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David Malpass just had an editorial in the WSJ explaining why the global, dollar-system-centered monetary imbalances aren't imbalances at all, and why the US system is so gosh-darned super. Predictably, the column was full of poorly-supported arguments that generally managed to be the exact opposite of the truth.
Here's a sample:
Haw haw haw! (Cue great, big, Santa Claus belly laughs) -- 10%+ growing China investing in us "too slow" to keep up with our 2%?! Hell, even Europe is pulling ahead of us in GDP growth. This statement is either patently false (the evidence being the trade deficit), or meaningless; but neither is good. Tell us another one, Malpass.
Below is my antispin, in full-on blogosphere "fisking" style (originally posted to TheMessThatGreenspanMade). Here's a more detailed and diplomatic one from Brad Setser.
Malpass begins:
For decades, the trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America's imminent economic collapse. The reality is different.
Oh really? What of the steady downward trajectory of the dollar since 2002, then?
Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.
This is almost meaningless rhetoric. The US's economy isn't aging, but all others are? What about the Asian tigers and the former soviet bloc of Eastern Europe -- all growing at 10%+? Even "old Europe" is pulling ahead of the US, which itself is now at 2% GDP even by the official numbers, and trending downward.
Since the 2001 recession, the U.S. economy has created 9.3 million new jobs, compared with 360,000 in Japan and 1.1 million in the euro zone excluding Spain.
By who's count? The BLS? Does this count the millions of housing bubble jobs that either don't really exist more or are set to disappear? How about all the so-called "self-employed", like real estate agents? How employed are they really, now?
Wages are rising solidly ...
Say what? Officially, real wages are stagnant. If you make a conservative +2% or so "real world" inflation adjustment, they're declining. And remember: average statistics don't count; what counts is the median. A handful of hedge fund managers and investment bankers are not a valid proxy for the entire economy.
The latest data on growth in jobs, retail sales and housing starts, and the record level of household savings, underscores the solid economy described by Fed Chairman Ben Bernanke last
month.
What a specious load of crap! "Household savings" only exist if you count dubious home equity "wealth"! Retail sales at +1% by official stats quickly disappear with a realistic inflation adjustment, and this number is almost certainly wrong when you look at major retailer results such as Wal-Mart, Best Buy, Home Depot, and Circuit City (all disappointments, our outright declines).
Of course, it is quite a subjective judgement to interpret what Bernanke says as "solid" -- now we have the Fed statement revised to say "significant" cooling of the housing market, and the central bankers are still saying they're worried about incipient inflation (one may dispute the legitimacy of this worry, but then if one does, the Fed isn't credible).
Supporting the "solid-growth" view are rising global stock markets, strong growth of corporate profits, the narrow credit spread between Treasurys and riskier bonds, and low interest
rates relative to inflation and to growth -- nominal growth in the 12 months through September was 6%, yet the Fed funds rate, usually in line with nominal growth, only averaged 4.6%.
1. Rising global stock markets - "markets can stay irrational longer than you can stay solvent"
2. narrow credit spread - #1 plus heavy interference in US markets by foreign central banks
3. 6% nominal growth - who cares about nominal growth? only inflation-adjust growth is real. Even the government bureaucrats don't report nominal growth as "headline". This switching between real and nominal statistics is extremely dishonest.
But just as the high level of U.S. savings is likely to add to future growth -- the savings rate is only low if you arbitrarily exclude gains -- the trade deficit and heavy capital inflows are also positive parts of the growth outlook.
What savings? Borrowing isn't savings, numskull!
You can argue perhaps that borrowing is "productivity", and hence count it in seriously hand-wavey metrics like the GDP, but I am personally offended that you might conflate it with any legitimate notion of savings.
True savings, that is, abstaining from consumption and investing the corresponding cash, is productive when it goes to private innovation and the interest returns to the same economy from whence the principal originated.
But when much of the principle is poured into the unproductive (or even wealth-destroying) government sector, and interest gains largely flow out of the country, the above arguments no longer apply. On a national scale, structural borrowing of this sort is always bad, and ultimately, as much capital must pour out of the country as came in, and then some.
The latter is a point always missed when economists try to explain away the trade deficit. We owe China $1 trillion, plus interest, baby.
Rather than signaling a slowdown, the inversion of the yield curve -- "Greenspan's conundrum," in which bond yields are low despite solid growth and rising inflation -- is probably the result of this deep underestimate of the U.S. growth outlook, plentiful liquidity, and a backward-looking deflation premium for bonds, the reverse of the backward-looking inflation premium that kept bond yields unusually high in the 1980s.
Right, it will be "different this time".
The only data point these folks have for this kind of argument is the 1995 incident, which as we know now was actually a "shadow recession" pulled out of by an unprecedented liquification of the US banking system and financial economy. These changes were one-time and cannot be repeated. Any attempt to do so will be hyperinflationary.
But maybe that's the strongest argument that hyperinflation will happen.
The common perception is that Americans drive the trade deficit in an unhealthy way by spending more than we produce. To make up the difference, foreigners ship us things on credit. This sounds bad, but should be evaluated in terms of our demographics, low unemployment rate, attractiveness to foreign investment and rising household savings.
Yes, spending more than we produce would be the precise definition of a trade deficit, so anyone holding this "common perception" is certainly more sane than you.
Demographics? Let's see -- 15-20 million illegal immigrant laborers, declining incomes for the middle class and below, looming boomer retirement in 2008, and diminishing technical and industrial expertise.
Unemployment rate? A joke; we invented the category of "discouraged worker" to artificially place all those that don't find a job soon enough. Then there's the 2 million people in prison that aren't counted as part of the work force (more than in authoritarian China) -- yet ironically the work force must support them.
Attractiveness to investment? For now (and thank god for foreign central banks, extending us that "merchant's credit"). But how interesting can our capital markets continue to be if we don't actually produce anything (I mean besides options scandals touching between 2,000 and 3,000 corporations) and our currency is declining?
The recent surge in the U.S. trade deficit reflects, in part, the unprecedented shift in the demographics of the world's large economies. The under-60 U.S. population is expected to grow for at least 50 years while the under-60 populations in Japan and Europe are already declining and in China will turn down within a decade. They need bonds while Americans need capital. They want to save more than they invest in their own economies, and are eager to help us invest more heavily (through their purchase of bonds.)
How quaint. This might be a nice argument in some theoretical la-la land, but if it were really true, then why wouldn't the world's capital instead be pouring into the Asian Tiger countries (China, India, and others), which have the youngest populations? Yet, paradoxically, these countries are the source of most of the global excess capital ending up in the US.
The answer is clearly that intervention is driving these money flows "uphill" (a-la Setser), not "demographics."
And the demographic divide between the US and Europe claimed above doesn't even exist: the US's native population is also aging, just like Europe's. Only immigration from other countries is bringing in any sort of young cohort. In the US, this is Mexico; in Europe, this is Eastern Europe and Muslim North Africa. Didn't you notice the riots in France a year ago?
Like young households, many companies also spend more than they produce, using bonds and bank loans, some from foreigners, to make up the difference. They add employees, machines, supplies and advertising before they produce.
Again, theoretical la-la land. We're actually cutting manufacturing and hence machinery, laying off domestic employees, and now heading into a recession, we're about to see advertising fall off a cliff. This must be the great gearing up for production, so we can pay back all that national debt!
The only production increases we're likely to see will be due to the dollar's decline, making the US a cheaper place to source and manufacture. This will be healthy, but it's in conflict with the US being a place predominantly to invest.
Growing corporations are expected to be cash hungry. This leverage is treated as a positive for companies but a negative for countries, a key inconsistency in popular economics.
To the extent this is true, there is a problem with how companies are valued these days. As I and others have pointed out recently, it is historically better to be holding net cash, not debt. Spending from cash is less risky and cheaper than spending from debt. "Leverage" is a telling term in the above; it has been forgotten that leverage implies risk.
Besides, this argument should be even stronger for the faster-growing Asian Tigers, so it is unclear how this points to a US advantage.
Rather than paying the debt back, the growing company rolls the debt over and adds more, just as the U.S. has been doing throughout most of its prosperous economic history.
In other words, you're advocating a pyramid scheme.
I dispute the latter -- if it could even be said "prosperous economic history" is a meaningful term. What "prosperous" times are being referred to? Certainly not most of the 1800s and early 1900s.
In fact, the trade deficit didn't appear in its modern, large-scale form until 1975.
Foreigners are as eager to invest in the U.S. as we are to buy goods and services from them -- it's a two-way street.
What a ridiculous claim!
Do the rank-and-file Chinese have any say in how much of this dollar surplus they accumulate, or where it goes?
Does anyone here really want to buy crappy Chinese-manufactured goods -- as opposed to being forced to by economic necessity?
While the net foreign debt of the U.S. is growing (the result of capital inflows), household net worth is growing faster, meaning foreigners are investing in the U.S. too slowly and conservatively to keep up with our growth.
Well, I can hardly believe my eyes here. Europe growing at 2-4% and China growing at 8-12% are "investing in us too slow" to "keep up with our [2%] growth." This makes absolutely no sense.
And of course, household "wealth" growing is actually tomorrow's household debt (money owed on mortgages). This is all evidence of exactly what you pointed out, but not in the way you intended: we're forced to pyramid more debt to support the old debt, spending the principle on nothing (wars) or declining assets (houses) while paying the interest streams to foreigners (China and OPEC).
The already-large foreign demand for investments in the U.S. is likely to grow from here, putting upward pressure on the trade deficit even if foreign growth continues to accelerate. The U.S. offers a relatively high and steady return on investment -- high because of the innovation and growth taking place here, steady because the commodity and manufacturing parts of many businesses are increasingly done abroad, reducing the volatility in U.S. growth. Equally important, the demographics of the world's large economies are shifting rapidly in favor of the U.S.
This paragraph is so tendentious as to be devoid of meaning.
But the trade deficit, around for hundreds of years of solid American growth, doesn't justify the inflation risk from dollar weakness or the growth risk from protectionism. And the trade deficit probably wouldn't respond to a weaker dollar anyway -- yen strength hasn't dented Japan's trade surplus, and it took a recession to create our last trade surplus in 1990-1991.
This is a bizarre statement. How are we going to "make the dollar weaker"? It is either intrinsically weak and will adjust (attempts to stop its fall be damned), or it isn't. The argument is that the trade deficit is a major factor in determining these fundamentals.
Protectionism is, of course, always dumb (arguably with exceptions in cases where we're simply counter-acting foreign intervention, such as China's currency peg).
The last part is true only in the short term: all other things equal, a weaker dollar will increase exports, but also lower the dollar value of them, thus being irrelevant to the deficit. But in the long term, it causes the export sector to expand.
As for the trade surplus in 1990-1991, this may be rather prescient, though the deficit is now so huge I find it hard to believe a recession could overcome it.
We cannot simply decide to "not have a recession", so again, this is directed bizarrely. Is the worry that the bears are going to somehow create a recession? Perhaps it is their fault that the housing market has tanked?
The cornucopians are getting desperate!
The swing vote on the dollar, and probably the controlling vote, is Fed policy.
Sneaky... leaving it all riding on the Fed, so that when things don't go as predicted, and your debt-as-wealth based paradigm breaks down, you can just blame the Fed!
I've seen lots of other "US economy cornucopians" doing the same -- whether they realize it or not, they are essentially butt-covering for invitable crackup of their untenable system.
This essay was garbage. The WSJ should be embarassed.
Here's a sample:
While the net foreign debt of the U.S. is growing (the result of capital inflows), household net worth is growing faster, meaning foreigners are investing in the U.S. too slowly and conservatively to keep up with our growth.
Below is my antispin, in full-on blogosphere "fisking" style (originally posted to TheMessThatGreenspanMade). Here's a more detailed and diplomatic one from Brad Setser.
Malpass begins:
For decades, the trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America's imminent economic collapse. The reality is different.
Oh really? What of the steady downward trajectory of the dollar since 2002, then?
Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.
This is almost meaningless rhetoric. The US's economy isn't aging, but all others are? What about the Asian tigers and the former soviet bloc of Eastern Europe -- all growing at 10%+? Even "old Europe" is pulling ahead of the US, which itself is now at 2% GDP even by the official numbers, and trending downward.
Since the 2001 recession, the U.S. economy has created 9.3 million new jobs, compared with 360,000 in Japan and 1.1 million in the euro zone excluding Spain.
By who's count? The BLS? Does this count the millions of housing bubble jobs that either don't really exist more or are set to disappear? How about all the so-called "self-employed", like real estate agents? How employed are they really, now?
Wages are rising solidly ...
Say what? Officially, real wages are stagnant. If you make a conservative +2% or so "real world" inflation adjustment, they're declining. And remember: average statistics don't count; what counts is the median. A handful of hedge fund managers and investment bankers are not a valid proxy for the entire economy.
The latest data on growth in jobs, retail sales and housing starts, and the record level of household savings, underscores the solid economy described by Fed Chairman Ben Bernanke last
month.
What a specious load of crap! "Household savings" only exist if you count dubious home equity "wealth"! Retail sales at +1% by official stats quickly disappear with a realistic inflation adjustment, and this number is almost certainly wrong when you look at major retailer results such as Wal-Mart, Best Buy, Home Depot, and Circuit City (all disappointments, our outright declines).
Of course, it is quite a subjective judgement to interpret what Bernanke says as "solid" -- now we have the Fed statement revised to say "significant" cooling of the housing market, and the central bankers are still saying they're worried about incipient inflation (one may dispute the legitimacy of this worry, but then if one does, the Fed isn't credible).
Supporting the "solid-growth" view are rising global stock markets, strong growth of corporate profits, the narrow credit spread between Treasurys and riskier bonds, and low interest
rates relative to inflation and to growth -- nominal growth in the 12 months through September was 6%, yet the Fed funds rate, usually in line with nominal growth, only averaged 4.6%.
1. Rising global stock markets - "markets can stay irrational longer than you can stay solvent"
2. narrow credit spread - #1 plus heavy interference in US markets by foreign central banks
3. 6% nominal growth - who cares about nominal growth? only inflation-adjust growth is real. Even the government bureaucrats don't report nominal growth as "headline". This switching between real and nominal statistics is extremely dishonest.
But just as the high level of U.S. savings is likely to add to future growth -- the savings rate is only low if you arbitrarily exclude gains -- the trade deficit and heavy capital inflows are also positive parts of the growth outlook.
What savings? Borrowing isn't savings, numskull!
You can argue perhaps that borrowing is "productivity", and hence count it in seriously hand-wavey metrics like the GDP, but I am personally offended that you might conflate it with any legitimate notion of savings.
True savings, that is, abstaining from consumption and investing the corresponding cash, is productive when it goes to private innovation and the interest returns to the same economy from whence the principal originated.
But when much of the principle is poured into the unproductive (or even wealth-destroying) government sector, and interest gains largely flow out of the country, the above arguments no longer apply. On a national scale, structural borrowing of this sort is always bad, and ultimately, as much capital must pour out of the country as came in, and then some.
The latter is a point always missed when economists try to explain away the trade deficit. We owe China $1 trillion, plus interest, baby.
Rather than signaling a slowdown, the inversion of the yield curve -- "Greenspan's conundrum," in which bond yields are low despite solid growth and rising inflation -- is probably the result of this deep underestimate of the U.S. growth outlook, plentiful liquidity, and a backward-looking deflation premium for bonds, the reverse of the backward-looking inflation premium that kept bond yields unusually high in the 1980s.
Right, it will be "different this time".
The only data point these folks have for this kind of argument is the 1995 incident, which as we know now was actually a "shadow recession" pulled out of by an unprecedented liquification of the US banking system and financial economy. These changes were one-time and cannot be repeated. Any attempt to do so will be hyperinflationary.
But maybe that's the strongest argument that hyperinflation will happen.
The common perception is that Americans drive the trade deficit in an unhealthy way by spending more than we produce. To make up the difference, foreigners ship us things on credit. This sounds bad, but should be evaluated in terms of our demographics, low unemployment rate, attractiveness to foreign investment and rising household savings.
Yes, spending more than we produce would be the precise definition of a trade deficit, so anyone holding this "common perception" is certainly more sane than you.
Demographics? Let's see -- 15-20 million illegal immigrant laborers, declining incomes for the middle class and below, looming boomer retirement in 2008, and diminishing technical and industrial expertise.
Unemployment rate? A joke; we invented the category of "discouraged worker" to artificially place all those that don't find a job soon enough. Then there's the 2 million people in prison that aren't counted as part of the work force (more than in authoritarian China) -- yet ironically the work force must support them.
Attractiveness to investment? For now (and thank god for foreign central banks, extending us that "merchant's credit"). But how interesting can our capital markets continue to be if we don't actually produce anything (I mean besides options scandals touching between 2,000 and 3,000 corporations) and our currency is declining?
The recent surge in the U.S. trade deficit reflects, in part, the unprecedented shift in the demographics of the world's large economies. The under-60 U.S. population is expected to grow for at least 50 years while the under-60 populations in Japan and Europe are already declining and in China will turn down within a decade. They need bonds while Americans need capital. They want to save more than they invest in their own economies, and are eager to help us invest more heavily (through their purchase of bonds.)
How quaint. This might be a nice argument in some theoretical la-la land, but if it were really true, then why wouldn't the world's capital instead be pouring into the Asian Tiger countries (China, India, and others), which have the youngest populations? Yet, paradoxically, these countries are the source of most of the global excess capital ending up in the US.
The answer is clearly that intervention is driving these money flows "uphill" (a-la Setser), not "demographics."
And the demographic divide between the US and Europe claimed above doesn't even exist: the US's native population is also aging, just like Europe's. Only immigration from other countries is bringing in any sort of young cohort. In the US, this is Mexico; in Europe, this is Eastern Europe and Muslim North Africa. Didn't you notice the riots in France a year ago?
Like young households, many companies also spend more than they produce, using bonds and bank loans, some from foreigners, to make up the difference. They add employees, machines, supplies and advertising before they produce.
Again, theoretical la-la land. We're actually cutting manufacturing and hence machinery, laying off domestic employees, and now heading into a recession, we're about to see advertising fall off a cliff. This must be the great gearing up for production, so we can pay back all that national debt!
The only production increases we're likely to see will be due to the dollar's decline, making the US a cheaper place to source and manufacture. This will be healthy, but it's in conflict with the US being a place predominantly to invest.
Growing corporations are expected to be cash hungry. This leverage is treated as a positive for companies but a negative for countries, a key inconsistency in popular economics.
To the extent this is true, there is a problem with how companies are valued these days. As I and others have pointed out recently, it is historically better to be holding net cash, not debt. Spending from cash is less risky and cheaper than spending from debt. "Leverage" is a telling term in the above; it has been forgotten that leverage implies risk.
Besides, this argument should be even stronger for the faster-growing Asian Tigers, so it is unclear how this points to a US advantage.
Rather than paying the debt back, the growing company rolls the debt over and adds more, just as the U.S. has been doing throughout most of its prosperous economic history.
In other words, you're advocating a pyramid scheme.
I dispute the latter -- if it could even be said "prosperous economic history" is a meaningful term. What "prosperous" times are being referred to? Certainly not most of the 1800s and early 1900s.
In fact, the trade deficit didn't appear in its modern, large-scale form until 1975.
Foreigners are as eager to invest in the U.S. as we are to buy goods and services from them -- it's a two-way street.
What a ridiculous claim!
Do the rank-and-file Chinese have any say in how much of this dollar surplus they accumulate, or where it goes?
Does anyone here really want to buy crappy Chinese-manufactured goods -- as opposed to being forced to by economic necessity?
While the net foreign debt of the U.S. is growing (the result of capital inflows), household net worth is growing faster, meaning foreigners are investing in the U.S. too slowly and conservatively to keep up with our growth.
Well, I can hardly believe my eyes here. Europe growing at 2-4% and China growing at 8-12% are "investing in us too slow" to "keep up with our [2%] growth." This makes absolutely no sense.
And of course, household "wealth" growing is actually tomorrow's household debt (money owed on mortgages). This is all evidence of exactly what you pointed out, but not in the way you intended: we're forced to pyramid more debt to support the old debt, spending the principle on nothing (wars) or declining assets (houses) while paying the interest streams to foreigners (China and OPEC).
The already-large foreign demand for investments in the U.S. is likely to grow from here, putting upward pressure on the trade deficit even if foreign growth continues to accelerate. The U.S. offers a relatively high and steady return on investment -- high because of the innovation and growth taking place here, steady because the commodity and manufacturing parts of many businesses are increasingly done abroad, reducing the volatility in U.S. growth. Equally important, the demographics of the world's large economies are shifting rapidly in favor of the U.S.
This paragraph is so tendentious as to be devoid of meaning.
But the trade deficit, around for hundreds of years of solid American growth, doesn't justify the inflation risk from dollar weakness or the growth risk from protectionism. And the trade deficit probably wouldn't respond to a weaker dollar anyway -- yen strength hasn't dented Japan's trade surplus, and it took a recession to create our last trade surplus in 1990-1991.
This is a bizarre statement. How are we going to "make the dollar weaker"? It is either intrinsically weak and will adjust (attempts to stop its fall be damned), or it isn't. The argument is that the trade deficit is a major factor in determining these fundamentals.
Protectionism is, of course, always dumb (arguably with exceptions in cases where we're simply counter-acting foreign intervention, such as China's currency peg).
The last part is true only in the short term: all other things equal, a weaker dollar will increase exports, but also lower the dollar value of them, thus being irrelevant to the deficit. But in the long term, it causes the export sector to expand.
As for the trade surplus in 1990-1991, this may be rather prescient, though the deficit is now so huge I find it hard to believe a recession could overcome it.
We cannot simply decide to "not have a recession", so again, this is directed bizarrely. Is the worry that the bears are going to somehow create a recession? Perhaps it is their fault that the housing market has tanked?
The cornucopians are getting desperate!
The swing vote on the dollar, and probably the controlling vote, is Fed policy.
Sneaky... leaving it all riding on the Fed, so that when things don't go as predicted, and your debt-as-wealth based paradigm breaks down, you can just blame the Fed!
I've seen lots of other "US economy cornucopians" doing the same -- whether they realize it or not, they are essentially butt-covering for invitable crackup of their untenable system.
This essay was garbage. The WSJ should be embarassed.
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