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Grrr... Martin Wolf still blames the Chinese for the Anglo Disease

by Jerome a Paris Wed Jun 18th, 2008 at 07:26:54 AM EST

Martin Wolf is still pushing the notion that a savings glut brought us to the current crisis:

Interventionist policies aimed at sustaining export competitiveness expand economies. The results normally include rapid rises in net exports, low interest rates, aimed at curbing the capital inflow, and expansion in the monetary base, despite attempts at sterilisation. The Chinese economy is overheating as a direct result of this trio of effects.

Most of these reserves were accumulated by countries more or less explicitly targeting the US dollar and accumulating US liabilities. The resulting capital flow financed the US trade and current account deficits. But a trade deficit is contractionary: for any given level of domestic demand, it lowers domestic output. Thus, the US needed to expand domestic demand, in order to offset the contractionary effect of the external deficits. Some groups within the economy needed to spend more than their incomes. The most important such group turned out to be households. Thus the growth in US household indebtedness that led to today’s “credit crunch” is a direct result of the global imbalances.

He goes on to say (correctly) that this creates a policy headache as the Fed is now trying to expand a post-bubble US economy right at the time when emerging economies, which are pegged (by their choice) to the dollar, are booming and need to slow down. He is also right to note that global inflation (fuelled in his view by the expansionist policies of the exporters) is a threat that requires coordination of policies.

The problem is that he gets the initial diagnosis wrong- the cause of the current imbalances - and of global inflation - was Western, and in particular US - policies focused on providing cheap debt. The reason Western consumers had to borrow was not to absorb the Asian surpluses, it was to compensate for their stagnant incomes caused by macro-economic policies that favor short term corporate and financial profits over everything else. All follows from there: the Asian surpluses were a response to that surplus demand from the West (supported, it is true, by the mercantilist policies of these countries); inflation was created then, but took the shape of asset price inflation rather than goods inflation (thanks to the artificial price competitiveness-protecting policies of the Asian exporters) - it is only now spreading to other goods as the emerging economies overheat and put pressure on global resource availability.

The financial bubble has now burst, creating pain for all, but the inflation it unleashed previously is still there, and lowering interest rates today is like opening the door after the horses have bolted...

Earlier Anglo Disease articles.


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Here's an idea, Marty: Stop running huge deficits to finance psychotic policy proposals.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 18th, 2008 at 07:41:35 AM EST
stop running insanely policies that you're not paying for (dumping the bill on the next generation - they can't complain, or exhausting the reserves built up by our parents - how naive were they?)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 18th, 2008 at 11:43:29 AM EST
[ Parent ]
Isn't that what I said?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 18th, 2008 at 03:31:03 PM EST
[ Parent ]
Not doing insane policies would stop both the insane policies and the budget hemorrhage. Paying for them now would only stop the latter :-P

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 19th, 2008 at 03:55:12 AM EST
[ Parent ]
During the last 2/3 decades we have been living in a cultural setting that could be defined as short termed/short sighted:

Companies are measured on yearly profits, with continuous (exponential) growth expectations.

Workers are expected to "adapt" and "be flexible".

Long term planning is scorned as "socialistic", the immediate invisible hand of the market solves everything.

Cultural consumption (just the idea of defining culture as consumption-only is revolting) is for short lived products...

We are seeing some fundamental changes in the world (peak oil) which require a completely different mindset: Planning, organization, seeing more than only our own belly... Steady-state economics (well, declining economics, really) as opposed to perma-growth.

The problem is: the cultural framework is so unprepared for the idea planning or addressing problems in a collective way.

My point is: wage stagnation (maintaining lifestyles on debt) is just the tip of the iceberg of society inadaptation to the coming resource constrained world.

Middle-lower class income stagnation was a good explanation for our past problems. But, in the future, there is much more than that on the "Anglo disease" lifestyle that is simply out of touch with the basic premises that will be around.

It is not clear to me that people will be prepared to accept reasonable long-term solutions. The path will not be one of the least pain, on the contrary (although you start to see some of the resource scarcity discourse showing up).

by t-------------- on Wed Jun 18th, 2008 at 08:11:25 AM EST
Most of the political, military and economic circus in the world is for the US internal consumption, in favor of dominant economic classes. They came a long way. It is even hard to distinguish how many work for them, or is there any real opposition at all anywhere.
by das monde on Wed Jun 18th, 2008 at 09:24:16 AM EST
[ Parent ]
people have been shown that they should not care about the future, that they should care only about what has monetary value, and now, for many, cannot do otherwise, or don't know that they can do otherwise.

It's self-sustaining in that the narrowmindedness and selfishness of others pushes us to do the same, if only for temporary self-preservation.

Only people that have something and voluntarily renounce it in the name of a greater good can lead, by example.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jun 18th, 2008 at 11:46:24 AM EST
[ Parent ]
Bigger than all of this is the "Peer to Peer" connectivity of the Internet.

The consequences of dis-intermediation of the financial system - which is continuing - and the consequent transition from a transaction-based economy to a service-based economy will change everything IMHO.

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

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 01:05:55 PM EST
[ Parent ]
Do you have any pointers/ideas to share about this?

I would have some (a lot, actually) interest in reading about the possible consequences of the emergence of a peer to peer relationship model as opposed to the the current intermediation model that exists in many of human activities.

Thanks

by t-------------- on Thu Jun 19th, 2008 at 11:27:42 AM EST
[ Parent ]
The interface between economic activity/markets and the Internet essentially underpins everything I have been working on for the past 10 years.

I wrote

Market 3.0

about seven years ago and was interested to see it recently taken up by Michel Bauwens of the P2P Foundation on his blog.

The stuff on my site concerning what I call

Open Capital

has long since gone from the conceptual to practical application (in Scotland , mainly) of the partnership-based dis-intermediated legal and financial structures or "enterprise models" I observe emerging and suitable for frameworks for "Peer to Peer" direct connections.

This subject litters my ET Diaries and comments - ad nauseam for many here I know, although I think I have made a few "converts"!

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

by ChrisCook (cojockathotmaildotcom) on Sat Jun 21st, 2008 at 06:15:14 PM EST
[ Parent ]
This reminds me of the episode in the US where Regan tried on and attempted to claim the legacy of FDR for the Republicans.  Deliberately confounding and deeply grotesque.

Were Woolf to put as much effort into pinning the problem on Greenspan's interest rate policies and resolute refusal to use regulatory powers given the Fed in 1994, would it be possible for him to long continue writing for the FT?  More rhetorical misdirection in the service of all who benefit from The Anglo Disease.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 18th, 2008 at 09:55:39 AM EST
The problem is that he gets the initial diagnosis wrong- the cause of the current imbalances - and of global inflation - was Western, and in particular US - policies focused on providing cheap debt.
The 'savings glut' lowers interest rates, some are more receptive than others to take debt with lower rates. There is no objective correct behaving on this. It is as much nonsense to blame those countries who took the debt as those which lend. It is about an agreement of mature people and no side should try blame the other for its own pain. Max Weber said, if you have one single reason for a complex social development, you are almost certainly wrong. Neither Fed nor govs reacted, but just some actors not stopping something isn't the sole reason for something to happen.

The reason Western consumers had to borrow was not to absorb the Asian surpluses, it was to compensate for their stagnant incomes caused by macro-economic policies that favor short term corporate and financial profits over everything else.
I completely disagree with this. Western countries had to absorb Asian surpluses or building up trade barriers, as Asian countries have/had explicitly mercantilist policies. Incomes were stagnant largely because of the competition with low wage countries. Wages in the US, UK, Ireland, Spain have grown faster in recent years than e.g. German wages. If your thesis would be correct, German consumers would have borrowed much more than consumers in the above countries. This is clearly not the case, e.g. the term 'Western consumers' is not really what I think is appropriate.
Among the reasons I would suggest for the anglo disease

  • different cultural acceptance of debt
  • different cultural view on showing off, btw. keeping up with others
  • type of prevalent industry before it began
  • expectation of future financial situation
  • autosuggestion into the believe that high deficits are no problem
  • policy reaction (at least under Clinton) to counter what you suggest as reason, but not to deal with a given Asian surplus (that means, if the state borrows less, consumers will borrow more)


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Jun 18th, 2008 at 11:52:17 AM EST
Germans did not go for debt and "enjoyed" the low growth caused by stagnant incomes. Which kinda makes my point that debt was used to hide the real consequences of stagnant wages in other countries, especially the Anglo ones.

I disagree fundamentally that it is the mercantilist policies that caused the export surplus of these countries. It is US deficits fuelled by debt that created the surplus. The mercantilist policies did feed the cycle, but did not initiate it. Of course you had positive feedback after, but the real decision was to keep interest rates low in 2001-2004, along with the tax cuts to the rich that fuelled inequality.


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

by Jerome a Paris (etg@eurotrib.com) on Wed Jun 18th, 2008 at 03:58:35 PM EST
[ Parent ]
So low Fed funds rate is responsible for the deficit e.g. India has with China? Why have several Asian states such high reserves, e.g. gov decided saving instead of private decisions to save?
The mercantilist policy in Asia was an answer to the crisis in the end of 90s. You think Asian countries would not try to make a policy, which would prevent such a crisis to happen again? That this is just a random outcome of decisions made by others?
I don't deny that the Fed would have had the power to reduce the propensity to private debt in the US, but one shouldn't blame only the borrower if a deal turns out to be bad. The lender is as responsible, or he has nobody to blame. The same accounts for those who took the debt. Nobody can say, 'oh, the rates were so low, I had to buy an oversized and overpriced house'.

Recently I have started to read Nassim Taleb's 'The Black Swan'. The thing I found most interesting so far, is a piece about how humans tend to build narratives around facts. 'Savings glut' and 'Promotion of debt' seem to be such narratives. Both may describe the truth, but it includes already an interpretation of what is the morally correct propensity to take debt. It is more than just facts.

Furthermore I don't think at all, that CA deficit necessarily leads to anglo-disease. That is what stroke me even more in Wolf's article than his 'savings glut',
The most important such group turned out to be households
This was visible since quite some time, and nobody reacted on it. 'It turned out' sounds a bit like fate, but 4 years ago those who could have changed that, found lots of good reasons, why consumer debt is a great idea. But of course you can use a CA deficit as well to build up infrastructure, to kickoff research and other business investments, to overcome a temporarily demographic situation (e.g. lots of kids),...

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Jun 18th, 2008 at 05:55:23 PM EST
[ Parent ]
Recently I have started to read Nassim Taleb's 'The Black Swan'. The thing I found most interesting so far, is a piece about how humans tend to build narratives around facts. 'Savings glut' and 'Promotion of debt' seem to be such narratives. Both may describe the truth, but it includes already an interpretation of what is the morally correct propensity to take debt. It is more than just facts.

Have you read Per Bak's How Nature Works?

I have mentioned Taleb in some earlier diaries. Maybe you'd like to do a review of Black Swan when you're finidhed with it?



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 Wed Jun 18th, 2008 at 06:26:18 PM EST
[ Parent ]
Maybe you'd like to do a review of Black Swan when you're finidhed with it?
Sure.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Thu Jun 19th, 2008 at 09:02:17 AM EST
[ Parent ]
It's worth noting also that "mercantalist" policies were a direct and conscious reaction to the actions of the IMF during the Asian currency crisis.

There was a firm determination across Asia to build reserves such that they would never be dependent on the corrupt Washington consensus IMF ever again.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jun 18th, 2008 at 05:41:43 PM EST
That's an interesting point.

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 Wed Jun 18th, 2008 at 05:42:51 PM EST
[ Parent ]
is that the lesson they learnt from "do not be a debtor" was "be a creditor", rather than "have a balanced position", and they are going to be fucked a second time (this time by inflation that will wipe out the value of their reserves).

But you're right on where these policies came from: it's just that they pushed them to the other extreme, which is not healthy either.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 19th, 2008 at 04:30:38 AM EST
[ Parent ]


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