Brad DeLong's Semi-Daily Journal: A Weblog

And yet:

The Federal Reserve tightened short term credit for the 5th time, and promised more to come. The result in the markets was a moderate positive day for stocks and a strong day for long term bonds. The S&P is up 10% for the year, while middle and small cap stocks are much stronger. Value stocks are stronger than growth. Energy and real estate investment trusts are having terrific years, while health care stocks are having a moderate year but are close to catching the S&P. International stocks are up more strongly than the S&P with few few countries as exceptions. Again, international value leads growth. As for bonds, the bull market in long term bonds continues. Quite a fine investing year.

Funny, in the Social Security discussion below I talked about this generation passing the buck to my generation for its SS privatization, tax cuts, and war, and get acused of buying into "gen x propaganda". Lets see if the all knowing "Barry" makes an appearence here to deride my opinion now that the Economist says it.

here's nouriel roubini's solution :D

http://www.roubiniglobal.com/archives/2004/12/index.html

"[T]he US will provide to the markets and investors the Euros and Yens and other strong currencies that they want and thus retire the $ assets (US debt) that no one wants. This is a better and more fair way to finance our budget deficit: instead of inducing the world to pile up more - money losing - dollar assets (US Treasury liabilities), let us finance our imbalance by running down our official foreign assets and letting the world return the $ they do not want in exchange of our own holdings of strong reserves."

cheers!

Ah, but in America there is much to buy and invest in. Dollars are not such a problem when the holder wishes to buy in America as friends from Japan and Hong Kong have done recently. China's dollars are being used for foreign aid projects, for international investing, for resource purchases. And if we are focused on Japan and China as supporting the dollar, there are other central banks. Brazil may be on the development path of China, and Brazil is buying dollars. A stable dollar is important to developed Japan, but is an important source of stability for emerging economies. Brazil has become an agricultural market basket for the world, but a currency that becomes too expensive relativ to the dollar could limit growth severely. So, there is much Brazil can do with dollars.

Today Bush pledged a strong dollar policy and told reporters that the trade deficit was "easy to resolve. People can buy more United States products if they're worried about the trade deficit."

http://flagship3.vanguard.com/VGApp/hnw/FundsByName

Vanguard Returns
12/31/03 to 12/15/04

S&P is up 10.1%
Growth Index is 6.6
Value Index is 14.3

Mid Cap Index is 18.9%

Small Cap Index is 18.8%
Small Cap Value is 22.5

Europe Index is 18.9
Pacific Index is 12.7

Energy is 35.1
Health Care is 8.3
REIT Index is 29.2

High Yield Corporate Bond Fund is 8.3
Long Term Corporate Bond Fund is 10.1

....

http://www.msci.com/equity/index2.html

National Index Returns
12/31/03 - 12/15/04

Australia 24.8
Canada 18.0
Denmark 28.0
France 16.9
Germany 14.1
Hong Kong 22.5
Ireland 40.5
Japan 9.4
Norway 50.3
Sweden 34.9
Switzerland 14.1
UK 18.7

An excellent article:

http://www.nytimes.com/2004/12/14/business/worldbusiness/14bangla.html?pagewanted=all&position=

Bangladesh Is Surviving to Export Another Day
By KEITH BRADSHER

DHAKA, Bangladesh - Not long ago, garment makers in the world's poorest countries were in utter dismay, fearing that the long-planned abolition of global trade quotas for textiles and apparel next month would wipe out their factories and send millions of jobs to more competitive operations in China. The International Monetary Fund warned that a quarter of Bangladesh's exports and 2.3 million jobs here could evaporate next year, shaking the entire economy.

So why, then, is Abu Taher tripling his work force, adding five floors to his cotton trousers factory here? And why is Annisul Huq, just down the road, hiring 2,000 more workers and building two new factories - adding to the eight he already has - to churn out more shirts and sweaters for Calvin Klein, Van Heusen and others?

It turns out that the outlook for the textile and apparel makers here and elsewhere is not as bleak as many experts had thought, at least for the bigger, more up-to-date factories in developing countries, especially those like Bangladesh and Pakistan with large, low-wage work forces. 'Retailers are asking for better factories, more volume,' said Mr. Huq, who got a master's degree in economics and did a stint in television before he started his apparel-making business. 'I do not foresee immediately an earthquake in 2005.'

[In an additional nod to countries like Bangladesh, China said on Sunday that it would tax clothing exports to stem excessive growth next year. And if that is not enough, the Bush administration is prepared to further limit Chinese imports.]

Still, the end to decades of textile and clothing quotas on Jan. 1 is beginning to spin the economics of the developing world around and around. The expiration of the quotas is intended to allow for free-flowing trade in garment making. It used to be that by guaranteeing a certain level of clothing production from nearly every poor country in the world, quotas became a classic engine for just about every less-developed country with cheap labor and low skills to connect effectively with the global economy.

But now, without quotas to ensure access, quality and modernity will count as much, if not more, than low wages. Poor countries will have to compete on the scale and skill of their factories and on the efficiency of their roads, ports and electrical grids. Most of the cost of clothing lies not in the labor but in the logistics of moving it to stores for sale, so low manufacturing wages by themselves are not enough....

And who with more brains than your average protozoan WOULDN'T be unhappy with the Bush administration's short-term fiscal policy? That's what I want to know.

Japan and China purchase "external demand" by buying U.S. dollars since the world market is currently in dollars.

Each country decides how much work their people can do, and at first adjusts their interest rate to reach the desired exchange rate.

Once a country's interest rate reaches zero (as in Japan) their only way to purchase "external demand" is to buy foreign exchange.

To keep from reaching a zero interest rate, a country can create "internal demand" through sufficient deficit spending.

To be sufficient, deficit spending must exceed "saving" desires, Japan with a 5.3% deficit, government spending is still too small to raise interest rates.

Currently, the world "saving" desires exceeds U.S. deficit spending, though there seems to have been a slowing in the last few months. It is easy to observe the countries that have recently slowed their purchases of U.S. foreign exchange (Japan, Euro) have recently seen a slowdown in their economies.

The "loss" these countries face is loss of external demand or market share. America has enabled countries to take unproductive labor, and make it productive while using its own resources to provide world security.

If the rest of the world wants to change the sytem, let them pay for world security through an international income tax.

A dollar devaluation is an international income tax that will pay for the transfer. The reserve currencies that replace the dollar should then finance the world security as a proportion that they are held by the people of the world.

China and Europe should quit whining and step up to the plate, most of Japan seems to be okay with the current system.

philip:

"Funny, in the Social Security discussion below I talked about this generation passing the buck to my generation for its SS privatization, tax cuts, and war, and get acused of buying into "gen x propaganda". Lets see if the all knowing "Barry" makes an appearence here to deride my opinion now that the Economist says it."

Whatever. Ignore the boomers who paid extra taxes which Bush gave to his rich buddies. Ignore the Gen X-ers who are doing their best to screw you (like the guy interviewed by CBS as 'a man on the street'). Ignore the fact that the only boomers not to get screwed are those who die before Bush has a chance to screw them.

You're a Gen X guy - streetwise and smart and stuff like that. You can't be fooled by advertising and propaganda.

"Dollars are not such a problem when the holder wishes to buy in America as friends from Japan and Hong Kong have done recently."

ah, but i am not so sure this is true in aggregate:

http://www.briefing.com/common/images/content/pagecontent/BondMarketUpdate/20041215111200avg.bmp

and japan sold $5.1 billion net in october; as lex notes:

http://news.ft.com/cms/s/dd6cff68-4ed3-11d9-9488-00000e2511c8.html

What is $48bn between friends? Not enough to prevent a dollar decline, it would seem. Wednesday's US Treasury data shows that global investors are still gobbling up American assets: net capital inflows totalled $48.1bn in October. However, these inflows were notably smaller than September's $67.5bn figure, since foreigners bought fewer US corporate bonds and American investors rushed to buy non-US assets.

More importantly, the inflows seem to be lagging behind the expansion of the US current account deficit. Consensus estimates expect that data today will show this rose $170bn in the third quarter of the year, compared with $166bn in the second quarter. If so, on average about $57bn monthly net capital inflows are now needed to plug the gap and prevent a dollar slide.

Of course, monthly financial flows are highly erratic. It is entirely possible that capital inflows will jump back up above $57bn next month. But do not bet on any rebound being too large or lasting. Broker surveys show that both US and non-US fund managers hope to diversify away from US assets next year. While US growth is expected to be almost double that of the eurozone or Japan, investors fear that a sliding dollar will slash returns on American assets. To add to the problem, the Japanese government appears to have limited appetite for large-scale currency intervention and thus are less willing to buy US bonds. Barring any global policy shift, the greenback almost certainly has further to fall.

---
also see: http://www.roubiniglobal.com/archives/2004/12/dubya_has_found.html

Philip, I'd like to understand why you're blaming things on boomers - maybe you could elaborate on that idea.

The most Republican age group in the last election was the 30- to 44-year-olds. And are boomers responsible for the change in demographics?

The WW II generation was the first and probably the last to have a comfortable retirement. Most baby-boomers are going to be really screwed. The rules of the game got changed radically on us when we were in our 30s and 40s.

I think you're going to be stepping over old folks living on the sidewalks in 10 years time. And why is it that you think we deserve this?

tomorrow's headlines today :D

WSJ: "Fannie Mae violated accounting rules and must restate earnings for the past four years, the SEC's chief accountant found. The decision will force Fannie to recognize an estimated $9 billion of losses on derivatives."

uh oh, better watch them agency spreads! (impacting foreign buying and its indirect subsidation of home buyers?)

more colour here :D

http://quote.bloomberg.com/apps/news?pid=10000006&sid=a8mmCdOEh_AE

cheers!

In the era of global financial flows and central bank sponsored carry trades, the idea that government fiscal deficits crowd out private investment seems rather quaint. The present moment sees large fiscal deficits in Japan, the U.S., and much of Europe co-existing with a glut of speculative capital driving asset prices around the world to unprecedented levels and capital investment in China to bubble-like proportions.

If the U.S. were to balance its budget by raising taxes by 3.5% of GDP it really would crowd out investment capital since the deficit is largely funded by central banks and the financial institution/hedge fund carry trade rather than domestic savings. We're stuck in a world of ass-backwards economics. Good job Doctor Greenspan.

> Good job, Dr. Greenspan.

It seems we've got a world where financial engineering can generate cash flows out of thin air.

As long as asset prices keep appreciating, you can borrow against them, and buy more assets.

The only inflation indicator deemed relevant is wages - for everything else, it's deemed as pricing power. Pump up those profits - but god forbid workers should expect their wages to rise!

Maybe this alternate reality really can replace savings with financial wizzardry. Seems to me it can only work so long, and eventually, the spiral can't be sustained. The beast keeps getting hungrier and hungrier, and needs ever larger fixes to stay satiated.

But who knows - maybe we can have rolling asset bubbles in different classes of assets, and keep unemployment just high enough along the way so wages lag and the cycle continues.

What asset class will they turn to next to bail out this round?

There is every reason to be bearish, but we need to be intelligent bears as we need to be intelligent bulls. There is a large investment world before us, and all sorts of ways to be balanced and conservative. How can anyone know the future, but we can be intelligently invested in stocks and bonds and a home. We can invest in America and abroad. I am optimistic because I think about how to be balanced in investing. I read all the literature I get from Vanguard, and I read this board and make cautious portfolio decisions. We have had another fine investment year.

Possibly most important for us is to avoid debt when possible and save save save. Locking in a mortgage rate seems to be essential in so uncertain a climate.

Winslow,

Nicely argued, except that (to my knowledge) Europe has not intervened to buy dollars on anything like a regular basis in a very long time. I think you've punched a hole in your own argument by offering Europe as an example of a place where growth has slowed due to reduced dollar purchases. Otherwise, yes indeed, the only reason to stack up a narrow range of dollar denominated assets (Treasuries of maturities of 5 years and below, a smattering of agencies, not stock, no fixed assets, no non-agency corporate bonds) is to change domestic economic outcomes.

Anonymous, it's probably because too many Gen-X people buy that generational warfare line - and who the bad guy is. It's part of the GOP line, actually - screaming that others are waging 'class warfare!!!!!' while waging it themselves.

anne, lise: Yes on the investment year. But I submit overall US living standards have declined or at best stagnated (if you are taking "averages"). Of course if you measure economic performance in appreciation of financial instruments (whose ownership is rather concentrated) or hedonically adjusted GDP, things look OK. But people don't purchase their food, gas, and healthcare with GDP share certificates.

http://www.nytimes.com/2004/12/16/international/asia/16china.html

Workers Demand Union at Wal-Mart Supplier in China
By HOWARD W. FRENCH

SHENZHEN, China - The scene on the street did not look like much, just the comings and goings of small groups of women from their factory dormitory, with a few lingering here and there in knots to discuss their situation.

Since Friday, though, work has stopped inside the Uniden factory's walls here, where 12,000 workers, mostly young women from China's poor interior provinces, make wireless phones, which the Japanese manufacturer supplies in large number to the giant American retailer Wal-Mart.

China's laws tightly proscribe public demonstrations, so the women found another way to vent their anger over their wages, and what they said were many other abusive work conditions. They met secretly to draw up a list of demands, and then walked off the job.

Wal-Mart has been much in the news recently in China, with the government insisting that the retailer do what it refuses to do in the United States: allow all its workers to join unions.

But what the scene at the Uniden plant here in Shenzhen, the very heartland of China's export-led resurgence, reveals is a situation much more typical in this country's booming new economy, where the government has been reluctant to enforce laws that would oblige foreign companies to allow unions, for fear of losing overseas investment.

The hordes of young women employed here say they are required to work 11-hour days, including three hours of mandatory overtime, to earn a basic monthly salary of 484 yuan, or about $58.

The women say they must spend nearly half their wage on the drab company dormitories where, as migrants, they must live. They laughed ruefully when asked if they were able to save any money, or send money back to their families.

'No, I haven't been able to save any money,' said Liu Shuangyan, outside the factory gates. 'You have to eat. You buy a few clothes, and then there's nothing left.'

'If you get sick,' added Ms. Liu, a native of Hunan Province, 'they won't give you leave unless it is very serious.'

A friend and fellow worker from Hunan, Wang Lifang, then spoke up to say, 'They have a small clinic, but you have to pay, and the medicines they give you are much more expensive than outside.'

Other young women said that many minors were employed in the plant, and that most of the employees had been forced to pay 200 yuan under the table as a job-finder's fee in order to be hired.

Some women said they had little idea what a union was, but yearned for some kind of representation that could serve as their advocate. Others said with certainty that no union existed, and ascribed their plight in large part to this fact.

No, things do not simply look all right. There is much to worry about, especially lack of a significant enough level of job creation to generate healthy gains in wages and benefit levels and what again has to be a continually growing inequality of income and wealth. But, we are a wealthy productive economy and such problems are only slowly commonly realised. The time has not come.

Kharris wrote:

"Nicely argued, except that (to my knowledge) Europe has not intervened to buy dollars on anything like a regular basis in a very long time. I think you've punched a hole in your own argument by offering Europe as an example of a place where growth has slowed due to reduced dollar purchases."

I disagree, Europe "officially" may have an "unmanaged" currency but intervention of some sort has occurred at 1.30 in the past (jan 04) and currently at about 1.35.

Europe is struggling with the idea of becoming a "reserve" currency and is fast approaching zero interest rates. The question is, will they join Japan and "officially" buy dollars, or will they take on the responsibility that comes with being a reserve currency?

The value of a currency in time will reflect the well-being or strength of an economy. Robert Rubin would repeat "a strong dollar is in America's interest," but he meant a strong dollar will reflect sound fiscal and monetary policy and a strong economy. We have strong corporate saving, though we would prefer that much of this saving be invested in America. We have almost no household saving, and we have a large and growing government deficit. Since we spend more than our income, there is a growing trade imbalance. To support our trade imbalnce we obviously must borrow, and borrow we do from abroad. This consistent and growing need to borrow from abroad will tend to put pressure on the dollar. Care to bolster the dollar, then adopt a sounder domestic economic course.

Now, I am not alarmed about a selectively weakening dollar at present. But we are in ample danger of seriously weakening ourselves in time, and it is not for the Europeans of Japanese or rapidly developing states like China and India and Brazil to correct our domestic economic policy and strengthen us in time again.

Obviously I don't blame every single baby boomer for the mess that is being passed on to my generation. I do however think it sad that it is comming to this, that the youth have to tell the adults to step up and act like adults (if the shoe fits).

The baby boomers that I dealt with up here is the Seattle area are *genrerally*, not completely, of this type: They would come into the coffee house that I worked at while doing my undergraduate degree (1998-2000), all proud of how they had just voted. Washington State is one of the many states that has gone crazy with the initiative process. Time after time after time, these people who commute in from the suburbs in their SUV's (yes I saw them park and come in) would tell me about how they voted for whatever initiative it was, a cut in property taxes, cut in car tab excise taxes, (no income tax in Washington) etc. Then they would tell me about how they voted for initiatives to increase class sizes, increase care for elderly, increase pay for teachers or build more roads. Almost every one of the people that I would talk to that were of the boomer genration was so proud of how they had just voted; to cut government revenues and increase government expenditures.

This metality is what I saw playout in the national election. The electorate, lead by aging suburban (and exurban) boomers, chose to reelect a president who has been cutting revenues and increasing expenses. Regardless of whether or not this applies to you specifically, if you look at the data, if you are of the boomer age and live in the suburbs then statistically you voted for Bush. This is why people of my generation are begining to see the boomers as nothing more that a generation of selfish, me firsters. As the Economist article points out:

"Budget deficits, as Mr Mankiw has pointed out, “are a mechanism whereby one generation of taxpayers passes the buck for its spending on to future generations”. That is why they are so insidious....

So its not just me, or some propaganda machine ,saying this. Whether or not you specifically support these activities is largly irrelevant because the bottom line is one generation is passing the buck (for tax cuts, Iraq war, and possibly the debt associated with the Bush private accounts plan) to the next.

Obviously my generation leaves much to be desired, but we are still young and developing (intellectually, financially and politically), and its not fair to have to grow into these massive debts that are going to be left behind for us. And while my generation may not have turned out at the polls the way so many of us would have liked, I would rather have someone not vote at all, then go out and vote to cut revenues and increase expeditures. If I offended certain members of the boomer generation that post on this board, then I hope they will accept my sincere apology, my point was simply to bring the issue to the forefront and make it known loud and clear that this genration is slipping the bill to mine, and that, in my opinion, it is time for the adults to start acting like adults. The bottom line is that in all the discussion I've heard and seen lately surrounding the SS reform I have not seen or heard one individual explicitly say that the buck was being passed until I saw this Economist article.

Anne, hope you don't mind...

Anne wrote:

The value of a currency in time will reflect the well-being or strength of an economy.

*Does Europe and Japan have a strong economy? No offense, but I see little correlation.

Robert Rubin would repeat "a strong dollar is in America's interest," but he meant a strong dollar will reflect sound fiscal and monetary policy and a strong economy.

*A strong dollar is an external factor currently set by our trading partners buying "market share".

We have strong corporate saving, though we would prefer that much of this saving be invested in America.

*Offshore island inflows into Tsy Secs are at all time highs as companies are "saving" rather than "investing" offshore profits.

We have almost no household saving, and we have a large and growing government deficit.

*Right, government deficit spending needs to create even more aggregate demand to increase household savings. SS reform might do the trick.

Since we spend more than our income, there is a growing trade imbalance.

*Spending more than income results in debt. Trade imbalance results from us buying more stuff from foreingers than they want to buy from us.

To support our trade imbalnce we obviously must borrow, and borrow we do from abroad.

*To make sure we keep buying the foreign products the foreign countries CB must modify the exchange rate by purchasing Tsy Secs.

This consistent and growing need to borrow from abroad will tend to put pressure on the dollar.

*Only if foreign CB's no longer want to purchase "market share".

Care to bolster the dollar, then adopt a sounder domestic economic course.

*Bolster the dollar by reducing demand for goods and services, this will help the world/U.S. economy?

Now, I am not alarmed about a selectively weakening dollar at present.

*Just says foreign countries CB's are thinking about changing the current system.

But we are in ample danger of seriously weakening ourselves in time, and it is not for the Europeans of Japanese or rapidly developing states like China and India and Brazil to correct our domestic economic policy and strengthen us in time again.

*If we all understand the current system and accept it, there is no danger.

Winslow R., this response is quite clever, and will in turn make me think through each line of argument.

What I must ask myself initially is whether the strength of a currency over time reflects domestic economic strength. Brad DeLong also attributed this thinking to Robert Rubin a few years years ago, and agreed. But, how can we possibly say that Japan has shown economic strength since 1990 or 1992 till now? What of economic strength in a slow growing Europe? Have I trapped myself from the beginning?

If the most Republican age group was the 30-44 year olds, then there are a lot of fiscally irresponsible Gen X voters. At this point, a vote for Bush isn't just a vote for fiscal irresponsibility, it's a vote for really, really large-scale economic fraud.

Anne,

Please do rethink it will be worth your time, I wish more people would, including the Professor.

Much of my "framework" has been honed at:

http://www.mosler.org/wwwboard/wwwboard.html

The Professor ridicules Mosler.

http://www.j-bradford-delong.net/movable_type/2004_archives/000361.html

Mosler ridicules the Professor.

http://www.mosler.org/wwwboard/messages/1006.shtml

They both seem to be populists, I wish they could "just learn to get along". Mosler has some very good ideas about an "employer of last resort".

It seems economic professors can be deeply hurt by critism.