The 'standard theory' is, that high inequality in a country leads to high savings, because the propensity of rich people to save is higher according to the 'standard theory' than for low income people. Lefties in Germany make always inequality responsible for the sluggish consumption, but perhaps this theory is indeed wrong and we should increase inequality to get more consumption. Now, Jerome said, normal people borrowed to keep their standard of living with declining median incomes. But as the economy overall grew, this borrowing could be just a replacement for a different income distribution, e.g. the desire to keep the standard of living (note: to borrow for that is as well a choice, and an unusual one) would not require to borrow more than the extra savings of the rich. The negative savings rate in the US is only explainable, when rich people didn't save much, either. For the high trade deficit, the lack of huge savings from the better off maybe the most striking point. But the historic crisis that is the example for the christianisation of the anglo-disease, describes a situation, in which one sector, that doesn't employ many people for its share of output, is over competitive on the international market and 'crowds out' other branches in the same country from the international market, by leading to a largely overvalued currency. But what was the product the US exported so successfully, that the dollar has become overvalued? IOUs! And who bought that paper, in a way, that the dollar went up? Emerging markets, with their surplus savings. Indeed European banks have as well lots of US debt, but they didn't really buy that paper with European savings. They borrowed dollars to purchase these papers, they were just dealers, no big net buyers. This actually makes sense, if you expect, that the US would inflate out of any debt crisis. Then US real estate would become more valuable in dollar terms, so no defaults on the now so toxic debt. And as the European banks were not net long in the dollar, the decline of the dollar wouldn't be a problem for them, either. When a central bank keeps its interest down, then this should lead to long term inflation. Long term inflation expectation should lead to high long term interest rates. The funny thing is, that this didn't happen. The emerging markets bought the $ IOUs despite the expectation, that they would lose money on them - the reasons maybe various or not, but that they bought this IOUs for low interest rates, is pretty clear. The expectation is, that this should lead to a losses mostly for the emerging markets, not the US.
What went wrong in the US then? I think the most important question is, if houses are counted as consumption or as investment. If they are investment, then there is no problem. The houses, that were bought with the borrowed money do still exist. If they are investment, they should generate enough wealth to pay for the debt, people have loaded on the houses. If houses are consumption, their prices should be in the CPI and Greenspan should have raised rates. His argument for not raising rates is, that the long term rates - on which the central bank has no direct influence - were low, despite his low short term rates. Increasing the short term rates would have led to an inverse interest structure. He could have accompanied a rise in the rates with a clear statement, that he intends to keep rates high for a long term. But this would have required a brave decision. Greenspan is a coward, as obvious by his constant hedging of nearly all of his statements. He says about everything this and the opposite. As well the Fed has not even only the goal to keep inflation down, but as well to keep employment up (indeed many lefties in Germany cheered Greenspans low interest rates). So the Fed is very willing to create bubbles, when this helps to keep employment high. The lack of a social net, doesn't allow the US to have recessions with longer term unemployment as high as in many European countries. The normal gov't is paralyzed by the believe it is always and ever only the problem and never the solution. So the Fed is the only actor to perform a full range of gov't responsibilities (as not even Americans are libertarian enough to accept mass starving), that it simply cannot fulfill with its very limited tool box.
But while Greenspan's failure to act is important, the Fed wasn't the only institution that is responsible. One source of the trade deficit of the US in last years were already the high commodity prices of a more and more crowded earth. This strikes in a double way. Not only directly via higher import prices, but as well on the housing market, devaluing the worth of houses as investment, when they are huge, insufficiently insulated, and far away of other social infrastructure people need in their daily lives. The channels through which the emerging markets financed the US was mostly by buying treasuries and somewhat by buying Fanny&Freddy guaranteed mortgages. So while the US could IMO do little to prevent to have a CA deficit against the mercantilistic emerging markets, she had the possibility to decide where to put the money. The money was funneled via F&F into the housing market, or used for consumption by the US gov't. If the national debt of the US would have been used to invest into something useful, e.g. energy independence, she would now easily be able to finance the interest on the debt. But instead tax reductions and wars were financed.
Now to some explicit points of your diary:
For me, mentions of "the last 30 years" in recent commentary are becoming synonymous with Friedmanomics, the Reagan/Thatcher revolution and the dominance of Market Fundamentalism as an ideology.
However, what is clear from what he writes is that free movement of capital is a contributing factor to international financial crises. It has to stop.
"spending binge"
He implies that the emerging economies shifted into a large surplus of savings over investment after 1997. In fact these economies were saving heavily through the 1980's and early 90's.
Re balance picture: Note that this is savings relative to world GDP. Part of the increase may be due to the fact, that emerging Asia has increased its share of world GDP in that time. Perhaps the savings surplus became simply too big to absorb. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
I don't think anybody disagrees with Wolf that the Chinese exchange rate policies helped inflate the bubble. But bubbles inflate with or without help from abroad - that's in the nature of almost all systems with limited information and delayed feedback. So the interesting question is not so much by which precise mechanism the bubble was inflated; rather, it is a question of who - if anyone - could have deflated it in time to minimise the fallout.
Wolf's (implicit) answer is that Chinese policy meant (at least partially) that the US government couldn't have deflated the bubble in time to avoid nasty fallout. Jerome's and Bruce's answer is that the US government could have deflated the bubble in time - but then they'd have had to deal with the fallout from the last bubble, which they deliberately did not deflate in time.
I.o.w., they made a conscious political choice to kick the can farther down the road rather than deal with the problems there and then. And if The Powers That Be are perfectly willing to make a bigger mess tomorrow in order to avoid dealing with the mess today... do you really believe that they wouldn't have found some other way to bubble up their economy if China hadn't played ball?
Also, I'll PN you on this:
The last 30 years were pretty good years for humanity. Global inequality was reduced by free markets, technology and knowledge spread around the world, the increasing dependency of others made wars far more expensive and very rare, except in those countries that took harly part in the international division of labour. So Thatcher and Reagan were the greatest politicians - ever?
I think that Grenada, Lebanon, El Salvador, Nicaragua, Libya, Iran, Panama, Iraq (twice - at least), Somalia, Sudan, Afghanistan (twice) and Serbia would disagree.
Not to mention East Timor, Palestine, Tchad, Liberia, Sierra Leone, Rwanda and a couple of other African countries whose names I can't recall off the top of my head.
One could, of course, argue that none of the above countries had joined the Washington Consensus (in fact, quite a lot of these wars were about forcing them (back) in line with the Washington Consensus. But I digress). But that would be akin to saying that the British Empire was a good thing for the colonies, because the colonies didn't fight wars against each other while under British rule.
And I take issue with your claim that global inequality declined. It is possible that global inequality between the countries within the Washington Consensus framework declined. But if so - and I am far from certain that it is so - this is more than offset by the explosive growth of truly destitute underclasses within Washington Consensus countries.
In fact, over this period, we saw slums and/or shantytowns springing up at an unprecedented rate in Palestine, South Africa, Indonesia, Russia and a couple of the countries on the above lists as well.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Which single country of those you name, is part of the international division of labour? And which war was about the Washington consensus? For sure none of the Iraq or Afghanistan wars, for sure not the Iran-Irak war, not the war in Sudan,... And rare is of course relative. We live for sure in peaceful times by historical standards. The overwhelming majority of people live in absence of war in their country.
But as far as I can tell, you don't actually disagree with Bruce that prudent US policy could have averted the crisis? Of course I don't disagree. But that doesn't mean, that the savings glut didn't exist. It is important to mention this, as there are many Chinese officials, who blame the US for their most likely currency losses on their reserves. I don't see how any country in the context of the current financial crisis can blame any other country for its own problems. All problems are made by the countries themselves. Does Wolf anywhere say explicitly, that the US couldn't do anything against that? As I see it, not in the exerpts presented by Migeru. The point that comes closest: the current banking and economic traumas should not be seen as just the product of risky monetary policy, lax regulation and irresponsible finance, important though these were. You see, 'just'. Not 'not'. And I guess there are other things. E.g. the 'culture of debt', the unwillingness to react on the action of other people,... and the actions of other people. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Also, GDP, as quoted in that Rosling presentation, is a self-serving measure which doesn't define well-being in any useful sense.
As an anecdotal data point I've known people who visit supposedly wretched and deprived third world locations and find that personally the people don't feel deprived at all - they have a strong culture and are more included and less alienated, not to mention happier, than Westerners are.
Imposing economic imperialism on the supposedly 'undeveloped' world doesn't necessarily count as a win just because the supposedly developed world can't imagine an alternative view.
Imposing economic imperialism on the supposedly 'undeveloped' world doesn't necessarily count as a win just because the supposedly developed world can't imagine an alternative view. Who is doing that in which way? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Economic imperialism is something the IMF has been doing for pretty much all of its existence, almost by definition.
Also, Rosling, by assuming that everyone wants to be like us - and if they don't, they should, because obviously we're better than they are.
All the rest of Rosling's figures are aggregates or averages, which can easily mask worsening conditions for the majority of the population.
Which single country of those you name, is part of the international division of labour?
Which international division of labour? Niceragua and Serbia were certainly parts of an international division of labour.
And which war was about the Washington consensus?
Nicaragua, Iran, Grenada, El Salvador, arguably Palestine, East Timor and Lebanon (if propping up WC supporting states count - Israel, Indonesia and Israel, respectively), arguably Serbia (depending on which historians you ask).
Two years after the invasion, there was no majority view of what the US action has been ... a Rescue Mission Ordained by God (the Gairy-ite position), a legal Intervention Sanctioned by the OECS (the position of anti-Gairy-ites who had fallen away from New Jewel), an Illegal Invasion overthrowing an Illegal coup d'état (the main New Jewel position) ... but an overwhelming majority of support for the action, whatever the action may have been. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Mike Bygrave: Where did all the protesters go? | World news | The Observer
Small armies of economists study these questions. In pursuit of the answers, I attended a lecture by Professor Robert Wade at the London School of Economics. He began with the usual depressing figures: 80 per cent of world income goes to the top 20 per cent of people while 60 per cent of the world's population have to make do with 6 per cent of the income. Then he moved on to 'the thunder and lightning of current debate': whether the situation has been getting better or worse over the past 20 years. His answer was twofold: we don't know for sure; but the balance of the evidence is, it's getting worse and inequality is increasing. It turns out the statistics relied on by the pro-globalisers, led by the World Bank, are suspect. There are different methods for determining global poverty and inequality and the answers you get depend on the techniques you use. The World Bank, Wade implied, may have chosen the one that supports its own neo-liberal agenda. 'The Bank is a very political institution,' he said.
Small armies of economists study these questions. In pursuit of the answers, I attended a lecture by Professor Robert Wade at the London School of Economics. He began with the usual depressing figures: 80 per cent of world income goes to the top 20 per cent of people while 60 per cent of the world's population have to make do with 6 per cent of the income. Then he moved on to 'the thunder and lightning of current debate': whether the situation has been getting better or worse over the past 20 years. His answer was twofold: we don't know for sure; but the balance of the evidence is, it's getting worse and inequality is increasing.
It turns out the statistics relied on by the pro-globalisers, led by the World Bank, are suspect. There are different methods for determining global poverty and inequality and the answers you get depend on the techniques you use. The World Bank, Wade implied, may have chosen the one that supports its own neo-liberal agenda. 'The Bank is a very political institution,' he said.
And Professor Rosling uses World Bank data for his neat graphical presentations. Of course you can argue that Professor Wade is political too (he very much appears to be).
I think poverty is hard to get good statistics on. Nobody measures it without having an agenda, and the poorest are the least likely to show up on routine measurements, the kind that Rosling loves. I would like to note that wealth has also turned out to be measured in fraudulent ways to serve political agendas.
I use my own poverty index, which is the number of apparently homeless I see in the streets. For example, by that measurement poverty has increased in Sweden the last twenty years. That average income and wealth also has increased (as Rosling would point out) only means that inequality has increased even more.
To be fair, if you should use Rosling to argue that there is less inequality between persons - not countries - you are better of picking when he looks at mortality rates for newly-borns. That is a measurement that is often connected to structural poverty. A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
Well, it is implicit in
In this world of massive savings surpluses in a range of important countries and weak demand for capital from non-financial corporations, central banks ran easy monetary policies. They did so because they feared the possibility of a shift into deflation. The Fed, in particular, found itself having to offset the contractionary effects of the vast flow of private and, above all, public capital into the US.
The Wolf/Bernanke argument is basically that China put the US in a no-win situation through its neomercantilist policies. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The Wolf/Bernanke argument is basically that China put the US in a no-win situation through its neomercantilist policies. Well, given his believe, that the only institution with a mandate to act is the Fed, he may be right. With the single policy tool of short term interest rates, there are not too much things the US could do. Of course the Fed has some regulative power, but given, that it was the goal to create a housing bubble, regulation would have been counterproductive. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
And, are you sure Wolf is wrong on that point?
Wolf isn't wrong to point out that there would have been a nasty recession. They had a very nasty bubble that burst around spring 2001. That bubble could have been deflated harmlessly, but a lot of people (Greenspan very prominently among them) decided that they'd rather make it bigger before it crashed. So if they hadn't inflated a new bubble, they'd have had to deal with the wreckage from the last one.
So he says the Fed initiated the bubble consciously to do the job of a dysfunctional regular gov't. Essentially Wolf says, the real gov't isn't the official administration, but the Fed.
That doesn't sound like an unreasonable political analysis. But the point is that whether or not the real government is powerless to fight a recession, inflating a bubble to obfuscate the wreckage from the popping of the last bubble is grossly irresponsible. Because it won't make the wreckage go away, it'll just hide it. So now they have to deal with both the wreckage from the tech stock bubble, and the wreckage from the Mother Of All Bubbles. Yeah, it bought them three to seven years - depending a bit on how you count. But at the cost of amplifying the problem greatly.
When a fuse blows in your house, you do not replace it with a string of copper wire - you find the faulty equipment and repair it. Unless, of course, you're Alan Greenspan.
And if you look at the timing it is clear that Bush wouldn't have been reelected if a nasty recession had hit in 2003. Real interest rates were negative in 2003-5, which resulted in a wave of remortgagings and home equity withdrawals. And then in 2004 you have USA Today: Greenspan says ARMs might be better deal (2/23/2004)
Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.
The Wolf/Bernanke argument is basically that China put the US in a no-win situation through its neomercantilist policies. Well, given his believe, that the only institution with a mandate to act is the Fed, he may be right.
Well, given his believe, that the only institution with a mandate to act is the Fed, he may be right.
If the income level is above a short period equilibrium level, its the lack of injections or rate of leakage that can be blamed for it dropping back to a lower equilibrium than someone would like to see ... but if its low propensity to consume because income recipients are trying hard to save, that does not work through a big "surplus of saving" working through a saving/investment market, it works through a drop in consumption directly leading to a drop in income.
Different propensities to save do not determine the aggregate saving level, it determines the distribution of the aggregate saving that occurs. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Which is the chicken and which is the egg is largely irrelevant: The US could have stopped the process at any time by running a responsible economic policy that would have been in the best long-term interest of the US population. China and OPEC could have stopped the process at any time, but it is not obvious that it would have been in their interest to do so. If your chief rival is ruining his own economy through grossly irresponsible policies and paying you to aid him in the endeavour, why on Earth would you want to stop him?
It's kinda like building a navy full of big metal coffins battleships, going to war, getting your navy wiped out and then blaming China for selling you the steel to build the ships with in the first place.
But absent the willingness to hand goods over in exchange for dollars, the US could not have sustained its trade deficit ... while given a willingness to hand goods over in exchange for dollars, the Chinese cannot help but accumulate "external saving", and the only question is in what form.
The reason that cause and effect is important is that efforts to change the outcome by modifying effects rather than causes will be as successful as trying to suppress a fever by breaking the thermometer.
If the US pursues policy to return its trade deficit to below its long term average growth rate, or China adopts a policy of demanding a larger share of products in return for products, the "saving glut" subsides precisely in line with the reduction of the systemic current account imbalance.
By contrast, China or the US attempt to directly halt the "accumulating of external saving" by China without changing the system current account imbalance, and all that can change is the form of the accumulation of external saving. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
What went wrong in the US then? I think the most important question is, if houses are counted as consumption or as investment. If they are investment, then there is no problem. The houses, that were bought with the borrowed money do still exist. If they are investment, they should generate enough wealth to pay for the debt, people have loaded on the houses. If houses are consumption, their prices should be in the CPI and Greenspan should have raised rates.
If they are investment, then there is no problem. The houses, that were bought with the borrowed money do still exist. If they are investment, they should generate enough wealth to pay for the debt, people have loaded on the houses.
If houses are consumption, their prices should be in the CPI and Greenspan should have raised rates.
I focus on this statement, because land is the basis of over 70% of "Anglo" money in circulation.
Land is a productive asset, as is the house built on it: the difference is that land does not depreciate, and it is also a Commons, but that is another story.
Now, if investment is about anything it is about acquiring ownership of a productive asset through a Property relationship.
The reason land is not consumption is that it has a "use value" that actually could be characterised as consumption. The purchase price of land is the net present value of future land rentals.
Yes, by all means include land/property rentals in an inflation index, but not the sale price of the productive asset: it's chalk and cheese.
The houses, that were bought with the borrowed money do still exist.
But to come back to the point of the Diary, Wolf's assumption is that in some way the "Savings Glut" is pre-existing money which has been lent to unwise property purchasers/ investors.
The chain of causality is the other way around.
Secured loans were made to by credit institutions to assist in property purchases, and due to the deficit nature of the money supply these interest-bearing loans created new money which inflated the bubble still further.
The direct cause of asset price inflation is the deficit basis of money created as debt
A very large part of this new money which was instantaneously deposited back into the system was thereupon used by American consumers to buy Chinese etc goods, and this was then saved, by being deposited in the banking system somewhere in the world.
The Bubble caused the Savings Glut: the Savings Glut did not cause the Bubble.
The whole point about the system now going to Hell in a Handbasket is that if pre-existing money were (as 99.999% of the population believe) lent out by banks to whoever, then there simply could not be any new money.
End of story. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And, indeed, as I point out in the diary,
Then, in a sleight of hand that would make The Economist proud, Wolf inserts three charts which have nothing to do with his argument. In fact, if you look at his third chart you see that there's nothing peculiar about the "emerging Asia" current account balance until after 2004, that is, after the US had been running negative real interest rates for 18 months.
But why didn't all this newly created money show up in the CPI and triggered the Fed to increase rates, or the banks to demand higher interest for mortgages? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
