Insanity is doing the same thing over and over again and expecting different results. The last four years of Bush economic policy has been to weaken the US dollar, hoping that it would make US manufactured goods cheaper. The reverse has been the case, all it has done has been to make US imports more expensive. The problem is that there isn't strong demand for our most competitive manufactured export - aerospace - in a high energy environment. And yet the group think drum beat goes on.
What Newbury refers to here was an very interesting event that occurred Friday afternoon, twenty minutes before trading closed for a holiday weekend in China. The Chinese government apparently let the Yuan float relative to the dollar for the first time in a long time. China is facing inflation if they don't let the Yuan rise, and a downturn in demand if they do. It's a tough choice, but one that seems inevitable given Asia's dependence on US demand that appears softer everyday.
This reverse effect means that many of the actions which will ease the inflationary effect on oil, will exacerbate the inflationary effect on general consumer inflation. Instead of getting inflation across the board, the situation resembels the late 1920's when income for a broad section of the consuming public is falling, while prices continue to rise. The continued extension of easy credit, in both eras, allows this to continue longer than otherwise would be the case, but is creating a massive weakness in the financial system. It is not clear whether this weakness will rupture - you are only insovlent if someone calls you on it - but it is clear that this weakness will continue to pile up until such time as the basic monetary dynamic is resolved. Since nothing is being done to do this - instead we are seeing the equivalent of the "Smithsonian Agreement", to kick the can down the road a bit - it is almost certain that at some point in the not too distant future, some group will find a means to unilaterally exploit the common agreements not to crash the system.
Time is running out for a fundamental shift of policy, and since the US will not change before 2009, time is almost certain to run out.
Another economist is speaking out about the risks of deflation and the similarity of current economic conditions to the conditions of the late 1920s. In other words, the US risks a new Great Depression where income falls, credit continues to rise until the consumer has no more credit to buy. Then demand crashes and the economy spirals into a deep hole. Bush just may have a similar legacy to that of Herbert Hoover who has been blamed for the Great Depression.
Monetary End Game | China's Currency
Monetary End Game Continues
By Stirling Newberry in Economics on Sat Apr 30th, 2005 at 08:14:32 AM PDT
Insanity is doing the same thing over and over again and expecting different results. The last four years of Bush economic policy has been to weaken the US dollar, hoping that it would make US manufactured goods cheaper. The reverse has been the case, all it has done has been to make US imports more expensive. The problem is that there isn't strong demand for our most competitive manufactured export - aerospace - in a high energy environment. And yet the group think drum beat goes on.
All floating the Yuan - or really semi floating it, since the internal Chinese banking and equities market will still be, in reality, off limits to foreigners beyond small percentages - will accomplish is allow the Chinese to buy more oil. The US will still import as much from China, or some other low wage producer, and consumer prices will rise in the US.
More over, it won't help the other Asian economies by that much, since they have huge dollar exposure. They may get more dollars, but these dollars are going to buy increasingly less.
What the world needs to wake up to is that we are watching the death throes of a monetary order, just as the early 1970's were the death throes of the Bretton Woods order. In the late 1960's and early 1970's gold was the lever, because gold was both currency - in transactions between nations - and a store of wealth. When these two functions of money are combined, there is a squeeze play possible - as the impulse to make currency less liquid as there is higher demand for it spirals out of control.
In our case the US has very unwisely decided to make houses the store of value for the middle class, and houses are based on the ability to transport to them. Since housing is also the basis of our currency - in terms of assets on the books of banks - the same problem is running in reverse - the more inflated our houses become, the more money supply can grow. The less liquid the economy is, the more money it has. This generates upward pressure on home prices and starts the cycle over again.
To an Austrian economist this would be called "inflation". I don't agree with the usage, since it does not fit into a macro equilibrium. Increased money supply can produce devaluation as well as inflation. Devaluation is when more and more of the currency is stored as wealth, and the marginal utility of savings drops. As Asia has become glutted with dollars for their current financial system, the value of the dollar has dropped.
The old gold bugs think that this will always show up as gold, because they worship it as an icon. The reality is slightly different, money is what the producer who has glutted their consumption needs will take as a store of wealth. Money, at the moment, is what an Arab prince will take for a barrel of oil. This means that whatever the ultimate unit of wealth is - either what that producer supplies or what that producer demands - is where a monetary system has leverage.
In the early 1970's there was a wealth demand leverage in gold. In the present there is a wealth supply leverage in oil. The difference means that rather than increasing consumer inflationary pressures across the board, since in 1968-1973 increased gold costs lead to increased trade costs and inflationary pressures - there is in the present a deflationary spiral of costs, with an inflationary spiral of the inputs to wealth preservation in the US and distortion of the distribution of pricing power. Since trade inputs are going up more slowly than protected economy inputs, gasoline is both cheap and expensive at the same time: it is cheap as a wealth preservation input, but it is getting more and more expensive as the lubricant to economic activity.
This reverse effect means that many of the actions which will ease the inflationary effect on oil, will exacerbate the inflationary effect on general consumer inflation. Instead of getting inflation across the board, the situation resembels the late 1920's when income for a broad section of the consuming public is falling, while prices continue to rise. The continued extension of easy credit, in both eras, allows this to continue longer than otherwise would be the case, but is creating a massive weakness in the financial system. It is not clear whether this weakness will rupture - you are only insovlent if someone calls you on it - but it is clear that this weakness will continue to pile up until such time as the basic monetary dynamic is resolved. Since nothing is being done to do this - instead we are seeing the equivalent of the "Smithsonian Agreement", to kick the can down the road a bit - it is almost certain that at some point in the not too distant future, some group will find a means to unilaterally exploit the common agreements not to crash the system.
Time is running out for a fundamental shift of policy, and since the US will not change before 2009, time is almost certain to run out.
The New York Times
April 30, 2005
A Currency Afloat (for All of 20 Minutes)
By KEITH BRADSHER
HONG KONG, April 29 - The Bush administration has been pressing the Chinese government for years to allow its currency, which is pegged to the dollar, to trade more freely. It got its wish on Friday - but only for 20 minutes.
A freely trading Chinese yuan would probably rise in value against the dollar, making Chinese exports to the United States more costly. That, in turn, would give relief to American manufacturers battered by low-priced Chinese goods as the American trade deficit has been growing faster with China than with any other country. It would also be a political victory for the Bush administration.
Until this afternoon, China had ignored the demands. But as traders drifted back to their desks from lunch in Asian financial capitals on Friday, the yuan suddenly broke out of its prescribed trading range. No one knows for sure if the move was deliberate or a result of a technical glitch.
But regardless of whether it was a Chinese test of their ability to manage a rising yuan or simply a case of the Chinese central bank briefly failing to buy enough dollars to keep supporting the American currency, traders noticed it and the prices for many other currencies began to shift in response.
The yuan climbed until it took 8.270 of them to buy a dollar instead of the usual 8.276. That difference, of only six thousandths of a yuan, might not seem like much of a change.
But it came on the eve of a weeklong holiday in China and at a time of intense speculation that a Chinese revaluation of the currency, which has been fixed by Beijing against the dollar for years, might be imminent. The brief appreciation, a hint of further rises if the yuan were to float, was enough to roil currency markets around the world.
The dollar fell and the euro, yen and gold rose as investors placed bets that if China let the yuan rise against the dollar, other countries would also permit their currencies to appreciate against the dollar because their exporters would no longer be so fearful of being undercut by Chinese rivals.
Economists said it was almost impossible to discern from the swirl of rumors on Friday whether China was on the verge of finally allowing the tidal wave of investment flowing into the country to push up the value of the yuan.
"I wouldn't be surprised if we woke up to an announcement this weekend; I wouldn't be surprised if they waited until this summer," said Jonathan Anderson, an economist at UBS.
Traders used to seeing a flat line on their screens day after day for the value of the yuan were especially transfixed by the brief surge because it came the same day that a state-run newspaper, The China Securities Journal, ran an article on its front page that seemed to depart from previous government statements ruling out any shift in currency policy soon.
The article asserted that China's financial system and currency regime were finally ready for the yuan to rise, provided that the rise was only a few percentage points.
The People's Bank of China, the central bank, issued a public denial by midafternoon that it had received any formal instructions from the country's political authorities to push the yuan to a new level. But the brief movement of the yuan prompted some economists to say that China may have been testing its ability to manage a small fluctuation in the value of its currency, as a possible preparation for managing an eventual change in the yuan's value.
Some currency traders said a more likely explanation was that a mistake was made by a Chinese employee, who may have typed a wrong number onto the government's official currency posting. "We interpret it as a technical glitch, rather than an imminent revaluation," said Steven Englander, a currency strategist at Barclays Capital in New York.
Frank Gong, an economist at J. P. Morgan, said that the central bank had tolerated tiny spurts in the yuan's value to 8.275 for a few minutes over the last decade. But he said it was highly unlikely that Chinese authorities accidentally let such a large spike in value occur on Friday, especially at a time of intense speculation about the future value of the yuan.
"They chose that timing to test the market," he said, adding that he thought China might revalue during the coming holiday week.
Beijing authorities pegged the currency at 8.3 to the dollar toward the end of the Asian financial crisis in 1998 and have since kept it in a tight trading range around that level. China's foreign exchange reserves soared by $200 billion last year alone as the People's Bank of China intervened heavily in currency markets, issuing yuan and buying dollars to keep the yuan from breaching the top of the narrow trading range, 8.276 to the dollar.
The Bush administration has been calling with increasing outspokenness in recent weeks for China to let the currency rise, which would make imports cheaper in China as well as make China's exports less competitive in the United States and other overseas markets. European and Japanese officials have supported Washington's position but have been less vocal.
Many economists within China, including some government economists, have been warning that the country risks serious inflation if it continues printing ever more yuan and exchanging them for dollars in an effort to hold down the value of the yuan in currency markets.
The Chinese government has tried a variety of measures, with mixed success, to buy back the yuan that it is issuing in its currency market interventions, most notably by selling bonds to the public and by reducing credit to the banking sector.
But political leaders in China have been leery of moving too quickly to permit an appreciation of the currency, known either as the yuan or the renminbi. They fear that a swift rise might lead to layoffs at export-oriented factories and job losses in the countryside as cheap food from the United States and elsewhere would flood in.
In interviews at the Canton Trade Fair in Guangzhou on Thursday, executives from companies across China said that a higher yuan would cut into their profit margins. But they differed, depending on their industry, as to whether a stronger yuan would prompt overseas buyers to shift their purchases to other countries.
Ma Jilin, the general manager of the Zibo Shuangfeng Ceramics Company in Shandong Province in northeastern China, said that a 10 percent rise in the value of the yuan - larger than most economists expect - would cause many restaurants and other customers to stop buying brightly colored ceramic plates and mugs from his factory and take their business to Malaysia or South Korea.
Wages for factory workers have risen 15 percent in the last year because of labor shortages, electricity prices are rising, shipping costs are climbing and high-quality clay is in short supply, he added.
"If the renminbi rises, that will make it very difficult for a lot of factories," Mr. Ma said.
But Yan Jun, the general manager of the Jinxiang Bristles Industrial Company in Hunan Province in southern China, said that a rising yuan might not have that much effect on overseas demand for his company's pig bristles, used for paint brushes. In a country where pork is practically a staple, pig bristles are so plentiful and inexpensive that any threat comes not from other countries' pig bristles but from synthetic bristles.
The synthetic bristles cost one-eighth as much as even the Chinese bristles, and the main issue in the industry is whether buyers will decide to accept the inferior quality of the synthetic materials, in which case the value of the yuan will be irrelevant, Mr. Yan said.
Even before Friday's brief rise in the yuan, The China Securities Journal report prompted a rise in the value of the euro and especially the yen, with the yen climbing 1.16 percent, to 104.83 to the dollar in New York trading.
The State Administration of Foreign Exchange, which manages the country's currency reserves, issued a statement on Friday, outlining some administrative changes in the handling of foreign currency transactions within China and saying that it wanted to "provide better conditions in the foreign exchange market." The statement gave no specific clues about the value of the yuan.
Copyright 2005 The New York Times Company
No comments:
Post a Comment