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Will MOAB Trigger Protectionism?

by rifek Tue Jan 13th, 2009 at 06:04:28 AM EST

The Mother Of All Bailouts seems to become a bigger mother every day.  Will it also undermine itself by causing countries to set up barriers to international finance?

promoted by Jérôme - interesting discussion below the fold.


I was catching up on David Goldman's blog at Asia Times and noticed his comments about Italy trading flat with Bank of America.  It would seem odd that a bank (even a large bank) would trade flat with a reasonably productive state, but there is a double whammy working for B of A (and everyone like B of A) and against Italy (and everyone like Italy).

First, the bottomless bailout has effectively made several, privileged entities in the US financial sector (including B of A) sovereigns by pulling them into the protective ring of the Treasury.  Consequently, Italy isn't really trading against B of A, it's trading against the US Treasury.

Second, the US Treasury keeps borrowing by the boatload, and the US Dollar remains the world's reserve currency.  That means that every borrowing sovereign finds itself in line behind the US at the door of every lender out there, and the US isn't leaving much for everyone else.

Which leads us to this: How long before sovereigns, or coalitions of sovereigns, start putting ring fences around their financial systems to restrict the flight of capital to the US?  And when (not if) that happens, how will bailouts and stimulus packages be funded, and where will the credit loosening the MOAB was supposed to generate come from?

Display:
An interesting question, especially when set against the opinion I've seen expressed that the flight of capital into US Treasury bonds with yields less than 1 suggests a panic bubble that suggests a catastrophic collapse of the US dollar within a year.

Beyond that I simply odn't know, but anyone pouring money into dollars instead of euros right now has to be delusional

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Jan 12th, 2009 at 02:45:19 PM EST
Beyond that I simply odn't know, but anyone pouring money into dollars instead of euros right now has to be delusional.

We have deflation setting in in my neighborhood.  (We're gonna need a bigger boat stimulus, Mr President-elect.)  Not too severe yet, but we'll talk when unemployment's at 8% or 9%.  So dollars aren't the worst thing to be holding right now, and if you're (say) China, after buying all those T-bills over several years -- well, shit, you did pretty well selling to the panicked morons on the Street as they were diving for cover.  "Cash is King" and all that.

I wouldn't pour money into dollars now, as I think the stimulus will be close enough to correct to get the job done.  Knowing Benny and the Inkjets, I'd advise that the principle of "Don't Fight the Fed" likely also applies.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jan 12th, 2009 at 05:20:15 PM EST
[ Parent ]
Dunno about David Goldman, but the shrewd cookies over at Goldman Sachs are saying that the Norwegian Krone and Swedish Krona are way undervalued.

Bloomberg.com: Exclusive

For Goldman Sachs, the Norwegian krone is the most undervalued currency versus the euro, falling short of the bank's fair value by 42 percent, according to a Jan. 8 research report. At 25 percent, the Swedish krona is the third most undervalued.

And I agree with solveig - who has an instinct for these things (probably 'cos she's a Virgo) <hides> - that Swedish properties are astonishingly good value.

Norwegian property's not bad outside the cities either....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jan 12th, 2009 at 07:02:33 PM EST
[ Parent ]
Would that I had a way to return to Voss.
by rifek on Mon Jan 12th, 2009 at 07:28:34 PM EST
[ Parent ]
I've liked the Norwegian kroner versus the euro or US dollar for some time.  They've still got some North Sea oil and the ships to transport it to market.  Against this is the rising price of foods - esp. grains.

Swedish krona ... not so much.  One way or the other the Swedes are going to have to spend to build domestic power production to offset the decline in fuel oil production.  Unfortunately that means borrowing in the international capital markets during a time when the US is sucking everything up.  I agree land prices in Sweden are getting interesting.  If I had the money I'd be seriously looking to invest in agriculturally productive lands in Skåne, somewhere near the Copenhagen/Malmo bridge.  

Investing in farmland in Norway is even more interesting.  The downside is the darn government forces you to actually farm it!  (Obnoxious, huh?  ;-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Jan 13th, 2009 at 01:53:49 PM EST
[ Parent ]
Solveig has reminded me that if you want to buy Norwegian land you need to be prepared to live on it, and in relation to farming land, you probably have to demonstrate that you have or will acquire farming capability. If the farm is anything more than a smallholding you will have to farm it yourself.

This is because good farmland is in very short supply in Norway, and until very recently the concept of an absentee landlord in Norway simply did not exist. Even today it only tends to apply to the relatively few Yuppie flats which have become the subject of Norway's own mini sub-prime problem.

These restrictions on absentee ownership generally and by extension, on foreign ownership in particular, are one of the key reasons why Norway twice rejected EU membership, which would, I undrestand, have obliged Norway to lift them.

One of the effects has been that Norway has not seen its far-flung populations deserting rural areas for the cities.

It also suited NATO to see the far North of Norway suitably populated against the Red Threat.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jan 13th, 2009 at 02:15:23 PM EST
[ Parent ]
I readily agree with your comment.  With so little arable land available the government - quite rightly - insists land that can be used for farming is used for farming.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Jan 13th, 2009 at 02:56:12 PM EST
[ Parent ]
But that does not stop investment in Finland being worthwhile. The very low level of public debt, and a triple A national rating (real) make Finland still quite attractive. There will be increased government borrowing this year, but the fundamentals - so far - are relatively OK.

My clients in the capital intensive forestry/paper industry are shitting bricks, but the rest are more sanguine. I am hoping that an intensive support of exports will be to my benefit, because that is my core business - B2B international.

At the moment, the state R&DI investment remains at around 3.3 % GDP - i.e. relatively high.  That may change with corporate tax income dropping rapidly. But one of my clients just secured 500.000 € from Tekes "(funds innovative research and development projects in companies, universities and research institutes") for a MMO strategy game. (MMO = massively multiplayer online).

But then again the unique aspect of these funding organizations and the research and development they promote has always been at least 8 - 10 years ahead. In a quartal business environment, that has never been more valuable...

You can't be me, I'm taken

by Sven Triloqvist on Tue Jan 13th, 2009 at 06:33:03 PM EST
[ Parent ]
Uh... we don't produce or comsume any fuel oil, at least outside some specialised sectors where there are no or few alternatives.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 14th, 2009 at 03:53:33 PM EST
[ Parent ]
Capital controls are not "protectionism," notwithstanding claims by the punditry and the neolibs to the contrary.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 04:06:21 PM EST
... but its marred by a misleading title.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 04:52:56 PM EST
[ Parent ]
I view protectionism as the refusal to buy another country's products (or placing restrictions on their purchase), the reason typically being to protect domestic assets (although it can be punitive as well).  I don't see why this shouldn't apply to financial instruments as well as goods and raw materials.
by rifek on Mon Jan 12th, 2009 at 07:34:33 PM EST
[ Parent ]
Because financial instruments are not products, they are financial instruments.

This is part of the neoliberal agenda, to smuggle in freedom for corporations to shift wealth across national borders under the idea that it is "freeing up financial services" and so is part of a free trade in goods and services agenda.

A similar tactic, though different in detail, is treating the ever-expanding restriction on rights to information copying and sharing as "promoting trade in intellectual property", as if the makers of Mickey Mouse cartoons before WWII are gaining encouragement to their creative activity by the Disney Corporation retaining perpetual copyright via repeated extension.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 08:34:41 PM EST
[ Parent ]
You're accusing me of pushing a neoliberal agenda that treats labor as if it were as mobile as capital?  You don't know the positions I've been taking since the beginning of Ronnie Raygun's Reign of Terror.
by rifek on Mon Jan 12th, 2009 at 11:31:48 PM EST
[ Parent ]
... treating financial instruments as if they were produced goods and services.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 11:45:22 PM EST
[ Parent ]
Thanks for clarifying that.  I've been arguing for over a quarter-century now (The years creep up on you.) that treating labor as if it were as mobile as capital (such as Raygun's "Vote with your feet" remark) was a scam to impoverish everyone outside the capital class.  Free flow of capital was instituted anyway, and now the system is addicted to it.  What I'm saying here is that the international capital spigot will get choked off, it will be choked off for protectionist reasons, and it will have protectionist effects.  Consequently, if it waddles like a duck....
by rifek on Tue Jan 13th, 2009 at 08:13:15 AM EST
[ Parent ]
You'll find little disagreement here on those thing you have been arguing for a quarter century...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 10:27:03 AM EST
[ Parent ]
... will undermine the strength of transnational corporations, yes.

If by protectionist effects, you mean it will eliminate opportunities to trade in finished goods and services, I don't see how that follows.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 12:19:17 PM EST
[ Parent ]
That's an excessively broad definition. Protectionism of necessity involves protecting some domestic industry. But there are plenty of import restrictions - on both financial products and stuff - that are justified on grounds that have nothing to do with protecting domestic interests.

A blanket ban on GMO crops, for instance, would be protectionism under your definition. But clearly, that conclusion is absurd - a blanket ban on GMO crops is an agricultural and environmental policy; the fact that it is applied to foreign farmers as well as your own country's does not magically turn it into a protectionist measure.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 08:40:49 PM EST
[ Parent ]
A blanket ban on GMO crops because domestic agriculture can not compete against them (cost, aesthetics, lack of technology, whatever) would be protectionist.  A blanket ban for safety and health reasons would not (although safety and health a often trotted out to mask protectionism).  Either way, simply labeling it "agricultural policy" does not make a distinction.  Much (most?) agricultural policy is protectionist.

More to the point, I didn't say what you say I said.  If a country blocks another from obtaining capital from within its jurisdiction so that it can preserve that capital for domestic use, how is that not protectionist?

by rifek on Mon Jan 12th, 2009 at 11:47:48 PM EST
[ Parent ]
For the same reason that preventing the Calabrian mafia from setting up shop in your jurisdiction would not be protectionism. That also deprives a foreign company from doing business on your turf. The foreign company in question happens, however, to be a kind of company that you don't want on your turf, and have quite legitimate reasons to not want on your turf.

It only becomes protectionism when you are shielding a genuinely inefficient industry - i.e. an industry that has no hope of ever being competitive on the merits - from foreign competition. Using barriers to trade to enforce certain standards is not protectionism - domestic industry is not given an advantage, it's merely protected from being put at an unfair disadvantage.

Finally, the financial system is not an industry in the conventional sense of the term - it is so tightly bound to the political process that it makes more sense to treat is as a utility than an industry. So the logic that applies to the financial sector is not the logic that applies to steel or ball bearings or wine - the closest analogy is the logic that applies to railroads and water supply.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 05:02:40 AM EST
[ Parent ]
As nearly as I can tell, the neolibs (neocons here, Chicago School) have advocated free flow of capital on efficiency grounds.

Let's get this out of the realm of health and crime for a second.  Farawaystan is swimming in cash from the gas reserves it's sitting on.  Beyond that it doesn't have much of an economy traditional agriculture, mostly herding.  The US has regularly milked this cash cow to finance its deficits.  Neolibs would argue that this is a correct result because it is more efficient for Farawaystan to invest in the US than at home (Let's set aside for the time being the obvious bias for developed markets.  It isn't as though I were advocating that position.).

Now the people of Farawaystan decide they want to keep more of their money at home for domestic projects (Pick any element of the Farawaystan economy, and you'll find it at a competitive disadvantage because of inadequate education, transportation, communication, etc.  Even the gas industry fears that, if there were a decrease in demand, Farawaystan's fields would be the first ones shut down.).  So they cut back the amount that can be loaned to the US.

The US now can't sell as much of its product (Treasury securities) as it could, so capital in the US decreases as surely as it would if we were talking about manufactured goods.  As the capital shrinks, the plants start cutting back just as surely as if Farawaystan had slapped a tariff on US products, because none of the plants operates on current accounts.  Then there will be the inevitable noise in the media and Congress for retaliation against Farawaystan, just as though it had imposed a tariff or embargo.  As I have said elsewhere, if it quacks like a duck....

Concerning your last paragraph, you've raised a couple of points that don't apply very well in the US.  The financial industry is very political, but all industry is very political here.  Charles Wilson, then president of General Motors, once said that what was good for GM was good for the US.  While the auto industry may not have that kind of pull any more, the defense industry (which is ubiquitous here) doesn't even have to ask; it has the government on a leash.  As for utilities and railroads, they're largely private industries here.

Returning to the main point, I think the restriction of capital flows to the US will be imposed at least in part for protectionist reasons (It will be couched in health, safety, and national security terms, but all protectionist policies are.), will trigger protectionist reactions, and will cause protectionist results.  If for whatever reason you don't like "protectionist", then it must be viewed as "quasi-protectionist".

by rifek on Tue Jan 13th, 2009 at 09:58:59 AM EST
[ Parent ]
"it has the government on a leash"

Understatement of the year.

by asdf on Tue Jan 13th, 2009 at 10:01:19 AM EST
[ Parent ]
"Choke chain"?
by rifek on Tue Jan 13th, 2009 at 10:07:04 AM EST
[ Parent ]
But selling Treasuries isn't "selling a product" - it's signing an I.O.U. And in a world with completely rigid capital controls (probably not desirable, but useful as an example), Farawaystan wouldn't be sitting on a vault full of cash. It would be sitting on a pile of stuff - because if capital can't move from one country to another, you'd have to eventually buy stuff with your export earnings.

Of course, from the US point of view, balanced trade would be a disaster, because it would mean having to pay in real stuff - ball bearings, rubber, steel, integrated circuits - instead of just blithely issuing I.O.U.s. But that doesn't make it "protectionist."

OTOH, it's entirely possible that I simply don't get it - I find the whole monetary system pretty confusing, which is why I like to think of the economy in terms of stuff getting produced, moved around and used.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 11:25:22 AM EST
[ Parent ]
... not in Northeast Ohio. Having to pay for imports with stuff made in the US would be a win/win, with both new work for domestic markets and new work for markets overseas due to the exporters exchange rate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 02:39:45 PM EST
[ Parent ]
... that is, the loanable funds fallacy:
The US now can't sell as much of its product (Treasury securities) as it could, so capital in the US decreases as surely as it would if we were talking about manufactured goods.  As the capital shrinks, the plants start cutting back just as surely as if Farawaystan had slapped a tariff on US products, because none of the plants operates on current accounts.

It conflates plant and equipment (a.k.a. "real capital") ... productive capacity ... with financial obligations. But financial capital is not like plant and equipment in being technically necessary for production, rather it is part of the institutional system for determining control of production.

Its very convenient for the interests of transnational corporations to conflate financial capital with plant and equipment as if the former was part of the requisite resources for production, rather than being part of the current rules of the game for who gets to say how resources are deployed.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 12:29:12 PM EST
[ Parent ]
People confuse wealth and the measurement of wealth all the time.  The neo-libs, with their Positivist bias, have risen this to a Fine Art.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Jan 13th, 2009 at 01:14:56 PM EST
[ Parent ]
... "real capital" and "financial capital" in class altogether, and just say plant and equipment versus financial assets.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 05:41:00 PM EST
[ Parent ]
because you cannot control their spread into other crops (which is what happens each time) is health and safety policy, not protectionnism.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 13th, 2009 at 05:34:56 AM EST
[ Parent ]
What would happen to the Eurozone if Italy instituted capital controls?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 05:46:02 AM EST
[ Parent ]
... instituted capital controls?

The appropriate boundary for capital controls is not somewhere inside the domestic zone for a currency. When y'all decided to go for a common currency, you kind of limited your freedom of action in terms of independent monetary policy actions of all sorts below the Eurozone level.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 05:43:49 PM EST
[ Parent ]
That was sort of my point, but Jerome kept pretending Italy could institute capital controls if they had the political will...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 05:45:49 PM EST
[ Parent ]
... to re-institute the Lira, and I doubt that is going to happen.

Capital controls at the boundary of the Eurozone would be hard enough ... but when bona-fide domestic Euro credit money can be created in Frankfort and spent in Florence, its hard to impose effective capital controls.

It might be an "Italian Euro" that the monetary authorities in Italy work hard to maintain at parity with the real Euro, but capital controls in the sense of the kind of controls imposed by Malaysian after the Asian Financial Crisis, or in the sense of the capital controls in force today in China ... is at its heart controlling foreign exchange transactions. If I borrow Euros in Germany and spend them in Italy, that's not a foreign exchange transaction. If Italy imposes the regulatory framework that makes it work like one, its de facto left the Eurozone.

Inside an Economic Union it would be hard enough ... the narrowest "straightforward" boundary for Italian capital controls is the European Union.

In a conventional Free Trade Area, it would be fairly straightforward, but of course the US "FTA"s are conventional Free Trade Areas in name only ... they are mostly agreements on eliminating capital controls in return for trade access to the US market, though dressed up as bilateral removal of capital controls and bilateral trade access. So capital controls in the US context would basically be reneging on the FTAs. But since most of them are not passed as Treaties in any event, there's the institutional freedom to renege on them if we want to.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 06:00:31 PM EST
[ Parent ]
Interestingly I read today that one reason why the Italian financial community has been less hurt by the global fuck-ups, is poor English skills ;-)

You can't be me, I'm taken
by Sven Triloqvist on Tue Jan 13th, 2009 at 06:03:58 PM EST
[ Parent ]
... "I'm sorry, I don't understand, could you explain that in Italian?" "Sorry, I still don't understand, it sounds like you are telling me I am first in line to pick which line I stand at the end of, I do not see why I should buy that tiered CDO you are selling. I will jus' wait an' see."


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 06:10:15 PM EST
[ Parent ]
Precisely. 'Ignorance is bliss' personified...

You can't be me, I'm taken
by Sven Triloqvist on Tue Jan 13th, 2009 at 06:12:43 PM EST
[ Parent ]
Why would protecting domestic assets necessarily be bad? I don't think a country should allow the strip mining of its assets and the impoverishment of its population by capitulating unconditionally to 'market forces'. If not protectionism, what other weapon do we have against 'unfair competition' from areas with lower production costs due to their failure to implement to proper environmental and labour regulation? Do we really want to participate in a race to the bottom?
by someone (s0me1smail(a)gmail(d)com) on Tue Jan 13th, 2009 at 04:03:27 AM EST
[ Parent ]
You'll get no argument from me.  I've always opposed sacrificing at the altar of efficiency, especially since efficiency and the rules creating it always seem to favor the haves over the have nots, a bit of reality the Austrians/Chicagoans studiously gloss.
by rifek on Tue Jan 13th, 2009 at 10:05:55 AM EST
[ Parent ]
The further bit of slight-of-hand in the efficiency argument is that rarely is it declared what it is the efficiency of. I.e. which parameter is being optimized? Efficiency on its own can hardly be considered an unquestionable good. After all, the Nazis where quite efficient with their gas chambers, optimising the number of people killed per unit time.
by someone (s0me1smail(a)gmail(d)com) on Tue Jan 13th, 2009 at 11:06:30 AM EST
[ Parent ]
... of efficiency, its sacrificing to a false idol of efficiency ... a partial, static, efficiency, ignoring externalized costs and ignoring dynamic efficiency gains.

Following the static efficiency argument, Japan would never have invested in steel making and shipbuilding after the end of WWII, but if they had not, they would have sacrificed dynamic efficiency gains far in excess of the static efficiency gains that they did sacrifice, so in terms of "efficiency", what was claimed by most of their US advisers to be the inefficient choice (Deming gets an honourable mention here, he just wanted to make efficiently whatever it was decided should be made) turned out to be the efficient one.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 05:48:03 PM EST
[ Parent ]
And we see yet another reason not to confuse science with social studies.  There is scientific efficiency, which is a useful and quantifiable measure of an element of the operation of a physical system, and there is economic efficiency, which typically is a faux-scientific political construct arbitrarily defined by those with the power to do so.
by rifek on Tue Jan 13th, 2009 at 08:31:34 PM EST
[ Parent ]
Economic efficiency is both easy to define and identify in a clear, unambiguous way and easy to use to generate simple, formal, tractable models.

Its just that the term economic efficiency in the former and the latter mean different things. The problem is that once you go to the trouble of actually specifying your economic terms in ways that can be clearly and unambiguously identified, you can no longer hide from the fact that any simple, formal, tractable model of economic development is intrinsically and radically incomplete.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 10:15:39 PM EST
[ Parent ]
And the model, to be manageable, must be simplified to a point far beyond mere Goedelian incompleteness and on to a point where the model becomes irrelevant and even nonsensical.  There are simply too many vectors that can barely be identified, let alone measured or controlled for.  Such exercises do show us, though, in stark fashion the firmness of the foundations of Logical Positivism and its "informed actor" and his "enlightened self-interest."
by rifek on Tue Jan 13th, 2009 at 11:23:23 PM EST
[ Parent ]
... remarkable similarity between the supposedly Universal Homo Economicus and the particular habits of thought of upper middle class English merchants of the 1800's.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 14th, 2009 at 12:55:38 AM EST
[ Parent ]
And J K Galbraith makes the same point in the New Industrial State when he mocks (the then young) Milton Friedman and his ilk as hopeless romantic throwbacks to the petty merchant and manufacturer economy of the time of Adam Smith.

I suppose Miltie had the last laugh over Galbraith, unfortunately for all of us.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Jan 14th, 2009 at 04:11:55 AM EST
[ Parent ]
He had a laugh over John Kenneth, but not, it may be be, the last one.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 14th, 2009 at 06:53:41 AM EST
[ Parent ]
Well, they're both dead now.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 14th, 2009 at 06:54:46 AM EST
[ Parent ]
But madmen in power listening to voices in the wind are as often as not listening to the voice of a long dead economist.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 14th, 2009 at 01:38:54 PM EST
[ Parent ]
We're still around to laugh, although rather bitterly...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 14th, 2009 at 04:02:21 PM EST
[ Parent ]
and my reply to that is will MOAB trigger a Jeb Bush presidential run in 2012.  Gotcha, didn't I.
by Lasthorseman on Mon Jan 12th, 2009 at 08:47:03 PM EST
given that it has a high savings rate and a long tradition of financing its public deficits domestically (ie without needing foreign capital inflows).

Is it a surprise that the biggest proponents of no capital flow restrictions are the biggest importers of capital today...?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 13th, 2009 at 04:50:31 AM EST
Could you address the minor point that you cannot have capital controls within the European Economic Area?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 04:56:30 AM EST
[ Parent ]
"you're not allowed to" is not the same as "you cannot"

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 13th, 2009 at 05:32:49 AM EST
[ Parent ]
Well, with the euro + Schengen, you cannot prevent cash crossing borders...
by Metatone (metatone [a|t] gmail (dot) com) on Tue Jan 13th, 2009 at 06:42:07 AM EST
[ Parent ]
Better to say, with the euro + Schengen, Italy cannot prevent cash crossing borders.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Jan 13th, 2009 at 06:43:30 AM EST
[ Parent ]
It could put laws preventing bank and cash movements AND reinstate border controls (including under Schengen rules that allow it in exceptional circumstances).

This would be pretty extreme (and do wonders to European unity!) but it's certainly feasible.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 13th, 2009 at 06:54:38 AM EST
[ Parent ]
Possible? Yes.

Feasible? I'm not sure I agree. The political ramifications alone...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jan 13th, 2009 at 07:40:22 AM EST
[ Parent ]
Could the Eurozone institute capital controls on behalf its members with respect to external capital flows?  It's capital; flows to the US that people are worried about.

PS why would the US continue to have first call on global capital flows given the experience of devaluation to date - would it not make much more sense for that privilege to gravitate to the Eurozone now?

(As for Drew's point, we're all in deflationary mode right now...but presumably whoever borrows most, long term, also inflates most, or devalues their currency most with respect to the real output of their economy.  I have always been amazed at the Chinese continued willingness to invest in Dollars)

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 13th, 2009 at 08:47:23 AM EST
[ Parent ]
The easiest place to institute capital controls is the border of the European Economic Area (single market).

Otherwise, the Hungarian Central Bank might have been inclined to put a stop to Hungarian banks offering people loans denominated in Euros or Swiss francs, but that would have been instituting capital controls within the single market and couldn't be done. All they could do is lean on the banks to restrain themselves voluntarily.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 10:24:46 AM EST
[ Parent ]
I'm not sure we'd want to be the global reserve currency. It didn't seem to do much good for the American political economy, after all.

I wonder if it wouldn't be better to have three or four global reserve currencies - maybe that would prevent The Powers That Be from using reserve currency status to strip-mine the real economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 10:37:15 AM EST
[ Parent ]
Having first cut at all available global capital at the lowest interest rates would appear to give the US a huge structural advantage...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 13th, 2009 at 10:43:59 AM EST
[ Parent ]
It does. But that advantage needs to be weighted against the way it enables asset-stripping, Anglo Disease style.

Which is why I think it might make more sense to be a global reserve currency rather than the global reserve currency.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 10:55:05 AM EST
[ Parent ]
JakeS:
asset-stripping, Anglo Disease style
is a political choice, I'm not clear how it flows inevitably and unavoidably from being the reserve currency...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 13th, 2009 at 10:57:20 AM EST
[ Parent ]
It doesn't unavoidably flow from being a reserve currency, in the same sense that having a military capable of fighting colonial wars doesn't unavoidably cause colonial wars - it remains a policy decision.

But being the only reserve currency makes it easier, because there is enormous inertia in a system with only one reserve currency.

If the country with the only global reserve currency decides to strip-mine its industry, it can do so with greater ease because it has an inflated exchange rate on account of being a reserve currency. And it can continue to do so for a longer time without the damage becoming obvious to Joe Average, because it will continue to have an inflated exchange rate (allowing it to buy stuff from abroad on the cheap) for a long time, due to the inertia in the system.

If you had two or three reserve currencies, it would be a lot more viable for the rest of the world to shift away from the Anglo Diseased currency. Which would remove the upwards pressure on the exchange rate, and make life more difficult both for the people who are strip-mining the country's industry and for the people who are tasked with running the bread and circus shows.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 11:13:57 AM EST
[ Parent ]
Or, if the US dollar drops out of the race (who can tell what the next decade will bring, after all), number three?

China certainly would not want to have the reserve currency until 2020/2030 ... depending on how rough the ride is as they turn the demographic corner, but the Yen as a counterweight to the Euro might be acceptable.

Four? (or, if the US$ drops out, three?) ChrisCook's PetroDinar?


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 10:21:04 PM EST
[ Parent ]
BruceMcF:
ChrisCook's PetroDinar?

Petro.

You wouldn't have the Iranians or Russians supporting an Arabic currency....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jan 14th, 2009 at 05:55:14 AM EST
[ Parent ]
Ah, I was thinking in terms of capturing and diverting the Gold Dinar, but coming out of SEAsian Dar Islam, it may be ignoring the old fight back in the heartland.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 14th, 2009 at 06:56:22 AM EST
[ Parent ]
€, Yen and the North American Peso (a.k.a. US$) is three that will probably have a running chance.

Russia certainly has the population, resources and (potentially) industrial power to support a reserve currency, if they choose to do so (and play their cards right).

You say that China won't want to, and I assume that much the same logic applies to India.

Then there's the possibility of a South American Peso (think € for MerCoSur). That's probably not something we'll see on a ten- or twenty-year horizon, but MerCoSur (or an equivalent organisation) will be a major power within my lifetime.

Then you have Asean, which I personally don't believe will achieve Great Power status, or even enough political and economic coherence to form a monetary union in the first place. It's located right between two major powers (India and China)... which seems to be an unhealthy thing to be, judging by the way the Greater Middle East and Europe during the Cold War turned out...

Sub-Saharan Africa is a complete basket case and will take at least a lifetime to sort out - and that's assuming that the Great Powers would stop actively trying to break things there...

So my guess would be €, Yen, US$ for the first ten to twenty years. After that, possibly the Ruble. And within my lifetime possibly Renmimbi, Rupi or South American Peso.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 14th, 2009 at 01:47:53 PM EST
[ Parent ]
Just bring back the Bancor.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 14th, 2009 at 04:12:55 AM EST
[ Parent ]
It would be politically and technically difficult to implement a common currency like the Bancor any soon. However, a first step could be to adopt an international monetary system on the model of the pre-Euro European Monetary System.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 14th, 2009 at 04:37:33 AM EST
[ Parent ]
But wasn't part of the reason it was the pre-Euro EMS because it failed to hold together against the stresses of divergent FXR and domestic policy monetary policy objectives?

Unless there is an effective mechanism to share the burden of adjustment between surplus and deficit countries, we seem to retain the same tensions. while broadening the system increases the number of divergent domestic and FRX policies in competition.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jan 14th, 2009 at 06:59:36 AM EST
[ Parent ]
BruceMcF:
Unless there is an effective mechanism to share the burden of adjustment between surplus and deficit countries,

That's where Keynes was onto something with the Bancor/ICU approach.

His design built in a charge on both positive and negative balances. He was apparently a fan of Gesell.

This is in line with the proposal I advocate for credit creation (ie the time to pay/unsecured credit that makes the world go around), as follows:

Point One: Treasuries  -probably decentralised Treasury branches as is still nominally the case in Canada - issue undated interest-free credit (which they do already - it's called cash).

Point Two: Service-providers-formerly-known-as-banks" operate the accounting system and assess/manage the issue of this credit to business and individuals in line with policies set by a Monetary Authority.

Point Three: both sellers and buyers using this credit would pay a charge for the use of the guarantee. ie a charge would be made on both credit and debit balances. This is exactly analogous to Keynes' Gesellian approach.

Point Four: Service-providers-formerly-known-as-banks would be paid reasonable costs plus a share in the outcome.

Point Five: A Default Pool of funds - held by a Custodian-foremerly-known-as-a-Central-Bank would provide necessary liquidity to cover defaults, and any excess would be shared equally as a National Dividend.

Point Six: settlement of credit obligations could be made using positive balances of Treasury credits, or in "money's worth" acceptable to the seller.

Point Seven: defaults would be settled by the Pool and collected from defaulters, if possible. Defaulters could have the option to settle in hours of community service.

Settlement could be, and among businesses often would be, in barter. More generally, through "Unitisation" of existing secured debt, new classes of acceptable units would be developed redeemable in:

(a) energy value - the "Petro's" I have in mind as a generic global reserve currency;

(b) land rental value - an essentially "land-locked" currency.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jan 14th, 2009 at 07:39:25 AM EST
[ Parent ]
... their growth in effective productive capacity that are at the most serious risk of long term inflation. Its not the quantity of the borrowing but the effectiveness of the borrowing as an investment. The US has put itself behind the eight ball with $1T+ to maintain the senior workers of the finance sector in the lifestyle to which they have become accustomed ... the question is whether it repeats that in the productive sector with massive investment in an obsolete Energy Economy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 12:32:33 PM EST
[ Parent ]
The removal of capital controls was an important contributing factor to the 1997 currency crisis and its reinstatement was an important part of its remedy (for those countries that dared to reinstate them temporarily, such as Malaysia did with Krugman's blessing). It is apparent that free movement of capital contributes to financial instability generally.

Free movement of capital also renders international trade "non-Ricardian". In the presence of mobile capital trade is no longer win-win and comparative advantage is replaced by absolute advantage.

Capital controls need to be in the form of hard barriers, but simply of exit taxes.

I wonder if what is really damaging is the combination of free movement of capital and freely floating currency exchange rates. You could have one or the other. I think exit taxes on capital are by far the easiest way to moderate things.

In five words, capital controls are not 'protectionism'.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 05:05:10 AM EST
You cannot have controlled exchange rates without controlling capital flow - that would render your monetary policy impotent. So if you have to either restrict capital flows or control the exchange rate, it has to be the former.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 13th, 2009 at 05:10:22 AM EST
[ Parent ]
... if your monetary policy is to maintain a steeply discounted exchange rate, that is the easiest to maintain without support from capital controls.

OTOH, that is making maintenance of a stable exchange rate the overriding priority, irrespective of the state of domestic economic activity and financial markets, so it surely qualifies as a "hard" objective even under that qualifier.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 13th, 2009 at 12:42:17 PM EST
[ Parent ]
Correction:

Capital controls need tonot be in the form of hard barriers, ...

Otherwise it makes no sense.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 05:18:01 AM EST
[ Parent ]
I usually compare capital to a fluid in tanker truck trailer. If you leave the tank without any device to prevent it, at the first turn, even taken at medium-speed, the transfer of liquid inside the tank will create a massive imbalance which will topple the trailer. So, usually tank trailers are fitted with inside perforated walls to slow the fluid movement. This can be compared to capital controls.

Another way to prevent the problem is to increase the viscosity of the fluid, which could be a good metaphor for taxes on transactions...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Jan 13th, 2009 at 09:14:01 AM EST
[ Parent ]
In general, the coexistence of floating currencies and free flows of capital appears to create great instability with tsunami waves of cash flowing hither and tither in response to some crisis or other.  A Tobin tax on capital/flows/currency exchanges  as well as onshares/cdos etc. purchases would have the effect of dampening such huge speculative flows whilst not ultimately restricting real long term investments made on rational grounds.  

It would also have the effect of raising huge revenues as a form of "ground rent" payable in return for the huge privileges the global financial system confers on the major players and ultimately do a lot to ease public deficits.  This is an area where the EU and US under Obama could really take a lead.  It is not complex to administer, doesn't require a huge bureaucracy, doesn't ultimately create barriers to real trade, and provides a mechanism for those who benefit most from the system to pay for its maintenance.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 13th, 2009 at 08:58:30 AM EST
Frank Schnittger:
A Tobin tax on capital/flows/currency exchanges  as well as onshares/cdos etc. purchases would have the effect of dampening such huge speculative flows whilst not ultimately restricting real long term investments made on rational grounds.  

A Tobin tax is impracticable in a global clearing system with consolidated clearing,layers of intermediaries, and disparate jurisdictions which regard lax regulation as a competitive advantage.

In a decentralised networked clearing system, within a suitable global framework, on the other hand, it's a no-brainer.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jan 13th, 2009 at 11:49:58 AM EST
[ Parent ]
The interesting question your post brings up is "Why?"

You are absolutely correct that Italy is competing not with BoA but instead with the US because of the explicit guarantee of the US FDIC for new BoA debt, but the more important question is why should Italy not be competitive with the US, given America's evidently problematic economic fundamentals?

I think the the reason that will eventually come to light is that US political authorities are simply more credible in their coercive capacity (read: power) to redistribute social resources to make good on promises to pay than anyone else in the world, now or for the forseeable future. During manifestations of aggregate risk like the present, power is simply more important than the ruses of balance sheets.

Capital controls are one possible policy response to that (and, contrary to most posts on this topic, capital controls, at least as far as economists are concerned, certainly ARE protectionist, as are immigration controls on movements of labor), but if I'm right about the role of power in mitigating risk, placing capital controls will simply make exporting goods to America less profitable and reduce both trade and economic growth -- worsen the recession.  That's probably not something Italy or other European economies are interested in right now.

by santiago on Wed Jan 14th, 2009 at 01:13:43 PM EST
Thanks and welcome to European Tribune, santiago!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 14th, 2009 at 04:14:16 PM EST
[ Parent ]


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