Losing the Battle, Winning the War?

Or, the Economic Implications of the G-20 Meeting’s Aftermath


The narrative emerging in the wake of the G-20 meetings is that, not only is the rest of the world angry at us over quantitative easing, but we also achieved none of our diplomatic objectives regarding rebalancing (the coverage seemed particularly negative on CNBC). [1] [2] [3] In addition, the outcome has been taken as a harbinger of the end of US dominance over economic policymaking, to the extent the US no longer has the intellectual high ground (given the failure to regulate the financial system in a sensible way) and the relative decline in economic weight.


Effective Economics versus Meaningful Communiques, and Strategic Interactions

I think one important point is to realize that achieving economic goals and diplomatic successes are not always the same. From a diplomatic standpoint, it would have been useful to have agreement that countries should limit current account balances, as in the US proposal. It might have been economically useful, to the extent that this put additional pressure on China to take more rapid action to rein in their current account surplus by way of exchange rate appreciation, and restructuring of the economy. Of course, at the panel I was on several weeks ago [4], PBoC deputy governor had already made a commitment to putting the Chinese CA/GDP ratio on a glide path towards reduction (but not necessarily as a share of world GDP), so it’s not clear what economic impact an agreement would have made.


I have also been thinking about the anger with which the policymakers and economists in the rest-of-the-world (as well as certain US politicians [5]) have greeted QE2 with. In some ways, the fact that they are angry speaks volumes about the effectiveness or ineffectiveness of QE2. (In other words, to criticize QE2 as having no effect, and then to be angry that it is being undertaken, are internally inconsistent views.)


My view is that anger at the US position is currently being driven by an understanding that QE2 has been surprisingly effective at depreciating the dollar, and that the rest-of-the-world has limited scope in countering that depreciation. In a game theoretic context, we usually think of competitive devaluation as a form of the prisoner’s dilemma, where the devalue option dominates the no-devalue option, and both parties end up with a devalued currency, but no net improvement because countries cannot all devalue against each other.


winning0.gif

Figure 1: Log nominal value of US dollar against broad basket of currencies (blue), and log real value (red). November observation for nominal rate pertains to 11/5/2010. Downward direction denotes deprecation. NBER recession dates shaded gray. Source: Federal Reserve Board, NBER and author’s calculations.

However, because of the radically different post-recession economic conditions facing the US and China, the payoff matrix has changed. The US gains by allowing the currency to depreciate against the rest-of-the-world, but the Chinese (and to a lesser extent the other BRICs) have competing goals of maintaining rapid growth, high exports, and stable inflation.
This point has become apparent as inflation has surged in China. [6] The conflicting goals Chinese policymakers face can be illustrated by reference to the Mundell-Fleming model. (See this post for detail).


winning1.gif

Figure 2: Tightening of monetary policy. Interest rates rise from i1 to i2, due to decrease in money supply which shifts in the LM curve. Source: Econbrowser (March 2007).

The Chinese can raise interest rates in order to stabilize inflation by cooling off the economy. However, that interest rate increase would exacerbate the capital inflow that would tend to appreciate the CNY. That in turn implies even greater forex intervention by PBoC, which in turn requires even greater sterilization measures, either by issuing more PBoC bonds, or by raising reserve requirements. The US measures to push down long term rates via QE2 have made that option more difficult.


If the Chinese are unable to rein in inflation via sterilization measures (and other administrative measures to cool off the economy), then the Chinese real exchange rate will appreciate, even if the nominal does not move. Recall the definition of the real exchange rate (in logs):


q = s – p + pUS


Where s is the log exchange rate expressed as CNY per USD, p is the log Chinese price level, and pUS is the log US price level, and q is the log real exchange rate; up is depreciation of the CNY. As p rises, q falls. This argument is merely an assertion that the monetary approach to the balance of payments holds in the long run.


The highlighting of this tradeoff by US actions might just induce the Chinese policymakers to accelerate measures to re-balance in a way external diplomatic pressure (from the US, the other G-20) did not.

Why Is the Exchange Rate Moving So Much?


As I noted earlier [6], there is some mystery why the impact on the exchange rate has been so much more marked than that on long term rates. As several observers have observed [Delong] [Krugman], QE2 is fairly small in quantitative magnitude, and in terms of implied impact on duration adjusted interest rates. Theory suggests offsetting inflation and liquidity effects from open market operations, so the impact on observed nominal rates could in principle be small (and in either direction).


I think a large chunk of the impact comes from the fact that QE2 signals additional information about the willingness of the monetary authorities to undertake actions to stimulate the economy, perhaps by future injections [7]. I will also observe that the likelihood of a sensible fiscal policy declined after the mid-term elections (that is the US will more likely undertake contractionary fiscal policy by not offsetting state spending reductions), so that from a simple Mundell-Fleming model, we should expect dollar depreciation.


What about Capital Controls?


There has been substantial discussion of whether capital controls can limit the capital inflows into emerging markets, thereby loosening the choice between exchange rate stability and monetary autonomy (i.e., “the trilemma”, as discussed here and here). I believe that capital controls can be effective, particularly in the short term, in reducing and changing the composition of capital inflows. Whether capital controls can be effective over the longer term in stemming these inflows to a substantial degree remains open. (see for instance the recent IMF paper here [pdf]).


Of course, if extensive capital controls are combined with financial repression, and pervasive controls over the rest of the economy, then capital flows can be controlled, as in China. Even then, capital controls only allow reserve accumulation/decumulation to loosen the binds of the trilemma. [8]


aci_ema.gif

Figure 3: drawn from Figure 4 in Aizenman, Chinn, Ito (2008).

The Bigger Game


The depreciation game between the US and the other G-20 countries is imbedded in other games. Moreover, the game is repeated (the dollar depreciation is one-shot, with repercussions into the future). Perhaps more importantly from my perspective, strategic interactions involving macro policies are imbedded in a larger game involving other policies including those related to trade. GI/Free Exchange discusses whether trade protection and depreciation are complements or substitutes. My colleague Mark Copelovitch, along with UW Professor Jon Pevehouse, has undertaken some systematic research on the subject of exchange rate regime choice and protection (presentation here), which suggests that they are substitutes.


Thinking in the context of the current game, China could retaliate, although not necessarily by using tariffs (rare metals comes to mind). We’ll have to wait and see; however, to the extent that China relies more profoundly on access to US markets than the US relies on access to Chinese markets (still), I’m dubious they will follow this path with full force.


Concluding Thoughts


None of the foregoing should be taken to mean that failure to come to an agreement on a formal statement restricting current account imbalances was a good thing. Certainly it would have been preferable to have an additional lever to induce more rapid action on the Chinese yuan. But it’s always important to recall what the economic fundamentals are, and right now it appears that the scope remains for the US to induce additional expenditure switching.


Hence, the US has, either intentionally or unintentionally, “pulled the trigger” (after all, it’s not clear Bernanke was thinking about the dollar, as opposed to domestic economic activity); we are now using our special position as a key reserve currency to depreciate our currency at exactly the time when other key countries (the BRICs) are not fully able to counter, since their output gaps are positive, and stronger currencies would help them counter inflationary pressures [9]


One last speculation. The other countries facing a negative output gap (primarily other advanced countries) will face the same incentives as the US, and so will more likely try to depreciate their currencies. It’s true that this will tend to negate the US depreciation — but to the extent that this induces greater monetary easing in those countries, this is a positive outcome.


Some words of caution about overinterpretation from Simon Evenett. Richard Portes also assesses the macro implications of the Seoul meetings. Paletta/RTE parses the words.

Update, 9:30am Pacific, 11/14: The game is afoot: “China to consider hot money policies: report,” Reuters 11/14/2010.

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31 thoughts on “Losing the Battle, Winning the War?

  1. The Rage

    Where has the dollar “depreciated”? Against a zombie currency like the Euro, boy, that is devaluation!!
    1.QE is overblown. Literally, it doesn’t mean squat. Maybe it will if they ever do try and really “QE”. At some point, the market needs to call out the FED and either do or don’t. Fear is one reason why they don’t.
    2.The global system is broken. Europe is dying via the EU and that won’t last much longer. America’s empire is dying because it has become to efficient and global. Asian economies are overgrowing and having horrific inflation, alot of it stolen from us.
    They need to deflate why we need to inflate. After a period of adjustment the global economy would be much better off. But this type of structural problem takes time to “come to grips with”. The last structural crisis took a years to overcome.
    My advice to the rest of the world is, don’t take to long. A wounded empire is bad, but when the empire becomes full of hate from their loss of power and capital, the hatred spawns into nationalism and socialism like you don’t want to believe.

  2. Dan Nile

    The fundamental flaw in all these linear monetary models of inflation is that they assume that the Fed has some general means of dropping money from helicopters more or less evenly into the hands of all agents in the economy. In fact all QE does is create money in the Fed accounts of the primary dealers, who these days mainly use it for leveraged market speculation. If you point to fiscal policy, all QE is doing is covering the deficit due to reduced tax collections.
    Viewed in this light, it’s no surprise that the exchange rate has outpaced interest rates and inflation. No money is being actually pumped into the non-financial economy to create inflation. The Fed’s presence as an irrational buyer of last resort in the Treasury market keeps yields low, while the primary dealers take their free money overseas seeking assets with better returns. This has depreciated the dollar as Goldman Sachs et al bid up foreign assets courtesy of Fed-provided dollar leverage.

  3. lark

    Terrific insights. I have been wondering why QE2 seems to be having an overblown effect on the dollar. You help me understand this.

  4. ray l love

    Dollar carry-trade activity in 2010, thus far, is roughly 10 times that of same in all of 2009.
    Brazil’s real is up 30% since March, 39% since 1/1/2009. South Africa’s rand has moved up 2nd most but I don’t remember by how much. The point is that currencies are rising in many nations, small and mid-size, and predictably so. The higher the demand (interest-rates) the more appreciation.
    The thing is, if the objective were to stimulate the global economy, ZIRP with QE boosters is putting the funds where they are most in demand.
    So, if the applicable nations were now to print their currencies and purchase dollars, so as to drive their currencies back down, as some nations are threatening to do, if done by enough nations in concert, in mass, the dollar could be driven back above current levels. And that would provide cheap stimulus funds where they could be best utilized with the only losers being those doing the carry-trades (Wall St.). The trader’s losses though would be offset somewhat by the high interest-rates.
    Could Bernanke be trying to repair the reputation of the US by solving the global AD shortfall? Could he be that rare man who sees his chance to rise above it all and do what is right?
    The various Financial Ministers would need to be in on the play. They certainly would not hesitate to boost their economies at the expense of Wall St.. That would mean that the ‘currency war’ is staged to a degree.
    Why not? QE as stimulus in the US is so obviously of little benefit. Bernanke surely knows that now. QE1 made it all very predictable. And that predictability could be acted upon to the benefit of all concerned.
    Tim Geithner did say that the US is not intentionally devaluing its currency.

  5. H.Z.

    “to the extent that China relies more profoundly on access to US markets than the US relies on access to Chinese markets …”
    This seems to be repeated by everyone as self-apparent truth (notably in a hawkish way, by Krugman), but why? Chinese FX reserve is now over $2 T, or more than 10 years worth of trade surplus. China also has stated that it intends to stimulate domestic consumption. At some point, any prudent capitalist would understand that China will care more about the purchasing power of its FX assets than continued access to US market. From China’s perspective, when it stimulates it domestic demand it would prefer a more subdued US demand so that it has less competition for the resources that are limited (which is a different way to say the same thing: that USD purchase power will matter more than access to US market, eventually).

  6. ray l love

    H.Z.,
    “but why?” Because most Americans must believe that they are superior. The same propensity applies when Americans are reminded that China has sustained growth rates that are double those ever achieved by the US. Same reason China gets so little credit for poverty reduction etc. Notice too that China’s economy is perpetually about to collapse, any day now for more than 25 years.
    Americans actually believe that they work as hard as a people can work. When of course they are the most entertained, overfed, exploitative, and spoiled people in the history of the world. Amazing!

  7. endorendil

    It should be a given that the dollar has to depreciate: it is the easiest way to reduce buying power of Americans and to make owning US debt and currency less desireable. Both of these actions are needed to address the global imbalance: Americans have to buy less things and other countries need to invest in themselves in stead of the US.
    The consequences will be hard to deal with, at least in the west. It isn’t clear that China would suffer, though, even if the US goes into an economic death spiral. Part of the reason that the US is such easy prey for Chinese products is that there are so many poor people that can’t afford to buy anything but the cheapest available – and that is buying Chinese. A bad economy won’t hurt Chinese exports much – it may even help them. The fact that US exports become cheaper will be irrelevant: China doesn’t have to buy US exports, it can buy US companies.

  8. MarkS

    Exactly how would you define “winning the war”?
    The US central bank is feeding free money to the primary dealers in order support to the Federal deficit and depress interest rates. This hot money is then used to inflate foreign securities and currencies. In the process, the credibility of the dollar as a reserve currency is eroded as is the credibility of the (US dominated) western banking system to manage international trade and finance.
    Its unlikely that the US will ever balance its current account deficit until it severely reduces oil imports. And oil dependence will remain in place as long as Big Oil can buy politicians, and Joe Sixpack and Soccer Mom think that its their patriotic duty to drive pickups and SUVs.
    The handwriting is on the wall. The international banking system needs a big shakeup… the dollar needs to take a big fall… the losses from Western banking over-leverage have to be realized…

  9. Barkley Rosser

    raylove,
    I was talking about actual economic impact rather than a lot of hysterical carrying on by finance ministers from countries with bilateral trade surpluses with the US. That is rather a “duh,” frankly. As it is, the complaints are a joke if in fact the dollar does not devalue, although it did fall some after the policy was first hinted at, but that fall has pretty much stopped.
    Menzie has been reasonably convincing that it is unlikely to be particularly inflationary within the US, a source of much hysteria by our domestic commentators, and on the more unfortunate side, aside from maybe a little push on the trade aspect from the small devaluing that did occur, probably not all that much stimulus to real economic growth either from the rather small declines in longer term notes and bond interest rates due to the policy. Still pretty much wet squib in terms of any substantive real economic impact as compared to showy screaming.

  10. KnotRP

    No amount of refueling and downhill push-starting
    can overcome a thrown rod, even if you get the
    rest of the world to push. Economists reapply
    the same cure at every sign of trouble because
    they do not recognize when the system is no
    longer operating within design parameters.
    We’re going to need an Economic/Political Mechanic,
    once we reach the bottom of the hill and find
    the engine still hasn’t started. But hey, where’s
    the risk, right?
    http://www.econbrowser.com/archives/2007/08/wheres_the_risk.html
    The backup chute was packed by the same
    incompetents…good luck with that.

  11. Steve

    From your poster child:
    Real inflation, down here where the people live is bad and getting worse. Result? Continued contraction of consumer spending.
    Credit: Tap still shut off for the people who could really benefit from restructuring their old debt. Result? Continued contraction of consumer spending.
    Housing: Value of asset has fallen 35% or so. Result? You’ve been reading my mail! Continued contraction of consumer spending.
    What does Obama do? Try and start a trade war with China! Result? Higher prices on the goods people down here need and, yep:
    Continued contraction of consumer spending.
    How about we restore fiscal sanity so the people in this Country are no longer economic slaves.
    I’ve got it! Obama says he’s like old honest Abe.
    How about a 2nd emancipation proclamation that releases all people who earn less than $250,000 from all debt effective 1/1/2011.
    I know, I know! We all just need to shut up and get back to mopping up this mess, after all you know bess massa.

  12. Barkley Rosser

    For all the huffing and puffing about dollar devaluation, including particularly by the German Finance Minister, the dollar has actually risen somewhat in the last week against the euro thanks to the Irish crisis. There is in fact good reason to think that the real bottom line of QEII will prove to be “not much effect,” for either good or bad.

  13. rayllove

    MarkS,
    I agree, assuming ‘war’ refers to the so called ‘currency war’, the US has already lost.
    There is an undeniable shortfall in global AD. The fact that well more than half of the global stock of all currencies must devalue to reach acceptable levels of global employment is an accounting-identity impossibility that is inescapable. There will be a long-tern burden of unemployment and debt somewhere in the world.
    It is also obvious which nation is most responsible. This responsibility though is far more than just the result of the recent AAA fraud fiasco/housing blunder etc.
    Dollar hegemony takes capital out of foreign hands and puts into US hands. This led to allocations that caused excessive investment in the US at the expense of investment in ROW. Naturally, the ROW is not accepting the excuse:’we were forced to over-consume, the Chinese are forcing us to be fat and wasteful’. The excessive foreign inflows, that added to the excess in liquidity, that fed the housing bubble and over-consumption and wars, should have been used for global development, no doubt.
    The US also agreed in 2002, along with most of the other advanced nations, to increase development aid up to 0.7% of GDP. The US delegation acknowledged the need to increase development yet reneged on the promise to do so. According to J. Stilitz, for every dollar the US spends on global development, there is a ROI of $3. So whether this 0.7% of GDP is ‘aid’, or just giving back some of what has been finagled, is yet to be decided, or admitted to at least.
    The point is, the war was lost when the ROW stood together and made it clear the bully-tactics will no longer be tolerated. And the US has been left no other choice but to take responsibility for the mess it not only created, but demanded.
    Once all of this is better understood, the magnitude of the hubris and stupidity will be an embarrassment for the ages. Unless of course Bernanke & Co. are up to what I explained above. There is one redeeming option left. The US could willingly take its punishment honorably.

  14. rayllove

    Barkley,
    I assume that you have been out-the-loop for a week or so. QEII united the ROW in opposition to the US. That is about as far from “not much effect” as anything that has happened in our lifetimes (and you are old, [I'm only 54]).

  15. rayllove

    Barkley,
    The MSM has failed once again to provide Americans (you, Barkley) with the information needed to understand what is happening. The two G-20 meets for example did not result in a ‘business as usual’ context as many Americans seem to believe.
    Before the first meet, when the Fin Mins of Brazil and Indonesia chose to send subordinates, this was a symbolic protest. It was made important though by the fact that it was India’s Fin Min, instead of those protesting, who commented as to ‘why’. What he said essentially was that the G-20 is a waste of time. But what makes this important is the fact that India imports more than it exports, and so, India was showing solidarity among 2nd tier nations because it had little to gain or lose in regards to QE2. In other words, the solidarity itself is signaling that the ‘currency war’ is not just about currency, the 2nd tier nations were saying that they stand united against the US.(I’m using the term ’2nd tier’ because some of the nations involved are not among the G-20)
    Another key clue that the MSM failed to recognize the importance of (they are more-so uninformed than devious), was when Brazil’s Fin Min., Guido Mantega, issued a joint statement with Brazil’s outgoing, and incoming Presidents, to the effect that Brazil is prepared to do whatever necessary to protect its currency from further appreciation(30% since March). This came after the first G-20 meet and after the Fed announced its QE2 intentions. At about this same time a rumor out of Brazil added another symbolic jab by claiming that 600 billion dollars might be bought with reals in the currency market(600 billion being the same number as the QE2 number[snarky]). And for another show of solidarity, the Fin Min in Thailand announced similar intentions in concert with a group of unnamed “neighboring” nations (the press sometimes confused some of these announcements with intentions to impose capital controls but Thailand already had such controls in place).
    There were many other such clues but without making a long comment longer maybe it is best just to say that US domination of world affairs has ended. The MSM should be explaining what this means but instead we are now stymied by our own deceit.

  16. Bruce E. Woych

    It seems to me that much of the forcasting is retrospective second guessing of what has been done wrong to offset a mutual working order. This process of “deployment diplomacy” is a circular event in global “stag-Nations.” As long as the international systemic is played as a fragmented set of economic factions, there can be no serious counterbalances in the delicate art of measuring a buoyant set of standards. The international standards can not be one where one sided micro-economic gains are neither recognized as disequilibrium or assessed for unjustifiable damage. This does not even begin to address the varieties of corruption that should be a primary concern in an arena of fair play.
    Nations are building armaments just as they did prior to WWI and we can not afford to fool ourselves into thinking that contemporary times are above it all. The gravity for cooperative and mutual understanding cannot be overstated. We need to acquire a new outlook for global diplomacy and stop the idea that is tantamount to unspoken soft war.
    While the idea that the derivatives that pushed this crisis were coined as the equivalent to instruments of mass destruction; to the extent that detente had been largely based upon mutually assured destruction; we must construct a new language of urgency. Not one based upon fear and destruction, but one based upon mutual respect and construction. I would argue that a standard of “mutually assured production” be a unconditional precept and standard to global agreements. And that “mutually assured production” should be one that is unequivocally measured and considered acceptable to the full assigned authorities in precipitating these policy agreements. Furthermore, an authoritative review board should be available for appeals at regular intervals to assure the original spirit as well as lawful intentions are sustained over the duration of a working order.

  17. Wisdom Seeker

    Menzie commented “…the US has, either intentionally or unintentionally, “pulled the trigger” (after all, it’s not clear Bernanke was thinking about the dollar, as opposed to domestic economic activity)”.
    That is frightening. If Bernanke and the economic team responsible for the QE2 move weren’t *simultaneously* thinking about the effects on the dollar and associated implications, they’re incompetent. Even if their focus was on domestic economic activity, ignoring the dollar effects is incompetent, as the U.S. does not live in a “domestic economy” bubble anymore.
    More likely IMHO is that they *were* considering potential impacts on the dollar, but chose not to highlight those in the public arena. I believe they were seeking plausible deniability with regard to whether those effects were intentional.
    Personally I think the QE2 move is brilliant. It’s a move that everyone thinks means inflation — but it doesn’t produce inflation. It DOES put long-overdue rebalancing pressure on the dollar and thus on overly-coupled overseas trade partners. It also buys Congress a few more months before the U.S. deficit becomes a critical issue (who’s going to buy $1,000,000,000,000 of U.S. debt this year, other than the Federal Reserve, again?), and in those few months, Europe will go through another major leg of its own crisis of sovereign confidence.

  18. rayllove

    Bruce,
    Great stuff. Your thoughts are headed in the right direction. We need to learn from the folly of Bretton Woods and restructure the institutional framework. What you said about “the spirit” was dead on. The WTO, IMF, and the WB, became a tragic farce because the very essence of those efforts were about ending jingoistic trade practices. But then fo course the US used its overwhelming influence to take jingoism to a higher level, most folks will not not understand how detrimental this has been for humankind, but who has time to explain every last thing? You get it and I am glad to have ‘one’ ally. Of course ‘others’ understand but have jobs to protect and etc…
    =========================================
    Wisdom Seeker,
    If you do in fact seek wisdom, I may have some for you. First, QEII is causing some inflation but its price inflation so luckily it will only hurt poor people and inconsequential nations, and of course they are of little concern. Hard commodities have risen about 10% in the last 75 days or so and wheat was just bad luck so what’s a plutocrat to do? A little more strife will just make ‘em work a little harder, and that is good for everybody, right? (I’m just having some fun, don’t take this personally, [but you are a 'wisdom seeker', are you not?])
    Anyway, your:”long-overdue re-balancing pressure on the dollar”, is wrong. You don’t understand dollar hegemony and how devious it is. You apparently did not read what I explained above so I am at an impasse. It is your move.

  19. rayllove

    Barkley [deleted -- mdc], (you got my name wrong even though I was once a regular at your boring and pointless site, [other than the obituaries of course])
    I was actually hoping to talk about Jamie Galbraith’s mention of you as one of those who was prescient in regards to the recent economic crisis. Remember the conversation we had about how Jamie failed to mention Mike Hudson when it was so obvious that Hudson called the housing collapse, but the likes of you and Dean the-I-was-only 3-months-after-Hudson’s-unmissable-article-in-Harper’s Baker were given credit by Jamie the Prince… but-too-out-of-touch-to-have-any-idea-of-what-is-actually-going-on, but-well-paid-in-Texas-and-gotta-say-somthin’, Galbraith, the heir to the pretenders throne, probably not, you had trouble keeping up at the time. In fact, you, as was the case with Dean Baker, chose not to respond to my ‘confusion’ as to why M. Hudson was not mentioned. ??? The only response I was given came from your only die-hard: ‘Trucker’.
    So, now you are again pretending that you know what is going on, but of course you don’t, and I do, so what can you say?
    You could of course try as you did the time that you claimed to have told Stiglitz to his face that he knew no better than Hanson regarding an economic issue that Stiglitz knew backwards, but of course you never did. Stiglitz would laugh at you and your pretense, and so here we are. You as insulting as ever, and me wondering how jerks like you fooled enough jerks like you to maintain the status quo, which is failing as you continue to pretend to understand what you obviously do not get, Barkley Rosser [deleted -- mdc]

  20. rayllove

    I feel as if I am involved in conversation in which my comments are being ignored. That may be because a key part of what I have said was presented as a reply to MarkS. Or perhaps many of the participants here ignore all or most of the comments, who knows. In any case, I repeat:
    There is an undeniable shortfall in global AD. The fact that well more than half of the global stock of all currencies must devalue to reach acceptable levels of global employment is an accounting-identity impossibility that is inescapable. There will be a long-term burden of unemployment and debt somewhere in the world.
    It is also obvious which nation is most responsible. This responsibility though is far more than just the result of the recent AAA fraud fiasco/housing blunder etc.
    Dollar hegemony takes capital out of foreign hands and puts into US hands. This led to allocations that caused excessive investment in the US at the expense of investment in ROW. Naturally, the ROW is not accepting the excuse:’we were forced to over-consume, the Chinese are forcing us to be fat and wasteful’. The excessive foreign inflows, that added to the excess in liquidity, that fed the housing bubble and over-consumption and wars, should have been used for global development, no doubt.
    The US also agreed in 2002, along with most of the other advanced nations, to increase development aid up to 0.7% of GDP. The US delegation acknowledged the need to increase development yet reneged on the promise to do so. According to J. Stilitz, for every dollar the US spends on global development, there is a ROI of $3. So whether this 0.7% of GDP is ‘aid’, or just giving back some of what has been finagled, is yet to be decided, or admitted to at least.
    The point is, the war was lost when the ROW stood together and made it clear the bully-tactics will no longer be tolerated. And the US has been left no other choice but to take responsibility for the mess it not only created, but demanded.
    Once all of this is better understood, the magnitude of the hubris and stupidity will be an embarrassment for the ages. Unless of course Bernanke & Co. are up to what I explained above. There is one redeeming option left. The US could willingly take its punishment honorably.

  21. rayllove

    Anyway, an economics professor (Barkley), has provided me with a perfect example of just how ignorant seemingly well-informed Americans can be:
    “raylove,
    I was talking about actual economic impact rather than a lot of hysterical carrying on by finance ministers from countries with bilateral trade surpluses with the US. That is rather a “duh,” frankly. As it is, the complaints are a joke if in fact the dollar does not devalue, although it did fall some after the policy was first hinted at, but that fall has pretty much stopped.”
    What Barkley’s hubris has caused here is expressed by his thinking that the dollar must devalue for the “complaints” to be anything other than a “joke”. But of course the dollar does NOT need to depreciate for carry-trade activity to drive ‘up’ the currencies of other nations with small to mid-size economies. Brazil’s real rising 30% since March, combined with carry-trade activity that is 10 times normal, (which is only counting ‘front-door’ trades), is proof of that. And of course there is a long list of other such nations providing similar examples.
    So… there is “joke” and a “duh” that applies here, but not as originally intended. Even Bernanke and Geithner have admitted to the ‘spillover’ effect after-all, and this ‘effect’ is not some obscure and trivial factor. The ‘spillover effect’ was in fact the central issue at the each of the G-20 meetings, hard to miss.
    Hubris and ignorance are our primary enemy.

  22. Barkley Rosser

    rayllove (apologies for misspelling your “name”),
    Not sure why my comment that you quote is not here. Guess you saw it before somebody axed it.
    Regarding why I go by “Jr.” (which I do not put in my signature on blog comments), it is because my father was a famous mathematician, more famous than I am, and we regularly get confused with each other. So, this is more a matter of a pathetic son attempting to assert/maintain his identity in the shadow of a more famous father.
    Yes, Jamie G. listed me as one of the 10 who most called what was coming. I’ll take that. And, for the record, I have debated Joe Stiglitz to his face, but will not go on about that here. Other than that, of course you are welcome to your opinions of my publicly stated opinions here or elsewhere. However, you have failed to convince me that QEII really amounts to much or that the ravings of the Chinese, German, and Brazilian fin ministers are not much more than hypocritical posturing not worth a cup of tea.

  23. rayllove

    Barkley,
    First, how is anything Guido Mantega has done “hypocritical posturing”? I don’t quite see how the German Fin Min fits in your claim either, but then unsupported claims are like that, are they not? How about some hard support on those. For example: ‘Brazil’s exports fell by 2% last month’ (consider that as ‘support’ in opposition to your:”that QEII really amounts to much”,[see how that works])
    Furthermore, about this: “you have failed to convince me that QEII really amounts to much…”
    To begin with it is ZIRP with QE that is causing the ‘spillover’ and I have not said otherwise, and only a misinformed person would put it the way that you have put it… and why is your lack of understanding my responsibility? You quite obviously don’t know what you are talking about and so it is you, who is “posturing”, ‘hypocritically’.
    Moreover, I could care less what you know about this issue. My original contention regarding your ‘contribution’ here had to do with you misleading others. So it is not my intention to educate you, I simply felt that it was necessary to protect the conversation from your under-informed influence. As it turned out, you actually made the fact that you are quick to speak on matters you know little about, apparent on your own, with only a little help from me. The following for example made your folly quite clear:
    “As it is, the complaints are a joke if in fact the dollar does not devalue, although it did fall some after the policy was first hinted at, but that fall has pretty much stopped.”
    As I said in my previous comment, you mistakenly claimed that only dollar depreciation could have any effect when the ‘effect’ is already an indisputable fact. Currencies all over the world have appreciated to degrees that have put downward pressure on exports. A wide variety of capital controls have been implemented, and some of these are new and innovative versions, and yet you seem to think there are only “ravings” involved.
    I suppose I could go to explain how ZIRP/QEII led to the South Koreans backing out of signing a direct trade treaty with the US, due to capital control restrictions presumably, and other such “posturing”, but like I suggested, you are not my responsibility… and you are well behind.

  24. Barkley Rosser

    rayllove,
    This will be my last post on this thread as I am about to go out of the country for several days and will not be blogging at all.
    Needless to say, you are free to denounce me at length on this and that, but I will make two comments. One is that I would accept that the term “hypocritical” is too strong and unfair to apply to the Brazilians. However, I continue to apply it too the Chinese and the Germans unequivocally with no moderation.
    The other is that I am sorry, but you are way off on certain matters you are putting yourself forward as a big expert on. There is zero evidence of any linkage between the failure of the KORUS deal and QEII. President Lee has dismissed QEII as having any noticeable impact on ROK, in sharp contrast to the politically convenient and hysterical rantings of the Chinese and Germans (and the more defensible ones of the Brazilians). All reports focus on very micro elements that are politically sensitive, details regarding the beef and autos parts of the deal that were not nailed down. Many are criticizing Obama with good reason for having failed to pin those down before going to Seoul, but there is simply no evidence that the QEII had one iota of input to the breakdown of those talks. So, I would suggest you get off your high horse at least a bit, even if you think I am the biggest ignorant moron in the econoblogosphere.

  25. rayllove

    Barkley,
    Naturally, more unsupported claims, except for the part about you being an ignorant moron, plenty of support there. While of course continuing to avoid the main thrust of my argument, ‘as if’ some unsupported insults and name-calling might protect your reputation.
    And of course you “will not be blogging at all”, you have no other escape. IIRC, you are a frequent ‘traveler’.
    Then too, of all of the issues that I called you on, you picked the one most inconsequential point to attack me on. Here is what I said:
    “I suppose I could go to explain how ZIRP/QEII led to the South Koreans backing out of signing a direct trade treaty with the US, due to capital control restrictions presumably, and other such “posturing”, but like I suggested, you are not my responsibility… and you are well behind.”
    The key words here are “I suppose” and “presumably”, but of course in all of your insults you conveniently ignored that I qualified in 2 ways for the possibility that we could argue over that which is beyond “actual economic impact” and go to the land of ethereal argumentation. That place where issues are never concluded, as if economics shares space with religion. But of course economics has at least a little math involved, albeit evasive and serving.
    The telling and unavoidable thing though, is that it was you who feigned a pretense of keeping all of this about “actual economic impact”, and this may be a little difficult for other readers to follow, due to the fact your “actual economic impact” pretense came from your first insulting remarks, but you and I know that you were once again talking from some other orifice than the ones in your head.
    Where all of this gets ironic though, is while you were accusing me of being on a “high horse”, I, who among other things am a farrier, was running ‘roughshod’ over the pretentious c*** spewing from a respected economics professor, who is of course ‘called away’.

  26. BKOKS

    “My advice to the rest of the world is, don’t take to long. A wounded empire is bad, but when the empire becomes full of hate from their loss of power and capital, the hatred spawns into nationalism and socialism like you don’t want to believe.”
    Aside from the silliness of calling America an “empire” in relation to past true empires, you are obviously intentionally confusing relative and absolute decline.
    Again, binary thinking abounds, even on economics blogs where people should be educated beyond such. Astonishing and disturbing.
    “Chinese FX reserve is now over $2 T, or more than 10 years worth of trade surplus.”
    You clearly do not understand what China’s reserves represent, why that massive reserve exists, or what China can and – more importantly – cannot do with it.
    “China also has stated that it intends to stimulate domestic consumption.”
    You mean it has been stating for some time that it intends to stimulate domestic consumption, even while DC as a percentage of GDP has fallen and bubbles have formed that will blow holes in the “Chinese consumer”‘s ability to grow consumption.
    “Notice too that China’s economy is perpetually about to collapse, any day now for more than 25 years.”
    Just as America’s has been about to collapse any day now for the last 50 years?
    “Americans actually believe that they work as hard as a people can work. When of course they are the most entertained, overfed, exploitative, and spoiled people in the history of the world. Amazing!”
    Yeesh, perhaps my assumption that anyone posting here would be well educated was a wrong one. You should contact the Chinese government, as you’re easily one of the better Sinophile propaganda pumpers I’ve run across in the last year. You could make good money.
    “I feel as if I am involved in conversation in which my comments are being ignored.”
    Yes, that happens when your comments are little more than blinkered, gleeful rage through which you stream warped fiscal and economic proclamations with little bearing on reality.

  27. rayllove

    BKOKS,
    “Yeesh”, ever consider that unsupported claims say more about the claimant than the accused?
    Also, coincidentally, these ‘cheap shots’ always seem to come from those who are hiding behind pseudonyms, after a daily onslaught of such cowardice, I have, even not being “well educated” (brainwashed), established a pattern. But then cowardice being so common, and unsupported claims and name-calling being the only recourse of a coward, even the most self-educated among us could not miss the common denominators. Lame effort.

  28. Menzie Chinn

    I regret not having screened comments more carefully. Any further ad hominem attacks, including ridicule of individual names, will invite severe editing.

    Individuals should also refrain from complaints that their posts are being ignored, and using that as a pretext to re-post materials. Such actions will also invite severe editing.

    I will also take action to eliminate use of expletives, retro-actively.

  29. rayllove

    Menzie,
    Before you expose yourself as some sort of one -man-police-state, which is a task that you should not be responsible for, as if you have nothing better to do, you should be careful to recognize that Barkley insulted me first. That may sound childish, but apt just the same. Somehow though, his initial insults were posted out of order, it is confusing but if you have the time to put the conversation in its temporal context you will see that I was attacked underhandedly.
    As for teasing Barkley about his name, James Barkley Rosser Jr., died back in the 1930s. ‘Barkley’ though pretends to be a man of the people, and so there is some teasing. Whether he should be the ‘III’ or the ‘IV’ or a Jr. or whatever, I don’t know. But I do know that he knows my name is Ray or rayllove or ray, because, I am one of the frequent participants at his site over the past year or so. Accordingly, I knew that his addressing me as ‘raylove’ was meant as coy, and, coupled with his comment the fight was on. In other words, he asked for it, and he got more than he could handle. But not because he didn’t deserve it. But instead because I know the material and he doesn’t. Simple as that.
    As for your implication regarding “ad homonym attacks”, I am one of only a handful of participants on this site who actually supports claims, so either you don’t understand what ‘ad homonym’ means, or you are referring to someone else. Ironically, you failed to show any support for ‘your claim’, so there we are.
    As for re-posting material, one can only re-explain so many times. Perhaps you should read the ‘re-posted’ comment ‘again’, and ask yourself how it is not at least twice as relevant as the rest. It is not like there is a space issue.

  30. rayllove

    Anyway, if we begin with the question:”Losing the Battle, Winning the War?” (currency/trade), that question comes down to a consideration of what best serves the interests and needs of the largest number of people. That is determined by the inescapable fact that the criteria involved here is that of what most improves the shortfall in global aggregate demand, that then could be divided into short-term, and of course long-term considerations. The thing is though, regardless of which the comparisons are made, the US loses the ‘battle’ and the ‘war’ on every level but one.
    Due to the inescapable fact the US gains more and gives back less than any other developed nation, there is no case for the importance of the US in regards to global aid, so, the case for the importance the US economy on the health and well-being of the global economy rests on 3 other claims: 1. The US is the consumer of last resort. 2) The US makes up for its lacking foreign aid with FDI. 3) The US provides global stability, militarily.
    But, the ‘consumer of last resort’ claim is now nullified by the fact that Americans consume far more than their share of global resources without actually paying for all of this consumption due to dollar hegemony and un-payable debt. The gains made by the nations providing goods to the US are not being allocated as needed to maintain global AD, and so, for that reason alone, the Americans can no longer claim to be beneficial to nations other than their own. This claim weakened further now too because the proposed solution to the current conditions aim to increase US exports.
    As for the 2nd justification of the US ‘winning the currency/trade war’, it is folly to argue that US FDI is of much value when the nations with the most demand for capital are imposing capital controls to protect against FDI.
    So that leaves a military presence that is of dubious value, and, not exactly offered as a matter of choice.
    Anyway, this is the argument that I was trying have on this thread, and one that I was building a case for in my previous comments. But just the ‘difficulty’ of having this argument alone, shows how misinformed and delusional Americans are on this subject. The claims for example that the Germans are guilty of mercantilism should be considered with a comparison of the fact the Germans give well more than twice what Americans do in development aid. And much of the ‘aid given’ by the US is actually back door military spending, it is impossible to know how much, but only a glance at the recipient list shows that the nations receiving the most ‘aid’ are the very nations that most suit US strategic interests.
    And China of course has an unparalleled record on poverty with Brazil not far behind. So in the zero sum considerations regarding imports/exports, with global AD as the criteria, the US lost this ‘war’ along time ago.
    Then too, there is an issue of responsibility for the current mess. But the US had already lost the ‘war’ before the mess was apparent. And, there is no doubt as to which nation is responsible for the mess.

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