Thursday, May 14, 2009

Another one who just doesn't get it: Nouriel Roubini

Some more crazy economics. This time from Nouriel Roubini. His comments in gray. My comments follow his.


Op-Ed Contributor: China’s Heart of Gold (May 14, 2009) Print Version of Op-Art (May 14, 2009)

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

Geopolitical muscle is also a requirement for a reserve currency. At the end of WWII the U.S. had it in spades. Britain lost it. This was a major factor in the pound ceding reserve currency status to the dollar.

Budget and trade deficits are a REQUIREMENT for a country's currency to be a reserve currency. A nation whose currency is a reserve currency, by definition, must supply exactly the amount of currency that foreigners want to hold or risk harming the integrity of the global financial system. Running trade and budget surpluses would be disruptive and eventually drive people to other currencies.

He is so confused here it is unreal. There are no "foreign creditors." What there is, are people who desire to hold dollars and the only way they can do that is by running trade surpluses with the the U.S. The dollars that they get in return are then held on account in the form of a Treasury, which is a financial asset. This does not constitute lending.

Foreigners' desire to hold dollars is a voluntary choice, but it is a choice that foreigners want so badly that they are willing to accept a lower standard of living to do. Exporting to the U.S. necessitates comparative advantage, which is usually achieved through suppression of wages and/or currency manipulation. Both reduce living standards.


But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

Britain, Japan and Switzerland have not shown any interest in running budget and trade deficits sufficiently large enough to sustain their currencies as reserve currencies. Indeed, Japan and Switzerland run trade surpluses. Not gonna work.



China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

Right. China runs trade surpluses, so no way can the renmimbi can be the reserve currency. That's like saying the reserve currency will be moon rocks. But who can get their hands on moon rocks? No one. Roubini doesn't understand this simple concept.


At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

And run huge and sustained trade deficits! Hello!!!


If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Most of the major industrial countries have interest rates at or near zero now. They ALL "borrow" cheaply, but their currencies are not reserve currencies. He doesn't see that?? And we have low interest rates because the Fed put them there, just as other central banks did. Interest rates are a parameter set by the central bank.



If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

The Chinese gov't spends the way the U.S. gov't does: by crediting bank accounts. Their hoard of dollars is not in any way a consequence of "financing" the U.S. I've been all through that. It is their desire to net save in dollars. They could net save in baby seals if they wanted to, but they'd have to export to the Eskimos at the North Pole to get the seals. The Eskimos would have a trade deficit with the Chinese (they'd get cars, clothes, computers, toys and all sorts of stuff and the Chinese would get baby seals because that is what they wanted as their desired unit of saving).


This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

If the dollar's position is not secure it is because U.S. policymakers think like we have to become an export powerhouse like China to solve our "problems." This can only be done by gaining comparative advantage, which means suppressing wages and weakening our currency. We are doing it to ourselves

5 comments:

googleheim said...

he does not want us to spend, yet wants us to invest while adding to savings ?

s = i, savings is a function of investment which is a function of spending

he is a contradictarian if that is a word.

he wants the dollar to soften because he is stuck with Peter Schiff with a bunch of Euros he bought at 1 EURO = 1.6 USD.

want a houdini !! maybe this guy will disappear

STF said...

LOVE the baby seal example. That's a keeper!

And Taleb thinks this guy should be Tsy Sec since he "foresaw" the crisis . . . . shows how much Taleb knows once the discussion moves beyond statistics.

Scott

googleheim said...

Garsh, I am recycling my comments from the posts about Stiglitz for Roubini, same boat any how -

-------
CHINA IS CONSTRAINED BY THE FACT THAT IT'S CURRENCY IS FIXED LIKE THE ARGENTINE PESO WAS - FIXED NOT TO BE ON PAR WITH THE U$D, BUT FIXED TO BE MUCH LOWER ... IT IS PEGGED IN A WAY.

China can act quickly, and it has nothing to do with savings. However, it is pegged via devalued function with the U$D so the $600 billion is the tops most it can afford to inject and that is it.

China cannot sell it's bonds, as it would devalue the bonds. There is not another bucket to put them in, especially since they never bothered to upgrade their own currency.

The reason the $600 billion is so effective is because there is two Chinas - a socio economic upper eschelon layer which benefits from this stimulus the most, and the lower layer comprised of all the poor workers who live without any improvement in their standard of living.

If there is another run to the dollar, will China be able to prop up the horse again ?

Mike Norman said...

Scott,

Once someone starts to understand this stuff (and it's not hard; it's just a matter of throwing out the bad paradigm explanations) then these examples can be made more and more ridiculous to teach the point.

What is so disturbing, though, is that guys like Roubini are so "revered" as economic geniuses by the media and policymakers and they don't even understand simple, basis, common sense stuff.

More ominous is the fact that their preachings are GAINING in acceptance and application rather than fading with the light of truth.

As I said to Warren last night in an email: we are surely facing a long dark period ahead for this country. These ideas will one day come crashing down, but only after they have delivered enormous hardship and suffering to this country and its citizens and, yes, future generations.

Anyone who reads my blog or Warren's or listens to guys like you, should be thinking about moving somewhere far, far away right now!

googleheim said...

i'm getting phone calls from newt gringrich ( the guy who tried to shut down Barney on PBS ) asking for money for an advert in the wall street journal

something about tax payers being on the hook for wasteful Obama spending.

then in the same paragraph they are telling me that Obama is raising taxes to fuel the spending.

now, if Obama is really raising taxes, then he is making the same mistake as Roosevelt ( then ) and California ( now ) by trying to inflict some sort of justice or balancing of the budget.

and, if Gringrich really truly wants to help business then he will need to stop screaming tax payers on the hook as if Gringrich himself is not a balance budget monger.

in the 90's the budget was balanced due to the Gringrich and Clinton dynamic.

balancing the budget right now will have the effect of plucking the green shoots to the detriment of the fall harvest.

a dollar taken out of the economy is many dollars taken out of taxes, savings, distribution, etc