The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

March 26, 2006

Odds And Ends

Another quarter begins at the University of Chicago Graduate School of Business, and I have once again cleverly fallen behind on my reading, giving me the excuse to introduce some of my favorite weblogs to new students, via this review of things I should have talked about last week.

First things first, the week ended with economic news that was mixed, at best. Kash at Angry Bear reads the durable goods reports and concludes (fairly, I think) that business investment spending is still short of spectacular.  On the other hand, at The Nattering Naybob Chronicles, Mr. Naybob is able to look on the bright side: "Both [the durable goods and house sales] reports eased inflation fears and bond yield dropped."

With respect to the real estate news, Calculated Risk, a consistently fine go-to source on the housing market, has the latest on home mortgage applications (down slightly), existing home sales (up, but perhaps not the best indicator),  and new home sales (a better indicator, and coming in "very weak".) CR also has a handy chart, mapping the pattern of home sales in recessions.  At the Big Picture, Barry Ritholtz opines: "The [Real Estate] market has dropped from white hot to red hot to mid-plateau."  Calculated Risk says   "The sky may not be falling, but... housing sales are clearly trending down."  Captain Capitalism, however, is not cheered by that prognosis, and Michael Shedlock pores over the Calculated Risk pictures, to find that his disposition is soured as well.  ElectEcon finds a prediction that things are going to get ugly fast

For those who simply must have more housing indicators to watch, Daniel Gross bears good news, from Standard & Poor's.  For those who just can't get enough detail on economic data period, Mark Thoma has more at Economist's View.

Speaking of data, a nice summary of U.S. wealth as reported in the Federal Reserve's Flow of Funds can be found at Angry Bear. (Although I don't necessarily endorse the conclusions, you might also enjoy the pictures provided at Economic Dreams - Economic Nightmares.)

Last week I (sort of) came to the rescue of the Consumer Price Index.  Barry Ritholtz (again) counter punches, with a Wall Street Journal survey of readers indicating the vast majority don't think very highly of the Consumer Price Index, but Russell Roberts effectively (in my view) defends the beleaguered index, at Cafe Hayek.

Also in the inflation vein, Mark Thoma follows up my post on the relationship between the CPI and the PPI with some work of his own -- broadly illustrating the point of the research I was citing.

Mark also relays the crux of Federal Reserve Chairman Ben Bernanke's speech on the yield curve.  Meanwhile, the inverted yield curve watch continues, at The Capital Spectator.

Shifting to the fiscal side of the government house, Kash breaks down the sources of federal spending growth in the United States over the past five years.  The guys at Angry Bear have had several useful, even if a bit partisan, posts on the subject in the recent past -- here, here, here, here, and hereGary Becker and Richard Posner provide some much needed perspective on how to think about the build-up in defense spending. 

In other legislative news, Andrew Chamberlain at Tax Policy Blog indicates that tax reform may not be dead just yet (good), and at Vox Baby, Andrew Samwick reports on the progress of pension reform (decidedly not good).

David Weman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better).  The Skeptical Speculator concurs that "protectionism looms." Asia Pundit reminds us that, in the United States, the impulse is bipartisan (and Sun Bin channels Stephen Roach's comments on the subject). William Polley deems it "Nothing if not predictable." Mark Thoma provides an extended commentary from the Financial Times on the dangers of "Dobbism" (as in Lou).  Daniel Drezner, however, has better news. Brad DeLong takes notice of a Alan Blinder's sometimes less charitable view of trade and globalization, to which Arnold Kling replies -- here and here.

Steve Antler (of EconoPundit) makes the connection from trade protectionism to immigration reform.   Russell Roberts is even less tolerant of the anti-immigration argument.  So is Arnold Kling (at EconLog).  EurActiv reports on how the EU is attempting to deal with its own immigration questions. The New Economist provides a glimpse of research suggesting that outsourcing explains about 28 percent of the growth in the wage gap between high- and low-skilled labor between 1980 and 1999.

Continuing with the international theme, Brad Setser thinks both sides are at fault in the ongoing tensions over Chinese exchange rate policies.  He also has terrific coverage of Larry Summers' must-read views on the current state of global financial markets and capital flows.  Mark Thoma notes an article on the relationship between exchange rate policies and trade gaps and a summary of research on foreign direct investment. Steve Antler suggests an explanation for "why the dollar still reigns".  Barry Ritholtz is pretty sure the answer is not Dark MatterMenzie Chinn, writing at Econbrowser, is even less convinced.  (He follows up that post with a very nice discussion of "purchasing power parity."  Don't worry if you don't know what that means -- Menzie will fill you in.)

Speaking of China, Daniel Gross carries a story from the New York Times on the development race between China and India, the latter a country that I think gets far less attention than it deserves.  (Lest there is any confusion, I mean positive attention.)  Interestingly, Toni Straka at The Prudent Investor -- who  unfailingly does not ignore India -- reports that India is about to float its currency and remove foreign exchange controls.

About Economics has a macro-relevant post on the, increasingly quaint, problem of the so-called zero nominal interest rate bound.  Digging even further into the history of monetary theory, Jane Galt ruminates on "free money." In the some-think-it-matters-I-don't category, The Capital Spectator comments on the retirement of M3.  So does Tim Iacono. That makes the graphs at Economist's View on M3 velocity -- explained here -- somewhat obsolete, but don't worry -- there is still M1 and M2 to absorb your attention.

UPDATE: Oh yeah -- Tyler Cowen has a new gig at the New York Times.

SPECIAL BRAIN-LOCK UPDATE:  Above I hat-tipped A Fistful of Euro's David Weman for a Guardian article  "bemoaning  the rising tide of protectionism" (my words).  Unfortunately, the Guardian article that does the bemoaning is not the one David cites.  I had in mind an earlier article by James Surowiecki.  David was pointing to another article, by Daniel Davies, arguing that capital controls do not count as protectionism.  Double hat-tip to David for keeping me on the straight and narrow.  (Oh, and by the way -- I'm with Surowiecki.)

March 26, 2006 in Asia, Data Releases, Deficits, Europe, Exchange Rates and the Dollar, Federal Debt and Deficits, Housing, Inflation, Interest Rates, Labor Markets, Saving, Capital, and Investment, Taxes, This, That, and the Other, Trade , Trade Deficit | Permalink


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» Round-up of Recent Economics Blog Postings from EclectEcon
Dave Altig at Macroblog has a very comprehensive round-up of recent blog postings from all over creation, all grouped by various economics topics. It is very thorough and ... [Read More]

Tracked on Mar 26, 2006 9:04:00 PM

» Carnival of the Economists from The Big Picture
Over at Macroblog, Dave Altig collects lots of Odds And Ends from the week's economic writings. He's a one man Carnival of the Economists. Looks like it took hours to put together. If you are looking for additional sources of economic writing and discu... [Read More]

Tracked on Mar 27, 2006 9:46:30 AM

» What Has Happened to U.S. M3 Growth Rates? from EclectEcon
If you're interested in growth rates of the U.S. money supply (and Fed policy concerning them), you might enjoy [Read More]

Tracked on Mar 28, 2006 1:06:21 PM


Great site. Great post. But, do you really think India is being underreported? I sure don't. It's hard even finding articles on China these days (such as your post) that don't mention India.

Posted by: China Law Blog | March 26, 2006 at 09:51 PM

CLB -- Fair enough. The indictment should really be aimed squarely at me. (By the way -- I just checked out your site. Very interesting. I'll make it regular reading from now on.)

Posted by: Dave Altig | March 27, 2006 at 07:20 AM

I'll add a few on-line print business columnists for your insatiable readers. O.C.Register's Jon Lansner is always on top of the socal economy, & I think Dallas Morning News' Danielle DiMartino's piece this morning, "Systemic risk is on the bubble", speaks loudly & well of her ability.

Posted by: bailey | March 27, 2006 at 10:40 AM

"David Weiman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better)."

Actually, no.

Posted by: David Weman | March 27, 2006 at 10:56 AM

David -- Sorry about the typo. All fixed.

Posted by: Dave Altig | March 27, 2006 at 04:16 PM

Sorry, I meant that Daniel Davies doesn't say what you think he says, but rather:

'Basically and historically, "protectionism" (and "mercantilism" and related terms) always used to refer to tariff policy, with respect to goods markets and trade between buyers and sellers. The use of the terms to refer to policies about capital markets and ownership of companies is a new one; I spotted it beginning to arise in the FT and Economist around the beginning of the 1990s and have been writing Mr Angry letters on the subject ever since. Because capital markets "protectionism" is much less bad than the goods market type and might not even be bad at all.'

Posted by: David Weman | March 27, 2006 at 06:16 PM

David -- Oops. Wrong article. Thanks for keeping me honest. I trust the update is better?

Posted by: Dave Altig | March 27, 2006 at 08:50 PM

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March 10, 2006

The Economic Costs Of The Failed Port Deal

Regular readers know that I generally avoid wading into waters where political riptides dominate, and for that reason I have avoided commentary on the now defunct plan to allow interests from Dubai to take control of a (very) small number of US ports.  But in today's Wall Street Journal (page A18 in the print edition), Larry Lindsey makes a pretty good case that the consequences go well beyond the political fallout:

...congressional attitudes on the ports raise questions about the sustainability of our global economic leadership. For over 50 years a bipartisan consensus has held that global free trade and the free movement of capital is in our interest. The U.S. was the world's driving force for globalization, whether the president was named Kennedy, Reagan, Clinton or Bush. That leadership has underpinned the greatest rise in living standards the world has seen, the emergence of a global middle class that now numbers well over a billion people, and America's triumph in the Cold War without ever firing a direct shot...

... America has not pushed globalization and the free movement of capital out of an altruistic concern for global development: These are causes from which America enjoys enormous benefits. This is particularly true today when the free movement of capital underpins so much of our macroeconomic stability. The U.S. is by far the largest investor in the rest of the world, with $10 trillion of assets overseas. We have pushed other countries to allow our companies to invest overseas because it was in our interest to do so. Our corporate boards did not authorize this scale of investment in order to lose money: Last year they made over $500 billion on these investments -- $1,600 for every person in the U.S. To insist on our ability to invest abroad but resist foreign investments here is untenable.

Even more important is that America is the recipient of a huge amount of foreign inward investment. Last year foreigners increased their investments here by $1.4 trillion. A good portion of this comes from the Middle East for the simple reason that their oil revenues have soared. Does Congress prefer that this money be invested elsewhere to create jobs overseas rather than here? Moreover, absent this capital inflow, interest rates would be far higher and equity prices far lower than what they currently are. If you hang out a "Not For Sale to Foreigners" sign, fewer bidders will mean lower prices.

Color me saddened, and distressed.

March 10, 2006 in This, That, and the Other, Trade | Permalink


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"Does Congress prefer that this money be invested elsewhere to create jobs overseas rather than here?"

It doesn't really matter what Congress thinks. For several years now IBM, HP, Intel, Microsoft, GE, Carrier, well, you get the picture, have sent far more jobs overseas than they have created here.

IBM's version of job creation is to buy an outfit, fire the US employees and send the remaining jobs to India.

So who is really destroying the US? Our leadership went down the drain with the big mulitnationals. Witness the R&D and high level jobs moving offshore. Witness the articles, as in Forbes about how the ROI on a college education just isn't there anymore.

So as far as worrying aobut job creation, this economy hasn't produed enough jobs to keep up with population growth the last 5 years.

Posted by: me | March 10, 2006 at 04:22 PM

So why is unemployment at 4.8

Posted by: cb | March 10, 2006 at 04:55 PM

So why has the participation rate fallen so much? I guess I would say becuase peopple aren't being counted, or if they are counted, they are underemployed. Freelance consultants are hardly "employed".

Posted by: me | March 10, 2006 at 04:58 PM

From the beginning I've argued the Dubai deal was probably not too important. But it does point out common failures of the Bush Administration.

First, the Bush Administration mislead the public as to the number of ports involved. The actual number was 22, not 6 ports. This doesn't exactly build confidence in the process.

See Dr. Hamilton's "Still no correction from Homeland Security"

Second, port operators (like a Chinese company here in Long Beach) do perform security functions. The Bush Administration falsely stated they do not.

Third, the Bush Administration ignored the law concerning reviews of foreign government owned entities buying US properties. In 1992, the law governing the Committee on Foreign Investment in the United States (CFIUS) was updated to require a 45-day investigation for any state-backed company. That law was ignored - a common theme for the "above the law" Bush Administration.

Fourth, this deal exposed the minimal security at US ports. This was a campaign theme for Senator Kerry during 2004, but Bush has only paid lip service to US port security. For a fraction of the money spent daily in Iraq, US ports could be made significantly more secure.

Finally, the Bush Administration has fanned the flames of xenophobia. Its no surprise that they were bit by their own exaggerated rhetoric. It is a shame that the US has to pay for Bush's fear mongering - color me saddened too!

The economic issues related to running record trade deficits, hanging out what Lindsey named: "Not for Sale to Foreigners" sign, and the tarnished American brand are all important. But the first step is to hold the Bush Administration accountable for the above failures.

Best to all.

Posted by: CalculatedRisk | March 10, 2006 at 06:57 PM

My personal opposition is to the Dubai government owning this. Look at their record. After all, we are fighting them over there so we don't have to fight them over here, remember?

I was in favor of the Petrochina deal. Certain things are fair and some aren't. If I can't go to India and be the manager of a Wal-Mart there then I have a problem with India taking our jobs. If Dubai wants to push Israel into the Mediterranean, I have a problem with that deal.

Do you people have no limits to what you call free trade? The failure of this deal does not sadden me at all.

Posted by: me | March 10, 2006 at 07:26 PM

When we were the largest exporting country the promotion of free trade was natural. The less important exports become, the less support there is for it and the more we become like other countries.

Posted by: Lord | March 11, 2006 at 12:35 PM

I think that Lindsey is right. Somehow though, I think that there is a protectionist movement undercurrent in the nation. It stems from the War in Iraq and loss of jobs to other countries.

The U.S. has never done well as a protectionist state. Legally preventing the loss jobs to other countries because of cheap labor will not increase jobs here. It will lower the standard of living in the United States.

America is not about protectionism.
Bush was right when he advocated a 45 day inquiry into security and other things before the deal was approved. We could have accomplished a lot in those 45 days, and cooler heads could have made a reasonable decision.

Foriegn investment is not a bad thing. Real estate prices in Florida rose in part because so many Europeans bought homes there.

Free trade lifts all boats.

Posted by: jeff | March 12, 2006 at 12:33 PM

US promotion of a tightly linked world was in part, parhaps a large part, motivated by geopolitical, rather than economic, interest. One of the big, frustrating efforts within the US foriegn policy mechanism was to get more attention paid to outright economic interest, rather than having economics play hand-maiden to "big think" geopolitics.

When the White House wanted a trade deal, but faced resistance in Congress, the option was there during the Cold War to tell recalcitrant legislators that their economic views were threatening our national security interests. Legislators tended to fold up when confronted with such arguments back then. Now, they don't. Making matters worse, it is easy to argue that allowing foriegners to run our ports is contrary to our security interest. So once again, security is trumping economics. This time, though, the White House put economics first, and Congress has played the security card. The security card won.

Look at efforts to foster trade liberalization in international (GATT/WTO) negotiations since the fall of the Soviet Union. Not so successful. Punte Del Este is just about the last big success. Since then, China has joined the WTO in a US and European effort to get China into the web of formerly Western-allied nations through trade. The Chinese were objectively not prepared to enter. Since entering, they have benefited from trade access while demostrating questionable adherence to trade rules. The public noticed the result, and support for trade is flagging. I don't think the "benefits from trade" argument was ever the sole motivation for trade deals. Alone, it is hard to sell. We are no longer successfully using tradee to improve security.

At the same time, we are doing little to mitigate the short-term losses from trade. China is doing its part, by helping keep interest rates low. If that effort peters out, trade may become decidedly less popular.

Posted by: kharris | March 13, 2006 at 09:29 AM

The first question to ask is this.
How can the overhead of long haul shipping with all the consumption of fuel and with all the required protective packaging compete with local value added economies? The answer is simple. Free Trade is based on destitute impoverished workers in a new kind of modern wage slave trade.
The 2nd question is this. When and why did we ever have to compete on a global basis since the consumers of the United States are the primary source of support for most of the global economy ?
The U.S. Federal Government itself sponsored the moving of factories outside the USA starting in 1956 and this evolved into so called Free Trade which is all about moving production from place to place based on the cheapest labor markets of the world. Now it is a boomerang coming back to haunt us with a new working poor class finding it difficult now to even afford the cheaper imports. Any port situation boils down to this with the main commodities being human beings instead of products.
See http://tapsearch.com/globalization

Posted by: Tapsearcher | December 15, 2006 at 11:17 PM

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January 04, 2006

Trade And Debt

One of my New year's resolutions is to work through some the random bits of things I have been meaning to blog on about, stored in my ever-useful copy of EverNote.  So far I am making about as much progress on that as on my promise to eat less ice cream.

Oh, well.  Baby steps.  One piece of old business comes from Don Boudreaux's campaign last month to undermine the view that current account deficits imply indebtedness.  If I might paraphrase, Don's argument -- which you can find here, here, and here -- is essentially that that trade deficits represent an act of deferred consumption -- and hence investment -- by someone in the world. This is crystal clear when the funds made available by countries with trade surpluses are used to purchase plants, properties, or significant equity claims outside of their own border -- an activity known as foreign direct investment

Here's a picture you have probably seen before:


Here's a picture you may not have seen, from Sun Bin:


Since about 1980 the United States has, for all practical purposes, run permanent trade deficits.  It has also been a magnet for direct investment.  And though some of the income from that direct investment is repatriated to other countries, I think you would be hard pressed to argue that the situation shown above represents a loss to Americans.

You can certainly quibble with the size of the U.S. current account deficit today.  Or that in present circumstances current account deficits are primarily financing consumption, not investment. Don would probably say shame on you for your parochial perspective (because those deficits surely represent saving for someone else in the world, even if globally they just swap their consumption today for our consumption tomorrow).   Either way, a blanket aversion to trade or current account deficits just does not seem justified by the record.

January 4, 2006 in Trade , Trade Deficit | Permalink


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Power to the keyboard, Right oN!

Posted by: Edward Hugh | January 05, 2006 at 06:45 AM

Power to the keyboard, Right On!

Posted by: Edward Hugh | January 05, 2006 at 06:46 AM

The Bernanke/Bill O'Reilly view, well argued.

Everybody has to send their money here because, well, they have no choice: the US is just the greatest nation on earth.

But to look at it through another lens, if I'm the US and you're sources of capital, currently:

You throw money at me because if you don't I won't buy your stuff, because after all I don't have a real job myself. Also because if you don't throw money at me, I'll go broke and then _nobody_ will buy your stuff, because I'm the only one stupid enough to keep spending ever-increasing amounts of money I don't have. But to me it's all ok; I think I'm so great you'll keep sending me money forever.

What the Bernanke/O'Reilly/Altig argument seems to conveniently ignore is that these inflows aren't gifts, they're investment that needs to be repaid by our children, by one or more of the following: higher taxes, lower spending power per a falling dollar, and perhaps more than anything, a lower standard of living in the form of opportunity cost if inflow goes to consumption and not productive investment.

I genuinely wonder how some of these people can look their children in the eye.

Posted by: RN | January 05, 2006 at 10:06 AM


what do labor force participation rates look like these days?

Posted by: nate | January 05, 2006 at 10:48 AM

Nice summary of Don's argument but I have the following problem with it. Suppose that I borrow $1 million to open pizza parlors in Los Angeles. I did invest but I still owe the bank $1 million. Of course - as James Hamilton often reminds us - the U.S. is saving LESS not more.

Brad Setser recently posted an interesting paper with "Dark Matter" being part of the title. The upshot is that when one sees the fact that the U.S. has positive net income from abroad even today, one has to ask whether the MARKET value of US investments abroad so greatly exceedks the BOOK value that our investments abroad might actually be worth more than the recorded $12.5 trillion in US obligations to the rest of the world.

As I note over at Angrybear, it's an interesting claim, but then we have been offering transfer pricing manipulation as an alternative explanation as to why recorded net income from abroad is still positive for the U.S.

Posted by: pgl | January 05, 2006 at 05:13 PM

There are many things I am willing to give up, but Blue Bell ice cream is not on the list.

Moderation perhaps, but that's about it.

Hook 'em, Horns!

And pass the chocolate syrup.

Posted by: Movie Guy | January 05, 2006 at 06:55 PM

Unless "COMPNENTS" is something new, you've made a common blogger mistake - you typed in the title to the chart, looked at it quickly one time, then never looked at it again.

Happens to me all the time.

Posted by: Tim | January 07, 2006 at 08:32 PM

I hold that the Asian mercantilist manipulation of exchange rates that underpins the trade and current account deficits is simply a variant of the "vendor financing" fraud that fueled the telecomm bubble.

Just as the managments of Nortel and Lucent deceived their stockholders into thinking that business was great by lending customers the money to buy their products, though those customers had no real prospect of ever being able to repay the loans, so do the governing and managing classes of the Asian countries do essentially the same thing to deceive their citizens into thinking that export manufacturing is a great business.

In the cases of Nortel and Lucent, there were outside agencies in a position to expose the fraud and call management to account. In the case of the Asian export economies, there is not. These unsustainable trade imbalances will continue until they have so distorted the world economy that some constraint makes it simply impossible for them to go on. Put differently, straw will continue to be piled onto the camel until its back breaks.

Posted by: jm | January 09, 2006 at 10:27 AM

RN: "What the Bernanke/O'Reilly/Altig argument seems to conveniently ignore is that these inflows aren't gifts, they're investment that needs to be repaid by our children." If the issue is foreign direct investment, then the returns to that investment is what pays for the trade surplus today. And it is still a winning proposition for domestic households because more capital makes our labor more productive, independent of who owns it. I think what what you are worried about is the case where the extra resources we are belssed with from abroad are consumed away. Although I still think there is some room for discussion about how muh we should worry about this, it is fair to propose that this may represent passing a burden on to future generations.

pgl -- Right, as always. Investing with borrowed funds generates its own income to finance the loan, of course, so that does not worry me. I found the dark matter discussion quite interesting. Maybe some day I'll have something intelligent to add.

jm -- As I said above, I don't want to push the story to the point of claiming that trade deficits should be unquestionably accepted as a positive development. However, the trend for the current account deficit since the beginning of the 1980s is definitely toward deficit, and it has been associated with a lot of investment in the US. That, to me, suggests Don's point was worth taking note of.

Tim -- Yes, my RAs were mortified by sloppiness as well.

MG -- God bless Vince Young! (Both for beating USC and for deciding to be absent when Texas plays the Buckeyes next fall.)

Posted by: Dave Altig | January 09, 2006 at 01:42 PM

But what about this?

I am extremely skeptical that much of the inflow is foreign direct investment.

I read and speak Japanese fluently, was associated with the country in various trade-related areas until about five years ago, and live in the area near O'Hare Airport where many Japanese companies have US offices. The Japanese presence in this area is dramatically less than it was ten years ago. The clientele of my favorite Japanese restaurant, which used to be mainly Japanese, is now almost entirely American.

And I read the Japanese business and economics press fairly regularly, and have seen nothing about any boom in FDI to the US.

Japanese FDI, at least, is going to China, not the US.

Posted by: jm | January 10, 2006 at 03:00 AM

Where you're likely to find increased Japanese private investment in the US is in the MBS market, from financial entities rendered desperate for yield by the zero-interest-rate policy.

As the MBS market goes south with the bursting of the real estate bubble, there'll be an immense scandal back in Japan, and that source of funds will dry up.

I'd be surprised if the Japanese are not also active in selling credit default insurance -- the big boys' equivalent of selling naked puts. But it's late...

Posted by: jm | January 10, 2006 at 03:42 AM

jm -- The picture from Sun Bin above is data, so it speaks for itself. It, of course, only extends through 1998 and most critics of recent US economic policy have argued that the cause of rising trade deficits in the past 4 or 5 years are not comparable to the forces that have yielded a general trend in deficits in the post-1980 period. I'm not really objecting to that claim here -- only pointing out that up to 1998 trade was indeed associated with FDI flowing into the US (big time). Them's the facts.

Posted by: Dave Altig | January 10, 2006 at 11:55 AM

But David, how can data for expansion of FDI from '80 thru '98 have much serious relevancy regarding the nature of today's trade and current account deficits, when pre-'98 they were nowhere near their present horrific scale, as your own graph at page top shows?

BTW, before I go any farther, I should state that I completely agree that free trade is a win-win proposition, strongly believe that unfettered comparative advantage will lead to optimal partitioning of production among nations -- and even agree that, at least in the short term, having foreign governments force their citizens to work for us at below-free-market wages by manipulating their currencies is overall to our benefit.

But exactly because I believe in free markets and comparative advantage, I can't see how the blatantly mercantilistic exchange rate manipulations of the Asian governments can possibly be to the world's and our advantage in the long run. And I find it simply amazing that putative foes of government interference in markets such as Don Boudreaux not only fail to rise up in outrage against such manipulations, but seem to tie themselves in knots finding ways to defend them.

As you must well know, in the five quarters of 2003 through Q1 2004, the Japanese government expended about $320 billion in direct intervention against the yen/dollar exchange rate, and authorized the expenditure of about $1 trillion more.

Consider that, Japan's GDP being about half ours, that is equivalent in scale to the US government expending $640 billion on currency intervention and authorizing $2 trillion more.

What would Boudreaux be writing if the US government did that?

What would you be writing?

How can any serious person use the words "free trade" to describe the current international trade regime?

Are not prices the fundamental means by which participants in free markets signal to each other their relative economic preferences? Is exchange rate manipulation by government buying of massive quantities of US Treasury securities anything other than blatant manipulation and falsification of those sacred pricing signals?

How can the mechanisms of comparative advantage possibly function correctly in the presence of such distortions?

Posted by: jm | January 11, 2006 at 12:47 AM

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December 21, 2005

Free Trade And Freedom

asiapundit was loaded with items yesterday on internet censorship in China -- here, here, here, and here --  which prompted me to reflect on the juxtaposition of two seemingly unrelated events during my own recently completed trip. 

The first "event" was my own face-to-face with the limitations on internet access imposed by the Chinese government.  There appears to be some confusion about what is, and what is not, blocked in China these days.  Apparently Typead was blocked before, was unblocked, and then blocked once more. Blogspot supposedly lit up again, but maybe not everywhere.  The commentary at asiapundit posts suggests that the situation is, well, confused.

Here is my story, which I have relayed before, in bits and pieces.  During a visit last January, I discovered that I was unable to locate any weblogs hosted by the Blogspot service. Subsequent to that visit, news arrived that Typepad -- my host -- had joined the list of blocked blog services.  It was a pleasant surprise, then, when I found that, upon arriving in China this month, I was having no problem reading all of my favorite weblogs, or posting on my own site. Then a minor disaster befell me, my trusty laptop decided it had had enough of my abuse, and it would henceforth decline to operate. As a consequence, I was driven to the public computer in my hotel's business center.

Uh-oh.  Once again, no Typepad, no Blogspot.  I tried to access these sites in many other public or quasi-public places -- a university, airports and airport lounges, other hotel business centers. All to no avail.  I was led to conclude that, at least where I was -- Guangzhou mostly -- I had relatively unfettered access in the privacy of my own hotel room, but nowhere else.  One conclusion is that travelers -- particularly non-Chinese travelers, who are probably the majority in the hotels I stayed at -- are simply less likely to create trouble than are Chinese citizens.  But that can only be half the answer.  The other part must be that the government finds that it is not useful to put restrictions on foreigners used to a less heavy hand, either because it repels them or because it does not project the desired image of a thoroughly modern China.   

Which brings me to the second event during my visit, the all-too familiar protests surrounding the World Trade Organization talks in Hong Kong. This time around the demonstrations were concentrated among the South Korean farmers.  There appeared to me not much, if any, of the hodge-podge of anti-capitalism, anti-globalization groups that have plagued past meetings.  That is  probably due more to the particular venue than some newly found enlightenment among the groups to which I allude.  In any event, we now have yet another moment in the ongoing attempt to tear down the barriers to global trade marred by considerable noise from those who want no part of it.

The connection between this and my personal internet trials? The irony, of course.  I believe that, if China continues on its current course, the on-again, off-again relaxation of personal freedoms for the Chinese people will soon or later be on-again for good.  That will in main part be due to the dynamics of the relationship between the government and a citizenry growing ever wealthier.  But it will also in part be due to the imperatives of trade, the increasing role of foreigners that trade-driven development requires, and the presumptions of basic freedoms (and economic necessities) that outsiders bring with them.  Foreign business concerns are increasingly moving out of the hotel rooms and into the population, and that itself provides an impulse to change.

I understand that there will always be some interest group that stands to lose from free trade.  And I am not unsympathetic to their plight.  But I take it as an absolute article of faith that those losses are swamped by the returns to humanity as a whole.  And those returns are not just measured in dollars and cents.

UPDATE: myrick stays on the case.

December 21, 2005 in This, That, and the Other, Trade | Permalink


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Interesting comments that jive totally with friends of mine that have recently been to China. A friend of mine was at Tianneman(?) Square with a high ranking Chinese official. He noticed all the cell phones being used by people in the square. He commented to the official that there is no way you could roll tanks in here ever again. The official said he was right.

There has been a lot in the press about the wealth of the Chinese, their development of commodity markets et al. My guess is that they are about to take another leap forward, or they are posturing before a big fall. It is hard to tell with the communists. I think their banking system has a lot of holes in it similar to the Japanese in 1980, and we will have to see how that shakes out.

They always release information for a reason, it just is not clear what the reason is.

Posted by: jeff | December 21, 2005 at 03:49 PM

In the U.S. I have noticed that some businesses or public places have curtailed internet access to certain sites. I am not sure why this is done. In some instances, it is public policy (eg, a library blocks email services because it wants the PCs used for education and research and does not want chit chat on email). In other instances, it may be cost. Businesses do not want to unnecessarily pay for PCs that are broken down by people downloading inappropriate things from the internet.

Posted by: nate | December 21, 2005 at 05:30 PM

One more: the recent edition of Technology Review has an article called "The Internet is Broken". It may or may not be relevant.

Posted by: nate | December 21, 2005 at 06:06 PM

You are quite right about fewer restriction being placed on foreigners. Satellite television, as well, is still technically banned outside of hotels used by foreigners and diplomatic compounds (although not in a way that is either effective or enforced).

Posted by: myrick | December 21, 2005 at 06:18 PM

David --

Last I checked, trade/ GDP is already quite high in China, far higher than the in US. but internet usage is still controlled -- here in the US too, perhaps, though the snooping is on a more limited scale :). The Chinese government certainly is not democratically accountable. That helps facilitate business in some ways -- want to evict a bunch of farmers for a factory or infrastructure, no problem. In China, the farmers don't actually own the land they work on. hence the protests. And it facilitates the off balance sheet subsidy the PBoC provides to US consumption rght now. If the central bank takes big capital losses on its reserves (as say Yu Yongding expects), it can be confident that it will not be subject to ex post legislative scrutiny.

My point: Free trade = freedom sounds right, but China seems to have already achieved a high degree of economic integration into the world economy without providing some basic freedoms. Not just freedoms that matter to the middle class, but others too -- including the freedom to own your own (farming) land (that one gets to me, given my roots). And given that much of that integration hinges on widening global imbalances, it would not surprise me if China's economic integration (measured by trade/ GDP) hits a plateau soon and then starts to fall. That is the likely implication of shifting away from 30% y/y export growth toward other, more domestic sources of dynamism. Us import growth slows to 5-6% per year, keeping M/ GDP constant. US imports from China grow at a similar rate. But China's economy grows faster, driven by domestic demand. That is a good scenario, one of orderly rebalancing. And even in that context, it seems that the free trade = freedom equation might prove to be a bit more complicated.

Posted by: brad setser | December 22, 2005 at 10:51 AM

Uh, Dave. What were the beverages of choice over there?

And were you trying to access typepad after....

Posted by: Movie Guy | December 23, 2005 at 08:31 AM

Brad -- Don't disagree. Overall, though, I do think that there is generally a limit to how far economic liberalization can go absent substantial political liberalization -- especially in a country the size of China.

MG -- Tsing Tao. Yes, of course...

Posted by: Dave Altig | December 24, 2005 at 10:34 AM

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November 14, 2005

All Quiet On The Fed Funds Futures Front

Although I was largely on the sidelines, there was plenty to talk about on the trade front last week, including the news that our trade deficits continue to grow and China's surpluses continued to rise.  That wasn't the only old news, however, as none of that made any impression on market expectations of where the federal funds rate is headed over the next couple of FOMC meetings.  The pictures:



Tim Duy says "Monotonous", and William Polley is feeling  a bit complacent. It appears they have lots of company.

If you are new here, the calculations in the pictures above are described here.  If you are not new here, and are beginning to feel your Monday funds probabilities jones, relax.  Here is the data:

Download implied_pdf_december_111105.xls
Download implied_pdf_january_111105.xls
Download Imp_pdf_slides_for_blog_111105.ppt

Note: If you are paying really, really close attention, you may recall that the implied probability for a 4.5% funds rate after the January meeting was over 90% when we last reported.  The difference this week is that we added an option for an increase to 4.75%, which absorbed a little of the action on 4.5.

November 14, 2005 in Fed Funds Futures, Trade | Permalink


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October 25, 2005

Getting The Savings Glut Right

Perhaps it is because he is the most forceful discouraging word at the moment, but for the second day in a row I find myself reacting to a comment from Barry Ritholtz at The Big Picture.  What got my attention this morning relates to Barry's reservations about Ben Bernanke's nomination to replace Alan Greenspan at the helm of the Federal Reserve Board of Governors:

My only reservations with Bernanke are a couple of his speeches as a Fed Governor:

The Global Saving Glut and the U.S. Current Account Deficit -- was just so much political blather. It completely fails intellectually.

I have used the global savings glut story many times -- most recently here -- but I do agree with those that have urged us to put more emphasis on the global investment bust side of the story. Although a glut by definition implies a surplus relative to a deficit in something else, from which side of the saving-investment equation the surpluses arise is relevant for many of the policy questions we want answered.  But that quibble aside, I think Brad Setser has exactly the right perspective:

But Bernanke's savings glut speech also got two key things right -

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan...

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

An intellectual failure it was not.

October 25, 2005 in Trade , Trade Deficit | Permalink


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» More Glut from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 26, 2005 1:09:14 PM

» More on the Savings Glut meme from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 29, 2005 7:04:51 AM


I also think Brad got it about right with regard to the savings glut. He raises some important questions that are worth debating.

Posted by: William Polley | October 25, 2005 at 08:52 AM

The savings glut argument is a semantic game that reminds me of The Simpsons:

"Oh, meltdown. it's one of those annoying “buzzwords." We prefer to call it an unrequested fission surplus."

While that settles the issue for me, others may want more details:

1) The US savings rate is almost nonexistent; It is exceedingly difficult for a stone cold drunk to lecture others on the virtues of fine wine;

2) Much of the rest of the world looks somewhat askance at what is often called the "excessive consumption" in the U.S.

Consider Europe: Their culture is much longer vacation time than us, shorter working week, and most of the Summer off. They are not nearly the consumer society we are. For us to suggest that Europeans need to start buying more stuff is not only unrealistic, it generates guffaws.

3) In all seriousness, The Savings Glut argument is a defense of a structural imbalance via a mostly painless solution, rather than the difficult medicine (most adults) know are necessary to cure the problem.

4) Then there's the "careful what you wish for" factor: What would happen if the rest of the world suddenly decided to go on a spending spree, racking up big debts, rather than buying our bonds?

Sheesh, tis a scary thought . . .

Posted by: Barry Ritholtz | October 25, 2005 at 02:43 PM

While I tend to agree with Barry that the global savings glut thesis does not fit the facts, I never considered Bernanke's statement to be motivated by GOP politics. It is interesting to note that the Bush cheerleaders over at the National Review do not like this appointment either - but their "reasoning" is full of BS. But then - what's new?!

Posted by: pgl | October 25, 2005 at 04:45 PM

I reread Brad Setser's piece (Here: http://www.rgemonitor.com/blog/setser/105474).

Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut
is a self-serving explanation for America's bad habits (see this: http://slate.msn.com/id/2121017/), Setser goes on to list 5 major criticisms of the Savings Glut theory.

The two nice things he said was little more than a polite coda, IMHO

Posted by: Barry Ritholtz | October 25, 2005 at 05:25 PM

Ben Bernanke is more than welcome to quote or attempt to dispute my conclusions as outlined below. I believe the following explanation is accurate and comprehensive.

Dave, your people at the Cleveland Fed are welcome to try to take it apart. I have plenty of CEOs and other heavies sitting on my side of the table.

Economic Hydrology Theory

The Future of Domestic Production versus Offshoring and Outsourcing to Foreign Locations

Once the WTO and national governments improved the opportunities for corporations to invest in the least expensive global production locations, the stage was set. Coupled with continually improving transportation and communications efficiencies, the successes of offshoring and outsourcing corporations which led the way were met by competitive desires of other corporations to also seek new lowest cost production sources. At present, over 450 of 500 top U.S. corporations have operations in China, as an example.

Unimpeded and with regard to available skill levels and technologies, corporations will seek out the lowest cost blue collar and white collar production sources on the planet and will create new production empires in those locations as fit their market needs. Currency manipulations and other foreign and domestic government incentives that improve foreign-based blue collar and white collar production opportunities increase the rate of flow or transference to such locations. The larger concentration of global production in lowest cost production environments results in a convergence of foreign direct investment (FDI) monies targeted toward achieving greater scales of production at these locations. This effort, in turn, minimizes the need for investment and development elsewhere by such corporations which further eliminates the logistical and technical support chains that previously existed for duplicate operations at facility locations in other nations. The results are reduced overall investment costs, reduced production costs, labor substitution, and reduction of related supporting logistical and technical support services and employment in other nations.


Good Luck, Ben.


Posted by: Movie Guy | October 26, 2005 at 03:05 AM

Well since Ben Bernanke himself is probably suffering from a bit too much overbooking to speak out in his own defence, I'll throw in my two centimes worth (from here in Euroland) to see if I can throw any light on why he holds to such an apparently 'intellectually flawed' hypothesis. (gee, for someone who's main strength has been argued to be his intellectual prowess, this would certainly seem to be a failing were it to hold).

First I think that what needs to be said is that Bernanke did not simply talk about a "global savings glut", he spoke about the 'glut' *and* the US CA deficit, and it was undoubtedly this association which lead to all the fuss.

It was thought that Bernanke was trying to *justify* the CA deficit. I would argue he wasn't trying to justify anything, he was trying to understand something. I wish more people would follow his example in this sense.

And what was he trying to understand? He was trying to understand something which apparently has even Alan Greenspan puzzled: why long term interest rates remain at stubbornly low levels.

Bernanke was trying to understand and explain this phenomen, and I think it is behoven on his critics , in rejecting his explanation, to offer - as surely they are entitled to do - some rival hypothesis.

Simply to say that monetary policy has been extremely accommodative is circular and begs the question: why has monetary policy been able to be extremely accommodative, indeed, as Dave would be the first to recognise, why are central bankers having great difficulty in easing them upwards without pushing against yield-curve inversion?

This was Bernanke's first problem.

Clearly it is the historically low level of long term rates which facilitate the US CA deficit, even if the mechanism is via a wealth effect on US consumers produced by a housing boom which is fuelled by these same rates.

By-the-by Bernake made what I think is the extraordinarily obvious point that there is no necessary connection between substantial and sustained fiscal deficits and CA balances, with high government deficiters Germany and Japan running ongoing surpluses. This I think is what brought the boiling oil down on Bernanke's sun-baked back.

Now what did Bernanke actually say about saving? Well......

"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad."

Here we have one key point: demographic changes in the ex-US Oecd world are producing ever-higher saving rates, *and* a weak-internal-demand driven dearth of investment opportunities.

Some have referred to Bernanke's linking of saving and investment here as subtle. Pah! I would say it was basic Econ 101, ineed I would say that anyone who doesn't have the basic intuition involved here shouldn't even bother signing up for Econ 101. Saving and investmnent are connected, normally via interest rates, and low interest rates normally should be seen as indicating something about the supply of savings and the demand for investment.

Bernake here is simply citing IMF orthodoxy about the impact of demographic changes on global trade and savings patterns (see WEO October 2004, Chap 2), and the result of a lot of simulation studies which all point in the same direction.

Where I think what Bernanke said might be criticised is for using "too broad a brush". This is also something which has allowed his critics in through the back door. What he declares to be a stylised fact of all mature industrial countries is far from such. It is not true, for example of France, it is not true of the UK. So the argument does obviously need refining.

I have been arguing that we need to consider two factors here: median ages, and the rate of ageing. The two countries with the highest median age, Germany and Japan (both over 42) are well-characterised by this account, as are countries which are ageing rapidly (S Korea, Hong Kong, Taiwan, Singapore).

China is a connundrum, and many factors are undoubtedly in play, but at least part of the explanation for China's high saving rate must surely be the very rapid increase in life expectancy and the fact that the economically more prosperous urban population have few descendants thanks to the one child policy.

Bernake's thesis, however, isn't limited to the developed world since:

"a possibly more important source of the rise in the global supply of saving is the recent metamorphosis of the developing world from a net user to a net supplier of funds to international capital markets".

So why the change? Well, for Bernanke:

"In my view, a key reason for the change in the current account positions of developing countries is the series of financial crises those countries experienced in the past decade or so"

This view has been criticised on the grounds that many of those who suffered most during the crisis have now carried out "balance sheet repair" and this argument surely has a ring of truth to it.

Again, I think the original view needs re-defining, just as the term "mature industrial economies" is far to broad, so too is the term "developing countries", since in this he includes states as diverse as S Korea and Thailand (which are, in fact, rapid agers) and the oil exporting states which still (ex Russia) are extraordinarily youthful in general (ie still have to pass through the full demographic transition). Interpreting saving in this latter - oil producing - context again isn't easy. One explanation could be 'income smoothing' (if you expect the price of oil to fall again) or another could be a 'lop-sided' development impact with the sudden surge in earnings skewing even further societies with high levels of inequality and corruption.

Be that as it may, the absence of theory doesn't decry the reality, which is the accumulation of savings, and lower global interest rates, which is why I think the 'savings glut' argument will prove to be more than something of a passing intellectual fad.

Incidentally Barry, since Brad S doesn't seem to have passed by, he is *not* a 'savings glut' argument groupie (which I must admit I unashamedly am). He simply recognises that *some* of Bernanke's arguments make sense.

Also, from over here in ol' Europe, we love leisure, but not the kind which means that participation rates from 55 onwards are ludicrously low, and Paygo pension funds in constant danger of un-balancing. Also, there is no 'typical' EU ageing profile. French fertility is not that different from that in the US, the UK is still comparatively 'young'. The big agers are Germany, Italy and Spain. The interesting thing will be to watch whether after the housing boom ends Spain will enter the group of glut-inducing savers.

Posted by: Edward Hugh | October 26, 2005 at 04:40 AM

ok, I am a bit late to this party, but:

1) I cannot match Edward on aging, but I do know a thing or two about emerging market balance sheets, and to me, the "balance sheet" repair argument is the weakest bit of Bernanke's argument. China simply never had a external balance sheet weaknesses that it needed to repair (its levels of external debt to reserves were always healthy, and it has very small currency mismatches), and, while it is not worth going into here, buidling up fx assets to me is of very little use when it comes to repairing the domestic balance sheets of the banks. shifting fx reserves to the banks as capital just transfers the central banks currency mismatch to the banking system, and to a large degree, it has substituted for more fundamental repair. bottom line, balance sheet repair cannot explain why china's reserves went from 30% of GDP to 50% of GDP over the past couple of years. And Russia also has by now more than repaired its balance sheet, and it truly did need some repairs back in 99 and even 00 -- I take balance sheet vulnerabilities seriously, but reserve accumulation in EM land accelerated AFTER the key balance sheets already had been repaired.

2) you will note that I don't criticize Argentina, Brazil or Turkey for reserve accumulation -- i think all three have balance sheets that are still under repair. Turkey in particular should have built up reserves (net reserves) by intervening to offset lira appreciation in my view.

3) I think Bernanke's initial speech did put too much emphasis on the savings side, and only later did he modify his presentation to include the fall in investment ... it works better on those terms. ironically, it also works pretty well right now, largely because of the late 04 deceleration in investment growth in china led savings v. investment to swing a bit, and, above all, cause of the oil exporters.

4) I would note that a global savings glut (relative) to investment triggered larger net private capital flows to China (do the math -- FDI + hot money was 10% of GDP or so in 04; maybe a bit less in 05) but none of the mechanisms that Bernanke indentified that turned a smaller surge in inflows to the uSA into lower savings and investment took root in China -- presumably b/c the chinese authorities resisted. lots of my critique of bernanke comes down to not emphasizing enough that the private flow of capital has shifted back to emerging markets.

5) both my critique and my points of agreement were sincere -- I cannot tell you how often I run across arguments that work off the premise that emerging markets need access to financing from the US in order to develop. Maybe. But right now, the US needs financing from emerging markets even more ... Dooley et al also got the basic flow of funds right. lots of folks don't. this is one of my biggest pet peeves.

6) finally, edward, i would note that according to the IMF, investment in the euroland as a whole is about the same as investment in the us as a share of GDP, and if you net out residential investment, it might well be higher -- the big difference is not "attractive investment in us, but not in europe" so much as that, setting spaniards aside, europeans save and we here don't.

Posted by: brad setser | October 27, 2005 at 01:15 AM

p.s. i also don't like the 20 cents on the dollar fed study for the impact of fiscal adjustment on the current account quite as much as bernanke does ... but my critique of that study (which assumes lots of crowding out) is a bit at odds with my crique of the glut -- edward is right, the core mystery is why us real long-term rates are as low as they are despite the big swing in fiscal toward a structural deficit. Bernanke was on to something, even if i don't buy his balance sheet repair explanation ...

Posted by: brad setser | October 27, 2005 at 01:19 AM

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October 04, 2005

New Website On Current Account Sustainability...

... from the University of Wisconsin's Charles Engel and Menzie Chinn.  You can find it here, and henceforth in the useful links section on this page.

October 4, 2005 in Trade | Permalink


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» Useful economic websites #11: Current account sustainability from New Economist
Thanks to Dave Altig for bringing to my attention an excellent new website on Current Account Sustainability of Major Industrialized Countries. An initiative of Menzie Chinn and Charles Engel from the University of Wisconsin, the project supports the d... [Read More]

Tracked on Oct 5, 2005 8:55:22 AM


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September 08, 2005

Evaluating The Renminbi Revaluation

I have, in the past, alluded to work-in-progress by my colleagues Pat Higgins and Owen Humpage that has significantly colored the way I look at the whole issue of Chinese exchange rate policy and its likely effects on the U.S. economy.   The work is in progress no more, appearing in the form of two new Economic Commentary articles from the Federal Reserve Bank of Cleveland.  The first deals with the impact of yuan-appreciation/dollar-depreciation on trade conditions.  The second discusses  nondeliverable forward contracts, and what we can learn from these contracts about market participant's estimates of the renminbi's future value.

Here is the key conclusion from the first article:

China's recent devaluation and liberalization of its exchange-rate policies will, at best, have only a temporary impact on its trade competitiveness with the United States. The type of exchange-rate regime that a country adopts matters little for its long-term international competitiveness. In addition, the recent focus on China's exchange rate diverts attention from the real problem: China’s command economy.

Higgins and Humpage come to this conclusion about liberalization of China's capital markets:

In general, Chinese policies favor net inflows of foreign direct investment,encourage exports over imports, and —most importantly— discourage other types of private financial outflows, largely by limiting the amount of dollars that China’s residents might hold and their ability to invest in foreign assets. Remove the restraints and corresponding policies, and the demand for renminbi will fall relative to the supply and domestic prices will rise.

In other words, the pressure will be in the direction of renminbi depreciation.  This conforms to former Commerce Department undersecretary Grant Aldonas' view of things.  It decidedly does not conform to Brad Setser's.

September 8, 2005 in Asia, Exchange Rates and the Dollar, Trade | Permalink


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Happy birthday, Paul Chater. The economics of Super Girl, China's TV talent search phenomena. China's nuclear power industry is booming, but what to do with the nuclear waste? Engrish: a labour of love, popular for the wrong reasons. China's next mann... [Read More]

Tracked on Sep 9, 2005 5:08:03 AM


I tend to be with Brad on this. With the euro more likely to decline, if the rupee and the renminbi don't steadily rise I don't know what is going to take the strain of an eventual US CA correction. Of course there is a lot to play around with here depending on whether you are talking about short, medium or long run.

Otoh, if some structural reason the euro can't drop short term I think you have to take very seriously indeed the deflation scenario for Germany.

Posted by: edward | September 08, 2005 at 01:14 PM

Looking at the Higgins and Humpage piece the point they are making about real and nominal exchange rates is valid, but:

"Between June 1995 and October 1997, the dollar depreciated 11.4 percent against the renminbi on a
real basis because China’s inflationrate exceeded the U.S. inflation rate. Between October 1997 and October 2003, however, China’s inflation rate dipped below the U.S. inflation rate,
causing the dollar to appreciate 17.2 percent on a real basis against the renminbi. Since October 2003, China’s inflation
rate has generally exceeded ours, and the dollar has again depreciated 1.1 percent against the renminbi in real terms. The
recent revaluation moves the real renminbi– dollar exchange rate approximately back to its mid-1995 level."

They seem to be talking about the CPI here. This may not be the appropriate index, you need something like a trade weighted ex-works PPI, and of course here prices in China seem to have have been dropping more systematically than in the US, so in real exchange rate terms post 1997 the dollar real exchange rate may have appreciated even more than they allow.

This does give the other argument why a rise in the renminbi may not be so strong in its impact on the CA deficit, since if the float lead the PPI to drop even more substantially this would tend to cancel out much of the trade impact of the float.

The big issue with China's evolution is the investment and export dependence of the economy - command or not command. Levels of fixed capital investment like they are having and 30% y-o-y export increases are just not sustainable. They are generating massive over capacity. But this is very much Brad Setser territory.

Posted by: edward | September 08, 2005 at 01:49 PM

We need to be careful about the semantics here. “Remove the restraints and corresponding policies, and the demand for renminbi will fall relative to the supply and domestic prices will rise.” So “the pressure will be in the direction of renminbi depreciation” relative to what the pressure is now, but not in absolute terms. I don’t read Higgins and Humpage to be saying that the renmenbi would fall relative to the dollar, only that the equilibrating forces would operate more rapidly and stop requiring the PBoC to buy so many dollars. In their conclusion, they refer specifically to “a real appreciation” – meaning that a rise in domestic prices may prevent the need for a nominal appreciation, but not that it will actually bring about a nominal depreciation.

Posted by: knzn | September 08, 2005 at 02:35 PM

To me all of this energy expended on exchange rates fogs up China's real problem: The massive increase in and level of foreign reserves. Foreign reserves grew $200B in 2004 with only a $31B trade surplus. This rate is continuing in 2005. China now has $711B in foreign reserves which is 40% of GDP. Surely this is unsustainable and will force China to take drastic steps that will effect us all. Let the Cleveland Fed folks write about this.

Posted by: Norman | September 08, 2005 at 03:38 PM

China is a paper dragon. They are less than a decade from total collapse.

Posted by: x | September 08, 2005 at 06:58 PM

I'll be honest -- I was not terribly impressed with Higgins and Humpage's analysis. Specifically, to me, the argument that "China creates artificial demand for RMB through substantial restraints on financial outflows" is:

a) one sided, since it leaves out the "substantial restraints on financial inflows into China."
b) ignores the available evidence indicating Chinese savings (at current exchange rates) is coming home, not moving away (see Wei and Prasad, and Setser)

re: a) i would note that the restraints on inflows were seriously tightened this year in one obvious way -- namely the imposition of quotas on the amount Chinese banks could borrow from abroad (the banks found lots of Chinese firms eager to borrow $ to invest in RMB). China also is trying to crack down on various schemes facilitating foreign investment in residential property. conversely, they are trying to encourage capital outflows by Chinese firms.

re b) I think the household dollar deposits to RMB deposits is a decent indicator, though it deals with onshore dollars rather than offshore dollars (offshore = safer, not in chinese banks), i suspect it tracked the movement of chinese savings into offshore dollars depsoits (98-02)and more recently, the movement out of offshore dollars back into RMB (hot money flows). household $ deposits fell in 04. Again, see Prasad and Wei, and various PBOC data.

re: China's bilateral real exchange rate vis a vis the dollar is where it was in 95. Isn't that precisely the problem? China's productivity growth exceeded US productivity growth significantly from 95-05, but the bilateral real exchange rate did not move ... recently, productivity growth in china has been 8% higher (per year) than in the US. that should produce a real appreciation. Do we really think the right real exchange for China in say 2015 will be the 2005 real exchange rate or the 1995 real exchange rate? China's economy/ exports are much different now than in 95.

Moreover, the recent data out of China suggest Chinese inflation rates that are well below US inflation rates (leaving aside the PPI v CPI) issue, so the RMB would depreciate in real terms barring any move in the nominal exchange rate. While i agree in principle that this kind of reserve growth should generate money growth and inflation, the facts are that this has not happened in China, at least not yet. THat has been a surprise to me -- but it is something that needs to be dealt with. i did not see any discussion of the 2005 data in Higgins and Humpage -- look at some of the work by Stephen Green for example. there is a puzzle here, but it needs to be addressed, not ignored away.

It also not obvious to me that sterilization will jeopardize the exchange rate peg w/o restrictions on imports/ outflows -- wouldn't not sterilizing the inflows be a bigger problem for the peg? More money growth, etc. China has been sterilizing in a big way since the end of 2003, and it has not obviously broken the peg. What would kill the peg is ending the controls on inflows, since the amount of sterilization debt that China would need to issue in the face or larger hot money inflows would go up ...

It seems to me that the Higgins/ Humpage analysis left out a lot of important recent data points.

I probably will turn this into a blog.

Posted by: brad | September 09, 2005 at 01:49 PM

Just to add the the discussion. One disagreement I have with Prof. Setser is that I'm of the opinion that Chinese capital controls are largely one-way in that they do not significantly lower the amount of capital inflows into China. They certainly change the nature of the inflow (moving them into joint ventures and physical assets rather than securities), but I do not believe that they affect too much the volume of the inflows. This argument would hold that the money that didn't get into China due to restrictions on dollar borrowing, eventually ended up in China anyhow.

Having said that I think it would be very bad idea for China to lift capital controls any time soon. The economic damage that is being done by the existence of capital controls (i.e. higher inefficiency) are minor compared to the damage that could be done by removing them too early (i.e. a Russian style looting of corporate assets followed by a systemic economic collapse.)

Posted by: Joseph Wang | September 10, 2005 at 01:16 AM

I don't see why Chinese reserve accumulation per se is unsustainable. (Export growth is politically unsustainable, but that's different.)

Surpluses aren't like debt in which if the X/GDP ratio goes too high, people stop lending.

I think the more relevant ratio is the Chinese reserves/US debt or Chinese reserves/US GDP ratio.

Posted by: Joseph Wang | September 10, 2005 at 01:22 AM

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August 08, 2005

Becker and Posner On China's Failed Unocal Bid

The Chinese have retreated for the moment, but Gary Becker and Richard Posner do not believe it is a victory.  Becker:

The attempted takeover of Unocal by CNOOC aroused great opposition in Congress, which resulted in Senator Byron Dorgan introducing a bill that would prohibit any takeover or merger of these two companies. After pursuing Unocal for several months, CNOOC accepted defeat last Tuesday and withdrew its offer, blaming the Washington political atmosphere.

The Dorgan bill lists several reasons why the purchase of Unocal by CNOOC would not be in America's interests, but none are convincing...

Most politicians and journalists, and even many economists, support free trade, including purchase by foreign companies of American assets, only when other countries abide by the same free trade rules. As the Dorgan bill indicates, China does not allow free movement of capital, and restricts foreign purchases of Chinese companies. These policies hurt China, but nevertheless the US is better off when it allows foreign companies, including those from China, to bid for American companies. If they are high bidders, either they would overpay for the assets-called the "winners curse" in auction theory- or they are more efficient managers. The US benefits even in the second case because it raises overall productivity of the American economy, and sets a good example for competitors.

Posner agrees with Becker, and essentially makes an argument that suggests inhibiting such direct investment in U.S. companies could have a destabilizing effect:

China holds vast amounts of U.S. dollars. To the extent that these holdings exceed China's need for financial reserves, China can benefit from holding dollars only by exchanging them for valuable goods, such as goods produced in the United States or assets of U.S. companies. We should want China to be able to make such purchases, since otherwise it will be less willing to hold dollars, which is to say less willing to sell us valuable goods in exchange for pieces of paper.

Do read the whole thing.

UPDATE: The Washington Post's Sebastian Mallaby suggests some geopolitcal arguments for treating of the successful Congressional resistance as a pyrrhic victory.

August 8, 2005 in Trade | Permalink


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July 30, 2005

The Enemy Of The Good?

No props for the Bush administration on the passage of CAFTA.  So saith pgl and Brad Delong, pointing to this story:

It was just before midnight on Wednesday when Representative Robin Hayes capitulated [on his opposition to the passage of CAFTA]...

But the House speaker, J. Dennis Hastert, told him they needed his vote anyway. If he switched from "nay" to "aye," Mr. Hayes recounted, Mr. Hastert promised to push for whatever steps he felt were necessary to restrict imports of Chinese clothing, which has been flooding into the United States in recent months.

As it turned out, the switch by Mr. Hayes was decisive.

If BD and pgl are looking for more ammunition with which to pursue this line of attack, I'll throw in the reminder that, in some circles, commentators were comforting themselves with rationale that the steel tariffs of 2002 were the price of breaking down resistance to the "fast-track" trade authority -- actually renamed Trade Promotion Authority (TPA) -- that ultimately led to the successful passage of CAFTA.   But even then that authority came with significant strings attached.  Here's a blast from the past from Larry Kudlow:

This week, the Senate added the Dayton-Craig amendment to a bill that would have given the White House greater negotiating authority on international trade. But what this amendment does is allow individual members of Congress to veto specific provisions of any presidentially negotiated trade pact. Say good-bye to fast-track trade-promotion authority for the White House.

This is a big backslide on trade for the U.S. And the finger can be pointed directly at the flawed strategy created by White House Senior Adviser Karl Rove and U.S. Trade Representative Robert Zoellick. Their original idea was to bring protection to the steel industry in order to capture the rustbelt states of West Virginia, Pennsylvania, and Ohio in the 2004 election. Also, steel protection (and now lumber protection against Canada) was designed to win votes from House members and Senators who might waver on a new fast-track negotiating package.

But apparently, a lean and mean trade-negotiating bill is not coming. The White House trade strategy has completely unravelled.

The Dayton-Craig Amendment did not wholly survive the House-Senate conference but that does not mean it faded into irrelevance:

On another difficult issue, the Dayton-Craig provisions in the Senate version, conferees dropped the provision but agreed to additional reports and oversight if negotiations might result in possible changes to U.S. trade remedy laws.

That last passage comes from an excellent overview of the legislative process (beginning in the Clinton administration) that led to the passage of the Trade Promotion Authority.   

And yes, it was a rather messy sight.  And pgl and Brad DeLong are shocked, shocked to find it so. 

Look.  pgl and Brad may be right in the larger scheme of things.  It may indeed be the case that the constellation of compromises required to get CAFTA -- in itself admittedly smaller potatoes -- are more costly than whatever benefits might be derived in terms of the deal itself or whatever it buys in terms of making future progress on the free trade front.  But observing that political outcomes involve politics, as odious as that seems, does not a compelling argument make.

July 30, 2005 in Trade | Permalink


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Unfortunately, pgl and Brad are "typical" economists who are enamored by theories and find the real world all too messy and -- well -- too real.

They cannot admit that the only way "free trade" makes its way in the world is as a fig leaf for capital crushing the working class.

Posted by: General Glut | July 30, 2005 at 12:01 PM

General Glut, it is the "working class" that has grown richer every year ... it is the "working class" whoes life expectancy grows longer every year ... it is the working class whose preference for imported luxury goods grows every year ... its the "working class" who owns more capital very year

Let's cut the class story ... it means nothing ... it is the part of Marx that has been proven wrong ... if one must play with stories lets tals about under dog

Posted by: simon | July 30, 2005 at 05:17 PM

Seriously David - with the pork in the highway bill, with the all pork energy bill, and all the sausage in CAFTA which likely makes it a movement away from free trade - why would any conservative defend this GOP dominated Federal government? See more at Angrybear where I guess I have changed my name to PGC (c for conservative).

Posted by: pgl | July 30, 2005 at 05:51 PM

pgl -- I posted my response over at Angry bear. I think you misread my remarks as an apologia for the administration, which it was not. It was, rather, a plea to focus on a discussion of the balance between costs and benefits, not just the costs. I certainly wouldn't object, however, if you changed your moniker to pgc.

Posted by: Dave Altig | July 31, 2005 at 08:39 AM

Pork in a highway bill? Pork in an energy bill? No way!?!?!?! Those damn right-wingers. How dare they put pork in a bill!

Posted by: cb | August 01, 2005 at 11:53 AM

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