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Socratic Economics IX: National Accounts

by Migeru Sat May 31st, 2008 at 07:16:27 AM EST

In the comments to my latest diary Where will Peak Oil hurt the most? I took a beating for using Foreign Exchange Reserves as a measure of the ability of a country to purchase oil in the open market in the event of a global oil crunch, thus cushioning the blow from such a shock. I was conceptualizing reserves as a stock that could be spent when apparently it's a side-effect of monetary policy and exchange-rate movements. What this illustrates is my tenuous grasp of international trade, the balance of payments, and the system of national accounts.


So, in the Socratic spirit, here are my questions:

  • What are currency reserves? Where do they come from? Can they be spent? How do they differ in the fiat currency system from gold reserves back in the age of the gold standard?
  • What is the relationship between currency reserves, exchange rates and the trade balance?
  • What do the components of the balance of payments (current account, capital account and financial account) mean, and how do they change?
  • Does one need to think about the balance of payments differently when considering a single-market area such as the EU, or a monetary union such as the Eurozone? Do individual US states have a balance of payments, too, and should they?

Socratic Economics is an occasional series of questions posed in a Socratic effort to understand economics.

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Recommendations are nice, but answers would be even nicer! (Random thoughts are good, too)

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sat May 31st, 2008 at 09:46:41 AM EST
A while ago you posted an example about stocks which showed that they were not fungible beyond certain levels. I'd guess the same goes for reserves? You have a stock of reserves same way as you can have company stocks, but if you start spending significant amounts the value you get out of it declines.
by nanne (zwaerdenmaecker@gmail.com) on Sat May 31st, 2008 at 12:26:37 PM EST
I'm wondering if it may be more illuminating to consider reserves as formalised political and economic relationships rather than piles of cash with a nominal value, and a also rudimentary type of international credit rating.

Declining value may not matter if you get benefits in kind - e.g. China and the US.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat May 31st, 2008 at 12:52:16 PM EST
[ Parent ]
there is the same sort of supply-and-demand dynamic - an actual market. That is one of them contradictions-of-capitalism that you hear so much about (well - not so much these days, but we used to hear about them). The contradiction in large terms is that, as the ruling class works to consolidate control (stifle competition) in one bailiwick, it sharpens competition between ruling groups. (I love Marxist terminology.)

When you get to the level of foreign reserves, the games become quite serious. China is allowed to build up U.S. dollars, then the Feds unleash inflation at a level that reduces their international value by about half (see the last three years). Then the myriad ramifications of that policy have all of their effects, such as a pissed-off U.S. populace and a pissed-off Chinese ruling class. Interesting times, indeed.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sun Jun 1st, 2008 at 11:13:57 AM EST
[ Parent ]
I recall from Keynes's Economic Consequences of the Peace that he had some spectacularly counter-intuitive observations about the macroeconomic effects of reparations on the recipient, whom they tend to impoverish, and that they turned out to be spectacularly true.  

I also recall discussions I had with economics masters candidates about balance of payments issues where they pointed out that when you run a balance of accounts deficit it is kind of like your trading partner, e.g. China, is giving you stuff for free.  I was never completely convinced.

I certainly hope that some of the heavyweight economists on ET can clarify.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 31st, 2008 at 05:43:31 PM EST
when you run a balance of accounts deficit it is kind of like your trading partner, e.g. China, is giving you stuff for free.

It is for free, if you finance your consumption by issuing debt, and then defaults on the debt.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat May 31st, 2008 at 07:18:36 PM EST
[ Parent ]
And the way things are going we may have to.  However, I have this disquieting feeling that this would not make all of the goods free and/or that it would not be without consequences.  But what are they?  

Is the World Bank going to impose sanctions?  Why should we care?  

Will the US remain the world's largest consumer economy? Well, we might have some difficulty getting our beloved Mid East Oil.  The Kingdom and the Emirates might take default personally.

With other trading partners can we take the position: We are your largest market. Consider the hit as a cost of doing business and the market is open.  Promise not to do it again. If so, then I would truly know WHY I AM PROUD TO BE AN AMERICAN!

If the US defaulted how much of a world economy would remain?

I can see that it would stop the accumulation of wealth by the top 1% in its tracks.  DEFAULTS FOR ECONOMIC JUSTICE!  

As a practical matter we may have to forgive our debtors.  The Lord's Prayer as Economic Policy! This is getting good.

But I still would like to know what Keynes would say.  Can anyone channel JMK?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 31st, 2008 at 10:08:53 PM EST
[ Parent ]
Does one need to think about the balance of payments differently when considering a single-market area such as the EU, or a monetary union such as the Eurozone? Do individual US states have a balance of payments, too, and should they?

You have a trade balance, so why should a state have none? But I don't know how relevant that is. For currency moves obviously not. A state might get problems if its people are overdebted, but it is said about 20% of the US GDP go through Washington. So there should be enough solidarity within US states and enough mobility of people to move e.g. to a state with less unemployment, that a state trade balance doesn't matter too much. For the Eurozone that is actually the point where most Eurobreakup-doomsayers (probably most prominent Ambrose Evans-Pritchard from the Telegraph) start. Only about 1% of EU GDP go through Brussels, and the various languages spoken in the Eurozone are a serious impediment to cross-country mobility. That would make individual Eurozone country accounts important.
But still I would argue that for most issues the trade balance of a currency zone is relevant. The EU account I think is mostly irrelevant. The main mechanism of balancing are through exchange rate moves.


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sat May 31st, 2008 at 11:00:49 PM EST

Do individual US states have a balance of payments, too, and should they?

Most, if not all, US states are forbidden in their constitutions from running a deficit.  They are forbidden by the U.S. Constitution from imposing import or export duties.  Capital markets and most large banks are, at minimum, national in scope.  They can charter banks that are confined to their states.  States do not issue currency, though I do not know if they are specifically precluded from doing so. They can issue bonds. They can charter corporations that are inherently of national or international scope, depending on the desire of the corporation. I have never heard discussion of a state's "balance of payments."  I do hear continually about budget deficits.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 31st, 2008 at 11:27:13 PM EST
[ Parent ]
Nationally chartered banks were able to issue their own currency up to 1935.  In order to do so they had to purchase bonds from the Federal Government covering the amount they issued.  The bonds were called in '35 and none have been sold since then.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 1st, 2008 at 12:58:46 AM EST
[ Parent ]
Most, if not all, US states are forbidden in their constitutions from running a deficit.

The Eurozone's Growth and Stability Pact commits Member States to running no more than a 3% GDP budget deficit.

They are forbidden by the U.S. Constitution from imposing import or export duties.

European Union Member States cannot restrict the flow of goods, services, people or capital among themselves, and import or export duties with third-party states are probably harmonized via the EU which negotiates before the WTO on behalf of the Member States.

Capital markets and most large banks are, at minimum, national in scope. They can charter banks that are confined to their states.

The scope of retail banks in the EU is still only a member state (even when a bank owns a subsidiary in a neighbouring state, it operates as a different bank - examples I am familiar with include NatWest operating in Spain and Raiffeisen in the Czech Republic, but I don't know what the situation is between two Eurozone countries). Capital markets are still at most regional. Euronext integrated Paris, Brussels and Amsterdam, and there were talks of a merger between Deusche Börse and the London Stock Excange, but that's about it, other than that the markets cover single member states.

States do not issue currency, though I do not know if they are specifically precluded from doing so. They can issue bonds.

It is unclear to me how the issuing of currency works within the Eurozone, but each Eurozone member state can issue its own bonds. The Member States' central banks still exist and retain a certain set of competences, and only some of the powers have been transferred to the European Central Bank. There is a "European System of Central Banks" which gathers the ECB and all the Eurozone member states' central banks.

It seems to me the Eurozone is almost there if we aren't there already.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Sun Jun 1st, 2008 at 04:58:45 AM EST
[ Parent ]
Most, if not all, US states are forbidden in their constitutions from running a deficit.
But sometimes they do or not? What for is the ability to issue bonds, if you are not allowed to run a deficit?

I'm asking because there were reports of budget shortfalls in several US states. If they can't run deficits, in case of a surprising drop in tax revenue, they have to cut immensely in their spending?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 02:05:41 PM EST
[ Parent ]
They can either:

  1.  Cut spending to met income
  2.  Raise taxes to met expenditures
  3.  Engage in 'Creative Accounting' - pretend income/expenditures balance


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 1st, 2008 at 02:54:53 PM EST
[ Parent ]
That provision routinely, in times of downturns, produces economic crises. These crises are often borne on the backs of those least able to afford it.  Cuts to welfare, medicade, education, mental health programs and other programs that aid the poor.  This is especially evident during Republican administrations.  They see these downturns as opportunities to roll back social programs.  If you don't want to do something, it is always handy if it is impossible.  If you want to do something, it is nice if you have no other choice.  We like to make things like that easy in the good ole USA.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:04:42 PM EST
[ Parent ]
... accounting ... not a deficit on the primitive "pile of money" accounting of the USG.

IOW, where capital spending is funded by bonds, the interest payments and bond repayments to retire the bonds must be fully funded by revenues ... no rolling over debt, and no borrowing to meet current expenditure.


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 Jun 2nd, 2008 at 01:37:54 AM EST
[ Parent ]
First, its not just the trade account, its the whole current account. Capital account transactions are transactions with financial strings attached ... typically financial strings valued as roughly equivalent to the size of the transaction.

IOW, a capital transaction is an exchange of financial assets now for a promise of some service, typically including some flow of financial assets in the opposite direction, later.

In what might be the paradigmatic capital transaction, an international sale of a commercial bond (debenture), the later flow of financial assets is the regular interest payments, which continue until the bond is purchased by someone from the originating country. If the price of the bond has not changed, that means that a transfer of assets from A to B starts a flow of assets from B to A, which continues until there is a canceling transfer of assets from B to A to extinguish the international liability.

Current transactions do not have these strings attached. They include exports and imports, where the current obligation is provision of a good or service, income payments, where they satisfy an existing obligation ... often generated by a previous capital transaction, sometimes involving hire of labor from overseas ... and unilateral transactions like overseas remittances.

If country A has a trade deficit but an equal surplus on the rest of the current account, so it has a balanced current account, there is no special impact from that trade deficit. In that case, the trade deficit amounts to simply consuming the income from abroad.

OTOH, if country A has a current account deficit, through whatever combination on the trade account, income account and unilateral transfers, that is when international money starts to be something other than a neutral medium of exchange.

If there is no net official account transactions ... in particular, no accumulation or draw down of official foreign exchange reserves ... then a current account deficit requires an equal capital account surplus. That entails accumulating net additional international financial obligations (whether they are obligations of the government or private citizens, and whether they are held by governments or private citizens abroad, is a second-order question ... sometimes quite important, but still subsidiary to the main international double entry book-keeping).

In broad outline, this can be treated like other entities taking on external financial obligations in order to outspend their current financial income ... a business making a capital investment, or a household taking out a second mortgage to go to Disney World.

(1) If what is bought as a result of the external finance results in later income that exceeds the required interest payments, the debt is self-funding. This is, of course, the ideal that a commercial corporation ought to be aiming for.

(2) If there is no financial benefit from the acquisition, then this is discounting away future income in order to engage in current consumption.

(2a) This can be done without a loss in future standard of living if the funding comes from future income growth ... to simplify from above, if Mom just got a raise in her salary, and the vacation in Disney World will be easily paid for out of the first two years of the raise.

(2b) Otherwise, this is trading away a higher standard of living now for a lower standard of living in the future. Taking out of second mortgage to take a trip to Disney World because capital price inflation in the housing market makes the second mortgage possible, while both Mom and Dad are working in dead end jobs with a high risk of being laid off if a recession should raise its ugly head.

So that is a rough framework to raise the first order questions about a current account imbalance:

(1) In real terms, is the current deficit real investment in productive capacity, or is it a combination of current consumption and debt service for previous consumption?

(2) If the current deficit is consumption or debt service, is its future funding going to come from economic growth, or from future sacrifice of the standard of living of some or all of the residents of the deficit nation?

From a ecological economic perspective, therefore, a current deficit that is requiring the capital account to finance current consumption or debt service is either a contribution to growth addiction or trading away future standard of living in nations that do not at present have a sustainable technology for maintaining their current standard of living.

And where do foreign exchange reserves come in? They are in the official account transactions that were held in balance in order to make it easier to focus on the current/capital account relationship.


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 Sun Jun 1st, 2008 at 01:07:37 PM EST
Thanks Bruce.


In broad outline, this can be treated like other entities taking on external financial obligations in order to outspend their current financial income ... a business making a capital investment, or a household taking out a second mortgage to go to Disney World.

(1) If what is bought as a result of the external finance results in later income that exceeds the required interest payments, the debt is self-funding. This is, of course, the ideal that a commercial corporation ought to be aiming for.

(2) If there is no financial benefit from the acquisition, then this is discounting away future income in order to engage in current consumption.

(2a) This can be done without a loss in future standard of living if the funding comes from future income growth ... to simplify from above, if Mom just got a raise in her salary, and the vacation in Disney World will be easily paid for out of the first two years of the raise.

(2b) Otherwise, this is trading away a higher standard of living now for a lower standard of living in the future. Taking out of second mortgage to take a trip to Disney World because capital price inflation in the housing market makes the second mortgage possible, while both Mom and Dad are working in dead end jobs with a high risk of being laid off if a recession should raise its ugly head.

This is about what I understood.  The bank can repossess Mom's house.  However, it seems that things can get more complex in an international economy:  

We run a large balance of trade deficit with China.  My understanding is that this deficit is not anywhere close to nearly counterbalanced by financial service transactions.  Instead, China effectively loans us the money to pay for their imports by buying US Treasury Bonds.  If they try to dump those bonds they will trash their value.  Meanwhile, inflation proceeds and the value of the dollar, in which the bonds are denominated, declines relative to other currencies.  But many US investors have put money into production facilities in China, I believe.

  1. So is our current combination of public and private financial actions regarding China just a brilliant way to extract cheap goods from China for a lot less than the Chinese thought they were getting?

  2. Doesn't that simultaneously erode the value of US citizens' investments in China?  Are the importers and investors the same and is this o.k. with them?  

  3. What could China do if they think they are getting screwed.

  4. What could US citizens could do if they weren't such a bunch of dumb fucks that they think trading their jobs for cheap, often shoddy, sometimes poisonous Chinese goods is a good deal.  

  5. Is there anyone besides the importers, such as WalMart, that benefit from this arrangement?

  6. Can our present economic theories make any sense out of this arrangement?


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 02:30:42 PM EST
[ Parent ]
... neo-mercantalist exchange rate policies.

It is, of course, a fuzzy question the extent to which a discounted peg is neo-mercantalism, and the extent to which it is just what a country has to do if it is trying to maintain a peg.

That is, if there is a cut-throat, non-cooperative international exchange rate system, then a country whose industrial development requires the stability of pegged exchange rates is forced to a discounted peg. A peg that is neutral "on average" will require as much defense from short-term downward pressure as from short-term upward pressure. And while a country defends a peg against upward pressure using its own currency, which it can create as required, defense against downward pressure requires the use of foreign exchange reserves, which cannot be created as required.

So a nation that needs to peg in the current, non-cooperative exchange rate system, needs to establish a discounted peg.

However, when the peg is arguably in the range of a 30% to 50% discount, such as the Chinese Yuan/Renminbi, there is no doubt that this is beyond the technical demands of a peg that can be defended, and into the range of pursuing a deliberately undervalued currency in an effort to export unemployment to overseas trade partners.

(1) Here in the US, our current combination of policies is pursuing short term profits for large corporations, by going along with the Chinese efforts to export unemployment and using the threat and reality of Chinese competition to squeeze down costs from competitive supplier networks across the board.

(2) The value of US investments in China is not a big issue, since the US has not had a substantial surplus on the capital account in the period since it has been possible to engage in foreign direct investment in China. And even for Japan, which has been in a position to accumulate FDI assets in China, the primary purpose has been to cement relationships with Chinese suppliers, and the benefits of the FDI are gained from the profitability of the operations at the final stages of the supply chain, rather than from repatriating profits from the Chinese operations.

(3) China knows perfectly well what they are doing ... they are doing it, after all, as deliberate policy established after much internal deliberation, study and debate, while in the US the complementary policy has been established on the basis of interest groups introducing enough noise and confusion in the political process that they can get the individual deals or individual loopholes that they require to play their part in the Chinese policy.

So its not a matter of the Chinese "realizing they are getting screwed", but rather the Chinese deciding that the situation has changed, and that their interest no longer lies in an exchange rate that is steeply discounted against the US$. I previously diaried on one scenario for that ... where the Chinese decide that imported inflation for Energy and other commodities is a more serious issue than their competitiveness in the US market, and decide to go for a partial revaluation of the yuan/renminbi.

If that happened, the US$ would drop, the US would gain new non-traditional export markets in various parts of the world ... though probably very little in the neo-mercantalist zone ... there would be some partial recovery at the margins of domestic production that has been under heavy pressure from import competition - though more in terms of things like machine tools and agricultural machinery than in terms of things like textiles ... the US mean standard of living would take a hit, and employment and economic would benefit, so that the median standard of living would either remain fairly stable or quite possibly rise.

The combination of some mild benefit to the majority of Americans and a big hit to the economic power of the US$ earnings of the top 1% would be portrayed in the US media as a massive crisis in US standard of living, and given the tendency of media to focus on mean averages rather than median averages, there would be all sorts of numbers floating around to persuade people that their personal experience of things being not so bad after all were only unusual special circumstances.

(4) It isn't like the median US citizen has decided to go along with the Chinese policy of exporting unemployment to the US ... when given an opportunity to vote against that policy, they do so. However, the example of this year tells the tale of the tape on that fight ... the nominees of the two parties for President this year only differing in terms of how enthusiastically to participate in the export of unemployment from China to the US. So the only votes that can be cast "against" are meaningless protest votes.

(5) All the big transnationals that benefit from a wage squeeze and weak organized labor in the US benefit from this policy. Its a big part of how they were able to accomplish a decade in which all the gains from productivity increases went to profits, instead of being split roughly fifty fifty as in the previous half century.

(6) There is nothing at all strenuous in this for a General Theory based Keynesian economics. Its only the cluster of traditional marginalist economic approaches that struggle to make sense of this, since they start at the outset with models in which the natural thing to happen is for foreign exchange rates to take the future trajectory of various economic paths into account, and therefore have baseline foreign exchange rates and domestic discount rates established at "fair prices" for both lender and borrower.

The fact that there is intrinsic uncertainty might be acknowledged by a traditional marginalist, but with modeling focusing on reactions to forces, there is no formal vocabulary for modeling the impact of true uncertainty in terms of the "universal" unaccounted for downside is always greater than the "universal" unaccounted for upside. The party accumulating net obligations ... the net "long" side ... is intrinsically more exposed to systematic risk from unforseen shocks.

All that is, of course, perfectly straightforward in a General Theory system, so its not like "no economic theory can cope with it", but rather that the economic theory that can cope with it has low social standing within the profession and therefore has relatively few people exploring its implications, bringing it up to date to the evolution of domestic economies and the international order, etc.

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 Sun Jun 1st, 2008 at 03:59:02 PM EST
[ Parent ]
I agree that a high discount peg weakens wage bargaining power in other countries, but still it means to give away one's goods for less than a free market price.
The idea, why economists have thought it might work out for both China and US, was that the US economy is so flexible and innovative, that even when losing old jobs, the US would easily create new jobs in different branches. So while China would get jobs, the US would get cheap products and still could have low unemployment (which is confirmed in a sense by the numbers of the past years).
The bad thing was, that too much of the extra working and credit capacity was only used in the credit distribute branch, instead of productive branches. It could have worked, if the extra work and capital capacity provided by the Chinese peg would have been used for investing in the future, like fossil fuel replacement...
Then at some point the Chinese imports would have replaced e.g. oil imports and it would not have distorted the long term US current account balance.

I don't think at all, that the Chinese gov is happy with the current situation. They just don't know how to come out. This is of course to some degree speculation, but it is clear, that abolish the current arrangement would create distortion in China. It is as well clear, that currently some investment is done in China, which won't be profitable any more, once the exchange rate moves significantly up. And keeping export subsidies going indefinitely is expensive.

The CA deficit of the US is much larger than the Chinese surplus. -> The responsibility for the US CA deficit is certainly not mainly China's.
China-EU trade is bigger than China-US trade. -> Everything which is due to China in the US economy should occur here, too (yes pressure on wage bargaining power is in the EU, too, but the CA deficit is much smaller).

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 04:36:20 PM EST
[ Parent ]
... is that if an economy has exhibited some characteristics ... "the US economy is so flexible and innovative" ... it will continue to exhibit it, and if only the government will stop intervening it will exhibit its intrinsic features that much more strongly.

When in reality the policy push for more "flexibility" in fact undermined much of the social infrastructure that gave such strong support for the "innovation", so the idea that those were intrinsic "natural" features of the US economy, entirely independent of government policy in terms of providing social infrastructure, was just wishful thinking.

The Chinese government, first and foremost, wants to avoid the mass unemployment that would result if growth dropped down to a sustained rate of 3% or 4% ... so, yes, of course they are not happy with every consequence of their current policy, but they are only going to move to an alternate policy if they think that either the growth potential of the current policy regime has run its course, or that there is an alternate policy regime that offers at least the same growth potential and other benefits on top.

On the US current account, no, the trade deficit with the neo-mercantalists do not directly account for the whole trade deficit. However, between the direct trade deficits with the neo-mercantalists and the side-effect on the US trade deficit of the artificially high value of the US$ that the neo-mercantalist pegs helped to maintain for so long, a lot of the push of the current account deficit beyond a sustainable range certainly can be traced back to the neo-mercantalists.

The other side of the push of the current account deficit into the unsustainable range is, of course, the ever-increasing sectoral deficit in energy. That was rising on the back of increased volume of net energy imports, and is now getting further amplified by the decline in terms of trade for energy importing nations.


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 Sun Jun 1st, 2008 at 04:52:04 PM EST
[ Parent ]
wishful thinking + advertising by US gov/business leaders

Actually as the US CA deficit was until recently larger than official financing of it, private investors must have believed as well in superior returns in the US. Otherwise the official inflows would have been accompangnied by private outflows, as it happens about since last summer, when the credit crisis became publicly aware.
This happens as well currently in the Euroarea, where private money flows largely out, while official money comes in.

I responded originally because it seemed you give the Chinese kind of a moral responsibility for the current situation in the US. Besides that the mercantilist policy has elevated hundreds of millions of Chinese out of poverty, this was an opportunity - a risky one, but still - to make large investments into the future with low interest rates and low inflation at the same time in the US. And it were not only private people who borrowed the money, but as well the gov, which obviously believes, that the future lies in a superior military. Without Chinese financing, the wars in Iraq and Afghanistan would be much more painful for the US tax payer. And to use this oppurtunity that way, was a decision made in the US, not in China.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 06:34:18 PM EST
[ Parent ]
... to commercial pursuit of long term investment opportunities ... there is also the net capital flows out of low income countries into high income countries, which is of course counter to the capital scarcity theory of how financial capital ought to flow, but makes perfect sense if you put yourself in the shoes of the wealthy in low income nations.

And of course, there are the capital flows still ongoing, even if not as great as in the earlier years of the decade, where Euro-zone based companies buy out Euro-zone assets owned by US-based companies ... that is a capital flow into the US, but rather than being based on any assessment of the long term appeal of the US as an investment proposition, is rather a legacy of past overseas investment by US firms.

On the moral responsibility of the Chinese government ... consequences for internal imperialism policies in Tibet, Inner Mongolia, Xinjiang ... that would be moral responsibility. Impact of a neo-mercantalist currency policy to export unemployment to a nation whose ruling elite seems positively eager to import unemployment ... given the vulnerability of many of those hardest hit, there's a clear moral responsibility there, but its hard to see how it can be laid at the feet of the Chinese.


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 Jun 2nd, 2008 at 01:31:34 AM EST
[ Parent ]
Nearly bought it, but then something came to my mind. European banks (incl. CH) have lost more than 100 bn $ recently on dubious credit based assets - and the losses are only a fraction of the investment and we speak about banks, not about hedgefunds, which were also in this business. I know even privately people who have invested in US real estate.
So there is lots of evidence that there was a lot of private money inflows into the US before summer 2007. I have strong doubts that Europeans were buying back more Eurozone assetes than Americans bought new ones.


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Jun 4th, 2008 at 07:24:45 PM EST
[ Parent ]
... to wishful thinking ... and since there's plenty of pandering to wishful thinking on both sides of the aisle, the "he said / she said" style of journalism can entirely avoid noting that its all naught but wishful thinking.


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 Jun 2nd, 2008 at 11:54:05 AM EST
[ Parent ]

its not like "no economic theory can cope with it", but rather that the economic theory that can cope with it has low social standing within the profession and therefore has relatively few people exploring its implications, bringing it up to date to the evolution of domestic economies and the international order, etc.

Thanks Bruce. Suspicions confirmed on that one!  I could never understand the Neo-Liberal line that Keynes' General Theory was based on a closed national economy and therefore had to be abandoned in "our new modern era of cleptocracy"  woops, "of globalization."  I couldn't understand why it couldn't be recast into a larger model and some effective accounts taken for the effects of international trade.  But then I have never disciplined myself to attempt to really understand Keynes.  Perhaps I should try.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 04:55:55 PM EST
[ Parent ]
They got that by reading watered down versions of the General Theory argument in which the terms of the theory were translated into national accounts according to the concerns of the translator, which were domestic economic management.

That is, if Samuelsonian economics is considered to somehow be an "updated, upgraded" Keynesian economics rather than considered to be a bastardized, watered down Keynesian economics, then there is no need to go back and read the original to "know" that the limitations of Samuelsonian economics are automatically also the limitations of the General Theory.

But in reality, most of the shackles in Samuelsonian economics were put in place in order to try to marry a Keynesian macroeconomics with an incompatible neoclassical microeconomics ... Samuelson seems to be, after all, the economist that Joan Robinson was referring to in her of-repeated aphorism, "converted against their will, is unconverted still".


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 Sun Jun 1st, 2008 at 05:15:25 PM EST
[ Parent ]
Samuelson, ca. 1961, was the first economics text I became familiar with, so that sounds right.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:17:19 PM EST
[ Parent ]
Samuelson's textbook? Bleurrgh!

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:40:35 AM EST
[ Parent ]
... its trying to do something that can't really be done.

The whole Samuelsonian system of putting a watered down version of mechanical Keynesian economics on a foundation of neoclassical microeconomics ... it doesn't hang together, but it was a convenient political compromise within economic departments at the time. Keynesian economics had too much prestige to ignore, and relying on Samuelsonian rather than General Theory macroeconomics meant that there seemed to be no need to fight with the neoclassicals over micro.

Of course, rebuilding the Keynesian aggregate model on incomplete foundations left it struggling to cope with "stagflation", as inflation in a world with neutral money is a quite different process than inflation in the real world.

I never used the Samuelson text itself, but I've used plenty of textbooks that inherit the Samuelsonian model.


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 Jun 2nd, 2008 at 12:25:44 PM EST
[ Parent ]
I tried the textbook, and then I tried the Foundations of Economic Analysis and I also went bleurrgh! and decided to go back and read the classics...

By the way, this thread is making me want to reread The General Theory. Are there other later books you would recommend apart from that, for macroeconomics?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 01:32:57 PM EST
[ Parent ]
No excellent answer pops into my head, which means I have to look into it more deeply.

A good counterpoint to some of the blind spots of even General Theory macro is Jane Jacobs Cities and the Wealth of Nations.


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 Jun 2nd, 2008 at 10:28:25 PM EST
[ Parent ]
Maybe there isn't a later book and Keynes is like Galileo waiting for his Newton...

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 3rd, 2008 at 05:34:30 AM EST
[ Parent ]
There are heaps of later books ... but its been a while since I read them, and I'll have to refresh my memory to sort out which ones are useful in their own right, and which ones are useful in parts, as long as you understand that part of the argument is nonsense.

And then there is the assumed audience ... some assume that the reader is already well versed in a post-General Theory approach, like Post Keynesian Economics.

JK Galbraith is always good ... so many of his books are useful for one or another question that its hard to narrow him down. For a later Post Keynesian economist of substantial influence, Paul Davidson's Economics for a Civilized Society gives a fairly readable introduction to his approach ...

... its also useful for punching through a lot of the Economist/FT type framing which sometimes show their "broad mindedness" by taking into account critiques from "house dissident" schools like New Keynesian economics ... Paul Davidson is a bit of a one-trick pony on intrinsic uncertainty, but its a critical point that traditional marginalist economics is incapable of addressing effectively.


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 Jun 3rd, 2008 at 10:08:08 AM EST
[ Parent ]
So, what about Veblen, Galbraith, Davidson and Jacobs? That should be good for at least a semester...

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 3rd, 2008 at 10:33:09 AM EST
[ Parent ]
That's a good mix.

For Veblen, Theory of Business Enterprise, although Veblen is always to be read a chapter at a time, make notes of what you think he was saying, and then reread the chapter, to find the points where he was in fact saying something else. He's the opposite of an "accessible" writer.

For Galbraith, A Short History of Financial Euphoria would seem to be especially relevant. And of course, Paul Krugman considers The New Industrial State to "not be real economic theory", which is a strong recommendation in its own right.


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 Jun 3rd, 2008 at 01:08:16 PM EST
[ Parent ]
Well, I read Galbraith's The Great Crash 1929 earlier this year, so maybe The New Industrial State would have lesser overlap than A Short History of Financial Euphoria.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 3rd, 2008 at 02:55:08 PM EST
[ Parent ]
The New Industrial State is a tremendous complement to the General Theory, because the General Theory is about those aspects of a monetary production economy for which you can draw a general theory ... rather than, as some people misread it, a "theory about everything in general".

The New Industrial State is a "special theory", about the post WWII corporate-dominated monetary economy of the United States. And being a special theory, it can go further into its particular topic area than a general theory can.


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 Jun 3rd, 2008 at 03:01:09 PM EST
[ Parent ]
Thanks, I hadn't heard of Jane Jacobs.

Her books are not stocked by online booksellers in the UK, but they sell for a couple of quid second-hand on Amazon.co.uk...

The Guardian: Obituary: Jane Jacobs (April 28 2006)

Influential fantasies about the perfect urban settlement had aggregated in the US over the previous 75 years into the dominant planning concept that she mocked as the "Radiant Garden City Beautiful", RGCB. "Cataclysmic money" was spent razing extant if tatty inner city zones, with their diverse uses, their self-generated social and economic energy vibrating on crowded sidewalks. They were to be replaced with RGCB public projects, segregated by income (therefore by colour: Jacobs was a fierce civil rights activist), with dwelling towers soaring above ornamental planting; by isolated civic and cultural precincts; by shopping malls dominated by retail cartels; by car parks linked by expressways. Together, these would aggregate into the city as a work of art, the vision of heroic egotists in generational revolt against the 19th century.

Everything would be provided: Jacobs thought everything "was the worst thing we can provide" and cited a preacher's prophecy that there would be gnashing of teeth in hell. A child asked: "What if you don't have teeth?" "Teeth will be provided." "That's it," Jacobs said, "the spirit of the designed city: Teeth Will Be Provided for You."

...

Jacobs met her arch-enemy, New York City master-planner and builder Robert Moses, who overrode residents to obliterate entire districts for automobile access to Manhattan. She recalled him, in a fury at her attempt to thwart his grand designs, yelling, "There is nobody against this - NOBODY, NOBODY, NOBODY, but a bunch of ... a bunch of MOTHERS!" and stomping out. She protested against his expressway ambitions through the 1960s, and was arrested on charges of riot and criminal mischief. The Janeites won that battle, too; Roger Starr, NYC housing administrator, acknowledged that despite Jacobs's homespun manner, "What a dear, sweet character she isn't."



When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 3rd, 2008 at 05:50:25 AM EST
[ Parent ]

No excellent answer pops into my head, which means I have to look into it more deeply.

One might think that 70+ years after the emergence of a General Theory apparently adequate to the task of explaining a complex economy, and which, by extension, should serve as the foundation of computer based models of the economy, that the failure of the field of economics to provide such an updated theory says something fundamental about the nature of the discipline and the great majority of its practitioners---and that what it says is not flattering.

Three questions present themselves:

1.) Were an updated General Theory capable of making verifiable predictions about the international economy developed and written so that it stands alone, without requiring prior understanding of Keynes's General Theory, generally be used as a text for macroeconomics in undergraduate and graduate courses?   (i.e., would it be commercially viable?)

2.) Could such an updated General Theory be used, (or have such updated theories been used), to generate computer based economic models with significantly more predictive and explanatory power?

3.) If, as seems likely, both 1. & 2. could be done, what does the fact that they have not been done show?

Historian Christopher Hill, in describing the reluctance of the Puritans to execute Charles I, proposed that there had been a "mind stop" in place that made a necessary step unthinkable.  Is that what is happening here?  Would production of such a theory and creation of such a model make the author such a pariah that no one is willing to do it?

Just asking? :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 4th, 2008 at 09:49:52 PM EST
[ Parent ]
1.) Were an updated General Theory capable of making verifiable predictions about the international economy developed and written so that it stands alone, without requiring prior understanding of Keynes's General Theory, generally be used as a text for macroeconomics in undergraduate and graduate courses?   (i.e., would it be commercially viable?)
What you're looking for is a Feynman Lectures on Economics, so to speak, which as you know would have a cult following and hence be commercially viable but would be very unlikely to be used in any courses, graduate or undergraduate.
2.) Could such an updated General Theory be used, (or have such updated theories been used), to generate computer based economic models with significantly more predictive and explanatory power?
I suspect such (explanatory, I don't know about predictive) models could already exist, based mostly on Leontieff's Input/Output analysis. Also things like the model developed by the Club of Rome for the Limits to Growth.
3.) If, as seems likely, both 1. & 2. could be done, what does the fact that they have not been done show?
Are they really likely and to what extent? Bruce says downthread
the General Theory is about those aspects of a monetary production economy for which you can draw a general theory ... rather than, as some people misread it, a "theory about everything in general".
Also, Economics is more like evolutionary biology and ecology and an evolutionary discipline cannot be predictive except in the short term. In this case, the rate of economic innovation is much faster than the rate of speciation which makes "the short term" really short.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2008 at 02:30:32 AM EST
[ Parent ]

Also, Economics is more like evolutionary biology and ecology and an evolutionary discipline cannot be predictive except in the short term. In this case, the rate of economic innovation is much faster than the rate of speciation which makes "the short term" really short.

I agree that explanatory is much more likely than predictive.  Predictions in emergent systems are always precarious.  With so many of those able to deal with these questions "in it for the money," for themselves and/or their backers or employers, it would seem that there are massive perverse incentives to keep the discipline as arcane as possible.  These folks would not welcome clarity any more than casinos would welcome a ban on scantily clad women plying gamblers with liquor.  The last thing they want is a level playing field.  The capital markets, especially of the USA and Great Britain, have become the by-product of the activities of casinos we call stock, bond and futures exchanges.  The question is how to build support for a restructuring of this socially destructive system.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2008 at 01:09:46 PM EST
[ Parent ]

I suspect such (explanatory, I don't know about predictive) models could already exist, based mostly on Leontieff's Input/Output analysis. Also things like the model developed by the Club of Rome for the Limits to Growth.

I would think such formulations would be most likely to be embedded in the source code of economic models, proprietary and inaccessible to all but those who maintain the model.

What I was getting at was the question of whether there might be some competitive advantage to a better theory that might facilitate adoption of said theory.  If so, this might be a disruptive technology that could be exploited towards beneficial ends.  More likely is that it would immediately be employed to build more profitable casinos.

The current Neo-Classical Economic Mythology seems to be the bastard offspring of Loki and Fortuna.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2008 at 01:28:17 PM EST
[ Parent ]
(3) China knows perfectly well what they are doing ... they are doing it, after all, as deliberate policy established after much internal deliberation, study and debate, while in the US the complementary policy has been established on the basis of interest groups introducing enough noise and confusion in the political process that they can get the individual deals or individual loopholes that they require to play their part in the Chinese policy.
That means China's bound to eat the US' lunch. I'm sure Sun Tzu must have an aphorism that puts it much better, though.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sun Jun 1st, 2008 at 06:11:34 PM EST
[ Parent ]
My response to that is more judo than counter-attack ... the US can pursue an economic policy that does not put it in direct opposition to China's most urgent needs, and if it does so, that opens up more possibilities of a non-confrontational forty years ahead.

And with Peak Oil and the Climate Crisis, its not like we need a hegemonic transition World War right now.


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 Sun Jun 1st, 2008 at 09:02:40 PM EST
[ Parent ]
But if the USA continues to allow the current policy, which is of, by and for the looters, he is right and the Chinese will eat our lunch, n'est pas?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:21:05 PM EST
[ Parent ]
Yes, but for the looters, its doesn't much matter who eats our lunch, as long as we are not getting the damn fool idea in our head that citizens in a high income country should not be worried about having a lunch to eat.


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 Sun Jun 1st, 2008 at 10:33:04 PM EST
[ Parent ]
Bruce,

Do you really think it can go on for even another 20 yrs?  The other thing this policy is facilitating is massive climate degradation.  All that CO2 isn't going to stay in China.

Does anyone have a map showing what the continents will look like after a 70 meter rise in sea level from the melting of the Greenland and West Antarctic Ice Sheets?

We may be at Peak Oil, but how about Peak Coal?

I believe most of the climate models assume that the ice sheets will melt slowly, in a linear fashion.  What if that is not correct and the process is non-linear and catastrophic?  I'm about 700 ft above current sea level.  How about the rest of you?  But this is getting seriously off topic.  Perhaps it would better serve as a separate diary.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:56:28 PM EST
[ Parent ]
... to maintain as close to 10% economic growth as they can for the next ten years at least ... I don't know that its necessary for them to maintain the same breakneck pace for 20 years. At a certain point, the massive growth rates in the Chinese labor force begins to slow.

Anything we in the West can do to contribute to a reduction in the CO2 impact of large scale construction projects in China ... we should do. For our own sake.

As long as the US furiously subsidizes the most energy inefficient transport and settlement system we can, our "contribution" to CO2 is secure, entirely independent of how many tube socks and $10 PSP rip-offs we buy from China.

The relevance to the climate crisis is less direct ... an international economic policy which places the median household in increasing stress in service of corporate profits makes for a policy environment where it is harder to pursue broader national interests like not drowning most of the eastern and western and southern seaboard cities.


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 Sun Jun 1st, 2008 at 11:35:17 PM EST
[ Parent ]
A lot of the climate models seem to have modelled the ice sheets as ice cubes when they behave more like a drop of honey. Ice cubes are very poor heat conductors, insulate their own interior, and only melt on the surface. A drop of honey gets less viscous and flows more easily as it warms up. But I am not an expert on climate modelling.

On Peak Coal, when people throw around estimates that there are 200 years' worth of reserves at current extraction rates, they forget that at, say, 3% yearly growth of extraction rates there's barely 50 years' worth, and if coal starts picking up the oil slack the growth rate of use will be larger than 3%. We should worry about peak fossil carbon.

Or then again, maybe not. Burning all the fossil carbon is one of the stupides things we can do, climate-wise.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 07:05:18 AM EST
[ Parent ]

A lot of the climate models seem to have modelled the ice sheets as ice cubes when they behave more like a drop of honey.

Lately I have been reading articles in Science News and elsewhere about glacial lakes melting holes through very thick glaciers and disappearing through said holes. It appears that this additional water further lubricates the interface between the ice and the rock below, increasing the rate of glacier flow. Such processes have been observed both in Greenland and West Antarctica.  I believe that the melting of the two ice sheets would product an increase of about 70 meters in sea level.

I recall an article arguing that the break-up of the North American Ice Sheet at the end of the last ice age had occured quite rapidly and that the influx of fresh water had temporarily disrupted the Gulf Stream and that this accounted for an unexplained episode of re-glaciation in Western Europe.  Non-linear processes can proceed quite rapidly.  This is what makes me worry that it may be later than we think.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 4th, 2008 at 10:14:11 PM EST
[ Parent ]
Lately I have been reading articles in Science News and elsewhere about glacial lakes melting holes through very thick glaciers and disappearing through said holes. It appears that this additional water further lubricates the interface between the ice and the rock below, increasing the rate of glacier flow.
Right! In hindsight, this should have been predictable.

Since ice floats in water, a water lake on top of a glacier is metastable and really wants to be under the glacier. The question is, how does it get there without freezing over?

As you know, around the ice/water phase transition a pressure increase can induce melting (due to the lower specific volume of water). Thus, if the lake is deep enough, hydrostatic pressure at the boundary may be large enough to induce melting. The open boundary of the lake will probably undergo some freezing, but once frozen over the ice layer acts as a thermal insulator and this process slows down. The pressure melting of ice at the bottom is a runaway process.


When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2008 at 02:41:35 AM EST
[ Parent ]
The US doesn't do Judo, Putin does Judo.

The US sets up football lines of scrimmage.

The US plays Chess and the Chinese play Go.

Do you expect the next US administration to "not put itself in direct opposition to China's most urgent needs" or to consciously avoid a "hegemonic transition World War"? And, if not, how do we get such an administration in place by 2012?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:41:05 AM EST
[ Parent ]
How would China benefit from a hegemonic war?

It's likely the US nuke capability would be the last thing to go in any decline.

You can lose all of the toy soldiers and submarines and planes, but if you still have more nukes than anyone else, you're a playa - even if half of them won't work on demand.

I think a buy out of some sort is more likely. The Chinese are relatively smart, unlike the US political class, which is almost terminally stupid, so the Chinese are unlikely to start a war they can't win within taking heavy damage.

So I wouldn't be surprised to see conquest by osmosis, with China buying up the remains of the US corporations and introducing Chinese working practices to them, possibly with a figurehead or puppet president - in much the same way that Bush is a Saudi puppet, only rather more so.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jun 2nd, 2008 at 07:27:27 AM EST
[ Parent ]
In other words, it's for the Chinese to avoid a hegemonic war. As the Chinese understand the importance of losing face they might be able to get what they want while allowing the US elite to believe they're still hegemonic, but it's up to them to try because the US will not.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 07:33:39 AM EST
[ Parent ]
... has to be done from bottom up ... in the US, its not possible for it to happen from the top down.

To the extent that there is a mandarin class in the US that could both look that far ahead and then implement it, they work for corporations and have not loyalty to the US as such. Since corporate interest requires throwing the long term interests of the nation under the bus, that is precisely what they would be looking to do.


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 Jun 2nd, 2008 at 12:32:59 PM EST
[ Parent ]
To the extent that there is a mandarin class in the US that could both look that far ahead and then implement it, they work for corporations and have not loyalty to the US as such.

I was afraid you would say just that.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 01:38:45 PM EST
[ Parent ]
... which then implies that it has to be done via coalition politics.

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 Jun 2nd, 2008 at 03:26:30 PM EST
[ Parent ]

The combination of some mild benefit to the majority of Americans and a big hit to the economic power of the US$ earnings of the top 1% would be portrayed in the US media as a massive crisis in US standard of living, and given the tendency of media to focus on mean averages rather than median averages, there would be all sorts of numbers floating around to persuade people that their personal experience of things being not so bad after all were only unusual special circumstances.

MORE SUSPICIONS CONFIRMED!

The question then becomes: HOW CAN WE CONVINCE A MAJORITY OF THE VOTERS, FOR ONCE IN THEIR LIVES, TO LET THE FAT CATS STEW IN THEIR OWN JUICES RATHER THAN GIVING THEM OUR RETIREMENT FUNDS TO BAIL THEM OUT.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:31:49 PM EST
[ Parent ]
You'd have to convince the 20% (or whatever it is according to polls) of Americans who believe they are or will eventually be among the top 1% that they're deluded.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:40:16 AM EST
[ Parent ]
I'm back.

"You'd have to convince the 20%.."

Unfortunately, it's not just the 20% who think they are or soon will be in the top 1%.  Probably at least another 20% think their kids will be, and another 20% think that everyone should have the opportunity to be in that top 1%.  They seem not to realize that as the very rich get much richer, there is less opportunity for the middling to even make it to the top 2% or 3%.

Spreading awareness of how difficult it is to become very wealthy starting from very little would help. As would an awareness of how the income level rises asymptoticly if plotted in 0.1% increments over that last 1%.  

An interesting article in Barron's a couple of months ago talked about what it really means to be wealthy.  According to the author, net worths of $2-3million weren't really considered wealthy.  If I recall correctly, it wasn't until one got to around $10 million net worth that one ceased to have to worry about catastrophic illness devastating one's wealth and were assured of being able to leave your heirs with the security of a trust.  I think it was around $20 million that enabled one to forgo commercial jet travel in favor of private or charter service.  This is so far from anything relevant to my personal situation....

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 4th, 2008 at 06:19:52 PM EST
[ Parent ]
You know, that is still way over my head.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sun Jun 1st, 2008 at 06:07:28 PM EST
[ Parent ]
Alas, just when this is getting really good, I have to depart on a three day road trip to St. Louis and back.  i just hope it is still going when I get back.  Later.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 10:23:16 PM EST
Currency reserves are ...

(1) under a fixed exchange rate system, what allows a central bank of a currency zone to ensure that payments clear in the short term in the case of imbalances in payments that may require a revaluation if they persist into the longer term.

(2) under a floating exchange rate system, what allows a central bank of a currency zone to intervene in foreign exchange markets to prop up the value of a currency.

When the central bank in (2) is not targeting a specific rate, but is simply intervening to slow down the pace of exchange rate movements, this is called a "dirty float".

If the central bank of a currency zone wishes to maintain a stable exchange rate with another currency, or basket of currencies, then it can do so in the context of a floating exchange rate system by pegging at an undervalued rate (using the indirect foreign exchange rate to simplify the language ... that is, the currency in question as a commodity to be bought and sold in some foreign exchange market overseas somewhere).

Pegging at an undervalued rate is possible because defending against an increase can be done by issuing more domestic currency and using that to purchase foreign exchange.

Pegging at an overvalued rate is not sustainable in the long term, because it requires using foreign exchange reserves, and the central bank of a currency zone has no ability to create new foreign exchange. Since its not sustainable in the long term, it can also attract speculative activity, and since the defense against that speculative activity consumes the foreign exchange reserves at an even faster rate, the speculative attack itself is likely to attract further speculation, creating a "feeding frenzy".

And since pegging means that the exchange rate remains stable, while foreign exchange market valuations are intrinsically volatile, a peg that is "neutral on average" would part of the time be above market valuation ... so to maintain a peg, the discounted peg on the one hand reduces the frequency when the peg has to be defended against falling, and on the other hand results in accumulation of foreign exchange reserves, making speculators less confident that a speculative attack will succeed, making a speculative attack less likely.

Foreign exchange reserves normally only come into attention when there is a capital accounts crisis in a country with a sudden surge of capital outflows ... the immediate impact of that is a collapse in the exchange rate, which can interfere with essential imports (food, fuel, etc.), but the central bank can use the foreign exchange reserves to prop up the exchange rate and slow the decline while the government tries to sort out a more permanent fix.

Also, countries that try to maintain an overvalued exchange rate have to try to capture foreign currency inflows as they occur and ration that currency among competing uses ... they are the countries for whom "x days foreign exchange reserves", means effectively, "x days of hard currency in the bank".

That's what foreign exchange reserves are ... they are used when a central bank is propping up an exchange rate, and accumulated when pushing down exchange rates.  The exception are a range of fourth world countries whose domestic currency is mostly treated as worthless beyond its national borders, for whom foreign exchange reserves are basically the total amount of "international money" that its central bank has available to allow payments for imports and overseas income obligations to be made.


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 Sun Jun 1st, 2008 at 11:07:02 PM EST
BruceMcF:
Pegging at an overvalued rate is not sustainable in the long term, because it requires using foreign exchange reserves, and the central bank of a currency zone has no ability to create new foreign exchange. Since its not sustainable in the long term, it can also attract speculative activity, and since the defense against that speculative activity consumes the foreign exchange reserves at an even faster rate, the speculative attack itself is likely to attract further speculation, creating a "feeding frenzy".
Explains Soros' ejection of the Pound from the European Monetary union as well as the Argentine corralito crisis and many others coming from pegging weak currencies to the dollar. It also might explain what happened in 1925 when Churchill as Chancellor of the Exchequer ignorantly set the exchange rate of the pound to the gold standard too high.

However, it is impossible for everyone to attempt a long-term peg of their currency as not every currency can be (slightly) undervalued at the same time. Was that the basic weakness of the gold standard and then of the bretton-woods systems before Nixon foated the dollar?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:33:06 AM EST
[ Parent ]
... a peg within a floating point system, but rather its a fixed point system.

A fixed point peg can be defended from speculation, so long as the side under pressure to devalue is defended by the other central bank ... because the other currency is under upward pressure, and that central bank can create its own currency to defend against upward pressure.

When the pound was forced out of the ERM, the Bundesbank did not want to defend the ERM exchange rate of the pound, AFAIR because it was faced with the inflationary impact of the integration of East and West Germany, and the side effect of pushing down against that upward pressure is an increase in supply of reserves, pushing down the floor inter-bank reserve lending rate.

And the Bank of England AFAIR did not want to defend the pound by increasing interest rates, AFAIR because the UK was coming out of a recession, so as it defended the FXR with purchases of pounds using foreign exchange reserves, at the same time it issued pounds as reserves domestically to keep the interest rate down.

To be able to defend a system of pegged exchange rates, you either need the central banks on either side of the peg to put first priority on defending the exchange rates, or regulatory controls on flows of financial capital across international boundaries, or both. The EU eliminated the capital controls in transactions between ERM members, and as it turned out when push came to shove, the priority on defending the ERM was not there.

The break-down of Bretton Woods was similar ... in the original Bretton Woods system, all currency pegs were to gold, and net clearances were in gold. The use of US$ for clearances was a convention that developed, to avoid the inconvenience of net clearances between reserve banks in gold.

When France refused to accept that the US$ in the early 70's was at the correct peg to gold, and demanded clearances in gold, the US was faced with either an ongoing series of devaluations by the USG, a radical change in economic policy to reduce the downward pressure on the dollar which showed up in the requirement to pay net clearances, or else an abandonment of the Bretton Woods system. In the end, though it took a little while to play out, the last course was taken.


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 Jun 2nd, 2008 at 09:44:10 AM EST
[ Parent ]
BruceMcF:
Foreign exchange reserves normally only come into attention when there is a capital accounts crisis in a country with a sudden surge of capital outflows ... the immediate impact of that is a collapse in the exchange rate, which can interfere with essential imports (food, fuel, etc.), but the central bank can use the foreign exchange reserves to prop up the exchange rate and slow the decline while the government tries to sort out a more permanent fix.
Does peak oil qualify as a sudden surge of capital outflows in energy-importing countries?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:34:31 AM EST
[ Parent ]
... therefore requiring either reduction in other current account outflows to balance it within the current account, or else an increase in capital account inflows ... as they say, "recycling the oil wealth".

For those who don't recall the debt crises of the 80's ... the push to recycle the current account surpluses of the OPEC oil exporters in the later 70's was a big part of laying the foundation for the debt crises of the 80's.

The first cabs off the rank in that series of debt crises were those developing nations like Brazil that has a strategy of relying on heavy foreign borrowing, where the knock on its current account from the oil price shocks suddenly left it unable to service its overseas obligations. But the push to recycle oil incomes made that worse as well ... when Brazil was in the stage of borrowing to meet existing debt obligations, the push by major money center banks looking to attract oil country funds by offering high returns meant that Brazil was able to dig itself far deeper into a hole than it should have been able to do.

The big change now is that we have just gone through a big wave of the same thing, except this time recycling the profit income gained by appropriating basically all productivity gains for nearly a decade, rather than splitting them with labor roughly 50:50 as under the Fordist regime. How the challenge of recycling oil incomes is going to work out in the current climate is anyone's guess.

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 Jun 2nd, 2008 at 10:37:33 PM EST
[ Parent ]
... payments differently for a common market? For a common currency zone?

For a common market, the problem is that as economies in the common market become more and more intertwined, and as supply chains cross and recross borders with greater frequency, volatile exchange rates interferes with the unit of account function of money, which is critical for long-term planning of large, complex industrial processes.

So its not so much that we have to think of the balance of payments differently, but that the trade-offs between floating and fixed exchange rates within the common market can shift in favor of fixed exchange rates.

For a common currency zone ... yes, of course. While the central banking system for a common currency might be federalized in a variety of ways, complicating the process of making monetary policy, or the process of working out what the monetary policy actually is, one money can have only one monetary policy with respect to underlying cash interest rate and only one foreign exchange rate with each other currency.

The most relevant balance of payments for the Euro-zone is, of course, the aggregated Euro-zone balance of payments. However, that is impolitic to make a big deal about, because it would be one more road-block to expanding the Euro-zone to include more of the EU membership, so I guess everybody just continues to publicly pretend that it is the national balance of payments that matter, while in private running up spreadsheets to aggregate the Eurozone nation accounts when they want to look at what is really going on.

Balance of payments for individual US states would be meaningless ... regional import/export flows are relevant, and possible to estimate to a certain extent, but working out capital accounts data would be, on the one hand, extremely hard and on the other hand, pretty much pointless, since there is no way that the US$ is going to collapse in value because of a rush of capital flows from California to New York or New York to Illinois ... given that no currency exchange is required in the funds so that the flow of funds has no effect on any US$ 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 Sun Jun 1st, 2008 at 11:19:26 PM EST
BruceMcF:
The most relevant balance of payments for the Euro-zone is, of course, the aggregated Euro-zone balance of payments. However, that is impolitic to make a big deal about, because it would be one more road-block to expanding the Euro-zone to include more of the EU membership, so I guess everybody just continues to publicly pretend that it is the national balance of payments that matter, while in private running up spreadsheets to aggregate the Eurozone nation accounts when they want to look at what is really going on.
When looking at those spreadsheets, how easy is it to distinguish external flows to/from other Eurozone states from external flows to/from third party states?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Jun 2nd, 2008 at 06:28:25 AM EST
[ Parent ]
When working with the balances ... you can just add them. A capital transaction outflow from one Eurozone nation that is an inflow to another will show up as a + in one balance and a - in the other, so when the balances are added up, it drops out.

When working at the individual accounts, you need to sum the individual accounts and then subtract the sum of the corresponding account for each bilateral flows within a group, to work out a set of balance of payments for a given bloc.

If bilateral flows of each member of the Eurozone have already been grouped to give a figure "to other Eurozone nations", that simplifies that second process substantially.


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 Jun 2nd, 2008 at 09:20:03 AM EST
[ Parent ]


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