The true money supply growth has dropped to 12.5% in January 2009. The money supply is now at a total level of $2.07 trillion.
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Category: Global Economics
Global Economics covers matters that concern economic phenomena that involve multiple countries.
China to US: We Hate You
The Chinese recently commented on their purchases of US Treasuries:
Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.
“We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
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Orangutans Smarter than US Politicians
BBC writes in Orangutans learn to trade favours :
Two orangutans – Bim and Dok – who live in Leipzig Zoo, Germany, were especially good at helping each other.
Initially, they were given several sets of tokens, and learned the value of the different types.
An animal could exchange one type for bananas for itself, another type could be used to gain bananas for a partner, and a third had no value.
Initially, Dok, the female, was especially good at swapping tokens to get bananas for Bim, the male. Sometimes Bim would point at the tokens to encourage her.
But he was less interested in trading tokens that would win bananas for her.
As she became less willing to help him out, Bim responded by trading more and more, until their efforts were more or less equal.
Bim quickly realized that he will not receive favors anymore unless he starts giving back. He was amassing debt while Dok was generating savings. This is a charming simplification of the process I outlined in The US Current Account Deficit. Just as Bim realized that he needs to consume less and start giving back more, US politicians need to realize that the same applies to their countrymen.
It shouldn’t be too much to ask of our politicians: Have the courage of a orangutan and abandon the policy of credit expansion and fiscal irresponsibility!
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The US Current Account Deficit
The US current account deficit is often mentioned by the US government as a problem that needs to be addressed. Few people realize that it is actually not a problem in itself, but rather a symptom.
The credit expansion by the Federal Reserve bank has set in motion the workings of the business cycle in the United States. As explained, in phase 5 of the business cycle, would-be savers are crowded out of the market and purchase either inflated stocks or consume part of their earnings which they would have usually saved. This additional demand for consumer goods, coupled with a decline in the actual production of these basic consumer goods, sends consumer prices higher.
Now, if we introduce a second country, say China, to this model, the consumers in the US will turn to goods produced abroad whose prices have not risen yet. Since they have to exchange their fiat money for foreign fiat money, the value of the US Dollar will drop against the Chinese Yuan, thus, after a short adjustment period, curbing US demand again and limiting Chinese exposure to inflated demand from the US and keeping US consumers from outbidding Chinese ones with inflated money. In addition, a cheapening of US goods to Chinese consumers will impel Chinese consumers to buy goods from the US, balancing the current account.
If, however, the Chinese central bank, prints additional Yuans in order to buy the excess Dollars and thus keeps the price of the Dollar in Yuan up, this will enable US consumers to outbid Chinese ones on the market for Chinese consumer goods. This way the Chinese central bank essentially inflates together with the US and lets the Chinese consumer shoulder the burden of US induced inflation, favoring Chinese export businesses who receive the new Yuans first and get to spend it first. A prolongation of the current account deficit in the US ensues which will not disappear until phase 9 of the business cycle, the correction, is completed.
(What adds to imports from China are added imports from other countries that also occur as a result of credit expansion. If the currencies of those countries are free floating, the exchange price of the Dollar will fall when expressed in those currencies. This is what could be observed when looking at the Dollar exchange rate in terms of Euros, Canadian Dollars, and lots of other currencies over the past years.)
The official RMB(Yuan)/USD exchange rate was pushed from 1.50 yuan in 1980 to 8.62 yuan by 1994 (lowest ever on the record). The Chinese government then maintained a peg of 8.27 yuan per USD from 1997 to 2005. As can be seen in the chart above, the current account deficit has developed accordingly.(From 2005 on, China began to peg its currency to a basket of currencies rather than the US Dollar alone. But a certain level of pegging against the Dollar remains due to this basket.)
In doing so, the Chinese central bank impelled its countrymen to produce more and consume less than they would have done without the monetary intervention. The Dollars obtained in exchange for newly printed Yuans were invested in US Treasury securities and thus in effect loaned out to the US government. This is how the Chinese central bank amassed its infamous portfolio of US Treasury securities, providing for an ongoing suppression of the interest rate on US Treasury securities, and creating the illusion of a never ending supply of financing from abroad. Of course the money was being spent by the US government on more consumption at home and thus ultimately resulted in domestic consumer price inflation as well.
If US politicians were sincere about addressing the issue of the US current account deficit, they would need to remedy the source of the problem. This would require an unconditional abandonment of the policy of credit expansion and a return to a sound monetary policy under a gold standard.
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Dax-Schwergewichte bieten für 2009 Verzicht auf Kündigungen an
As an exception, here post for my German readers:
Weil der historische Vergleich so bestechend ist, muss ich mal ganz kurz deutsche Wirtschaftspolitik ins Spiel bringen. Der Speigel berichtet Dax-Schwergewichte bieten für 2009 Verzicht auf Kündigungen an:
Eine Überlegung kann Bundesfinanzminister Steinbrück dann aber doch verkünden: In der Runde sei vorgeschlagen worden, im kommenden Jahr auf betriebsbedingte Kündigungen zu verzichten, sagt der SPD-Politiker. Stattdessen sollten verstärkt Kurzarbeitergeld und Qualifizierungsmaßnahmen der Bundesagentur in Anspruch genommen werden.
Keine wertvollen Mitarbeiter in die Arbeitslosigkeit schicken
Der Vorschlag für eine solche Selbstverpflichtung der Wirtschaft, erfuhr SPIEGEL ONLINE anschließend, wurde von Vertretern von Dax-Konzernen vorgetragen. Hintergrund der Überlegung: Angesichts der älter werdenden Gesellschaft und dem in Zukunft immer schlimmeren Fachkräftemangel in Deutschland sollten Schlüsselunternehmen in der Krise qualifizierte Mitarbeiter halten, statt sie vorzeitig in die Arbeitslosigkeit zu schicken.
Wenn sich Historie hier wiederholt, dann wird dies nicht die letzte Grosskotz-Sitzung sein. Der erfahrene Leser erkennt sofort die Parallelen mit der Politik von US Praesident Hoover im Jahre 1929, als er, wie ich schon beschreiben habe, im November mehere Sitzungen mit den Bossen der groessten Industrien einberief. Am Ende fielen Beschluesse die Loehne nicht zu senken und keine Arbeiter zu entlassen. Dies fuehrte natuerlich dazu das aus einer Rezession eine langanhaltende Depression wurde, und am ende dann doch Loehne gesenkt und unmengen von Arbeitern entlassen werden mussten.
Deutschland wird ohne Zweifel ueber die naechsten 4 Jahre dasselbe Schicksal erleiden. Die Idee von Freiheit und stabiler Wirtschafts- und Geldpolitik erscheinen mir dort fast komplett ausgeloescht, bis auf die FDP, die, als Deutschlands letzte Hoffnung als Traegerin von Freiheitsidealen, die Ursachen der Kreditkrise zumindest teilweise versteht: Dieses Pamphlet beschreibt zumindest ansatzweise, was die Ursachen sind. Der Loesungsvorschlag, mehr an die Bundesbank abzugeben, ist allerdings kompletter Schwachsinn. Wenn die amerikanische Zentralbank die Ursache fuer die Finanzkrise ist, dann wird die deutsche es auch nicht richten koennen. Ich schlage dem interessierten leser vor, sich ueber die Ursachen des Business Cycles, erzeugt durch Credit Expansion, zu informieren.