August 20, 2015

Voodoo Economics, Trump Style

  1:20 pm

To quote from a recent Wall Street Journal article, entitled Trump’s Defective Economics:

“To hear Donald Trump tell it, China is run by a cabal of geniuses who outsmarted the United States last week by cutting the purchasing power of their fellow Chinese citizens with a devaluation of the yuan,

Trump: They’re KILLING us. Now they’re going to take more jobs….I mean it’s RIDICULOUS!”

So, what sparked these histrionics? China let its currency slip 2% against the dollar. Donald’s notion is that the Chinese and Japanese and other nations that devalue their currencies are wealthier and more competitive every time they debase their currency, and, concomitantly, we’re weaker. China, in Trump’s view, gets away with this master stroke because “they have no fear of us.” The implication is that they couldn’t get away with anything this dastardly if HE, The Donald, was in charge.

Let’s analyze this. In fairness, there have been many protectionists before him using the same arguments, and devaluation is definitely a form of protectionism. If you weaken your currency, citizens in your country lose purchasing power and can no longer afford to buy as many better quality goods from other countries. Lowering the value of your money is the equivalent of slapping on a higher tariff on imported goods. It diminishes trade and deprives your citizens of goods that they could otherwise afford to buy.

In other words, when you devalue your currency you move to impoverish your citizens. If devaluation worked to make your country stronger, Argentina would be the economic power house of the world economy and not the economic basket case it is.

Of course, his idea is that the weaker your currency, the cheaper your exports, and the more you export the more jobs are created in your export industries and that stokes the economy and everybody’s happy.

Let’s look at how that would play out if the U.S. devalued the dollar. Right now we have a strong dollar, meaning that it’s appreciating vis a vis most other currencies. King Dollar, as Larry Kudlow terms it, means we are still the major reserve currency on the planet. So central banks around the world keep mass quantities of dollars on hand to store value and use to support international trade and buttress their own currencies if there’s a run on them. Also, many private citizens hold dollars to make sure they have a stable supply of savings; money that they can use when necessary; money that others will take in payment no matter what the circumstances are.

When we send dollars abroad to be used for these purposes we get paid in real money in return. This is money we can use to buy things with. In other words, we send them paper to put in vaults or stuff in mattresses and they send us goods and services. You can’t beat a deal like that. But if our currency were to get shaky, i.e., were to get devalued, foreign banks and other citizens will send those goods and services to other countries to use their paper as a reserve currency.

The problem with Trump’s policy of beggar thy neighbor, something that’s been Trump’s life work, is that eventually you run out of neighbors to beggar. Hence the consensus view of economists that the Smoot Hawley Tariff was a major cause of The Great Depression.  Some say THE major cause.

What we need to work our way out of deficit and job problem is growth, preferably 4% or more a year growth, and, to quote Larry Kudlow: “Trump’s agenda of trade protectionism, dollar devaluation, and immigrant deportation is completely anti-growth.”

The economy is completely globalized. The United States has to compete in the global market for capital and labor. Trump’s policies don’t fit. To grow our economy, we need to trade, maintain a strong dollar, and build a new legal immigration system.

Trump, the economic illiterate, is the wrong man for the job.

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August 5, 2015

Wednesday Open Thread (Grexit Follow-up Edition)

  7:00 am

This is an Open Thread: Yada, yada, yada …

Conversation starter: Most Europeans Want Greece Gone

YouGov polls show that a) Most Europeans would like to see Greece out of the Eurozone; and b) Most think they will be gone in five years.

The question asked in the poll was “Would you prefer Greece to leave or stay part of the Eurozone?” and although Germans unsurprisingly feel most negative towards Greece, a majority in all countries polled disapproved of the recent bailout deal, and would prefer the debt-ridden country to leave the common currency.

Greeks1

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July 29, 2015

Wednesday Open Thread (Rouble Collapse Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: To continue on our economic scare-stories theme this week, today we’ll visit Russia. This is from a Financial Times newsletter, so you may not be able to access it unless you’re registered with FT (reg is free for the level of access I have).

The Russian rouble fell past Rbs60 to the dollar for the first time since March this morning. The dollar has climbed by 1.4 per cent against the rouble today, according to Bloomberg data.

The rouble is the world’s second worst performing currency in the last three months. But it could have a lot further to fall, writes Joel Lewin.

Rather ominously, Commerzbank strategists warn:

The rouble weakness almost reminds us of December last year when the currency was at risk of collapse.

Back then the currency fell to a record low of almost Rbs80 per dollar, and the odds are stacked heavily against it once more.

Clearly, the oil price has a lot to do with this. The price of Russia’s lifeblood, Brent crude is down 1 per cent again today, and has slumped 20 per cent since the start of May.

Western sanctions and the weak currency have hit confidence. Retail sales fell 9.4 per cent in the second quarter and the economy more than likely fell into recession, contracting as much as 5 per cent.

To fight this, the Central Bank of Russia would ideally cut rates hard from the current level of 11.5 per cent when it meets this Friday, but analysts reckon the weakening currency is tying its hands, forcing it to move relatively slowly. Analysts expect a snip of 50bp.

Commerzbank strategists write:

Continued currency weakness is the last thing the Russian central bank needs at present. It has been fighting high levels of inflation (caused by the rouble depreciation at the end of last year) and as a result raised interest rates. As the situation seemed to improve at the beginning of the year it lowered interest rates notably. Further cuts are expected. Should the rouble remain under pressure thus fuelling inflation again these plans would be at risk.

BNP Paribas FX strategists write:

in its last monetary policy council statement in mid-June, the CBR warned that “the potential of monetary policy easing [would] be limited by inflation risks in the next few months”. Recent developments appear to justify these concerns.

the CBR’s growth assessment is likely to remain rather gloomy. June real sector indicators showed some stabilisation, but, in our view, it is too early to state conclusively that growth is close to bottoming out

rouble

This graph is Roubles per dollar over the past ninety days.

 

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July 28, 2015

Tuesday Open Thread (Chinese Stock Market Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: As of a few weeks ago, it looked like the Chinese government had managed to revitalize their collapsing market. Then yesterday, the stuff again hit the fan.

First, the basic facts from The Globe & Mail:

Chinese shares slid more than 8 per cent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing’s efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June. […]

The CSI300 index of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 per cent to 3,818.73 points, while the Shanghai Composite Index lost 8.5 per cent to 3,725.56 points.

China’s market gyrations have stoked fears among global investors about the broader health of the world’s second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low.

Then, Financial Times offers their advice, which is pretty much that the government should keep its hands off.

Worse, the behaviour of the stock market has scotched the idea that China’s rulers are relaxed about ceding control to market forces. The apparent blessing they bestowed on the boom, and the efforts they made to provide a floor to prices, suggest the market is dictated more by the whims of the state than by anything objectively economic. The government — via the Securities Association of China — even appeared to signal a target for the Shanghai Composite of 4,500.

Having appeared to backstop the market, there will be a price to pay should Beijing now step away. By some estimates, more than RMB3.5trn ($564bn) of debt is linked to speculation on shares. A few more days like Monday and the damage to household balance sheets could take a heavy toll on the economy.

But the greatest harm would be psychological. Having for so long appeared able to steer the economy where they wanted, China’s leadership would be forced to concede a clear limit to its powers. This could deal a severe blow to economic confidence at a time when the economy is already slowing.

Nevertheless, concede it must. There is no way to tell in advance how much the authorities must buy to stabilise share prices. Investor confidence premised wholly on state support vanishes as soon as the government stops buying. In the meantime, the longer that the market is at risk of haphazard interventions, the more that the planned shift towards market-based finance is set back. Restrictions on trading have already served to annoy international investors, and undermined efforts to turn the renminbi into an international reserve currency.

Finally, CNNMoney looks at how the US could be affected.

The fear is that China will pull other major economies — including the U.S. — down with it. That would be scary given how slowly the global economy is currently growing and how little ammo governments have left to jump start business.

“We need all the growth we can get. A slowdown in China wouldn’t help,” said David Joy, chief market strategist at Ameriprise Financial.

Ways China’s problems could hurt the US economy:

1. Trade slowdown: Foreign trade is the most direct link between the U.S. and China. Over the next two years, U.S.-China trade is projected to surpass U.S.-Canada trade as the largest in the world, according to State Street Global Advisors.

But if China slows drastically, it will lose its appetite for foreign products, including those made in America. […]

2. American business hit: Pockets of the U.S. stock market are exposed to China’s troubles. That’s because 40% of the revenue generated by S&P 500 companies comes from overseas. […]

3. China’s coming financial crisis? China’s economic growth has partially been fueled by an explosion of debt. Now that its economy is slowing, there are concerns about toxic loans could trigger a financial crisis there that could spread around the globe — much like what happened in 2008 with bad U.S. mortgages.

“A financial panic…could potentially plunge the world into recession, particularly if it spread throughout Asia,” said George Hoguet, global investment strategist at State Street Global Advisors.

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July 27, 2015

Monday Open Thread (Return of the Greeks Edition)

  7:00 am

Open threads can be used for discussing any topic you choose (no such thing as off-topic). Please try to keep off-topic comments here rather than on other threads.

Conversation starter: In case you thought the Greek economic clown show was over – nope, it rolls on and on.

Reports out of Athens are that the left wing of the ruling party tried to execute a seizure of the Bank of Greece’s reserves, a deal with Russia, and a return to the drachma.

From Reuters:

Some members of Greece’s leftist government wanted to raid central bank reserves and hack taxpayer accounts to prepare a return to the drachma, according to reports on Sunday that highlighted the chaos in the ruling Syriza party.

It is not clear how seriously the plans, attributed to former Energy Minister Panagiotis Lafazanis and former Finance Minister Yanis Varoufakis, were considered by the government and both ministers were sacked earlier this month. However the reports have been seized on by opposition parties who have demanded an explanation. […]

In an interview with Sunday’s edition of the RealNews daily, Panagiotis Lafazanis, the hardline former energy minister who lost his job after rebelling over the bailout plans, said he had urged the government to tap the reserves of the Bank of Greece in defiance of the European Central Bank.

Lafazanis, leader of a hardline faction in the ruling Syriza party that has argued for a return to the drachma, said the move would have allowed pensions and public sector wages to be paid if Greece were forced out of the euro.

“The main reason for that was for the Greek economy and Greek people to survive, which is the utmost duty every government has under the constitution,” he said.

Financial Times adds in re Russia (quoted from Forbes):

Mr Lafazanis visited Moscow three times as Mr Tsipras’s envoy after Syriza came to power in January. In return for signing up to a new gas pipeline project, he hoped for at least €5bn in prepayments of gas transit fees, according to people briefed on the initiative. But the Russians rejected the deal the week before the EU summit.

“It was all a fantasy,” said a senior Greek banker. “The Left Platform’s dreams of free gas and a Russian-backed drachma have crumbled away.”

Forbes goes on to note that it is questionable at best that the pipeline will ever be built, anyway.

I’m glad the Greeks are back — they’re so entertaining.

 

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April 20, 2015

World Order Once Again Dissolves

  6:22 pm

The earlier individual civilizations of this planet constantly went through cycles of various kinds including a general “order” of the forces at play in them.

We have for some recent time now had a planet-wide “world order” as communications and transportation innovations eliminated the earlier physical boundaries between hitherto distant and separated civilizations.

Although one can describe the world in terms of various cycles, including those of technology, climate, sociological relationships, health, demography/migration, religious belief and so on, the nation-states which arose from innumerable nomadic tribes, and the notions of power and aggression, have, in recent centuries, created the modern versions of a so-called world order.

There seems to be, in terms of this particular notion of a “grand” world order, alternating cycles of integration and dissolution which evolve over several decades each, and which serve as clarifying markers for their times.

Those who are now sixty years old or older grew up in a period of post-World War II integration of a new order resulting from the aftermath of World Wars I and II, just as the previous world order was a dissolution following the upheaval of the Napoleonic wars in Europe and the colonial “possessions” of European states around the world.

There has been an a mega-political process going on now for many years — a dissolving of the attempt to create a lasting order in Europe, the western hemisphere and Asia. The United States has played a certain and growing role in the ordering of the world for the past one hundred and fifty years or so. Clearly, the population giants of China and India are now asserting their place more aggressively as this old order dissolves. Other nations, including Brazil, Japan, Indonesia, and Russia, are asserting themselves by virtue of their large populations and growing economic market share of world trade. But this transformation is no longer limited to nation states, just as the earliest transformations were not limited to regional tribes. In the latest dissolution, we observe
transnational economic entities such as the European Union and OPEC; international ideological entities such as Islamic jihadism and radical environmentalism; and international regions such as South and Central America, and the trans-Pacific area, attempting to take a significant part in the creation of a new planetary order.

International organizations such as the United Nations, the World Court, and regional military alliances increasingly appear unable to bring any true enduring cooperation in an emerging new world order (whatever it is to be). The most dynamic factor of the modernization of the world, democratic capitalism, seems momentarily frozen in the face of aggressive new forces.

In the period after 1945, and again in 1990, there was a provisional belief in the West that first, fascism, and second, communism, both cruel and totalitarian phenomena, had been temporary, and were now “overcome.”  It seems, as their malign offspring reappear in the world, this was an over-optimistic conclusion.

The “level” of the world, as philosopher Ortega y Gasset described it in 1928, does continue to rise because of technology and invention (human beings live longer; more persons are fed; life is more varied), but the state of the world (its “order,” if you will) has seemed to become more uncertain and perilous.

It has taken some time, especially for the post-war generations in the West, to understand this fully. For many of these generations, in fact, they even now cling to a belief in the old order and its “comprehensible” optimism, security, rationality and reassurances — and that it can somehow be restored.

Daily events all over the globe, and even at home, however, signal another kind of process is at work. It’s time for some new thinking.

——————————————————————————————
Copyright (c) 2015 by Barry Casselman. All rights reserved.

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February 8, 2015

The Latest on Greece

  5:11 pm

Alan Greenspan said today that the departure of Greece from the Euro is pretty much inevitable.

The former head of the US central bank, Alan Greenspan, has predicted that Greece will have to leave the eurozone.

He told the BBC he could not see who would be willing to put up more loans to bolster Greece’s struggling economy.

Greece wants to re-negotiate its bailout, but Mr Greenspan said “I don’t think it will be resolved without Greece leaving the eurozone”.

Earlier, UK Chancellor George Osborne said a Greek exit would cause “deep ructions” for Britain.

Mr Greenspan, chairman of the Federal Reserve from 1987 to 2006, said: “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.

Further, he said that the Euro itself cannot survive unless there is political integration of Europe (something he of course knows ain’t gonna happen).

“The problem is that there there is no way that I can conceive of the euro of [sic] continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

I mostly agree, but then I’m very much a Euro-skeptic.

The BBC, which definitely isn’t, predictably disagrees in an attached analysis.

Alan Greenspan has long been a critic of the European single currency. Now, the 88-year-old former chairman of the US Federal Reserve has repeated a claim that nothing short of full political union – a United States of Europe – can save the euro from extinction.

Given that few (if any) of the current 19 sovereign governments which make up the eurozone would choose to create such an entity at this time, that means – for Greenspan at least – the euro is doomed.

Before all that, though, he foresees Greece quitting the single currency, but the euro surviving intact. Grexit, he says, is more manageable now than it would have been when Greece got its first EU bailout in 2010.

But Greenspan has been badly wrong before. He said markets (and banks in particular) would always act rationally and prevent self destructive crashes. Then the financial crisis happened in 2008 – plunging the world into a massive recession. He did, though, admit his error.

The last paragraph, of course, is a cheap shot to defend the BBC’s enthusiasm for European integration. I will be eagerly awaiting the BBC’s list of economic forecasters who have never been wrong. In the meantime, here’s mine:

1.
2.
3.

Greece, meanwhile, seems to think the solution to their problems is for Germany to pay off Greece’s debts via reparation payments for WW2.

Greek Prime Minister Alexis Tsipras said Sunday the country had a “moral obligation” to claim reparations from Germany for the damages wrought by the Nazis during World War II.

Greece had “a moral obligation to our people, to history, to all European peoples who fought and gave their blood against Nazism,” he said in a key address to parliament.

[ …]

Tsipras’s anti-austerity Syriza party claims Germany owes it around 162 billion euros ($183 billion) — or around half the country’s public debt, which stands at over 315 billion euros.

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January 25, 2015

Left-Wing Populists Win in Greece

  3:44 pm

I’ve posted a couple times previously on the rise of populist parties in Europe, which is semi-off-topic for this blog, because … well because it’s both important and interesting, and because I see it as very similar to developments here (the Tea Party and Occupy, and a broader-based feeling among many that the average person has been forgotten).

The populist parties in Europe are of both the right and left, and in a few cases fascist. But they have in common a desire to do away with rule by the Elite. As an item posted yesterday in Weekend Miscellany said:

Political earthquakes could be in store for Europe in 2015, according to research by the Economist Intelligence Unit for the BBC’s Democracy Day.

It says the rising appeal of populist parties could see some winning elections and mainstream parties forced into previously unthinkable alliances.

Europe’s “crisis of democracy” is a gap between elites and voters, EIU says.

Today, it appears that the first of maybe several shoes has fallen, as a leftist-populist party, Syriza, appears to have won the election there. Per AP:

Official results from 17.6 percent of polling stations counted showed Syriza with 35 percent and Samaras’ New Democracy with 29.3 percent. An exit poll on state-run Nerit TV projected Syriza as winning with between 36 and 38 percent, compared to ND with 26-28 percent.

Earlier projections had given Syriza 146-158 seats in parliament, and New Democracy 65-75 seats.

151 seats would give Syriza a majority in parliament. Even if they fall a few seats short, there are communist and socialist parties that would likely ally with them. The consequences of this sort of revolt, if it spreads as EIU speculates it might, would be enormous for the European Union, and therefore for the US.

I think it also offers a lesson for the 2016 election in the US, the subject of this blog. Assuming the Democrats go ahead with their coronation of Hillary Clinton, they will be extremely vulnerable to an attack by the Republican candidate based on appeals to small business, blue-collar workers, suburbanites, soft libertarians, socons, and others who feel oppressed by big government and/or tired of condescension and contempt from the media, urban elites, and establishment politicians.

Clinton and the Democrats will be vulnerable, that is, unless the Republicans nominate a candidate equally old and establishment-based and incapable of running a credible populist campaign.

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November 28, 2014

The UK Takes a Different Route

  8:06 pm

In sharp contrast to President Obama’s actions earlier this week, Britain’s Prime Minister proposed new rules to limit immigration (mostly by limiting welfare benefits to immigrants) and threatening, more openly than in the past, to take his country out of the EU if his actions are not accepted by that body.

David Cameron has urged other EU leaders to support his “reasonable” proposals for far-reaching curbs on welfare benefits for migrants.

Britain’s prime minister said lower EU migration would be a priority in future negotiations over the UK’s membership and he would “rule nothing out” if he did not get the changes he wanted.

Under his plans, migrants would have to wait four years for certain benefits.

Brussels said the ideas were “part of the debate” to be “calmly considered”.

Mr Cameron said he was confident he could change the basis of EU migration into the UK and therefore campaign for the UK to stay in the EU in a future referendum planned for 2017.

But he warned that if the UK’s demands fell on “deaf ears” he would “rule nothing out” – the strongest hint to date he could countenance the UK leaving the EU.

Details on Cameron’s proposals are at the link.

As with Obama’s actions, domestic political considerations are playing a big role here. David Cameron has an election coming up next year with a danger that he may lose much of his support on the right to the UK Independence Party.

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September 18, 2014

Jungle Creatures

  4:50 pm

The cinema has not usually been a source of truly profound utterances, but there is a line said by Eleanor of Aquitaine (Katherine Hepburn) to her husband Henry II (Peter O’Toole) in playwright James Goldman’s great film “The Lion In Winter” in which she says, “We are jungle creatures, Henry, and the dark is all around us.”

The first time I saw that film, and watched that scene, I knew I had heard something very powerful and true. Years later, it still echoes as I read the latest headlines about the enduring barbarity in the world in which we all live.

I am talking about the “civilization” of the species known as human beings. I know many of my readers will protest that I should not include most of Western “civilization” which includes Europe and North America, but why should I not include them?

Yes, democratic capitalism has advanced human society beyond the “naked” tribalism which has long existed in much of the world, and still prevails over a great portion of the human population. But more than two hundred years after democratic capitalism emerged in the West, and prevailed among some persons in some areas of the world, astonishing levels of barbarity survive and reappear in its midst.

The 20th century was among the most barbaric in all of recorded human history, and in spite of so many advances in technology, millions were unspeakably murdered in some of the previously most advanced societies. The 21st century, now in its early years, continues with more of the same. This is the century of the internet, astounding medical breakthroughs, and the rapid transformation of science fiction into science fact. And what do we also have? A worldwide religious war of savagery and intolerance. and a “United Nations” which supports and celebrates the denial of human rights, while it promotes conflict and hatred. In less than a century after they occurred, Europe has a case of amnesia about its Holocaust, and Russia has a case of amnesia about the murder of millions of Ukrainians by Stalin.

The world seems determined to repeat its past depravities again and again.

I know the reader would prefer a message of a more hopeful and positive world ahead. I would much prefer to write it.

But we are jungle creatures, and the dark is all around us.

__________________________________________________________________________
Copyright (c) 2014 by Barry Casselman. All rights reserved.

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