Friday, October 30, 2009
This is JUST PLAIN COOL...
Count me in ...but now tell me we're not a hair's breadth away from transcontinental open heart surgery...
Wednesday, October 28, 2009
This American Life
Links referenced by Prof. Smitka yesterday:
"The Giant Pool of Money" transcript and audio.
I recall hearing this some time ago. It's clear and some of you will enjoy it.
"The Giant Pool of Money" transcript and audio.
I recall hearing this some time ago. It's clear and some of you will enjoy it.
Zero-sum and Positive-sum IPE
Toliy offered some thoughts in comments on the US-China post below. I started with a reply to his comments, but decided to make this a longer post. In short, I think he is correct to note that a country's political strategy and economic strategy may point in different directions. Specifically, China may "gain politically" from greater prestige relative to the U.S. (say, from a weakening dollar), even if it may "lose economically" by doing so. And I agree with his first paragraph in his comments. If I follow correctly, he also then asks whether China's "political strategy" might be to look for a decline in the dollar.
My expectation would simply be that economic logic would trump political "point winning" for China in this regard. I too would argue as Toliy has: that China wants a long-term move away from the dollar as reserve currency, but surely wants no collapse of the dollar in the short-term. (For what it's worth, I can think of no-one who would want a collapse of the dollar in the short-term. Except maybe this guy. That is, Mr. July 2004. And no, for those keeping score, not even Mr. June 2005 would want a collapse of the dollar -- no way.) As for the question of "winning political points", or what I called "bragging rights", my expectation is that China would subordinate these to its economic objectives, trying to manage a long-term, slow weakening of the dollar with no sudden movements.
Perhaps this expectation that China would not seek "political points" from hurting the dollar's prestige comes from my belief (and one is free to call it a "perspective", "bias", or other term) that IPE probably has fewer "zero-sum games" than security studies. You will have to ask yourself if you agree.
Think of the Cold War. The US and USSR opposed one another militarily, and any relative increase in US power was seen to be a comparable decrease in Soviet power, and vice versa. This is a zero-sum game, just like football, baseball, or (of course) ice hockey: one side scores points at the expense of the other side. Notice in the Cold War case that the US and USSR also did not trade with one another. That is, each side denied the economic benefits of exchange (from basic comparative advantage, etc.) to its rival.
Contrast that with most cases in IPE between countries that maintain economic relations with one another. The U.S. and China today being the biggest example, but take the U.S. and the EU, for a moment (or the EU and China). Of course, each side is going to maximize the advantage it can get in negotiations and in trade with other parties, but there is very little sense that the EU would benefit from American economic weakness, or that America wants an economically weak Europe. Economics simply isn't that zero-sum between trading partners. Again, each will try to get the best deal for itself, and will try to maximize its own power, and other caveats exist (domestic politics may intervene in many ways, and the question of rapid growth's effects on the environment may shape peoples' preferences), but you will not find many arguing that we want an economically weak EU or a less vibrant world economy. A decrepit China would also mean a less vibrant world economy, and China probably competes less than Europe with the U.S. when it comes to directly competitive goods. (That is, we buy European stuff that Americans also make - like cars and airplanes - but buy relatively few Chinese items that are also Made in the U.S.A.)
When it comes to the positive-sum international relations we find in the global economy, consider also the Marshall Plan, in which the U.S. was part of the reconstruction of Europe after WWII. The logic was that - apart from humanitarian reasons - the U.S. smartly recognized the need for a vibrant international economy in the long run and thus invested in building up Europe as a powerful integrated economy. (Incidentally, administering the Marshall Plan was the origin of the institution Prof. Smitka referenced yesterday - the International Bank for Reconstruction and Development, or the World Bank.)
Returning to China now, the same principle of interdependence seems operative. In short, as David Razum noted in referencing a recent book, and as The Economist notes in its current issue, and as Niall Ferguson noted in coining the term "Chimerica", we have a partial "fusion" of the two major economies. The notion of interdependence suggests to me that if China has the U.S. by the throat, the U.S. has China by the [insert graphic image here]. Either one squeezes and both are going to get hurt. So neither wants to squeeze.
My expectation would simply be that economic logic would trump political "point winning" for China in this regard. I too would argue as Toliy has: that China wants a long-term move away from the dollar as reserve currency, but surely wants no collapse of the dollar in the short-term. (For what it's worth, I can think of no-one who would want a collapse of the dollar in the short-term. Except maybe this guy. That is, Mr. July 2004. And no, for those keeping score, not even Mr. June 2005 would want a collapse of the dollar -- no way.) As for the question of "winning political points", or what I called "bragging rights", my expectation is that China would subordinate these to its economic objectives, trying to manage a long-term, slow weakening of the dollar with no sudden movements.
Perhaps this expectation that China would not seek "political points" from hurting the dollar's prestige comes from my belief (and one is free to call it a "perspective", "bias", or other term) that IPE probably has fewer "zero-sum games" than security studies. You will have to ask yourself if you agree.
Think of the Cold War. The US and USSR opposed one another militarily, and any relative increase in US power was seen to be a comparable decrease in Soviet power, and vice versa. This is a zero-sum game, just like football, baseball, or (of course) ice hockey: one side scores points at the expense of the other side. Notice in the Cold War case that the US and USSR also did not trade with one another. That is, each side denied the economic benefits of exchange (from basic comparative advantage, etc.) to its rival.
Contrast that with most cases in IPE between countries that maintain economic relations with one another. The U.S. and China today being the biggest example, but take the U.S. and the EU, for a moment (or the EU and China). Of course, each side is going to maximize the advantage it can get in negotiations and in trade with other parties, but there is very little sense that the EU would benefit from American economic weakness, or that America wants an economically weak Europe. Economics simply isn't that zero-sum between trading partners. Again, each will try to get the best deal for itself, and will try to maximize its own power, and other caveats exist (domestic politics may intervene in many ways, and the question of rapid growth's effects on the environment may shape peoples' preferences), but you will not find many arguing that we want an economically weak EU or a less vibrant world economy. A decrepit China would also mean a less vibrant world economy, and China probably competes less than Europe with the U.S. when it comes to directly competitive goods. (That is, we buy European stuff that Americans also make - like cars and airplanes - but buy relatively few Chinese items that are also Made in the U.S.A.)
When it comes to the positive-sum international relations we find in the global economy, consider also the Marshall Plan, in which the U.S. was part of the reconstruction of Europe after WWII. The logic was that - apart from humanitarian reasons - the U.S. smartly recognized the need for a vibrant international economy in the long run and thus invested in building up Europe as a powerful integrated economy. (Incidentally, administering the Marshall Plan was the origin of the institution Prof. Smitka referenced yesterday - the International Bank for Reconstruction and Development, or the World Bank.)
Returning to China now, the same principle of interdependence seems operative. In short, as David Razum noted in referencing a recent book, and as The Economist notes in its current issue, and as Niall Ferguson noted in coining the term "Chimerica", we have a partial "fusion" of the two major economies. The notion of interdependence suggests to me that if China has the U.S. by the throat, the U.S. has China by the [insert graphic image here]. Either one squeezes and both are going to get hurt. So neither wants to squeeze.
Tuesday, October 27, 2009
Why do recessions happen?
Just as a marker for future conversation, note that Krugman and others seem to look at major systemic economic crises -- call them "depressions" -- in the following way:
Depression = recession + financial crisis
Which begs the question (since we're looking at financial crisis a good deal), why do recessions happen? Just as a first glance, have a look at this article in The Week. In short, it's a business cycle.
Depression = recession + financial crisis
Which begs the question (since we're looking at financial crisis a good deal), why do recessions happen? Just as a first glance, have a look at this article in The Week. In short, it's a business cycle.
Monday, October 26, 2009
Occam's Razor and China's currency reserves
One recent item of much discussion has been whether the Chinese government wants to see the dollar decline as a reserve currency. The main reason we have given that China would not wish to see a precipitous decline in the dollar is that the government would be shooting itself in the foot: destroying the value of its trillion-dollar reserve stash. This certainly matters.
But another simple way to look at why China might not want this is to consider how its policy has long been centered around an undervalued yuan. To be sure, China is looking at moving towards a greater emphasis on domestic consumption of domestic production in the future (as part of the global "rebalancing" Bernanke and many other economists wish to see), but in recent years we have seen general agreement that the yuan is undervalued -- the question has been "how much".
Now consider what China would be doing if it initiated the much-feared "run on the dollar" apart from hurting the value of its reserves: it would be smashing the very logic of its export-oriented growth strategy by makings its products dramatically pricier to Americans. Again, there are caveats here (China sells a large amount to Europe as well and may be interested in a strong euro as a competitor to the dollar as a global reserve currency, and moreover past policy is unlikely to be reflected in future policy), but it would seem very unlikely to have an export-oriented economy seek to undermine the purchasing power of its biggest customer.
In other words, to address some concerns in class, China may wish to see a long-term waning of the dollar's dominance in favor of a more stable "basket" of currencies (perhaps including its own yuan in the long run), but it surely does not wish to see a collapse of the dollar for the sake of bragging rights.
In short, sometimes a simple argument can suffice: if China really wanted to hurt the dollar, why wouldn't they have simply revalued the yuan long ago? And why would they have accumulated so many of them in reserves in the first place?
But another simple way to look at why China might not want this is to consider how its policy has long been centered around an undervalued yuan. To be sure, China is looking at moving towards a greater emphasis on domestic consumption of domestic production in the future (as part of the global "rebalancing" Bernanke and many other economists wish to see), but in recent years we have seen general agreement that the yuan is undervalued -- the question has been "how much".
Now consider what China would be doing if it initiated the much-feared "run on the dollar" apart from hurting the value of its reserves: it would be smashing the very logic of its export-oriented growth strategy by makings its products dramatically pricier to Americans. Again, there are caveats here (China sells a large amount to Europe as well and may be interested in a strong euro as a competitor to the dollar as a global reserve currency, and moreover past policy is unlikely to be reflected in future policy), but it would seem very unlikely to have an export-oriented economy seek to undermine the purchasing power of its biggest customer.
In other words, to address some concerns in class, China may wish to see a long-term waning of the dollar's dominance in favor of a more stable "basket" of currencies (perhaps including its own yuan in the long run), but it surely does not wish to see a collapse of the dollar for the sake of bragging rights.
In short, sometimes a simple argument can suffice: if China really wanted to hurt the dollar, why wouldn't they have simply revalued the yuan long ago? And why would they have accumulated so many of them in reserves in the first place?
Foreign and domestic capital flight
We have talked a about how uncertainty over a currency's value might lead to foreign capital fleeing a country. Nobody wants to be left "holding the bag" of cash after the hypothetical peso declines in value. This is true, but in the discussion, we may have been overlooking something that is also important: domestic capital. That is, citizens of [insert real country name here] Pesolandia might look to put their savings in dollars or another "hard currency" so they are not left holding the bag.
In other words, just a note that capital flight out of a developing country at a time of crisis may come from either international or domestic sources. And in some cases, it may be the latter that is more significant.
In other words, just a note that capital flight out of a developing country at a time of crisis may come from either international or domestic sources. And in some cases, it may be the latter that is more significant.
Friday, October 23, 2009
Animal Spirits
From the growing field (no joke!) of primate economics: evidence that monkeys know how to reward specialization, high-value tasks, and productivity with higher "wages" or maybe "profits". (You will love the form the earnings take.) More intriguing yet, when new suppliers enter the market, competition increases and earnings decline. Classic.
Have a listen. It is a 4 minute clip.
Have a listen. It is a 4 minute clip.
Reid Reads Krugman, but does Krugman Read Reid?
Paul Krugman this morning on China's currency and the dollar.
Beyond the arguments about the desirability of a strong or weak dollar, notice the linkage to the subprime mortgage crisis. Someone mentioned the "global savings glut" (or "Chinese" or "Asian" savings glut) as a possible cause of the crisis. How does that work? China uses the dollars from its exports to purchase massive amounts of U.S. government bonds. Since China is demanding so many bonds, the interest rate stays low. Low interest rates on government bonds leads to low interest rates on other loans, including mortgage rates, car loans, etc. So in this sense, the Chinese trade surplus led to Americans contracting more and more debt, which they/we largely used to buy bigger and bigger houses. You see where this is going...
Beyond the arguments about the desirability of a strong or weak dollar, notice the linkage to the subprime mortgage crisis. Someone mentioned the "global savings glut" (or "Chinese" or "Asian" savings glut) as a possible cause of the crisis. How does that work? China uses the dollars from its exports to purchase massive amounts of U.S. government bonds. Since China is demanding so many bonds, the interest rate stays low. Low interest rates on government bonds leads to low interest rates on other loans, including mortgage rates, car loans, etc. So in this sense, the Chinese trade surplus led to Americans contracting more and more debt, which they/we largely used to buy bigger and bigger houses. You see where this is going...
Thursday, October 22, 2009
China's Economy
What is your immediate reaction to this news:
China's Economy Grows 8.9%
Many of you may look at this and fear that it will signal China's continued growth at the expense of the United States, and its ever-more-imminent threat to overtake the U.S. as the world's "leading" economy. The case has already been made that China is the "leader" in the global macroeconomy, with the U.S. and Europe as followers.
There is a natural tendency to see the IPE as inherently "competitive". While this is appropriate for many reasons, it is worthwhile to note that the world economy is not "zero-sum". In fact, it is important to note that Asia (esp. China) must necessarily be a big part of any plan to get past the global financial panic and restabilize the world economy. By many counts, the U.S. needs China to do well.
So have a look at the article and consider the ways rapid Chinese growth presents both a challenge and an opportunity for the U.S.
China's Economy Grows 8.9%
Many of you may look at this and fear that it will signal China's continued growth at the expense of the United States, and its ever-more-imminent threat to overtake the U.S. as the world's "leading" economy. The case has already been made that China is the "leader" in the global macroeconomy, with the U.S. and Europe as followers.
There is a natural tendency to see the IPE as inherently "competitive". While this is appropriate for many reasons, it is worthwhile to note that the world economy is not "zero-sum". In fact, it is important to note that Asia (esp. China) must necessarily be a big part of any plan to get past the global financial panic and restabilize the world economy. By many counts, the U.S. needs China to do well.
So have a look at the article and consider the ways rapid Chinese growth presents both a challenge and an opportunity for the U.S.
Tuesday, October 20, 2009
It's Our Fault, All of Us
Since we took both sides of the lender-saver issue, Ben Bernanke decided to do the same.
It's everybody's fault!
It's everybody's fault!
Blast from the Past (Stiglitz 2005)
Note the following from Stiglitz, p. 254:
Two notes on this. First, the interest in diversifying away from the dollar is not a product of the recent financial crisis; rather it has been percolating for longer than that as a way to address "global imbalances", as Wolf would call them. Second, this proposal is not far off from what Stiglitz proposed in his reformed "global reserve system". To that, I can only say, hmm.
In early 2005, China announced that it is no longer committed to holding reserves in dollars. It had, in fact, already moved substantial amounts out of dollars (about a quarter of its reserve), but the announcement had immense symbolic value. Other central bankers, more in keeping with their tradition of staying out of the public eye, quietly confided to me that they too were moving out of dollars.Compare with the news from 2009 that China is calling for a new international reserve currency to replace the dollar, as reported in the New York Times and Wall Street Journal, among other places.
Two notes on this. First, the interest in diversifying away from the dollar is not a product of the recent financial crisis; rather it has been percolating for longer than that as a way to address "global imbalances", as Wolf would call them. Second, this proposal is not far off from what Stiglitz proposed in his reformed "global reserve system". To that, I can only say, hmm.
The Dollar is Falling! The Dollar is Falling!
Obligatory weekly contribution from The Economist.
There are many possible responses to the dollar's decline. One is from renowned commentator Ian Reid. Reid's argument is as follows:
One thing to be clear about is that inflation and currency depreciation should be differentiated from currency collapse and hyperinflation. It is unlikely the U.S. would suffer from the latter, even if/when it does suffer from the former.
There are many possible responses to the dollar's decline. One is from renowned commentator Ian Reid. Reid's argument is as follows:
I say stop the printing presses, raise some rates and let those with money spend it and save the dollar. I don't want to be a 21st century Zaire...This could certainly defend the dollar, largely by giving developing countries (read: China) more incentive to buy U.S. bonds. The downside is... well, someone else can make the counterargument.
One thing to be clear about is that inflation and currency depreciation should be differentiated from currency collapse and hyperinflation. It is unlikely the U.S. would suffer from the latter, even if/when it does suffer from the former.
Thursday, October 15, 2009
News Doesn't Stop for Reading Days
The EU and South Korea move ahead on international trade.
One of the interesting elements of the main plot is that the US and South Korea are moving (slowly) towards ratifying free trade, and a question is whether this will accelerate that process. One of the subplots here is whether bilateral trade agreements between countries present blocks or stepping stones to broader multilateral trade agreements. Something to follow for the purposes of the simulation, and especially in the event you plan on writing about international trade for the final paper.
Wednesday, October 14, 2009
Monday, October 12, 2009
Timely Op-Ed
On the "gold standard mentality" and the strength vs. weakness of the dollar. From Paul Krugman in today's New York Times.
For what it's worth, you could add Peter Temin's Lessons from the Great Depression to the list of pre-approved books for Week 7. (Temin is mentioned by Krugman in the op-ed.)
For what it's worth, you could add Peter Temin's Lessons from the Great Depression to the list of pre-approved books for Week 7. (Temin is mentioned by Krugman in the op-ed.)
Remittances and searches
Some of you may be interested in economic development in low-income countries, as it relates to some of the topics we will be discussing these weeks. In that vein, one of the big stories in development in recent years is about remittances. These are funds sent "home" by workers residing abroad. Most often, remittances come pass between family members from one earning a wage/salary in a higher-income country to the family in the low-income country. For families, this is obviously a supplemental source of income. From a national or macroeconomic perspective, they are also a source of "hard currency" -- an established, internationally-traded currency such as the dollar, euro, or yen.
Now, say you wanted to write your paper on this. As is often the case, I can link to a recent article in The Economist. But the point I'd like to make with the link here is a slightly different one: because the article piqued my interest, I googled "remittances capital account" and found a few different sources, including this interesting paper. This came after searching and finding similarly interesting material in a couple of other related searches. The lesson, I suppose, is one I have mentioned to several people: persist in trying out different search terms and take some time to sift through the results. (One of the great problems nowadays for me, being accustomed to easy availability of sources, is that I too often don't conduct a thorough search with different search parameters and the like.) If something interests you, find out more about it. It can be done, even if it takes a little extra effort.
Now, say you wanted to write your paper on this. As is often the case, I can link to a recent article in The Economist. But the point I'd like to make with the link here is a slightly different one: because the article piqued my interest, I googled "remittances capital account" and found a few different sources, including this interesting paper. This came after searching and finding similarly interesting material in a couple of other related searches. The lesson, I suppose, is one I have mentioned to several people: persist in trying out different search terms and take some time to sift through the results. (One of the great problems nowadays for me, being accustomed to easy availability of sources, is that I too often don't conduct a thorough search with different search parameters and the like.) If something interests you, find out more about it. It can be done, even if it takes a little extra effort.
Good news about gassy rocks
If you are feeling the need for some good news this morning, try this. The author, who writes for The Telegraph newpaper in the UK, was on NPR this morning with a decidedly optimistic assessment of the future of U.S. energy production and its resultant impact on the current account: easier extraction of natural gas from shale rock in the U.S. means natural gas prices decline, so oil prices must decline (because natural gas is increasingly a substitute for oil), so the U.S. will be sending much less overseas.
Have a look at the article. Before you get too excited, note one important caveat:As for the US, we may soon be looking at an era when gas, wind and solar power, combined with a smarter grid and a switch to electric cars returns the country to near energy self-sufficiency.
This has currency implications. If you strip out the energy deficit, America's vaulting savings rate may soon bring the current account back into surplus – and that is going to come at somebody else's expense, chiefly Japan, Germany and, up to a point, China.
Shale gas is undoubtedly messy. Millions of gallons of water mixed with sand, hydrochloric acid and toxic chemicals are blasted at rocks...Nonetheless, the article notes, "[n]atural gas has much lower CO2 emissions than coal, even from shale." The article concludes with a note that we can be prone to hyperbole... but also that "we may need to rewrite the geo-strategy textbooks for the next half century". So I'm glad we resolved that.
Nor is it exactly green.
Friday, October 09, 2009
Reading Options addendum
Add Globaloney 2.0, by Michael Veseth, to your list... though it is just being released and may not be available in time...
Tuesday, October 06, 2009
"Be careful what you wish for", Or "How Europe paid for the Vietnam War"
I can't believe I'm posting something I found via Drudge, but since Shamira's blog sent me there...
Here's another IPE issue raised... the dollar's role as a reserve currency.
We will be talking about the international monetary system soon, but notice that this issue -- the strength of the dollar -- underpins a huge range of related IPE issues. This includes your postings about China and the yuan, the Japanese yen, and so on.
One argument, just for fun, and just to keep the juices flowing: since the dollar was the reserve currency in the 1960s and 1970s (and we went off the gold standard in 1971), the U.S. was basically able to "export inflation" from all the expenditures of the 1960s. Which included Vietnam, Medicare, and Medicaid. Because other countries were stuffing dollars under their mattresses, the U.S. could spend a huge amount of dollars, suffering some inflation at home, but also knowing that the Europeans and others would accumulate some of the excess. Of course, with inflation, the dollar bought less over time (35 of them could no longer buy an ounce of gold, for starters), but the impact of that inflation was felt by foreigners just as it was felt by Americans. In other words, Europe partly paid for the Vietnam War.
If the world moves away from the dollar as the global reserve currency, think about what this means for American consumers and producers. Less demand for dollars from overseas, a less valuable ("weaker") dollar. Imports get more expensive. (Fuhgeddabout German cars...) Exports become relatively cheaper for others to buy. (Buy American! Woohoo!) It could be a kind of "rebalancing" that many people wish for... but, as we'll discuss...
be careful what you wish for, you just might get it...
Here's another IPE issue raised... the dollar's role as a reserve currency.
We will be talking about the international monetary system soon, but notice that this issue -- the strength of the dollar -- underpins a huge range of related IPE issues. This includes your postings about China and the yuan, the Japanese yen, and so on.
One argument, just for fun, and just to keep the juices flowing: since the dollar was the reserve currency in the 1960s and 1970s (and we went off the gold standard in 1971), the U.S. was basically able to "export inflation" from all the expenditures of the 1960s. Which included Vietnam, Medicare, and Medicaid. Because other countries were stuffing dollars under their mattresses, the U.S. could spend a huge amount of dollars, suffering some inflation at home, but also knowing that the Europeans and others would accumulate some of the excess. Of course, with inflation, the dollar bought less over time (35 of them could no longer buy an ounce of gold, for starters), but the impact of that inflation was felt by foreigners just as it was felt by Americans. In other words, Europe partly paid for the Vietnam War.
If the world moves away from the dollar as the global reserve currency, think about what this means for American consumers and producers. Less demand for dollars from overseas, a less valuable ("weaker") dollar. Imports get more expensive. (Fuhgeddabout German cars...) Exports become relatively cheaper for others to buy. (Buy American! Woohoo!) It could be a kind of "rebalancing" that many people wish for... but, as we'll discuss...
be careful what you wish for, you just might get it...
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