The FED has crossed the Rubicon

[touchring]

Re: The FED has crossed the Rubicon

Around ten years ago, I fully expected the US to go into a long imperial decline around 2030. I never expected it to start in 2006. I am afraid this is going to happen at Internet speed, meaning in months rather than decades.

This professor also said it will take decades.
http://www.itulip.com/forums/showthr...ight=professor

I say by 2020, and possibly earlier.

[bagginz]

Re: The FED has crossed the Rubicon

The Fed could not have possibly crossed the Rubicon, which is in northern Italy. They were busy on Jekyll Island, Georgia, USA, trying to make the case that they "are not in the business of creating inflation".

FYI

"The idiom "Crossing the Rubicon" means to pass a point of no return, and refers to Julius Caesar's crossing of the river in 49 BC "

http://en.wikipedia.org/wiki/Rubicon

[Down Under]

Re: The FED has crossed the Rubicon

Looks like I have some company...

All quite true, but who was it that exported all the toxic crap, CDOs etc to the rest of the world? It wasn't Germany, or China, or ...

And, it does not appear that Andy Xie agrees.

[GRG55]

Re: The FED has crossed the Rubicon

All quite true, but who was it that exported all the toxic crap, CDOs etc to the rest of the world? It wasn't Germany, or China, or ...

As I said, nobody is lily white in this affair, and...

And, it does not appear that Andy Xie agrees.

...Xie's criticisms of the US role in precipitating this crisis and its recent policy responses are largely legitimate, and I tend to agree with much of it.

His contention that changing the RMB/$ exchange rate won't really make much difference in moving production back to the USA, or increase US exports significantly [and therefore address the trade and current account imbalances] is one that I have also argued elsewhere on this forum.*

It is going to take a much deeper level of cooperation and coordinated mutual intervention by both China and the USA to fix this problem...and that is a point that Xie seems to overlook in his efforts to exonerate China of any material responsibility for either creating, or solving, the current precarious circumstance.

Finally, I don't see that Xie has made much of any comment about Germany or Europe, so it would be difficult to discern whether he agrees or not. His only comment in the latest missive from him that I read was limited to this:

"...The euro is surging by default. The European Central Bank seems to still be talking like Budensbank. But, it can't sustain its position through the next sovereign debt crisis. When the euro is high, some euro-zone economy, though not Germany or France, will get into a crisis mode. It may join the QE crowd too..."

...and that would seem to support my contention that the ECB is no more virtuous than the Federal Reserve at it prostitutes itself to the QE john.

************************************************** ************************************************** ************************************************** ***

* Here's an interesting and readable paper on that subject that may be of interest.

A couple of excerpts [China's importing of semi-finished goods and re-export of finished goods is a point that has been made repeatedly by EJ/iTulip]:

November 08, 2010

East Asian Exchange Rates and China’s Trade Surplus

By Willem Thorbecke

China's exchange rate regime has generated consternation in recent years. However, since much of the value-added of China's exports comes from other East Asian countries, economists should focus on exchange rates throughout the region and not on the renminbi alone.

China's trade surplus, as Figure 1 shows, is entirely in a customs regime called processing trade. Imports for processing are intermediate inputs such as hard disk drives that are brought into China for assembly and re-export. Processed exports are final goods such as computers that are produced using the imported inputs...

...Turning to recent years, Figure 3 presents the three exchange rates over the last 6 years. The figure shows that the renminbi has appreciated by 20 percent since 2005. The integrated exchange rate, however, has only appreciated by 8 percent.

In an arithmetic sense, the effect of the renminbi appreciation on since 2005 has been almost exactly offset by the 20 percent depreciation of the Korean won and the 14 percent depreciation of the New Taiwan dollar over this period.

This fact helps explain the puzzle that Cline [4] discusses concerning why China's surplus did not narrow when the renminbi appreciated between 2005 and 2008. Part of the explanation, as Cline discusses, is that exchange rate changes affect trade with a lag. Another part of the explanation, though, is that depreciations in other East Asian supply chain countries offset much of the effect of the appreciation of the renminbi.

These results indicate that if policymakers are concerned about China's surplus, they need to consider exchange rates throughout East Asia rather than the Chinese exchange rate alone.

The enormous surpluses in processing trade relative to the U.S. generate pressure for nominal exchange rates throughout Asia to appreciate relative to the dollar. If East Asian currencies were to appreciate against the dollar, it would be advantageous if they could appreciate together while maintaining some measure of intra-regional exchange rate stability. By reducing intra-regional exchange rate volatility and the associated uncertainty, this would facilitate the flow of FDI and intermediate goods in Asian production networks. It would also produce a smaller appreciation of real effective exchange rates in East Asian countries since the majority of their trade is intra-regional. Finally, it would overcome the collective action problem that arises as individual countries in the region resist appreciations because they do not want to lose competitiveness relative to neighboring countries...

[GRG55]

Re: The FED has crossed the Rubicon

The hypocrisy continues.

I am not at all arguing that the US policy is correct, or that the Europeans don't have valid criticisms. I just find it quite amazing that they seem to think they are above all the stuff they are accusing the USA of engaging in...

Eurozone joins onslaught against US Fed, weak dollar

BRUSSELS — Europe added its voice Monday to a growing chorus of criticism of the US Federal Reserve's decision to print billions of new dollars to shore up the nation's fragile economy.

In an unusually sharp rebuke of US monetary policy, delivered on the eve of the much-awaited G20 summit, Jean-Claude Juncker, head of the group of eurozone finance ministers, said the dollar was undervalued and the Fed stimulus threatened "risks" for the world at large...

..."I see more risks and more possibilities of skidding offcourse globally in the decisions taken by the Fed," he added...

..."You're fighting debt with debt," Juncker said...

And pray tell exactly what did the Europeans do earlier this year with Greece, but fight debt with debt. Assuming Greece meets the GDP growth forecasts in the rescue plan [doubtful] it will still end up, according to the "rescue" plan's own forecasts, with a national debt growing to 150% of GDP over the next few years. That's some rescue...

[FrankL]

Re: The FED has crossed the Rubicon

The hypocrisy continues.

I am not at all arguing that the US policy is correct, or that the Europeans don't have valid criticisms. I just find it quite amazing that they seem to think they are above all the stuff they are accusing the USA of engaging in...

Eurozone joins onslaught against US Fed, weak dollar

BRUSSELS — Europe added its voice Monday to a growing chorus of criticism of the US Federal Reserve's decision to print billions of new dollars to shore up the nation's fragile economy.

In an unusually sharp rebuke of US monetary policy, delivered on the eve of the much-awaited G20 summit, Jean-Claude Juncker, head of the group of eurozone finance ministers, said the dollar was undervalued and the Fed stimulus threatened "risks" for the world at large...

..."I see more risks and more possibilities of skidding offcourse globally in the decisions taken by the Fed," he added...

..."You're fighting debt with debt," Juncker said...

And pray tell exactly what did the Europeans do earlier this year with Greece, but fight debt with debt. Assuming Greece meets the GDP growth forecasts in the rescue plan [doubtful] it will still end up, according to the "rescue" plan's own forecasts, with a national debt growing to 150% of GDP over the next few years. That's some rescue...

Well there are voices saying that the EU 'rescued' Greece just to buy time till they have proper plans in place for an orderly national bankruptcy(ies) / debt restructuring.

[unlucky]

Re: The FED has crossed the Rubicon

Well there are voices saying that the EU 'rescued' Greece just to buy time till they have proper plans in place for an orderly national bankruptcy(ies).

It's hard to believe that the German government really doesn't understand accounting identities. The most favorable interpretation I can come up with, is that they believe the debtor nations should make their economies more competitive via restructuring and deflation, i.e. falling wages and prices. They seem to regard this as "fair" competition, while currency devaluation is "unfair".

(If that's the case then I think their hopes are quite unrealistic.)

[GRG55]

Re: The FED has crossed the Rubicon

As I said, nobody is lily white in this affair...



...It is going to take a much deeper level of cooperation and coordinated mutual intervention by both China and the USA to fix this problem...

The "good news" is that the USA trade deficit with China declined ever so slightly to $27.8 Billion [out of a total USA trade deficit of $44 Billion] in September according to the US Census Bureau.

The need for cooperation to deal with this is pressing. That is the outcome that is needed from the forthcoming G-20 confab, not more acrimony.

China's Trade Surplus Jumps Ahead of G-20 Leaders' Summit

By Bloomberg News - Nov 10, 2010 4:17 AM MT

China posted a larger-than-forecast $27.1 billion October trade surplus, a day before Group of 20 leaders including Presidents Barack Obama and Hu Jintao meet in Seoul to tackle global imbalances in spending and capital flows.

Exports gained 22.9 percent from a year earlier and imports rose 25.3 percent, the customs bureau said. With the surplus pumping cash into the fastest-growing major economy, the central bank announced a 0.5 percentage point increase in lenders’ reserve requirements...

...The surplus, China’s second biggest this year, compared with the $25 billion median estimate of 27 economists surveyed by Bloomberg News and September’s excess of $16.9 billion.

[GRG55]

Re: The FED has crossed the Rubicon

It's hard to believe that the German government really doesn't understand accounting identities. The most favorable interpretation I can come up with, is that they believe the debtor nations should make their economies more competitive via restructuring and deflation, i.e. falling wages and prices. They seem to regard this as "fair" competition, while currency devaluation is "unfair".

(If that's the case then I think their hopes are quite unrealistic.)

And you have good company...

Martin Wolf writing in the FT:

The Fed is right to turn on the tap

By Martin Wolf
Published: November 9 2010 20:19 | Last updated: November 9 2010 20:19

The sky is falling, scream the hysterics: the Federal Reserve is pouring forth dollars in such quantities that they will soon be worthless. Nothing could be further from the truth. As in Japan, the policy known as “quantitative easing” is far more likely to prove ineffective than lethal...

...It is hardly a surprise that Wolfgang Schäuble, finance minister of Germany, thinks differently. He describes the US growth model as in “deep crisis”, adding that “it’s not right when the Americans accuse China of manipulating exchange rates and then push the dollar exchange rate lower by opening up the flood gates”. Presumably, he believes that, in a proper world, the US would be forced to follow the deflationary route imposed upon Greece and Ireland, instead. This is not going to happen. Nor should it...

...Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,8000bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $6,8000bn to its reserves, but many strongly asked it not to do so.

It is also simply false to argue that the weakening dollar is due to Fed policies alone. Indeed, anyone with half a brain should realise that the US can no longer combine a large trade deficit with a manageable fiscal position. Those who want their US bonds to stay sound should welcome anything that helps the US expand domestic demand and rebalance its external position. Current US monetary policies are, contrary to Mr Schäuble’s views, simply the yang to the yin of east Asian mercantilism...

At the risk of sounding like a broken record [does anybody still remember vinyl records?] it is going to take a high degree of cooperation across major trade nations, led by Chinese - USA cooperation, to fix this problem. And time is running short...

[GRG55]

Re: The FED has crossed the Rubicon

Perhaps. But that is a privilege that has been conferred on the USA by the ROW, as it suited them to do so...and it still does, as long as the USA is willing to maintain massive current account deficits and absorb the output from the ROW [especially now, in a world that is awash with huge amounts of surplus productive capacity]. This is why the ROW continues to support the US Dollar, despite their squawking...and the best efforts of the USA to discourage them from doing so.

China, as one example, could not have achieved its privileged position of massive trade surplus and rapidly accumulating foreign reserves, unless the USA [and to a lesser degree the Eurozone] were willing to run equally gargantuan deficits [and I am sure it has not escaped anyone's attention that Australia benefits significantly from this situation].

That the USA needs to reduce its debt-financed private and public sector consumption rate is obvious. That China loudly lectures the USA to do so, but in the next breath expresses an expectation that it should do so without any reduction in Chinese access to US markets is one of the hypocracies. China expects the USA to somehow unilaterally reduce its current account deficit, but objects to one of the key policy tools that the USA would have to impose in order to realistically achieve that unilateral outcome - taxes and tariffs, and non-tariff barriers, on import trade. The surplus nations have demonstrated they will not cooperate with their principal deficit nation[s] pairings in order to tackle the very real problem of global account imbalances [Germany has proved equally intransigent on this issue within Eurozone trade patterns].

The surplus nations benefit from the status quo, and would like to see the situation somehow continue indefinitely. So determined are they to maintain this circumstance that they "vendor finance" it. Isn't that exactly what China has done with the USA? Isn't that what Germany did for years with the Eurozone peripheral countries? And isn't that exactly why China has recently, and very publicly, announced it shall purchase the sovereign bonds of Greece and Portugal, when practically no one else but the ECB will do so? Don't have the money to buy our stuff? No problem! We'll set you up with an account at Lucky Dragon Loansharking or Helmut's House of Hock, as the case might be. Greece is a "sub-prime" credit risk, and what China is doing is just a global variation of what sub-prime lenders were doing in the dusty outposts of California's Central Valley in 2006.

There is a legitimate argument that consumers & governments in deficit nations aren't forced to borrow from their surplus nation benefactors. That's the same argument that sub-prime "homeowners" weren't forced to borrow from Countrywide and its peers. Fair enough. But this observer finds it hilarious that as soon as the borrowers make noises about reducing their appetite [e.g. the US trying to cut its trade deficit], it's the lenders that seem to whine the loudest. When mortgage borrowers evaporated in the USA the problems it created for the clamouring lenders were TARPed over. Not even the Chinese can manufacture a tarp big enough to cover up the global equivalent. And they know that.

Nobody is lily white in this affair!. But if the USA and the ROW don't find some cooperative accomodation to the deal with the problem of global account imbalances, there will be a trade war. And frankly in ANY global war my bet will, once again, be on the side of the USA.

From Michael Pettis:

QE2 and the Titanic

China reported an October trade surplus of $27 billion Wednesday.

This is a very big number and not one likely to soothe anger directed at China. It will be very hard for China credibly to argue that it is trying to contribute to global growth while pulling in more and more foreign demand. Here is the article in the People’s Daily:

China’s exports rose 22.9 percent in October from a year earlier, while imports increased 25.3 percent, the General Administration of Customs said Wednesday. China’s trade surplus expanded to 27.1 billion U.S. dollars last month, compared with 16.88 billion U.S. dollars in September, making the October figures the second highest this year after July’s 28.73 billion U.S. dollars...

...Last week I argued that Tim Geithner’s proposal on restricting current account imbalances directly, rather than targeting currencies, was a good idea. October’s trade surplus shows both why it is a good idea and why it will be hard to accept.

The proposal was a good idea because trade responds to a lot more than the level of the currency, and just pushing for currency adjustment might have no impact on the balance. My biggest concern was that if countries like China were forced to raise the value of their currencies faster than they liked, or if tariffs were imposed on their products, there would be a huge temptation to intervene in other areas, especially by lowering real interest rates.

This would not only prevent the tariffs or currency appreciation from having much impact on the trade imbalance (indeed the imbalances might actually get worse), but it could seriously increase domestic distortions. As undervalued as the renminbi might be, I am convinced that the most serious domestic distortion in the Chinese economy, and the biggest cause of the trade surplus, is excessively low interest rates.

Low interest rates (along with their cousin, socialized credit risk) are the main causes of capital misallocation and excess capacity in China, and are probably also the main forces pushing down household income and household consumption as a share of GDP.

In that case the rebalancing benefits of an increase in the value of the currency could easily be swamped by the damage caused by reducing real interest rates.

This by the way is what happened, in my opinion, in Japan after the Plaza Accord. Not only did Tokyo wait way too long to begin the rebalancing process, but when the rest of the world (i.e. the US) refused to absorb its huge and expanding trade surplus and forced up the value of the yen, Tokyo made things worse – it counteracted the impact of the rising yen by expanding investment, expanding credit, and lowering interest rates. This accelerated Japan’s structural imbalances, set off a further frenzied rise in asset prices and capacity, and worsened the eventual adjustment. This also seems to have happened after China began revaluing the RMB after July 2005.

That is why I think a current account target would have been a more effective way of forcing a rebalancing, although of course if you are eager to postpone the adjustment as long as possible, restricting very easy-to-monitor current account balances create a real problem...

...China is very worried about the double impact of a contraction in the trade surplus and the impact of the Fed’s quantitative easing. If the former occurs, it will be almost impossible for Beijing to reduce the impact of the latter without causing a sharp slowdown in growth

Beijing claims that QE2 makes it impossible for other countries to protect themselves from massive capital inflows that will destabilize local asset markets. Actually, Beijing is wrong. There is a way for countries to protect themselves against QE2, but it would require that they give up intervening in their currency. In other words the only reason QE2 will create excessive monetary expansion in China is because the PBoC will insist on purchasing all dollar inflows at the exchange rate set by the PBoC and monetizing them. So QE2 is fairly explicitly the US countermove in the great global game of beggar-thy-neighbor...

...What an impasse. China and other countries are right to claim that QE2 is likely to lead to asset bubbles outside the US, but only, as the US points out, in countries that intervene to prevent dollar depreciation, something the US is anyway eager to discourage. If Beijing is correct however in claiming, as it has for many years, that Chinese currency policies should be aimed at China’s needs, not those of the US, it is hard for them to dispute the Fed’s argument that Fed monetary policies should be aimed at satisfying the needs of the US economy, not the needs of China...

...I don’t think any of these measures will make much difference. China already is experiencing a liquidity-driven investment boom, and would have already raised interest rates if it weren’t so difficult to do so (many borrowers can barely service debt even at such low interest rates), instead of letting them decline in real terms, as they have all year. And even if SAFE can prevent some hot money inflow, it will not be enough to keep matters from getting worse...

...Beijing believes that there is no real desire on the part of Washington to address the deficit, while Wolf argues that if Washington doesn’t act soon it will face a rising trade deficit, more unemployment, and a worsening fiscal deficit. I think they are both right – Washington is worried about the deficit and Beijing believes Washington doesn’t care. This is a great setting for some pretty foolish brinkmanship...

...Each major country (and many minor) is pursuing monetary policies that attempt to create domestic growth at the expense of their neighbors. One of the terrible consequences of trade and currency war is that every country eventually gets caught up in the process and must play the same brutal game or suffer the consequences. No one paid much attention to beggar-thy-neighbor polices when the world was growing quickly, but it should have come as a surprise to no one that once global demand growth slowed, it was going to create a huge problem for international trade...

...since China and the US have seemingly valid and actually quite similar reasons for insisting on policies that are mutually contradictory, and neither can force the other except by accelerating their incompatible currency policies, there is almost no possibility of a happy solution to the trade disputes...

[GRG55]

Re: The FED has crossed the Rubicon

And you have good company...

Martin Wolf writing in the FT:

The Fed is right to turn on the tap

By Martin Wolf
Published: November 9 2010 20:19 | Last updated: November 9 2010 20:19

The sky is falling, scream the hysterics: the Federal Reserve is pouring forth dollars in such quantities that they will soon be worthless. Nothing could be further from the truth. As in Japan, the policy known as “quantitative easing” is far more likely to prove ineffective than lethal...

...It is hardly a surprise that Wolfgang Schäuble, finance minister of Germany, thinks differently. He describes the US growth model as in “deep crisis”, adding that “it’s not right when the Americans accuse China of manipulating exchange rates and then push the dollar exchange rate lower by opening up the flood gates”. Presumably, he believes that, in a proper world, the US would be forced to follow the deflationary route imposed upon Greece and Ireland, instead. This is not going to happen. Nor should it...

...Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,8000bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $6,8000bn to its reserves, but many strongly asked it not to do so.

It is also simply false to argue that the weakening dollar is due to Fed policies alone. Indeed, anyone with half a brain should realise that the US can no longer combine a large trade deficit with a manageable fiscal position. Those who want their US bonds to stay sound should welcome anything that helps the US expand domestic demand and rebalance its external position. Current US monetary policies are, contrary to Mr Schäuble’s views, simply the yang to the yin of east Asian mercantilism...

At the risk of sounding like a broken record [does anybody still remember vinyl records?] it is going to take a high degree of cooperation across major trade nations, led by Chinese - USA cooperation, to fix this problem. And time is running short...

G-20 Nations Wrangle Over Strengthening Vow on Currencies

Nov 11, 2010 9:12 AM MT

Group of 20 nations’ efforts to tackle currency and trade imbalances floundered as China rejected policy prescriptions that fault its exchange rate regime and directed criticism at additional monetary easing in the U.S.

“Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”

At stake for the global economy is averting a repeat of the currency and trade tensions that erupted in the 1930s and were blamed for worsening the Great Depression. The pivotal roles China and the U.S. must play to get a breakthrough at the G-20 was underscored by an 80-minute meeting between Presidents Barack Obama and Hu Jintao dominated by exchange rates.

“The Chinese can’t help but think this is just a way of continuing to point the finger at China,” said Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official. “It doesn’t look as if we’re going to see anything specific or substantive that will address global imbalances.”...

...“They have to deal with the underlying causes for this instability, which are these imbalances,” said Josef Ackermann, chief executive officer of Frankfurt-based Deutsche Bank AG. “It’s not about assigning blame to who is in deficit and who is in surplus -- the markets will decide who is in surplus and who in deficit -- but to create a framework to find the right balance.” ...

...China, the U.S.’s second-largest trading partner, had a trade surplus in excess of $170 billion with the U.S. in the 12 months through August, according to the American Department of Commerce...

...China, along with Germany, opposed a suggestion last month by Geithner that the G-20 consider targets for reining in current-account imbalances. To meet the targets, countries like China would likely have to let the value of their currency rise, making their exports more expensive.

Differences in competitiveness between nations can’t be leveled by “politically imposed limits,” German Chancellor Angela Merkel told global business leaders in Seoul yesterday.

Setting limits on trade gaps “is an idea that should be discussed,” French Finance Minister Christine Lagarde said...

[GRG55]

Re: The FED has crossed the Rubicon

Underwhelming, to say the least...but not surprising...

G20 closes ranks but skims over toughest tasks

SEOUL | Fri Nov 12, 2010 6:49am EST

(Reuters) - G20 leaders closed ranks on Friday and agreed to a watered-down commitment to watch out for dangerous imbalances, yet offered investors little proof that the world was any safer from economic catastrophe.

After an acrimonious start, the developed and emerging nations agreed at a summit in Seoul to set vague "indicative guidelines" for measuring imbalances between their multi-speed economies but, calling a timeout to let tempers cool, left the details to be discussed in the first half of next year...

...In a communique signed off at the end of the gathering, the group's fifth since the financial crisis exploded in 2008, there was a little something for everyone.

Leaders vowed to move toward market-determined exchange rates, a reference to China's tightly managed yuan that the United States has long complained is undervalued.

They pledged to shun competitive devaluations, a line addressing other countries' concern that the U.S. Federal Reserve's easy-money policy was aimed at weakening the dollar.

In a nod to emerging markets struggling to contain huge capital inflows, the G20 gave the okay to impose "carefully designed" control measures.

They also agreed that there was a critical, but narrow, window of opportunity to conclude the long-elusive Doha round of trade liberalization talks launched in 2001.

But there was no mention of Ireland, and the bland promises to deal with imbalances did not appear substantive enough to bring about any real shift...