure that the world does not dive into a ‘protectionist’ shell. That is, it is best for all to keep trade open, to allow purchases of assets go ‘both ways’, and to facilitate the evolution of world trade integration rather that arrogantly stand above the fray and maintain the superiority of the anyone country.
Unfortunately, this is going to result in some pain because of the policies and programs that have been instituted in the past. The rest of the world owns a lot of America’s financial assets. With the value of the dollar being so low, it makes sense for these wealth interests to convert their financial assets into United States physical assets. This is something we are going to have to live with. The alternative, too, is painful…a protective world where trade is reduced and trust and cooperation is minimized. I believe that it will benefit more people to reach a balance closer to open trade than it will be to ‘close down the shop’.
Second, international communication and cooperation must be promoted on a greater scale. An article in the Financial Times has argued that the G-8 is really inconsequential any more and that the world stage must be broadened to at least the G-20. The point is that there are many more nations that play a significant enough role in the world that they must be included in any discussions taking place. Things just won’t get done if the circle is not widened.
But, even more important, the arrogance of the United States must be minimized. The United States must play by the rules of inter-dependent nations. The United States must become one among many and cannot appear agreeable to what others want when they are together and then go home and undercut the whole process.
This, too, will be painful. The consequences of the monetary and fiscal policies of the last seven to eight years must be reckoned with and this is going to hurt. But, the United States has to bring itself more into line with the rest of the world. Its policies are already hurting enough countries, countries whose currency is tied to the value of the dollar. And, the United States must accept the fact that because it did not play by the rules in the past that the nations and areas that did work hard to establish discipline and market confidence over these years must not now abandon their efforts in order to help out ‘good old America’.
As I have suggested before…the United States is at a ‘tipping point’. The country that we have known over the past forty years or so is rapidly receding. We are struggling to gain the future.
I have gone through another ‘tipping point’ in my life. My children have asked me over the years…”what was the big deal about Viet Nam?” This, I have found, is a difficult question to answer in a simple way. Perhaps the most relevant thing I have said about this period is that life before the 1960s was quite different from life after the 1960s.
I firmly believe that life after the 2000s will be considerably different than life before the 2000s. How so? No one has an answer for that at this time! But, we all must be flexible in our commitments and return to the principles of sound financial and economic programs and policies and cooperation and openness with others in building the world community.
I call what is happening ‘reverse globalization’ because, for Americans, globalization was a good thing when the United States was dominating the world, spreading into more and more corners of the globe, and investing in more and more foreign companies. Now, the shoe is on the other foot and the question of concern is over American attitudes to world trade…to further globalization.
We see trade agreements are in danger in Congress. We hear Presidential candidates claim that firms that transfer jobs off shore will be punished. And, we see more and more American Companies being purchased or invested in by foreign companies or national wealth pools. The question is how long will the voters in the United States support open trade and world economic evolution?
The problem is that in an inter-dependent world, countries cannot act as if they are isolated from other nations and international financial and economic markets…even if they are the sole remaining superpower. And, as we see in economic affairs, what has been started and supported historically must play itself out. It has taken us a long time to arrive at the situation we are now in and there is plenty of blame that can be passed around to all who have been involved.
The fact is, we are in the situation we are now in and we must deal with it in the best way we can. And, whether we like it or not…we must accept the fact that the current administration in Washington…the “Gang that couldn’t shoot straight”…is going to play a role in how we get to the future. The sad thing to me is that both candidates for the presidency are concentrating on programs that they are going to put into place once they are elected…and fail to recognize that the situation is not one in which they are going to be able to enact any of these programs.
Furthermore, more and more people are beginning to realize that the situation is continuing to unfold…the economy has not felt the full impact of the financial upheavals and the collapse of the housing market…and, that Americans are not just “whiners” who have a mental depression.
The good thing is that things are proceeding and being dealt with. There are going to be more assets written down. There will be more losses. There will be more financial institutions taken over by the regulators. But, situations are being identified and people are moving to resolve the problems. I believe that this will continue, if we can just keep attention-seeking Senators from sending out letters that set off panics at financial institutions.
It seems to me that two major changes in the way the United States does business is needed in the current situation. First, we need to make sure that the world does not dive into a ‘protectionist’ shell. That is, it is best for all to keep trade open, to allow purchases of assets go ‘both ways’, and to facilitate the evolution of world trade integration rather that arrogantly stand above the fray and maintain the superiority of the anyone country.
Unfortunately, this is going to result in some pain because of the policies and programs that have been instituted in the past. The rest of the world owns a lot of America’s financial assets. With the value of the dollar being so low, it makes sense for these wealth interests to convert their financial assets into United States physical assets. This is something we are going to have to live with. The alternative, too, is painful…a protective world where trade is reduced and trust and cooperation is minimized. I believe that it will benefit more people to reach a balance closer to open trade than it will be to ‘close down the shop’.
Second, international communication and cooperation must be promoted on a greater scale. An article in the Financial Times has argued that the G-8 is really inconsequential any more and that the world stage must be broadened to at least the G-20. The point is that there are many more nations that play a significant enough role in the world that they must be included in any discussions taking place. Things just won’t get done if the circle is not widened.
But, even more important, the arrogance of the United States must be minimized. The United States must play by the rules of inter-dependent nations. The United States must become one among many and cannot appear agreeable to what others want when they are together and then go home and undercut the whole process.
This, too, will be painful. The consequences of the monetary and fiscal policies of the last seven to eight years must be reckoned with and this is going to hurt. But, the United States has to bring itself more into line with the rest of the world. Its policies are already hurting enough countries, countries whose currency is tied to the value of the dollar. And, the United States must accept the fact that because it did not play by the rules in the past that the nations and areas that did work hard to establish discipline and market confidence over these years must not now abandon their efforts in order to help out ‘good old America’.
As I have suggested before…the United States is at a ‘tipping point’. The country that we have known over the past forty years or so is rapidly receding. We are struggling to gain the future.
I have gone through another ‘tipping point’ in my life. My children have asked me over the years…”what was the big deal about Viet Nam?” This, I have found, is a difficult question to answer in a simple way. Perhaps the most relevant thing I have said about this period is that life before the 1960s was quite different from life after the 1960s.
I firmly believe that life after the 2000s will be considerably different than life before the 2000s. How so? No one has an answer for that at this time! But, we all must be flexible in our commitments and return to the principles of sound financial and economic programs and policies and cooperation and openness with others in building the world community.
Monday, June 16, 2008
"Rubinomics"--Two
The concept of “Rubinomics” seems to generate some rather emotional responses…for and against the basic ideas…for and against Robert Rubin. Therefore, I felt the need to follow up my earlier post (June 13, 2008) on “Rubinomics” with this post, ““Rubinomics”—two’.
First, it is perhaps destructive of a idea to tie it so closely to an individual. “Rubinomics” and Robert Rubin seem to draw a visceral response much as did “Keynesian” and John Maynard Keynes. Milton Friedman was lucky enough not to get his name tied to the prominent idea which he promoted, “Monetarism”…which did allow for the creation of an opposition title…proponents were not called “Keynesians” but “Fiscalists”.
Calling something by a person’s name can be used to draw together those opposed to the person and his/her ideas and as a term of derision. It can also be used to rally those that pursue similar ends. Oftentimes the use of such titles direct attention away from the real issues at hand and the policies being proposed. Name-calling can be helpful…and it can be destructive. In order for any productive discussion to take place, however, focus must be returned to the real issues at hand.
Second, ideas must be placed within their historical context. In the case of “Rubinomics”, we have to go back to the Paris Peace Talks following World War I. To create the economic situation at that time is very simple terms I will argue that there were two major conditions at hand. The allies were very divided in terms of what they wanted to achieve…there were as many programs for the “new world order” as there were major nations involved in the discussions. In addition, the Russian Revolution had just taken place and there was great fear among the discussant nations that the threat to the future was labor unrest and the Bolsheviks, the proposed new order for the revolutionary world.
This was the world that John Maynard Keynes was involved in and his goal was to create a model of the world in which labor unrest could be avoided as much as possible so that the wave of revolution did not overcome the Western world as he knew it. The fundamentals of his model were fixed exchange rates between countries so that each nation could pursue its own independent economic policy and a government program to stimulate a national economy so as to avoid severe economic collapse and maintain high rates of employment.
As is well known, Keynes worked over the next twenty years or so to develop a theoretical model to support his perception of the world and to bring politicians and institutions to incorporate his ideas for low employment and peace. He then continued to work throughout World War II to create the international financial system that would actually implement his ideas.
So, for roughly fifty-five years efforts were made to try and create a world of fixed foreign exchange rates and the institutions and rules that could maintain such a system so that countries could operate their fiscal and monetary policies in a relatively independent manner. As history has shown, this system proved to be unworkable in the long run…because even in such a regime, nations cannot operate fully independently of one another. The post-World War II period was dotted with inflations and devaluations that periodically disrupted the system. In the early 1970s the system broke down. (I am in the process of writing a book on this period and the theoretical and practical issues that were a part of this history.)
The next twenty years or so the nations learned to operate in a world that was becoming more global and integrated in nature. Nation after nation learned that in such a world that they could not operate independently of one another and that a firm discipline needed to be maintained in order to exert some control over their destiny. A lack of governmental discipline and the slight smell of inflation could set into play forces in international financial markets that would completely disrupt the internal policies that these nations were attempting to follow. Nation after nation had to bring their budgets under control and follow a strictly disciplined approach to their debt creation. Also, these nations made their central banks independent of the national government and charged them with keeping inflation under control. This has become the foundation of the model for international cooperation on international trade and globalization.
The next fifteen years or so the world had to deal with a United States that was at first receptive to this new world financial order and then at odds with the system and even rebellious. It was within this context that “Rubinomics” was born. Again, putting things in relatively simple terms, the fundamentals of “Rubinomics”, to me, is the essence of the “new world order”. First, a country needs to get its fiscal affairs in order and minimize its creation of new debt. Second, the nation needs an independent central bank whose primary focus is on controlling inflation…and little else. Third, this country needs to operate as a partner within the world…even though it may be the world’s only super power…and help to facilitate the growth and interaction of nations into as fully an integrated world as possible.
It seems to me that this approach was attempted in the 1990s and was relatively successful. It seems to me that this approach was snubbed in the first decade of the twenty-first century and, as a consequence, we have substantial financial dislocation in the world and a fractured world community. It seems to me that “Humpty-Dumpty” needs to be put back together again.
Where do we start?
Paul Volcker (whoops another name), I believe, was right in writing “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, “Changing Fortunes: the World’s Money and the Threat to American Leadership, (New York: Times Books, 1992), p. 232.) This is where the United States must start!
United States fiscal and monetary policy must be responsive to what the rest of the world is trying to tell us. If the value of the U. S. dollar has been falling for seven years or so, maybe the market is trying to tell it something. This is what happened in the 1972-1992 period to many other countries. (Last post I mentioned a book by Steven Solomon that reviews this period: “The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy”, 1995.) In the Clinton years, policymakers seemed to understand this message. In the years that followed, the policymakers seemed to go out-of-their-way to avoid hearing this message.
The United States needs to start listening again. The Federal budget must be brought under control and the nation must move ahead in a disciplined manner with respect to debt creation. The Federal Reserve System must not be charged with multiple responsibilities that distract it from what should be its main focus…inflation. Note that this is more complex than just concentrating on the “flow” prices that are captured in the major price indices. There will be more on this in future posts.
There is no question that the United States government needs to review its fiscal programs and policies, its needed public investment. A lively debate must take place with respect to things like the war in Iraq and elsewhere, universal health care, the infrastructure, education, and so on. But, this discussion must take place within the constraint of what it takes to be a partner within the world community and operate according to the rules of membership. We may not like this…we Americans do not take well to the discipline of others. But, we are a member of the world community and we must be a GOOD member. Citizens of the United States must remember this.
We must also get away from the “Fundamentalism” that permeates both ends of the political spectrum. We cannot promote a left wing “Tax and Spend” fundamentalism any more than we can promote a right wind “Tax Cut and Spend” fundamentalism. We cannot be locked into past doctrine…we must be more pragmatic in practice. We cannot hold up politically correct tests of membership…from the right or from the left. We must shake off these remnants of the past!
First, it is perhaps destructive of a idea to tie it so closely to an individual. “Rubinomics” and Robert Rubin seem to draw a visceral response much as did “Keynesian” and John Maynard Keynes. Milton Friedman was lucky enough not to get his name tied to the prominent idea which he promoted, “Monetarism”…which did allow for the creation of an opposition title…proponents were not called “Keynesians” but “Fiscalists”.
Calling something by a person’s name can be used to draw together those opposed to the person and his/her ideas and as a term of derision. It can also be used to rally those that pursue similar ends. Oftentimes the use of such titles direct attention away from the real issues at hand and the policies being proposed. Name-calling can be helpful…and it can be destructive. In order for any productive discussion to take place, however, focus must be returned to the real issues at hand.
Second, ideas must be placed within their historical context. In the case of “Rubinomics”, we have to go back to the Paris Peace Talks following World War I. To create the economic situation at that time is very simple terms I will argue that there were two major conditions at hand. The allies were very divided in terms of what they wanted to achieve…there were as many programs for the “new world order” as there were major nations involved in the discussions. In addition, the Russian Revolution had just taken place and there was great fear among the discussant nations that the threat to the future was labor unrest and the Bolsheviks, the proposed new order for the revolutionary world.
This was the world that John Maynard Keynes was involved in and his goal was to create a model of the world in which labor unrest could be avoided as much as possible so that the wave of revolution did not overcome the Western world as he knew it. The fundamentals of his model were fixed exchange rates between countries so that each nation could pursue its own independent economic policy and a government program to stimulate a national economy so as to avoid severe economic collapse and maintain high rates of employment.
As is well known, Keynes worked over the next twenty years or so to develop a theoretical model to support his perception of the world and to bring politicians and institutions to incorporate his ideas for low employment and peace. He then continued to work throughout World War II to create the international financial system that would actually implement his ideas.
So, for roughly fifty-five years efforts were made to try and create a world of fixed foreign exchange rates and the institutions and rules that could maintain such a system so that countries could operate their fiscal and monetary policies in a relatively independent manner. As history has shown, this system proved to be unworkable in the long run…because even in such a regime, nations cannot operate fully independently of one another. The post-World War II period was dotted with inflations and devaluations that periodically disrupted the system. In the early 1970s the system broke down. (I am in the process of writing a book on this period and the theoretical and practical issues that were a part of this history.)
The next twenty years or so the nations learned to operate in a world that was becoming more global and integrated in nature. Nation after nation learned that in such a world that they could not operate independently of one another and that a firm discipline needed to be maintained in order to exert some control over their destiny. A lack of governmental discipline and the slight smell of inflation could set into play forces in international financial markets that would completely disrupt the internal policies that these nations were attempting to follow. Nation after nation had to bring their budgets under control and follow a strictly disciplined approach to their debt creation. Also, these nations made their central banks independent of the national government and charged them with keeping inflation under control. This has become the foundation of the model for international cooperation on international trade and globalization.
The next fifteen years or so the world had to deal with a United States that was at first receptive to this new world financial order and then at odds with the system and even rebellious. It was within this context that “Rubinomics” was born. Again, putting things in relatively simple terms, the fundamentals of “Rubinomics”, to me, is the essence of the “new world order”. First, a country needs to get its fiscal affairs in order and minimize its creation of new debt. Second, the nation needs an independent central bank whose primary focus is on controlling inflation…and little else. Third, this country needs to operate as a partner within the world…even though it may be the world’s only super power…and help to facilitate the growth and interaction of nations into as fully an integrated world as possible.
It seems to me that this approach was attempted in the 1990s and was relatively successful. It seems to me that this approach was snubbed in the first decade of the twenty-first century and, as a consequence, we have substantial financial dislocation in the world and a fractured world community. It seems to me that “Humpty-Dumpty” needs to be put back together again.
Where do we start?
Paul Volcker (whoops another name), I believe, was right in writing “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, “Changing Fortunes: the World’s Money and the Threat to American Leadership, (New York: Times Books, 1992), p. 232.) This is where the United States must start!
United States fiscal and monetary policy must be responsive to what the rest of the world is trying to tell us. If the value of the U. S. dollar has been falling for seven years or so, maybe the market is trying to tell it something. This is what happened in the 1972-1992 period to many other countries. (Last post I mentioned a book by Steven Solomon that reviews this period: “The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy”, 1995.) In the Clinton years, policymakers seemed to understand this message. In the years that followed, the policymakers seemed to go out-of-their-way to avoid hearing this message.
The United States needs to start listening again. The Federal budget must be brought under control and the nation must move ahead in a disciplined manner with respect to debt creation. The Federal Reserve System must not be charged with multiple responsibilities that distract it from what should be its main focus…inflation. Note that this is more complex than just concentrating on the “flow” prices that are captured in the major price indices. There will be more on this in future posts.
There is no question that the United States government needs to review its fiscal programs and policies, its needed public investment. A lively debate must take place with respect to things like the war in Iraq and elsewhere, universal health care, the infrastructure, education, and so on. But, this discussion must take place within the constraint of what it takes to be a partner within the world community and operate according to the rules of membership. We may not like this…we Americans do not take well to the discipline of others. But, we are a member of the world community and we must be a GOOD member. Citizens of the United States must remember this.
We must also get away from the “Fundamentalism” that permeates both ends of the political spectrum. We cannot promote a left wing “Tax and Spend” fundamentalism any more than we can promote a right wind “Tax Cut and Spend” fundamentalism. We cannot be locked into past doctrine…we must be more pragmatic in practice. We cannot hold up politically correct tests of membership…from the right or from the left. We must shake off these remnants of the past!
Tuesday, June 10, 2008
Earning the Trust of the World
It is difficult for an individual or an organization to earn the trust of the market. Although market participants may want to give an individual or an organization the ‘benefit of the doubt’, especially when a person or the leadership of an organization is new on the job, trust has to be earned and trust is not gained overnight. But, trust can be quickly lost and once it is lost it becomes even harder to earn it back..
There seems to be very little trust in the Bush administration these days and to hear members of “the team”, including President Bush, out in public talking up a strong dollar seems a little bit absurd and surreal. From time-to-time, the Bush administration has spoken about a strong dollar, but has never seemed to do anything about it. And, this charade has gone on for seven years or so.
Now, when this administration is in its waning days, when it can do little or nothing in the way of implementing appropriate policies, when it is subject to internal questioning of what it has done, “talking the good talk” just highlights how incompetent and how out-of-touch the Bush administration really is. The President has never really had much of an interest in economic policy making and has failed to appoint or listen to quality advisors. The results that have been achieved only point up these failures.
The internal questioning is another issue. Individuals that have been members of the Bush administration have given us their impressions about economic policymaking after they have left the administration, but now we have people within the monetary wing of the team expressing doubts and concerns in the public square. (See my post of June 6, 2008, The Bermuda Triangle?” which was posted on Speaking Alpha on June 10 with the title “Fed Policy and U. S. Economic Turmoil”.) Fed Chairman Ben Bernanke has spoken out three times in the past week to argue for a strong dollar and to waylay worries about the jump in the unemployment rate. (see:http://online.wsj.com/article/SB121305516121159161.html?mod=todays_us_page_one.) Yet, one worries about the leadership within the Federal Reserve System with so many governors and district bank presidents speaking out. This is coupled with the fact that the Board of Governors only has three confirmed governors plus one who resigned a week ago. Where is the source of any confidence here?
But, let’s look to the future, to the presidential candidates. Polls inform us that the state of the economy is, by far, the most important issue on the menu of voters concerns. The two candidates are contending that economics is the big issue that they will fight over in the upcoming election and that they stand miles apart in terms of what they would do.
Yet, what do the participants in international markets hear? They hear discussions about tax cuts…tax cuts for middle-income families and retirees…tax cuts for corporations and upper-income families…and expanded unemployment aid…and subsidies for state relief programs…and enlarged coverage of health care…and help for families facing foreclosure on their homes…and so on, and so on.
How will these be paid for? By letting the Bush tax cuts expire…by cutting back on other programs…by the reduction of support for the military through redirecting the use of resources…by taxing corporations like those in the oil industry…by better management of programs…by efficiencies…and so on, and so on.
The markets are interpreting this debate as promising more and more government debt. They have heard these arguments before. More benefits for the electorate…paid for through reductions in government or better management of programs. International markets are just hearing “more of the same”. And, when they look at the advisors to these candidates they see one candidate who admits that he doesn’t know much about economics and has two old friends, Phil Gramm and Jack Kemp, as his primary advisors. (“Back to the Future” Part VII or VIII.) The other candidate…well, that remains to be seen…we are told that the overall plans will be forthcoming this fall. Not much of a confidence builder here.
What about monetary policy? The bet is still on that United States monetary policy will help to underwrite the government debt. The first concern is with the leadership of the Federal Reserve System. Disarray within the body is not a good sign. The absence of so many principals it also not a good sign. And, the monetary authority is still strapped with the assignment to pursue both economic growth and low inflation...something that is very, very difficult to do. Furthermore, with a credit crisis still at hand…the Lehman earnings report did not help nerves at all…and the possibility of a recession…unemployment up, car sales and retail sales down and the housing market still in the tank and so forth…along with high oil and food prices…the best bet is that the Fed will support policy actions to lower unemployment and spur on economic
growth. It is currently the American way to inflate oneself out of problems.
Not only is this the way of the government, it is also the way of the people. A timely article on this point is the David Brooks piece in the New York Times of June 10, 2008: http://www.nytimes.com/2008/06/10/opinion/10brooks.html. I have also presented some points on this: see my blog of June 4, 2008, “Economic and Financial Power and Leverage”. Discipline does not seem to be a word to be found in the American vocabulary these days.
One of the problems is that we have to get rid of the Keynesian idea that monetary policy has a responsibility for high levels of economic employment. For one, statistical research has shown that monetary policy has very little, if any, influence over the unemployment rate over time. So, empirically, the relationship between monetary policy and employment is a weak one. Secondly, the Keynesian model was developed to provide a foundation for government spending policies at a time when greater national autonomy in economic policymaking was desired to achieve higher levels of employment so as to avoid social revolution. (See Donald Markwell, “John Maynard Keynes and International Relations, Oxford University Press, 2006.) These times have passed, yet, as Keynes himself argued, the ideas of economist long dead still influence the making of economic policy. The monetary authority needs to focus on inflation as its primary responsibility and not some dream about achieving high employment.
The difficulty that the United States is facing is exacerbated by other institutions within the world that are earning the trust of international financial markets. The European Central Bank (ECB) is one such institution and the Bank of England is another. The ECB has, as its main function, the goal of low inflation. It is determined to crush inflation. (See http://www.ft.com/cms/s/0/42ffd73e-3688-11dd-8bb8-0000779fd2ac.html.) The Bank of England is also taking a strong stance against the rising tide of inflation. Nations within the world community cannot ignore what is going on in the rest of the world and conduct economic policy independently of everyone else. History seems to side with the nations and institutions that establish and maintain the trust of others within the world community. To this end, participants in international financial markets are leery about placing any trust in the current leadership of the United States and are not comfortable with what they are hearing from the potential future leadership.
The future of the value of the dollar? Right now, it is hard to be bullish. There will be recoveries and rebounds…there always are. But, aside from these short-term swings, what is there to be confident about in terms of the future of the economic policies of the United States. Candidates have to get elected…and the candidates have to tell the electorate where they stand in terms of what they would do if elected. The policies and programs that are being proposed almost assuredly will not be enacted within the next two or three years. America must get its act together. That is the only way that the rest of the world will come to trust this country again. What needs to be done, however, will take time and patience. And, with time, trust can be re-earned. Until then, I believe the value of the dollar will remain soft.
There seems to be very little trust in the Bush administration these days and to hear members of “the team”, including President Bush, out in public talking up a strong dollar seems a little bit absurd and surreal. From time-to-time, the Bush administration has spoken about a strong dollar, but has never seemed to do anything about it. And, this charade has gone on for seven years or so.
Now, when this administration is in its waning days, when it can do little or nothing in the way of implementing appropriate policies, when it is subject to internal questioning of what it has done, “talking the good talk” just highlights how incompetent and how out-of-touch the Bush administration really is. The President has never really had much of an interest in economic policy making and has failed to appoint or listen to quality advisors. The results that have been achieved only point up these failures.
The internal questioning is another issue. Individuals that have been members of the Bush administration have given us their impressions about economic policymaking after they have left the administration, but now we have people within the monetary wing of the team expressing doubts and concerns in the public square. (See my post of June 6, 2008, The Bermuda Triangle?” which was posted on Speaking Alpha on June 10 with the title “Fed Policy and U. S. Economic Turmoil”.) Fed Chairman Ben Bernanke has spoken out three times in the past week to argue for a strong dollar and to waylay worries about the jump in the unemployment rate. (see:http://online.wsj.com/article/SB121305516121159161.html?mod=todays_us_page_one.) Yet, one worries about the leadership within the Federal Reserve System with so many governors and district bank presidents speaking out. This is coupled with the fact that the Board of Governors only has three confirmed governors plus one who resigned a week ago. Where is the source of any confidence here?
But, let’s look to the future, to the presidential candidates. Polls inform us that the state of the economy is, by far, the most important issue on the menu of voters concerns. The two candidates are contending that economics is the big issue that they will fight over in the upcoming election and that they stand miles apart in terms of what they would do.
Yet, what do the participants in international markets hear? They hear discussions about tax cuts…tax cuts for middle-income families and retirees…tax cuts for corporations and upper-income families…and expanded unemployment aid…and subsidies for state relief programs…and enlarged coverage of health care…and help for families facing foreclosure on their homes…and so on, and so on.
How will these be paid for? By letting the Bush tax cuts expire…by cutting back on other programs…by the reduction of support for the military through redirecting the use of resources…by taxing corporations like those in the oil industry…by better management of programs…by efficiencies…and so on, and so on.
The markets are interpreting this debate as promising more and more government debt. They have heard these arguments before. More benefits for the electorate…paid for through reductions in government or better management of programs. International markets are just hearing “more of the same”. And, when they look at the advisors to these candidates they see one candidate who admits that he doesn’t know much about economics and has two old friends, Phil Gramm and Jack Kemp, as his primary advisors. (“Back to the Future” Part VII or VIII.) The other candidate…well, that remains to be seen…we are told that the overall plans will be forthcoming this fall. Not much of a confidence builder here.
What about monetary policy? The bet is still on that United States monetary policy will help to underwrite the government debt. The first concern is with the leadership of the Federal Reserve System. Disarray within the body is not a good sign. The absence of so many principals it also not a good sign. And, the monetary authority is still strapped with the assignment to pursue both economic growth and low inflation...something that is very, very difficult to do. Furthermore, with a credit crisis still at hand…the Lehman earnings report did not help nerves at all…and the possibility of a recession…unemployment up, car sales and retail sales down and the housing market still in the tank and so forth…along with high oil and food prices…the best bet is that the Fed will support policy actions to lower unemployment and spur on economic
growth. It is currently the American way to inflate oneself out of problems.
Not only is this the way of the government, it is also the way of the people. A timely article on this point is the David Brooks piece in the New York Times of June 10, 2008: http://www.nytimes.com/2008/06/10/opinion/10brooks.html. I have also presented some points on this: see my blog of June 4, 2008, “Economic and Financial Power and Leverage”. Discipline does not seem to be a word to be found in the American vocabulary these days.
One of the problems is that we have to get rid of the Keynesian idea that monetary policy has a responsibility for high levels of economic employment. For one, statistical research has shown that monetary policy has very little, if any, influence over the unemployment rate over time. So, empirically, the relationship between monetary policy and employment is a weak one. Secondly, the Keynesian model was developed to provide a foundation for government spending policies at a time when greater national autonomy in economic policymaking was desired to achieve higher levels of employment so as to avoid social revolution. (See Donald Markwell, “John Maynard Keynes and International Relations, Oxford University Press, 2006.) These times have passed, yet, as Keynes himself argued, the ideas of economist long dead still influence the making of economic policy. The monetary authority needs to focus on inflation as its primary responsibility and not some dream about achieving high employment.
The difficulty that the United States is facing is exacerbated by other institutions within the world that are earning the trust of international financial markets. The European Central Bank (ECB) is one such institution and the Bank of England is another. The ECB has, as its main function, the goal of low inflation. It is determined to crush inflation. (See http://www.ft.com/cms/s/0/42ffd73e-3688-11dd-8bb8-0000779fd2ac.html.) The Bank of England is also taking a strong stance against the rising tide of inflation. Nations within the world community cannot ignore what is going on in the rest of the world and conduct economic policy independently of everyone else. History seems to side with the nations and institutions that establish and maintain the trust of others within the world community. To this end, participants in international financial markets are leery about placing any trust in the current leadership of the United States and are not comfortable with what they are hearing from the potential future leadership.
The future of the value of the dollar? Right now, it is hard to be bullish. There will be recoveries and rebounds…there always are. But, aside from these short-term swings, what is there to be confident about in terms of the future of the economic policies of the United States. Candidates have to get elected…and the candidates have to tell the electorate where they stand in terms of what they would do if elected. The policies and programs that are being proposed almost assuredly will not be enacted within the next two or three years. America must get its act together. That is the only way that the rest of the world will come to trust this country again. What needs to be done, however, will take time and patience. And, with time, trust can be re-earned. Until then, I believe the value of the dollar will remain soft.
Sunday, April 13, 2008
Finance Ministers Concerned with U. S. Dollar
The G-7 Finance Ministers and Central Bank Governors met in Washington, D. C. this past week and expressed concern over the decline in the value of the dollar. The United States dollar has fallen by about 15% against the Euro over the past year and has fallen by about 8.0% since the end of 2007. Against the yen it has fallen by the same amount over the past twelve months and by almost 10% since the close of 2007. The dollar has fallen by almost 10% against the currencies of major trading partners of the United States in the past year. Over the past six years the dollar has been in almost constant decline against most major currencies and against major U. S. trading blocks. The data all seem to show the same result.
The Group of Seven, generally, is relatively subtle about the statements they make. However, most observers agree that the statement put out by these people last Thursday evening was relatively blunt. The statement reads, “Since our last meeting, there have been sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” They followed this up by saying “We continue to monitor exchange markets closely, and cooperate as appropriate.”
But, what can be done. The possibilities are not very pleasant. The United States can raise interest rates. Or, Europe, and other countries, can lower their interest rates. Or, there can be direct intervention in markets. Although the English lowered rates last week, the European Central Bank has not followed. The English are in the midst of their own housing crisis and felt that they could not go any longer avoid lowering rates. Other central banks are not so willing to lower rates because, world wide there is a fear of setting off inflation again.
Much of the rest of the world has gone through the battle to get inflation under control and realign their fiscal and monetary affairs so as to keep inflation under control. This has meant that governments could not lose control of their fiscal discipline and that central banks had to become independent of the national government. In many cases, central banks pursued inflation targeting in order to establish their credibility and gain the confidence and trust of the global investment community. These countries, once they paid the price to achieve this control and credibility, are not willing to give up what came at such a cost. Other central banks will only reluctantly, if at all, lower their interest rates.
The United States has not conformed to the rest of the world in this respect. There has been little or no discipline established over its fiscal affairs and the Federal Reserve, especially between 2002 and 2005, conducted a policy that seemed anything but independent of the administration in Washington, D. C. There is now little or no confidence in the ability of the leaders in the Bush administration to gain the control necessary to regain fiscal discipline and monetary independence. Any necessary action on the part of Washington is going to have to wait until, at least, there is a new administration sworn in. So, don’t bet on the Federal Reserve raising interest rates in the near term.
What about direct intervention? This may work in the very short run, but the long term consequences of such action is worse than the benefits gained in the short run. These should not be relied upon unless absolutely necessary and then probably not even then.
Sooner or later the United States is going to have to bite-the-bullet and pay for the dislocations it has caused. Like almost every other country in the world, the United States is going to have to pay by the current international rules. America has ‘gone-it-alone’ for almost eight years now, in foreign affairs, as well as in economics and finance. In economics and finance, ultimately you have to pay for the way you have lived. You can only postpone things for so long.
The G-7 Finance Ministers and Central Bank Governors have given the United States a ‘mild’ slap on the hand. But, many financial experts believe that having this issue reach this level is a sign that the rest of the world is tired of the United States doing just what it wants to do. This administration is not going to really do anything about it. The G-7 statement, however, should be taken seriously by everyone of the candidates running for the office of President of the United States.
The Group of Seven, generally, is relatively subtle about the statements they make. However, most observers agree that the statement put out by these people last Thursday evening was relatively blunt. The statement reads, “Since our last meeting, there have been sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” They followed this up by saying “We continue to monitor exchange markets closely, and cooperate as appropriate.”
But, what can be done. The possibilities are not very pleasant. The United States can raise interest rates. Or, Europe, and other countries, can lower their interest rates. Or, there can be direct intervention in markets. Although the English lowered rates last week, the European Central Bank has not followed. The English are in the midst of their own housing crisis and felt that they could not go any longer avoid lowering rates. Other central banks are not so willing to lower rates because, world wide there is a fear of setting off inflation again.
Much of the rest of the world has gone through the battle to get inflation under control and realign their fiscal and monetary affairs so as to keep inflation under control. This has meant that governments could not lose control of their fiscal discipline and that central banks had to become independent of the national government. In many cases, central banks pursued inflation targeting in order to establish their credibility and gain the confidence and trust of the global investment community. These countries, once they paid the price to achieve this control and credibility, are not willing to give up what came at such a cost. Other central banks will only reluctantly, if at all, lower their interest rates.
The United States has not conformed to the rest of the world in this respect. There has been little or no discipline established over its fiscal affairs and the Federal Reserve, especially between 2002 and 2005, conducted a policy that seemed anything but independent of the administration in Washington, D. C. There is now little or no confidence in the ability of the leaders in the Bush administration to gain the control necessary to regain fiscal discipline and monetary independence. Any necessary action on the part of Washington is going to have to wait until, at least, there is a new administration sworn in. So, don’t bet on the Federal Reserve raising interest rates in the near term.
What about direct intervention? This may work in the very short run, but the long term consequences of such action is worse than the benefits gained in the short run. These should not be relied upon unless absolutely necessary and then probably not even then.
Sooner or later the United States is going to have to bite-the-bullet and pay for the dislocations it has caused. Like almost every other country in the world, the United States is going to have to pay by the current international rules. America has ‘gone-it-alone’ for almost eight years now, in foreign affairs, as well as in economics and finance. In economics and finance, ultimately you have to pay for the way you have lived. You can only postpone things for so long.
The G-7 Finance Ministers and Central Bank Governors have given the United States a ‘mild’ slap on the hand. But, many financial experts believe that having this issue reach this level is a sign that the rest of the world is tired of the United States doing just what it wants to do. This administration is not going to really do anything about it. The G-7 statement, however, should be taken seriously by everyone of the candidates running for the office of President of the United States.
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