Economics

The Conscious of a Liberal, Paul Krugman: The RMB And The WTO, June 12, 2010

It is not clear what the consequences of an appreciated yuan would be, as various opinions show. Here are two of them:

The US should not expect too much from a potential yuan appreciation

New Imbalances Will Threaten Global Recovery

Peterson Institute: New Imbalances Will Threaten Global Recovery, by C. Fred Bergsten, June10, 2010

Global imbalances are about to jump again. New estimates from the Organization for Economic Cooperation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300 billion (€251 billion, £208 billion) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further.

No one would accuse the eurozone of competitive devaluation. However, there is considerable satisfaction throughout Europe with the weak currency. Martin Wolf of this newspaper has already characterized Europe's de facto strategy to export its way out of stagnation as "stumbling into a beggar-my-neighbor policy."

Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this "new mercantilism" and the result will be a sharp rise in global imbalances. read more

This is an important working paper:

Estimated Macroeconomic Effects of a Chinese Yuan Appreciation, by Ray C. Fair, Cowles Foundation Discussion Paper No. 1755, Yale University, March 2010

with important findings:

Abstract:

"This paper uses a multicountry macroeconometric model to estimate the macroeconomic effects of a Chinese yuan appreciation. The estimated effects on U.S. output and employment are modest. Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction."

The Economist does not think that the various G20 austerity programs are unreasonable:

The Economist: Myths about fiscal austerity, A cut too far?; The G20’s budget cuts are less reckless than many fear. Be worried instead by the paucity of structural reforms, June 10, 2010

Paul Krugman has another opinion:

Madmen in Authority, by Paul Krugman, June 7, 2010

Econbrowser: Exchange Rate Angst and Rebalancing, by Menzie Chinn, Jan. 10, 2010

As the euro has plummeted against the USD, there's been concern that efforts to rebalance the global economy will face increasing headwinds. [Bergsten] [Duy]. This worry is only added to by the already widening US trade deficit [1]. In this post, I don't want to dispute the difficulty of effecting global rebalancing. It was already a difficult task, even before the euro area's recent debt-related travails. What I do want to do is to put the recent exchange rate movements in perspective. My three observations are as follows:

•The euro is a relatively small component of the US trade weighted exchange rate.
•The persistence of exchange rate movements is important in determining the impact on trade flows.
•Rebalancing was never going to be effected by exchange rate re-alignments alone. read more

Heleen Mees takes a differentiated view on the Southern European problem countries and she thinks it would be short-sighted to lump all the peripheral countries together:

EuroIntelligence: Don’t blame the euro, by: Heleen Mees, June 10, 2010

Here is an excerpt:

"It’s ridiculous to brand Spain, Portugal and Ireland as “overspending, unreliable partners”, as some commentators do. Until the economic crisis erupted, their national budgets were almost as well managed as those of Germany and the Netherlands. The same cannot be said of Greece, but it would be wrong and short-sighted to lump all the peripheral countries together."

The yuan/US$ exchange rate debate will continue as long as China's exports coninue to surge:

Reuters: Chinese exports leap, put yuan back under microscope, June 10, 2010

China's exports jumped in May, reassuring investors about the economy's strength but putting pressure on U.S. President Barack Obama to placate critics who say Beijing is keeping the yuan unfairly undervalued.

Imports also grew robustly, testifying to the underlying momentum of the world's third-largest economy despite government steps to cool the red-hot property market.

Some economists said the export surge would be short-lived given debt problems in Europe, the country's biggest overseas market, but several said it would revive a debate about the timing of a long-awaited resumption in the appreciation of the Chinese currency. read more

The Economist: Budget cuts in the euro area Nip and tuck; Europe’s plans for fiscal austerity are not quite the threat to recovery they seem, June 10, 2010

For those who might be too negative about the future of Europe:

Project Syndicate: The Future of Europe, by Joseph S. Nye, June 8, 2010

Here is an excerpt:

"What is the future of Europe? As The Economist has noted, “talk of Europe’s relative decline seems to be everywhere just now….You may hear glum figures about Europe’s future weight and with some reason. In 1900, Europe accounted for a quarter of the world’s population. By 2060, it may account for just 6% – and almost a third of these will be more than 65 years old.”

Europe does face severe demographic problems, but size of population is not highly correlated with power, and predictions of Europe’s downfall have a long history of failing to materialize. In the 1980’s, analysts spoke of Euro-sclerosis and a crippling malaise, but in the ensuing decades Europe showed impressive growth and institutional development.

The EU’s approach to sharing power, hammering out agreements, and resolving conflict by multiple committees can be frustrating and lacks drama, but it is increasingly relevant for many issues in a networked and interdependent world. As Mark Leonard, Director of the European Council on Foreign Relations, has put it, “The conventional wisdom is that Europe’s hour has come and gone. Its lack of vision, divisions, obsession with legal frameworks, unwillingness to project military power, and sclerotic economy are contrasted with a United States more dominant even than Rome…But the problem is not Europe – it is our outdated understanding of power.”

The American political scientist Andrew Moravcsik makes the similar argument that European nations, singly and collectively, are the only states other than the US that are able to “exert global influence across the full spectrum from ‘hard’ to ‘soft’ power. Insofar as the term retains any meaning, the world is bipolar, and is likely to remain so over the foreseeable future.”"

Source: Excerpt from article linked to above

Glenn Beck blasts F. A. Hayek’s The Road to Serfdom back up the Amazon bestsellers list.

Related:

NYT: Bernanke Warns of ‘Unsustainable’ Debt, June 9, 2010

Great thoughts about the interdependencies of international financial crises:

International Financial Crises, Rudi Dornbusch†, Stanley Fischer, CESIFO WORKING PAPER NO. 926 CATEGORY 6: MONETARY POLICY AND INTERNATIONAL FINANCE, March 2003

Project Syndicate: Athens, China, by Fan Gang, May 31, 2010

While parts of the world are dealing with the aftermath of the financial crisis or an emerging sovereign-debt crisis, China is coping with the risk of overheating and/or an asset bubble.

Many factors may be pushing China’s economy in this direction. One of the most worrying is the same which fueled the current crisis in the eurozone: mushrooming public debt. In the eurozone, the problem is member countries’ sovereign debt; in China, the problem is borrowing linked to local governments.

In the eurozone, a bloated social-welfare system, particularly for the rapidly growing population of retirees, and the economic slowdown caused by the financial crisis are key components of the structural debt problem. In China, local officials increased borrowing in order to ensure that their regions’ economic growth rates remain at double-digit levels. read more

EuroIntelligence: While Strauss-Kahn understands the problems of the eurozone, von Rompuy does not, June 8, 2010

After a meeting of his task force to reform the eurozone governance, Herman van Rompuy last night listed the priorities – a new stability pact and an agenda to reduce current account imbalances within the eurozone. In his analysis, the problem of countries with large current account deficit is 100% structural, and to 100% located in the countries with current account deficits.

[Both assumptions are dead wrong. Spain surely has competitiveness problems with structural components, but how then do you explain the US deficit relative to China? Is the US not supposed to be more competitive than we are? Was the Lisbon Agenda not premised on this assumption? The problem we observed during the last decade was excessive saving in Germany (and China), and excessive dissaving in Spain (and the US). There are structural pathologies in all those economies that contribute to this outcome, as well as a lack of co-ordination and integration (in the labour market, for example). If you to fix the problem, you have to propose a much more symmetric agenda. The German tax and regulatory systems have built-in incentives for manufacturing investments, and disincentives for consumption. ] read more

Here is some food for thought and for discussion on the "too big to fail problem"

The Baseline Scenario: Eugene Fama: “Too Big To Fail” Perverts Activities and Incentives

E. Fama is consistently defending free market ideas:

Eugene Fama on financial reform

Federal Reserve Bank of New York: Some Observations and Lessons from the Crisis, by Simon M. Potter, June 7, 2010

Among the many important lessons coming out of the global financial crisis that started in the summer of 2007, possibly the most important revolve around how complex the global financial system is, how quickly confidence in that system can deteriorate, and how difficult it is to come up with simple and robust solutions to stabilize the system in real time. My remarks today will break the progression of this crisis into four distinct phases. In doing so, my intention is to highlight some of the actions taken by the Federal Reserve to manage the crisis, and to offer what at least in retrospect seem to be clear lessons on how to promote financial stability outside the heat of a crisis.

The four distinct phases of the recent crisis were as follows:

The initial disruption in money markets in the summer of 2007—I will call this the "what are these securities worth?" phase;
The abrupt takeover of Bears Stearns by JPMorgan Chase—I will call this the "unusual and exigent" phase;
The 30 days following the bankruptcy of Lehman Brothers—I will call this the "panic" phase; and
The period from mid-November 2008 to early May 2009—I will call this the "viability of large U.S. banking organizations" phase.
One consistent theme that emerges across all these phases is that central banks must have the ability to respond quickly and flexibly in a crisis situation. This ability is crucial in preventing the emergence of an adverse feedback loop between instability in the financial system and weakness in the real economy. Another theme that emerged as these phases played out, however, was that an ability to move with speed and flexibility comes with the challenge of ensuring that accountability and transparency keep pace with the actions being taken. The need for accountability and transparency is especially true when central bank actions are being used to innovatively fill holes in a regulatory and legal framework that has not kept pace with the evolution of the financial system. read more