The Health of the Banking Systems in Europe and the United States

What still bothers me is that governments in both the United States and Europe have not resolved their problems with the solvency of their banking systems.

The question remains about how long these problems are going to be carried along.

This morning we read, “Ireland’s Largest Banks Given Failing Grades.” It is assumed that the government is going to take over the banks and the price tag is going to be a minimum of about $35 billion. (http://professional.wsj.com/article/SB10001424052748703806304576234180828120692.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj)

Following up on this there is the article about the bank problems in Spain, “Spain May Take Over CAM as Deal Talks Fail.” Here again we have the possibility of nationalizing another bank. Moody’s Investors Service estimates that the minimum needed to get the Spanish savings banks adequately capitalized at between €40 billion to €60 billion. (http://professional.wsj.com/article/SB10001424052748703806304576234912073054934.html?mod=ITP_moneyandinvesting_2&mg=reno-wsj)

On a smaller scale, we have another fiscal crisis in Portugal as it became known that the government’s financial figures were incorrect and that budget matters are worse than was expected. This news came a few days after Portugal’s credit rating had been downgraded once again. This, and the concern that Portugal may not be able to meet bond repayments falling in April and June, has raised new issues about the solvency of the Portuguese banking system.

In addition, we are still awaiting the results of the recently administered “stress tests” of European banks. There is substantial concern about what these “tests” might show.

And, question marks still hang over the health of the smaller banks…that is smaller than the biggest 25 commercial banks…in the United States banking system. The number of commercial banks on the FDIC’s list of problem banks was just under 900 on December 31, 2010. In all of 2010, 157 commercial banks failed while mergers occurred for 197 other banking organizations, many of them not exactly healthy.

This means that almost 12 percent of the commercial banks of the United States are on the problem list of the FDIC. Some put the number of commercial banks that are facing severe operating difficulties at 40 percent of the banking system.

I have argued that a major reason for the quantitative easing on the part of the Federal Reserve is to provide sufficient liquidity for the “smaller”, “troubled” commercial banks so that the FDIC can close or arrange mergers for as many of these banks as possible in an orderly fashion.

The concern over the health of the commercial banks in American and Europe is real.

And, now we are seeing just how extensive the financial crisis was in both Europe and the United States in 2008/2009. These banking systems collapsed together. And, the banking systems have continued to fail to resolve their issues together.

The release of the Federal Reserve statistics on borrowings from the Fed’s discount window, “Fed Kept Taps Open for Banks in Crisis”, is amazing in many respects. Some of the biggest borrowers, it turns out were from Europe. The Fed certainly became the worldwide “lender of last resort.” And, the Fed added large amounts of “junk” in the process. (http://professional.wsj.com/article/SB10001424052748704530204576235213193119194.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj)

The problems arose from real estate lending and the problems that continue are related to real estate lending.

The question that remains concerns the depths of the problems that still exist in the European and United States banking systems.

People I know are still in shock over the sale of the Wilmington Trust Company in early November 2010, a bank that everyone thought was in pristine shape. (http://seekingalpha.com/article/234027-wilmington-trust-sold-at-45-discount)

This subject came up again in discussions I was a part of during the past weekend.

The concern? How many more situations like that of the Wilmington Trust Company are there “out there”?

This is the worry that we cannot seem to shake.

And, the debate always seems to come back to one thing: Why is the Federal Reserve acting in the way it is? Injecting $1.5 trillion of excess reserves into the banking system does not make a lot of sense…unless the banking system is less solvent than we are being told.

There is a lot of discomfort… in both Europe and the United States…when it comes to looking at the banking system. Unfortunately, we may never understand how bad off the banks have been until we get more and more information in bits and pieces as things work themselves out.

Economic Policy in the Decade of the Twenty-Tens: More of the Same

Happy New Year!

I have spent a good portion of the last week and a half reviewing my perception of the foundational philosophy undergirding the economic and financial policies of governments in the United States and Europe and I come to the same conclusion over and over again.

Governments in the United States and Europe and the people working in and for them have learned little or nothing over the past fifty years.

These governments are still united in their belief that continuing credit inflation is what their economies need. It is the policy that they plan on delivering. And, if troubles develop, then they just bail troubled institutions out and continue on their merry way. Europe, in the first quarter of 2011, seems to be headed for another round of this bail and run behavior.

The underlying rationale for this is that the leaders of these governments believe that every effort must be made to keep unemployment as low as possible for as long as possible by aggregate governmental actions.

These leaders are unwilling to accept the fact that their policies only make it harder for them to achieve their goal over time and just applying more and more stimulus to the economy will just make things worse.

It is not enough to see that, in the United States alone, underemployment has gone from around ten percent in the 1960s to about twenty-five percent now and that over these past fifty years the income distribution has become more and more skewed toward the higher income end of the spectrum.

The reasons for these results? First, you cannot keep putting people back in their legacy jobs by means of fiscal and monetary stimulus and expect them to maintain their productivity and job competitiveness in a fast changing world. Second, credit inflation can only be taken advantage of by the wealthier people in the country; the less wealthy in such an environment, even though they might be benefitted by it in the short run, lose out to the wealthier over the longer run.

Stock markets, of course, like this environment of credit inflation. Note the following measures of stock market performance. Here we have charted Bob Shiller’s CAPE measure (Cyclically Adjusted P/E Ratio) and Jim Tobin’s q ratio. These statistics, obviously, roughly measure

the exact same thing, whether or not the capital stock in the United States is over- or under-valued. In the 1960s and early 1970s equities seem to be overvalued as the period of credit inflation gets underway. In the late 1970s, of course, we get the period of extremely tight monetary policy aimed at thwarting the rapid acceleration taking place at the time. However, the 1980s revived the bias toward credit inflation, and, as can be seen, the stock markets seemed to take advantage of this policy stance as both measures never dropped below their long-term averages even through the “Great Recession” up to the present time.

This fifty year period was, of course, the time in which the financial sectors of the economy grew to become such a large proportion of the economy and it was the heyday of financial innovation.

It was not the less-wealthy part of the country that benefitted from this policy stance over this period of time.

If the current foundational policy stance of the government remains one of credit inflation similar to the one in place for the last fifty years then all we can expect is more of the same.

And, in my mind, there is no separating out Republicans or Democrats on this issue. Both have proven equally committed to the same policy stance (just using different words to justify it) and both seem to remain oblivious to the facts.

Also, in my mind, the amount of debt people carry matters, but many of our policymakers seem to believe that the existence of debt carries with it no consequences. In fact, the belief seems to be that the solution to the problem of too much debt outstanding is the creation of even more debt. And, if the amount of debt outstanding seems to be troublesome, well, then just let a central bank buy it.

I see nothing on the horizon to change my mind concerning the economic philosophy that serves as the foundation for policy making in the United States and Europe. Credit inflation remains the underlying stance of the economic policies of these governments for future.

Thus, we can expect, over the next decade, a continuation of the economic and financial environment of the last fifty years.

Is the United States Making the Emerging Nations Stronger?

Why is the rate of inflation so low in the United States when the government has pumped huge amounts of debt into the country and the Federal Reserve has loaded the financial system with large amounts of liquidity?

The same question was asked in the 1990s. Where was the United States inflation?

The answer for the 1990s…and for the present time period…is that the United States has exported inflation to the rest of the world…more specifically…Asia. As the accompanying chart shows, inflation seems to be heading up in Asia…as it is also heading up in many other emerging nations.

As reported in the LEX column of the Financial Times yesterday, global inflation has seemingly bifurcated. In the developed countries the current inflation rate is below 2 percent (Australia and the UK are exceptions). Morgan Stanley expects a 1.5 percent rate of growth for the wealthier countries in 2010. “By contrast, the emerging market inflation rate is about three times higher—expected at 5.4 percent in 2010…” (http://www.ft.com/cms/s/3/0c01f5a4-fb0d-11df-b576-00144feab49a.html#axzz16h9jdCiK)

The post-financial crisis stimulus is now feeding the inflation in the emerging countries. “A significant portion of the river of cheap money flowed into commodity markets. The initial price recovery caused no problems, but the trend now threatens to create a vicious circle.”

There is also the “carry trade” which takes United States dollars throughout the world seeking higher interest rates. This flow is certainly not insignificant.

In these days, it seems like it is very difficult to contain the international flows of capital. Maybe policy makers need to give this a little more weight in their policy discussions.

There is an argument that central banks, in some Asian countries, kept their interest rates “appropriately low” over the past year or so because of “concerns about the strength in their developed-market trading partners” especially the United States. Now, with inflation threatening to get out-of-hand in the emerging nations, these same central banks are faced with the need to raise their domestic interest rates higher and higher. (See “Emerging Wild Card: Inflation”: http://www.ft.com/cms/s/3/0c01f5a4-fb0d-11df-b576-00144feab49a.html#axzz16h9jdCiK.)

The article continues: “One conundrum for investors is how more aggressive tightening would play out in the currency markets. Most investors have been operating on the assumption that with the Fed keeping interest rates at zero for the foreseeable future, any moves by emerging-market countries to raise interest rates would attract even more money from yield-hungry investors.”

This seems to reflect a cumulative problem. By keeping interest rates low in the United States, dollars are flowing out into the rest of the world. This out-flow is threatening to bring about greater amounts of inflation in the emerging nations of the world. In order to combat this rising level of inflation, the central banks in emerging nations are raising interest rates. But, in raising interest rates, more United States dollars flow to these emerging nations.

And the flow of money into dollars from Europe as a “safe haven” has kept the value of the dollar stronger than it otherwise would be in such a situation which just enhances the return to investors from moving into the interest rates in the emerging countries.

So, the Federal Reserve continues to inject large amounts of reserves into the banking system, hoping to get the United States economy going again. But, individuals, families, and small businesses do not seem to want to be borrowing. Only large, healthy companies seem to be borrowing and piling up cash reserves. The money the Fed is printing seems to be going off-shore.

Therefore, instead of stimulating the United States economy, the Federal Reserve seems to be stimulating the emerging countries of the world. The two results of this seem to be that the United States is not getting stronger, but it is helping the rest of the world to get relatively stronger. The rest of the world needs to keep inflation under control, but the emerging nations feel the relative shift in power within the world and are taking more and more advantage of this increased power. See reports on the recent G-20 meeting. (http://seekingalpha.com/article/236430-release-from-the-g20-what-more-needs-to-be-said)
Only strong, self-disciplined countries come out on top. Right now, the United States is anything but self-disciplined and it is finding that its relative strength is slipping away. The unfortunate thing is that in its lack of self-discipline, the United States is feeding the rising relative strength of the emerging nations in the world. This is our fault, not the fault of other nations within the world.

Release from the G-20: What More Needs to be Said?

Released at 4:04 PM EST by the Wall Street Journal: “China's Hu Rebuffs Weakened Obama at Summit” by Jonathan Weisman and Damian Paletta. (http://professional.wsj.com/article/SB10001424052748703848204575608024073731214.html?mod=WSJ_hpp_LEFTTopStories)

“That China was emboldened to lecture the U.S. on its currency, a notable reversal of recent meetings, underscores how it and other countries, including Brazil and Germany, have emerged from the global economic crisis faster and more strongly than the U.S. Mr. Obama found himself in the odd position of having to defend the U.S.'s independent central bank. He was also unable to quell concerns that the U.S. government is deliberately trying to weaken the dollar to boost exports.”

When are the leaders of the United States going to recognize that they are out-of-step with the world and that the economic model they are using is out-of-date and inappropriate?

China better not get too aggressive, however, because they continue to benefit from the short-sightedness of the United States leadership. Ah, but it feels good to lecture someone else after one has been down so long!

You Can't Lead Out Of Weakness: The IMF Meetings

With each international meeting it is becoming more and more obvious, the United States is dealing from a weakened hand.

The New York Times makes it very clear: “Despite loud calls from the United States; and more muted appeals by Europe, Japan and other countries, the annual meeting of the International Monetary Fund did not succeed in placing significant pressure on China to allow a prompt and meaningful rise in the value of its currency.” (See “Financial Leaders Decline to Press China on Currency,” http://www.nytimes.com/2010/10/10/business/global/10imf.html?_r=1&ref=todayspaper.)

The language in the concluding statement of the policy-setting committee of the IMF “was benign.” Everything was postponed to the G-20 meeting in Seoul, South Korea in November.

The United States took a strong position on the value of the Chinese currency and the behavior of the Chinese government with respect to this value. The United States Congress made its will known in late September. Treasury Secretary Geithner also spoke out about the need for action on the part of the Chinese. President Obama has even made mention of the issue.

But, policy-makers are “wary about pressuring China too severely.”

Right now, China seems to hold the cards and no one is willing to move strongly against their position.

Most revealing is the fact that the United States seems to be in no position to press its points with its own actions and does not seem to be strong enough to command support among the other nations that might side with it.

Furthermore, the central bank of the United States, the Federal Reserve System, appears to be on the verge of another round of “quantitative easing”, something that world financial markets have reacted to by selling dollars. The world investment community has not given the United States a very good grade in terms of how its government has managed the monetary and fiscal policy of the country over the past eight years or so and sees these additional efforts as just a continuation of the lack of foresight and discipline and will in its economic policymaking.

If this is the prevailing attitude in the world about the economic policy of the United States, then one can only project further declines in the position of this country in the evolving discussions about world financial arrangements.

The United States has dealt itself a weak hand in world economic affairs. Unless it steps back and re-assesses how it got here and what it needs to do to change the situation, it will just continue to further weaken its position. And, it is very hard for a nation to lead when it is continually hurting itself.

United States Losing Financial Clout?

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.

Monetary Warfare: the United States versus China?

Martin Wolf, in his latest column writes (http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html):

“In the absence of currency adjustments, we are seeing a form of monetary warfare: in effect, the US is seeking to inflate China, and China to deflate the US. Both sides are convinced they are right; neither is succeeding; and the rest of the world suffers.”

“It is not hard to see China’s point of view: it is desperate to avoid what it views as the dire fate of Japan after the Plaza accord.”

The basic argument in favor of China’s efforts is the Japanese experience in the 1990s. It seems as if everything goes back to this Japanese experience these days.

Maybe there is another explanation. Maybe this is what China’s leaders would like us to think.

The figures behind this discussion are those related to the world’s official reserves. From January 1999 and July 2008, these rose “from $1,615 billion to $7,534 billion—a staggering increase of $5,918 billion.” Between July 2008 and February 2009 reserves shrank by $472 billion, but rose again by $1,324 billion between February 2009 and May 2010 to reach $8385 billion.

“China is overwhelmingly the dominant intervener, accounting for 40 per cent of the accumulation since February 2009. By June 2010, its reserves had reached $2,450 billion, 30 per cent of the world total and a staggering 50 per cent of its own GDP. This accumulation must be viewed as a huge export subsidy.”

“Never in human history can the government of one superpower have lent so much to that of another.”

And, this, to me, is the key point. The key point is not what happened to Japan.

It is like the large United States corporations who have accumulated a huge amount of cash and they are, for the time being, just keeping their cash on their balance sheets. The question analysts are asking is “when will the corporations begin to invest again and get the economy moving?”

I don’t believe this is the issue for the United States corporations with lots of cash on hand. I believe that these corporations sense that a major re-structuring is in the process of taking place in the United States economy. They want to play a role in this re-structuring. Thus, the game plan is not to expand production by investment in physical plant and capital. Their plan is to merge and acquire other organizations and help re-define the landscape of American industry. I believe that this consolidation is just beginning.

I believe that this also applies to the some of the cash buildup in the banking industry and one of the reasons for the accumulation of so much cash in many of America’s larger financial institutions. These institutions want to be players in the consolidation of the banking industry.

China is observing the changes taking place in the world. It needs commodity resources. It needs production capacity. It needs world presence. In needs to extend its power into the world.

China is buying commodities or assuring commodity channels throughout the world. China is buying companies throughout the world. China is seeking and paying off new political relationships throughout the world. China is helping the world re-structure.

It would seem to me that a lot of international reserves would help it achieve these goals.

And, what is the United States doing?

It is underwriting the Chinese “re-structure” machine. Quoting Wolf, “the US is seeking to inflate China.” But, one could argue, China is not trying “to deflate the US.” China is playing a game of chess with the rest of the world. It is trying to re-position itself to be in a relatively greater position of power. It is trying to reduce the relative strength of the United States in the world and build up its own place.

And, the United States government is providing China with the means to accomplish this goal!

As with Mr. Wolf, many advisors in the United States government have been mesmerized by the events that took place in Japan in the 1990s. They couch almost every discussion about current international economic conditions in terms of Japan in the 1990s. Again, they are fighting the last war.

Japan was not trying to take on the United States. China is. And, that is the difference.

And, the President and the United States government, in their myopia, are doing all that the can to help China achieve its goal.

I would disagree with Mr. Wolf. We are not in “monetary warfare.” We are in a situation where the United States is giving China exactly what it needs to challenge America in the world!

China Is In The Game

China wants to play in the game. Yes, it would like to dominate the game, but that is for another time. For the present, China wants to be a player. I have written this constantly throughout my blogging career and I see no reason to change my opinion at this point.

China wants to play in the game and to do so its leaders realize that it must be a part of the game and not absent from it. But, remember two things: first, China will not do anything that it thinks might be harmful to itself in the long run; and second, China will always move in a way that “saves face.” Given these two conditions, China will be “in the game.”

The weekend news about China’s move on its currency is a case in point. The move was taken at China’s initiative. It seemed to catch the rest of the world by surprise. The move followed weeks of discussion about the possibility that China would not change the value of its currency in the near term.

China timed its move according to its dictates and not those of other nations.

Furthermore, the move pre-empts any discussion or actions by members of the G-20 at its June 26-27 meeting to highlight China’s unwillingness to play ball with the other major nations that will be in attendance. Now, the rest of the G-20 must re-boot their strategies relative to the agenda of the upcoming meeting.

China must see this as beneficial to itself and believe that moving at this time “saves face” because the news was done on its terms and not those of other countries in the world. It is keeping itself in the game.

However, China does not want events to get ahead of its plans. Although the announcement came on Saturday, when the market opened on Monday the value of the yuan was approximately 6.83 yuan to the dollar, roughly the same as it closed on Friday. By Monday afternoon, however, the yuan was trading around 6.8015 to the dollar, the highest level it has been in the modern era.

The point here is that China wants any appreciation in the value of the yuan to be incremental and not discrete. That is, movements in the yuan will tend to be more like a slow crawl and not like a discrete jump or leap. The leaders in China do not want to encourage speculators or huge currency inflows.

The signal to investors is that the value of the yuan may change but don’t expect wide swings. This is just not the way the Chinese do business.

But, I think, there is a bigger story going on here. The bigger story includes Russia and India…so we have three of the four BRIC nations as a part of what is going on. President Obama and his administration are making a concerted effort to be a part of the trajectory taking these countries into a prominent position in the world. All three of these countries are engaging each other, and talking with each other, visiting each other, and doing things with each other.

Chinese leaders have come to America and American leaders have gone to China.

New contacts with Russia show promise. Last year, President Obama called for a reset in relations with Russia. The countries have now signed a nuclear arms reduction treaty, agreed to increase cooperation in Afghanistan, and Russia has supported United States sanctions against Iran. This week President Medvedev comes to Washington to discuss business and then will visit Silicon Valley to meet with leaders in the technology field. Medvedev would like to encourage technology areas similar to Silicon Valley in Russia.

Leaders in India also are responding to invitations from the Obama administration to engage in dialogue and improved communications between India and the United States. Of these three BRIC nations, India has the longest solid ties with the United States and the greatest personal bond to see that these ties become stronger.

Not only are these three countries becoming relatively stronger in the world pecking order, but are the important reason why discussions about world business and foreign trade need to work in the larger Group of 20 nations rather than in the smaller groups that have been so prominent in the past.

Add on top of this the economic weaknesses experienced in the United States and Europe which have allowed these three, China, Russia, and India, to gain relative to “the West” faster than they would have if the financial collapse in these former areas had not occurred. These three nations are not going to back off their ascent in the world power scramble just because the United States and Europe are facing some “uncomfortable” economic weaknesses.

Furthermore, Europe has its own internal contradictions to deal with. Leadership in Europe is close to zero and the political problems that must be resolved there are almost overwhelming. And, while Europe attempts to get its house in order…the rest of the world moves on.

Brazil, the other BRIC, seems to be laying bricks lately. The current president, Luiz Inảcio Lula da Silva seems more interested in playing around with the leaders of countries at odds with the United States rather than entering into more mature relationships with the rest of the emerging world. Enough said.

What is vitally important for world trade and finance is to have these major countries talking with one another and learning about how they can work together to create a world in which all can prosper. World trade will not exist if it just benefits one or two countries.

The emerging nations are doing just that…emerging. These countries must be an important part of the world of the future. Keeping these nations down and causing resentments in a world where there are no channels for communication is not the way to build a richer and more vibrant world to live in.

The crucial thing is learning how to deal with each other. As I mentioned above, the Chinese will not make moves that will harm themselves in the long run and when they move they will do so in a way that does not make them look bad. Can we in the United States accept these two behavioral traits that seem so important to the Chinese or will we become so impatient and try and impose our self-importance on them?

Certainly, leaders in the United States cannot become “doormats” that others can just walk over. But, the time seems right for talking, for keeping channels open, for cooperation within the competitive framework, and for learning how to work with each other, accepting the quirks and psychological needs of others.

China will not always internally do the things we in the United States think that they should do…especially in some areas like human rights. We should not be silent on these things. But, I believe the world still has more to gain by building cooperation over the longer run than it does by breaking off ties. I believe that the recent economic moves by China confirm this. I believe that the leaders of China truly want to be in the game and will act accordingly.

China is Changing the World

Earlier, on March 25, I raised the question “Why Should China Change?” in my post, “Why Should China Change?” (http://seekingalpha.com/article/193689-why-should-china-change)
The thrust of the post was captured in the following:

“The world has changed and we in the United States have not accepted the fact.

Why should China change direction at this time?

China is growing stronger and stronger. The United States, and most of the rest of the west, is in a weakened state. The United States, and most of the rest of the west, has gone through a very severe financial crisis and the worst recession since the 1930s.”

The United States is still the number one power in the world, both economically and politically, but its relative position has changed. And we continue to see that in our relationship with China (and India and Brazil and Russia).

The current ‘high-level’ meeting in Beijing of representatives from China and the United States highlights the changing relations between the governments of China and the United States. As reported in the New York Times, “the opening session laid bare a recurring theme…the United States came with a long wish list for China…while China mostly wants to be left along…” (http://www.nytimes.com/2010/05/25/world/asia/25diplo.html?ref=business)

China is “turning into an economic superpower” according to the Times article and wants to continue along on its merry way. The United States, other than initiating an all out trade war, seems incapable of slowing down the Chinese economic machine or even getting the attention of the Chinese leaders.

Chinese President Hu Jintao did pledge to continue reform of China’s currency, but then repeated the standard operating response: “China will continue to steadily push forward reform of the renminbi exchange-rate formation mechanism in a self-initiated, controllable and gradual manner.” That is, we will change things when we want to change things and no sooner.

Secretary of the Treasury Geithner graciously replied: “We welcome the fact that China’s leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda.” What else could he say?

The United States, and most of the rest of the west, is in a weakened state. But, this weakened state goes beyond the short-run. The United States is facing longer run, structural problems it must deal with. Economic growth and financial strength are important factors in world economic power. However, when a nation extends itself and stretches itself too far due to over-commitment and over-leverage, thinking it can do too much, it exposes itself to other nations that are not in a similar position.

It is the United States, the number one world power that is asking China to change. China is in a position where it does not feel the need to cave into the American requests. China is strong and disciplined. The United States is strong, but undisciplined. Therein lies the difference.

And, the (supposed) allies of the United States are little or no help. Europe is attempting to resolve the problems it created for itself. As a consequence it is slowly fading into the background. The G-7 group of nations, the United States, Canada, France, Germany, Italy, Japan, and England, is losing relevance in the world. The G-20 includes the seven, but more importantly includes several emerging nations that are more strategic to the future than is the “old boyz club” from Europe.

De-emphasize the G-7 and raise up the G-20!

The ultimate problem of the United States is its lack of discipline. For the past fifty years or so, the United States has lived for “the short-run” because, we have been told, that “in the long-run we are all dead.” The economic policy of the United States has been designed to combat short-run increases in unemployment with a constant pressure to achieve high rates of economic growth. But, this creates an inflationary bias in economic policy. Because of this the United States has seen the purchasing power of its dollar drop 85% from January 1961 until the present time, underemployment has grown to about 20% of the working age population and the capacity utilization of its industrial base has declined to less than 75% at present (but rose to only slightly more than 80% in its most recent cyclical peak).

These are not signs of economic strength. Furthermore, the value of the dollar over the past forty years has dropped by approximately 35%. Huge amounts of United States debt, both public and private, have been financed “off shore”. These developments do not put America in a very strong bargaining position.

China thinks in decades. The United States thinks in terms of the next election. Discipline does matter.

There are still many economists in the United States who argue that the government must spend more and create more debt to get the country going once again. Their fundamentalist view of how the world works blinds them to the fact that it was the loss of fiscal discipline, the exorbitant creation of huge amounts of government debt and the subsequent credit inflation that this encouraged, that put the United States into the position it now finds itself.

More spending and more debt are not going to make the situation any better. I examined this issue in my May 13 post “Government Deficits and Economic Activity”: http://seekingalpha.com/article/204948-government-deficits-and-economic-activity. My basic conclusion was that in the present situation where the Federal Reserve has pumped so much liquidity into the banks that big banks and big companies can play games in world financial markets and cause major problems for areas like the euro-zone. The continued creation of deficits and more government debt is not going to solve this problem for Europe…or the United States.

Until it gets it act under control and in order, the United States will be the one asking China to change the way it does things. China, given the present circumstances, will continue to do things in their own interest and at their own speed. In addition, it is my guess that other, emerging nations will begin to exert themselves in similar ways. And, the United States will not be in a position to resist their efforts.

As I said earlier, “The world has changed and we in the United States have not accepted that fact.”

All we can really control is ourselves and if we fail to do that we give up the chance to influence others.

Is Germany resisting the "Race to the Bottom" in Europe?

Germany, and Angela Merkel the German Chancellor, clearly lost the battle over the bailout package and the European Central Bank’s move to buy bonds. (See “Where’s the Leadership in Europe, http://seekingalpha.com/article/204702-where-s-the-leadership-in-europe.)


Is Germany and Merkel now trying to stage a “comeback”?

There are certainly signs that Berlin is attempting to re-asset itself in the moves it made on short selling and other complex bond transactions. Furthermore, Merkel is asserting herself into the financial reform debate. At a meeting of the G-20 Thursday: “German Chancellor Angela Merkel said Thursday she will push her Group of 20 counterparts to accelerate steps to tighten political control over financial markets and add new taxes on banks. Ms. Merkel also said she will push G20 leaders to coordinate their strategies as they look to withdraw stimulus measures enacted during the financial crisis.“ (http://online.wsj.com/article/SB10001424052748703559004575256051573932296.html?mod=WSJ_hps_MIDDLEThirdNews.)

Politically, in the German state itself, Merkel needs to exert herself to defend Germany and Germany’s support of a sound fiscal and monetary stance within the European Union. The political feedback to the Chancellor’s position on the bailout was immediate and dramatic. She and her party lost seats. To maintain her coalition, it seems as if she must place herself in a stronger position.

Within the broader picture, however, someone needs to step up in Europe and show some real courage, something that will not be easy. That leadership has been sorely missing and the decline in the Euro to a four-year low just underscores how the market is ‘grading’ the response of the European Union to their current financial crisis. The immediate reaction to the German actions was disappointment in the response of the rest of the Union. There obviously is no unity within the European community.

Yet, the German movement is not without reason.

Someone has to step up to the plate.

Unfortunately, the European Union has tolerated the lack of discipline and incompetence in its member nations for years. As a consequence, there has been a “race to the bottom”; a movement to the lowest common denominator and the recent financial crisis is the result. And, now all members of the European Union are suffering.

Nature does not allow a vacuum to exist for very long in any human association. If the association allows the undisciplined or incapable to dominate, then the performance of the association comes to reflect this bias. Need I present a sports analogy?

The other alternative is for the members of the association to have standards set by the disciplined and capable where a situation can be achieved in which the rising performance of the community is shared by all.

A successful union has enough benefits for all to share. In an unsuccessful union no one is really happy!

In the European Union it seems as if there is no one else to turn to but the Germans for this leadership. It is certainly not going to come from France. France is the epitome of the acceptance of the mediocre. France’s leadership has guided the European Union into the state it is now in. It is not the future.

Will other nations listen to Germany? Will new leadership be established in the European Union?

I’m not sure that the rest of Europe is ready to get ‘disciplined’. There is a lot of ‘mouthing’ of the need for discipline, but are the nations doing this talking ready to change things for the longer term or will they revert to old habits once the immediate crisis is over? Can governments that really ‘tighten up’ be able to be re-elected in Greece, and Spain, and Portugal, and other places? Will other nations in the European Union really stand for German discipline and leadership?

Watch the hips, not the lips!!!

If the nations in the European Union other than Germany fail to get their acts together, will Germany and the German people be able to drop their standards of performance to the level of the ‘bottom’?

My guess is that the Germans do not want to be mediocre.

Therefore, disunity and disgruntlement will continue to rule in Europe. And, this will not be good for the Euro.

What might change attitudes in Europe?

The answer might be years of falling further behind the United States, China, India, Brazil, Russia, and other emerging nations. The European model, as it now stands, cannot compete in this world of the future. Competition is going to be fierce and nations that thrive on low performance and undisciplined behavior will fall further and further behind. But, this is a message to all nations, including some that are in the list just presented.

Unfortunately, Europe stands in a position to cause a lot of disruption to others. It is still important enough to let its failures cause dislocations in the world economy.

The United States should applaud the behavior of the Europeans. The behavior of the Europeans and the decline in the value of the Euro takes a lot of attention off of the value of the United States dollar and the weakness it has experienced due to the undisciplined behavior of the United States government with respect to its fiscal and monetary policies.

Still, I would like to see Germany and Angela Merkel succeed. I would like to see a strong Europe and a strong Euro. But, maybe I am just being sentimental.

The Euro and the European Union

When have you last heard that the dollar might drop into the $1.05 to $1.15 range? This morning we are trading at about $1.34.

The lower number is projected if some country leaves the European Union or if there is a national default in the euro area.

The cost of protecting debt from default over the past six-months has risen dramatically in several of the major European countries: Greece leads the world in this category. But, Portugal is right behind as credit-default swap data, compiled by Bloomberg, indicate an increase of about 150% in the last six months. (Remember the debt rating of Portugal was just reduced by Fitch last week.)

Major increases in the cost of protecting debt from default have also been registered against the debt of Spain, Italy, Belgium, England, and France.

The bottom line: governments cannot just spend and spend and spend expecting either the bond markets or the central bank to bail them out. Social programs or not, a democracy has to balance the competing ends within a country and if the social programs cannot be financed through sound finance then they will just have to wait. The lesson is very clear.

Historically, it is government spending that drives the finances of a country and not the central bank. Remember the European Central Bank and the Bank of England have been much more conscious “inflation targeters” than was the United States. Also, governments, historically, were always the leaders in financial innovation and not the private sector. The late 20th century is no exception to this rule. (See Niall Ferguson’s “The Ascent of Money” and also http://seekingalpha.com/article/120595-a-financial-history-of-the-world.)

In the past, if a country over-extended its finances then they would generally have to devalue their currency and then proceed into the future. With a common currency, the euro, a country loses the choice about devaluation because that country is now one among many and so must accept its position in the community. The poor country that has over-extended itself must bring its budget back into line, a very painful process as Greece is now experiencing. This is tough medicine to take.

What about the countries that were prudent and disciplined? Their emphasis on sound finance is now being called a vice by some because they do not want to be overly generous to those countries that were not prudent and disciplined. (One prominent critic has been Martin Wolf of the Financial Times: http://www.ft.com/cms/s/0/924b4cc0-36b7-11df-b810-00144feabdc0.html.)

And, the current crisis is bringing out those that are or have been opposed to the European Union as it is now constructed. For example, an op-ed piece in the New York Times “Euro Trashed” by a German professor, captures some of the tone of this side of the argument: http://www.nytimes.com/2010/03/29/opinion/29Starbatty.html?ref=opinion. A suggestion is made that the “strong” governments could pull out of the current arrangement and form a bloc that would “fulfill the euro’s original purpose” and would not have to worry about “laggard” high-debt states.

The betting is against the euro right now. John Taylor, the chairman of the currency hedge fund, FX Concepts Inc., argues that “Those people who are calling for the euro to go up are thinking the stock market is going to continue higher and that the euro zone problem is not going to spin out of control. I disagree with both of these things.” So, of the three areas that have experienced, in the recent past, the most negative vibes concerning the value of their currencies, the United States, Japan, and the euro zone, the pointer has rotated to the euro zone, taking the pressure off the other currencies, at least for the short run.

This could change. The reason for the current focus is that the euro zone faces the most current difficulties that have to be dealt with. But, this focus could be altered overnight because of the things happening in United States financial markets. The first has to do with the Federal Reserve signaling that it will honor its statement that its purchases of mortgage backed securities will end as March 2010 ends. The 10-year U. S. Treasury issue has bounded up to a 3.85% yield again, a level it was at in June 2009, August 2009, and January 2010. The concern by some is that yield could accelerate through 4.00% in the near term.

Why is this of concern? Well for one reason, upon the reaction in the bond markets, mortgage rates have moved above 5.00% with the expectation that they could go higher as the liquidity in the mortgage area of the capital markets declines. Banks and mortgage banks have already put a hold on committing to mortgage rates in the near term because of the uncertainty connected with the future level of mortgage interest rates. This, of course, is problematic because of all the variable rate mortgages or teaser mortgages that must re-price over the next 12 months.

There is also the concern about how easy it will be to place the upcoming quantity of the federal debt coming to the market over the next six to nine months. How much added pressure these new amounts of debt will have on interest rates is highly uncertain at the present time.

And, then what about the Fed’s exit strategy, the Great Undoing? How is the Fed going to act or react to all these market pressures? The exit strategy is planned to take place in an orderly financial market. What if the financial markets don’t cooperate and become dis-orderly over the next year due to everything else going on in the world? Just how is the Fed going to accomplish its Great Undoing in such an environment?

So, the emphasis is all on the euro right now and the political problems being dealt with by the nations of the European Union. Except for Germany’s Chancellor Merkel, the current batch of European leaders seem extremely weak at the present time. The weakness claim extends to the Prime Minister of England as well. What comes out of this mess is anybody’s guess right now, but it would seem that a country, like Germany, who is in relatively good fiscal shape and with a leader that can command some significant backing from her people, can be pretty adamant about what they want. The other countries in the EU may not like what Merkel is advocating, but they are not in the strongest position to suggest alternatives.

If this is the case, then it would seem as if the European Union will continue to battle on, but the debt-heavy countries that are now experiencing significant difficulties obtaining funding will have to get their houses in order for the Union to continue to function. Otherwise, as suggested in the New York Times this morning, we might see a move to one bloc of countries with a single currency who are relatively sound, financially, and all of the others who will re-establish their own currencies once again.

Politicians in the United States should pay attention to what is going on in Europe and take some lessons about their own fiscal responsibilities.

Chermany?

Martin Wolf introduces this name, a combination of China and Germany (as opposed to “Chimerica”, a name invented by Niall Ferguson and Moritz Schularick), to discuss the economic policies of the two countries in his opinion piece, “China and Germany unite to impose global deflation.” (See http://www.ft.com/cms/s/0/cd01f69e-3134-11df-8e6f-00144feabdc0.html.)
Wolf’s approach is not inconsistent with that of Paul Krugman, whose recent work was discussed in my Monday post “Why Should China Change?” (See http://seekingalpha.com/article/193689-why-should-china-change.) The only difference is that Wolf includes Germany in the discussion.

The basic premise is that China and Germany, “although very different from each other,” are pursuing economic policies that are very similar. Both have huge trade surpluses and massive surpluses of saving over investment. “Both believe that their customers should keep buying, but stop irresponsible borrowing.”

The Germans have “picked” on the European Union; the Chinese have “picked” on the United States.

In Wolf’s assessment, “the surplus countries are most unlikely to win.” The real loser, however, will be the world.

The problem with this analysis seems to be that all of the writers engaged in this discussion accept “the war” as only an economic war. A more correct assessment of the situation might lead one to conclude that what is going on is more political than just economic. What is going on is the shifting battle for relative national position in the world pecking order. The time is especially propitious for changing the political landscape as some countries are experiencing massive shifts in their economic strengths. And, the list is not just limited to China and Germany.

In the European frame of reference, the initial focus was on Greece, but economic problems abound for Spain, Portugal, Italy, and France. And, don’t forget the difficulties being faced by Ireland and England.

Economically, Germany is substantially better off than these countries and does not want to be made weak by giving these other countries a “free ride” to recovery. Why should Germany have to suffer economically because of the undisciplined budget policies of these other nations?

China, on the other hand, is smelling weakness, and, as a consequence, is seeing this as a way to improve its relative position of influence in the world. But, it is also pursuing this path in many different ways, establishing diplomatic relations with nations around the world, especially those that are wealthy in natural resources, buying companies all over the world, and gaining influence in the scientific and technological community. China’s influence is growing everywhere.

Others are on the move as well recognizing that the time is right for them to exert themselves in the world.

The argument that is being raised by Wolf and Krugman is that the behavior of the Chinese and the Germans is detrimental to the economic recovery of the other western nations. Continuing along the path they are now following will prevent the United States and France and Spain and the UK and others from getting back on their feet and this will result in a collapse of world trade and, hence, the economic well-being of everyone.

But, that is solely the economic analysis. It does not include the political aspects of the situation.

There are very few times in world history when the position of the nations of the world can be substantially altered. The period from the 1910s through the 1940s was such a period. As we know, the United States moved into a position of dominance during that time, both economically and militarily.

At the present time, some countries are sensing another massive shift in world power. And the potential big players are China, India, Brazil, and Russia. Germany and Japan would like to be there. And, there are others: Canada, Iran, and Argentina.

Nations who have a longer-term time horizon and see the world in decades, like China and India, are not going to let this opportunity pass. They also do not see that the issue of change will be resolved in the next ten to twenty years. In the short run we, individuals, may all be dead, but the nations will live on.

And, this is precisely the problem. Over the past fifty to sixty years, the countries that are now experiencing the most problems focused on the short run and, as a consequence, created an economic environment built upon a lack of saving, debt creation and inflation.

It says a lot when some of the leading intellectuals of this philosophy, “Keynesians” like Oliver Blanchard, propose that the solution to the current difficulties is to create higher targets for inflation. (See “The Lure of Inflation’s Siren Song” by David Reilly: http://online.wsj.com/article/SB20001424052748703734504575125943325490212.html#mod=todays_us_money_and_investing. Included in this piece is the quote, “Inflation can achieve what no congress can, fast reductions in fiscal deficits," Christian Broda, head of international research at Barclays Capital.) My response to this is “Doesn’t Anyone Understand Inflation?” (which can be found at http://seekingalpha.com/article/188351-doesn-t-anyone-understand-inflation).

Now, we have Wolf and Krugman arguing that those that are in the stronger position economically should “bail out” those that acted imprudently in the past. And, here is where the concept of moral hazard comes into play. If the countries having problems right now do get “bailed out” by those that are economically stronger, why should they, once they have recovered from their economic difficulties, act in a disciplined manner in the future? As with other institutions that have been “bailed out”, there is little incentive to for them to act prudently going forward.

The “Keynesians” have had their day. We are living with their legacy. We cannot expect the Chinese or the Germans to give them another chance. We cannot expect the Chinese or the Germans to place the future that they see within their grasp in jeopardy in order to rescue those that have willingly become addicted to more and more debt in their lives.

The ethos of the 1950s and the 1960s may have dominated the last fifty years, but it is my guess that the 21st century will be determined by what takes place in the 2010s and 2020s. The complete lack of fiscal discipline in the United States over the last eight years or so may have accelerated this transition in ways that we do not yet understand. One of the problems in dealing with such changes going forward, however, will be a failure to recognize that certain changes have already occurred.

Discipline is Needed for Real Economic Performance

There is an interesting article inside the Wall Street Journal this morning comparing the fortunes of Brazil and Argentina. (See “Argentina Falters as Old Rival Rises,” http://online.wsj.com/article/SB125798960525944513.html#mod=todays_us_page_one.) In the article a research paper published in Argentina is quoted: “Since the middle of the last century, Argentina’s economy has endured a notable decline relative to the rest of the region, falling into ‘insignificance in the international context.’”

During this time period the government of Argentina followed a very undisciplined approach to economic policy while it kept itself in power and suppressed dissent. In 2001, Argentina declared the largest sovereign debt default in history. Things have not gotten much better since.

Brazil’s government, on the other hand, after years of self-serving activity started to get its act in order about 15 years ago under the leadership of former President Fernando Henrique Cardoso. Runaway inflation was brought under control and more orthodox and conservative economic policies were put into place. The current president, Luiz Inảcio Lula da Silva, has maintained these policies. (See ”Olympic Accolade Sets Seal on Progress” in Financial Times: http://www.ft.com/cms/s/0/d16a27a6-c8d9-11de-8f9d-00144feabdc0.html.)

The central bank in Brazil is treated as independent and the stability that has been created has brought about lower interest rates and a growing mortgage market that has stimulated a construction boom. An emerging middle class has emerged and has supported the effort to obtain the Olympics and other international initiatives that will lead to a vast expansion of the Brazilian infrastructure in upcoming years.

Over and over again we see examples of the benefits of discipline in economic and financial affairs. We also see that the loss of discipline does nothing but eventually lead the undisciplined into undesirable situations in which all of the alternative options that are available to correct the condition are undesirable. In other words, there are no good choices to get one out of the difficulty in which one finds oneself.

Inflation represents a loss of discipline that always ends up hurting a large number of people. Furthermore, the consequences of inflation can leave a wreckage in which policymakers are left with no good alternative policies to follow. Often, the path of least resistance in such situations is to reflate.

Historically, governments have always excelled in spending more than they could bring in through taxes and other levies. Thus, going into debt is a normal governmental activity. Other than outright default on debt, governments got very good at inflating themselves out of excessive amounts of debt. And, the ability to inflate was helped in the twentieth century by developments in information technology: so governments got better and better at inflating their economies. (See “This Time is Different” by Reinhart and Rogoff: http://seekingalpha.com/article/171610-crisis-in-context-this-time-is-different-eight-centuries-of-financial-folly-by-carmen-m-reinhart-and-kenneth-s-rogoff.)

Philosophically, this bias toward inflation was supported by Keynesian economics as the argument was made that twentieth century governments could not allow wages and prices to fall. (See http://seekingalpha.com/article/167893-john-maynard-keynes-and-international-relations-economic-paths-to-war-and-peace-by-donald-markwell.) (Also see op-ed piece in Wall Street Journal “The Fed’s Woody Allen Policy”: http://online.wsj.com/article/SB10001424052748704402404574529510954803156.html.) So the twentieth century saw not only an improved technology to inflate but also a respected philosophy that supported a government policy that had a bias toward inflation.

The point is that inflation creates an incentive for economic units to grow and to take on greater and greater amounts of risk. This is, of course, because inflation favors debtors versus creditors. It pays individuals and businesses to take on more and more debt. And, this policy is particularly successful, at least in the early stages, when the central bank forces interest rates to stay excessively low.

Risk is minimized because inflation creates a situation of moral hazard by “bailing out” people who take on large amounts of exposure to risk. For example, one rule of thumb that floats around the banking world from time-to-time is that “In a time of inflation, anyone can become a contractor for building houses. One only learns who is bad at it is when inflation slows down or stops.” The idea can be expanded to say that in inflationary times, anyone can appear to be successful. As Citigroup’s CEO Charles O. Prince III blithely stated: “As long as the music is still playing, we are all still dancing…” Risk takes a back seat.

Second, size becomes all important! Since inflation reduces the real value of debt it becomes silly for individuals or businesses not to leverage up. What is it to create $30 of debt for $1 of equity you have? And, why not $35…or, $40? Using such leverage magnifies performance! Using such leverage magnifies bonuses! Using such leverage allows us to reach a size where we become “Too Big to Fail”!

Finally, inflation allows individuals and businesses to forget about producing good quality goods and services and diverts attention to “speculative trading” and “financial games”. Since outsize rewards and bonuses go to areas that prosper during inflationary times, more and more “talent” moves into areas connected with finance or with trading. Less and less emphasis is placed upon production and quality because rising prices contribute more to profits than does improvements in what goods and services are offered. As a consequence, the composition of the nation’s workforce becomes tilted toward finance and the financial industries.

In effect, inflation destroys discipline. And, once discipline is reduced, problems occur and until discipline is renewed the problems just cumulate and re-enforce one another. This happens in families, in businesses, and in governments.

But, as is usual in economics, the consequences associated with destructive incentives are not always easy to identify. (See “Feakonomics” or “Superfreakonomics”: http://seekingalpha.com/article/166993-the-power-of-unintended-consequences-superfreakonomics-by-steven-d-levitt-and-stephen-j-dubner.) It is so much easier to blame executive greed for the troubles we have been experiencing. This explanation covers so much territory: the growth of finance in the economy relative to “productive” jobs; the taking on of more and more leverage; the taking on of more and more risky deals; the emphasis on speculative trading rather than productive producing; and the payment of excessive salaries and bonuses.

In fact, it is often hard to identify the benefits of greater discipline unless examples of that discipline are placed alongside examples of a lack of discipline. This is why the Argentina/Brazil contrast caught my attention.

Such stories, however, cause one to worry about whether the United States will once again be able to regain its economic discipline. The fear is that as long as governmental policies contain an inflationary bias, the solution to the problems caused by this inflationary bias will continue to be re-flation. If this is so, discipline will continue to be lacking in this country, both personally and corporately. Maybe it is not so surprising that Brazil won the voting for the Olympics over the United States!