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January 14, 2005

Tim Geithner Worries...

Greg Ip reports:

WSJ.com - Fed Member Cites Risks to Economy: In a speech yesterday, Timothy Geithner, president of the Federal Reserve Bank of New York, said markets have priced in a very optimistic outlook for the U.S. and world economies. But he said there are many risks to this outlook, which makes it all the more important that the Fed keep inflation low and the federal government rein in its budget deficit.... Mr. Geithner's remarks reflect a growing concern at the central bank over imbalances such as the budget and trade deficits. But there is little the central bank can do other than talk....

Speaking at a conference on risk management in New York, Mr. Geithner said the U.S. is enjoying "pretty solid" growth and "moderate" inflation, and global growth should be strong. He noted this is the scenario markets are pricing in, with little margin for error.

But Mr. Geithner said the risks to this positive outlook include: rapid growth in government debt in the U.S. and other countries; "unprecedented" external imbalances, in particular the large U.S. trade deficit; and -- in an apparent reference to China -- some countries' use of fixed exchange rates that interfere with the resolution of those imbalances. China pegs its currency at what critics say is an artificially low level to the dollar, enabling it to run a large and growing trade surplus with the U.S.

These imbalances pose a threat to markets, Mr. Geithner said: "The probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with."...

Since I'm not President of the New York Fed, I can say that the probability of big bad shocks is not low but moderate, and that if they come we will find out exactly how good our central bankers are, and we will find out in a hurry.

Posted by DeLong at January 14, 2005 03:00 PM

Comments

The collapse is coming, but not as soon as some I think believe. Yes Asian currency manipulation is one of the root causes of our current trade imbalance, not to mention the expanding threat of outsourcing (particularly in lieu of any new economic sectors to soften the blow), but the fact of the matter is that these same Asian countries engaging in illegal monetary protectionism, and lavishing key sectors (read: manufacturing) with illegal subsidies are also the ones financing our debt. So to that extent they have us by the balls, but as long as American consumer spending holds up our Asian banker friends will likely continue to finance our spendthrift ways, and uphold this whole house of cards, however myopic a policy this may be.

Some external shock or shocks (another massive terrorist attack, the end of the housing and refi booms) may bring down American consumer spending in the nearer term, but you can be certain that the real crash will come in the 2010s, when 77-100 million big-spending baby boomers start retiring en masse, and are replaced by 40-60 some million frugal, indebted generation xers in middle age. This is a ticking demographic time bomb, with almost certain serious, widespread negative implications both economically (in terms of consumer spending, real estate, equities, and so on down the line) and fiscally (just wait until the xers get the bill for the boomers' retirement), and short of importing 30 million productive, entrepeneurial young adults in the next five to ten years (which isn't going to happen of course...instead we're likely to see curbs on even legal immigration), there's not a whole lot we can do about this mess.

Posted by: Robin the Hood at January 14, 2005 03:46 PM


I see America's collapse more as a slow glide down than a sudden crash.

I thought we should worry about the trade deficit, didn't NRO just tell us it isn't real?

Posted by: Unstable Isotope at January 14, 2005 05:47 PM


"...but you can be certain that the real crash will come in the 2010s, when 77-100 million big-spending baby boomers start retiring en masse..."

We baby boomers are doing a terrible job of saving for retirement. Defined-benefit pensions, for those who have them, seem to be seriously threatened (ask the boomers in the airline industry, for example). Spending may get cut back, but I believe that a majority of the boomers are going to discover that they can't live on SS alone, and their own savings make SS look generous. The assumption that the majority of the boomers will be able to retire is mistaken...

Posted by: Michael Cain at January 14, 2005 05:59 PM


"The assumption that the majority of the boomers will be able to retire is mistaken..."

True, but what happens to the millions who can't work or can't find jobs? And how will boomers respond when the GOP (who will likely continue to demagogue their way into preserving their dominance) make deep cuts in entitlements for boomers so they can continue their millenarian crusade against Islamist evil? There comes a point when America has to choose between entitlements and empire (just as the Europeans did in the middle of the 20th century), and it seems especially probable that that point will come in the next decade or two.

When young pot smokin peacenik boomers called for deep cuts in military spending in the late 60s and early the country responded by electing Republicans for most of a generation, but wait until it comes down to a choice between chemotherapy for the boomers' cancer and the neoconservatives' crusade to remake the political map of the mideast. We *can* afford generous entitlement benefits for everyone, and still have reasonable taxation for everyone, but it means deep downsizing of the military. The left has nothing more to lose. It should be making the case beginning now.

Posted by: Robin the Hood at January 14, 2005 08:50 PM


Not to worry. At last, we discover our competitive advantage. We can all become rag-pickers.

U.S. Tech Exports Slide, but Trash Sales Are Up

WHO says the United States cannot compete? Trade statistics may indicate the country is slipping in technology, but we're still tops in trash.

In the late 1990's, those who counseled Americans not to be worried about the growing trade deficit pointed to "advanced technology products" - a category tracked by the government that reflects what it calls leading-edge technologies. The United States was running a sizable trade surplus in that area, and shipments of those products were rising much more rapidly than other exports.

All that has changed. In November, the United States had a record trade deficit of $5.8 billion in advanced technology products. For the most recent 12 months, the deficit was $36.9 billion, also a record.

And where is the strength? The trade surplus in what the government calls "scrap and waste" is rising. The 12-month total of $8.4 billion in such exports is up 31 percent from a year earlier.


"What is effectively rubbish," said John Lonski, the chief economist of Moody's, "serves as one of the U.S.'s fastest-growing export categories."

Compare the annual levels of exports in those two areas with those of 1999, and you get a stark picture.

Exports of advanced technology products are down 21 percent, while those of scrap and waste are up 135 percent. To some extent the technology decline reflects the bursting of the bubble, but imports of technology products are up 28 percent, indicating that it's not just the bubble at work.

Instead, China, which runs the biggest trade surplus with the United States, does not allow its yuan to rise against the dollar, and other Asian countries have similar policies.

more here: http://nytimes.com/2005/01/14/business/14norris.html

Posted by: cafl at January 14, 2005 10:17 PM


The equity markets don't see moderate risk - based on historically low implicit volatility of options with terms from 1 months to 10 years, they see historically low risk.

Posted by: Andrew Boucher at January 14, 2005 10:25 PM


"China pegs its currency at what critics say is an artificially low level to the dollar, enabling it to run a large and growing trade surplus with the U.S."


Why isn't this an illegal trading practice subject to penalities from the WTO?

thanks.

Posted by: camille roy at January 14, 2005 10:59 PM


"Why isn't this an illegal trading practice subject to penalities from the WTO?"

It is, but that would require Washington actually doing something about it, and they won't because we rely on China to bankroll our debt.

Posted by: Robin the Hood at January 14, 2005 11:08 PM


What’s the remedy for the trade imbalance? Asian countries provide cheap products and Americans buy them. Is it irrational to buy a cheap product? When I go to Home Depot, I’m astounded at the array of good low-priced tools available. Twenty-five years ago similar tools sold for much more, and weren’t as good. Drill bits are so cheap it doesn’t pay to try to sharpen them. Digital equipment is so cheap it’s practically free. I can call my daughter as much as I want on my Korean-made cell phone, which is a marvel of design. The voice recognition feature actually works. I dropped my regular landline service and my phone bills went way down. If someone is going to offer me a high quality cheap product that I can use, I’m going to buy it. If there is a long-term danger to national security, then we should institute tariffs. But then De Long would scream that we are trying to make China poor. I realize that people lack discipline, and don’t save enough, welcome to the human condition.

Posted by: A. Zarkov at January 15, 2005 02:22 AM


There is nothing wrong with Japan or China pegging the Yen or Yuan to the dollar. We encouraged China to do just this for years. Brazil and South Africa and Korea and India have at times also pegged exchange rates to the dollar. Brazil has been buying dollars for the past year. We have gained wonderful benefits from our trade relations with Asian and South American nations. The need is for us to worry about our fiscal policy. With proper fiscal policy that spurs demand but produces less structurally growing debt we will be fine. Blaming India or Japan or Brazil for our fiscal policy choices makes no sense.

Posted by: lise at January 15, 2005 05:26 AM


"[T]here are many risks to this outlook, which makes it all the more important that the Fed keep inflation low and the federal government rein in its budget deficit...."

Notice the Fed governor was not talking about trade problems. Inflation is being kept low in significant part by our trade relations. Japan is buying American mortgage debt and keeping mortgage rates low. China is buying treasury debt and keeping long term interest rates low. The question we must ask is how to again rein in the budget deficit as was done during the 1990s.

Posted by: lise at January 15, 2005 05:41 AM


At the risk of sounding syllogistic, I would argue the odds of a "big bad shock" are not low, or moderate, but rather high, approaching near certainty. The only question is the timing.

Why? Because absent a big bad shock our political masters won't even consider the kind of fiscal pain required to offset a personal savings rate of zero (or below). Nor will the Fed be willing to apply the kind of monetary pain required to slow domestic investment enough to bring it in line with domestic savings + a sustainable current account deficit. Nor will our Asian trading partners be willing to adjust their economies to promote domestic as opposed to export-led growth.

As long as U.S. fiscal and monetary policymakers continue to talk about "unprecedented external imbalances," instead of actually doing something about them, and as long as foreign central banks continue to shield U.S. policymakers, investors and consumers (as well as their own exporters) from the economic consequences of their own actions, those unprecedented imbalances will continue to grow even MORE unprecedented.

Eventually -- 3 years, 5 years, 10 years, who knows? -- the status quo really will become unsustainable, and the shocks will come, on after the other. But, given the track record to date, it defies credibility to think the necessary course corrections will be made prior to that point.

Posted by: Billmon at January 15, 2005 01:17 PM


Billmon

Suggestions???

Posted by: lise at January 15, 2005 01:45 PM


Two whining Americans write:
.......................
"China pegs its currency at what critics say is an artificially low level to the dollar, enabling it to run a large and growing trade surplus with the U.S."

Why isn't this an illegal trading practice subject to penalities from the WTO?
......................

As opposed to the US which pegs the dollar at the rate of one to a dollar. Oh, you've never heard of seignorage? You didn't study how the world post-war economy evolved under Bretton Woods? You aren't aware of the benefits that accrue to the US because commodities (especially oil) are priced in dollars? But you feel perfectly competent to comment on the subject anyway?

Mark my words, the single biggest threat to world stability over the next fifty years is the fact that most Americans are willing to blame everyone in the world but themselves for their problems. Thus they'll take their forthcoming decline with a whole lot less grace than the British accepted theirs.

Posted by: Maynard Handley at January 15, 2005 01:52 PM


Here's a quote selected by one of those whining Americans. It comes from
http://www.institutional-economics.com/
which hosts the blog of an Australian economist,
Stephen Kirchner.


"The world economy could well be headed for a recession, but the decline in the USD is not the causal mechanism: it is merely symptomatic of the monetary train wreck unfolding in East Asia. If the US suffers, it will only be because the implicit subsidy to US and world growth from forced saving in East Asia might end. Yet even that is doubtful, because recession in East Asia means even more surplus industrial capacity needs to be offloaded onto world markets. The problem is not that the US has saved too little, but that East Asia has saved too much as a result of the state sponsored mercantilism that is the fundamental cause of global imbalances."

My question remains, if indeed it is agreed upon that the yuan-dollar peg is a form of mercantilism, why is that not subject to unfair trading practices penalties from the WTO? This is a serious question, and I would appreciate a serious answer. Thank you.

Posted by: camille roy at January 15, 2005 01:59 PM


"There is nothing wrong with Japan or China pegging the Yen or Yuan to the dollar. We encouraged China to do just this for years. Brazil and South Africa and Korea and India have at times also pegged exchange rates to the dollar."

Tell that to the milions of manufacturing and textile workers who have lost middle class careers and are now working in low wage service sector jobs. Tell that to the thousands of families whose small manufacturing and textile businesses have gone belly up in the last three decades. Tell that to the thousands of IT, financial services, customer service, animation and design workers who have seen their jobs exported to Asia over the last half-decade. The chief root cause of this depletion is illegal Asian monetary protectionism.

America is making the same foolish mistake the British, the Dutch, and the Spanish made before us, believing it possible to be a mostly or exclusively services and finance based economy, leaving goods production to emerging economies, and relying on innovation to produce new middle class jobs. It worked for a time (between the 70s and 90s, although you sure wouldn't want the misfortune of living in the rust belt in that time), as it did for previous great economic powers, but its a zero sum game now. Anything that needn't be done locally increasingly won't be done locally (ie in this country), which means that even if innovation picks up again there's nothing to prevent those new industries from shipping jobs off to India, China, and other emerging economies where skills are high, regulation is nearly non-existent and labor is cheap. American workers are too damn expensive now to hire except where they're absolutely necessary.

Fortunately, there was a populist backlash in Britain, the United Dutch Provinces, and Spain that brought British-led globalization, Dutch-led globalization, and Spanish-led globalization to their knees. The American, middle class backlash to American-led globalization has begun. Neoliberals beware, lest they end up burned at the proverbial stake.

Posted by: Robin the Hood at January 15, 2005 02:07 PM


"My question remains, if indeed it is agreed upon that the yuan-dollar peg is a form of mercantilism, why is that not subject to unfair trading practices penalties from the WTO? This is a serious question, and I would appreciate a serious answer. Thank you."

Because just as law enforcement is unlikely to open an investigation into who it was that burglarized your house unless you actually contact them, the WTO is not going to open an investigation into illegal currency manipulation on the part of emerging and dominant Asian economies unless the US files a complaint, and the US is unlikely to file a complaint because we are so dependent on our Asian banker friends to bankroll our spendthrift ways. It is of course an unhealthy co-dependent relationship (not unlike our relationship with repressive Arab dictatorships, on whom we depend for the other lifeblood of our economy - oil), and like most co-dependent relationships the operative factor is denial. Interestingly, the one president who did take a stand against Asian (which is to say Japanese in this case) monetary protectionism was Reagan, but that was only late in his tenure and because the administration feared a major economic crisis was looming. James Baker was dispatched (along with someone from Kohl's government) to tell the Japanese to knock it the hell off - which they did - and not surprisingly the Japanese giant fell to its knees within a few years. Washington's courageous stand against illegal Japanese monetary protectionism in this instance is the leading unacknowledged cause of the Japanese economic collapse of the early 1990s.

Posted by: Robin the Hood at January 15, 2005 02:19 PM


It is my understanding that China agreed to float the yuan as part of the WTO entry agreement, and that they have until 2008 to do that.

They have publicly suggested that it will start with trading in a narrow band sometime this year.

IMHO, they are right to be very careful and cautious with this, it is going to be a big adjustment, and there is no reason for them to shock their system any more than necesary, but they ought to get on with it. They have said (i.e. some officials) that they would like to accomplish this and the rest of the WTO compliance by the 2008 Olympics.

Posted by: Robert Ullmann at January 15, 2005 02:52 PM



California just reported that employment fell in the state in December, even in the non-recessionary southern portion of the state.

State job growth has failed to keep up with growth in the working-age population for the past 12 months, yet the official unemployment rate has fallen by more than 1 percentage point.

Posted by: Ottnott at January 15, 2005 03:14 PM


"State job growth has failed to keep up with growth in the working-age population for the past 12 months, yet the official unemployment rate has fallen by more than 1 percentage point."

People give up looking for work, and disappear from official statisticdom. Meanwhile, governor Arnold still gets high approval ratings, and continues with his near-criminal effort to pass the staggering burden of California's debt from the boomers onto generation x. If you were born in the 1960s and 1970s consider yourselves warned. California is probably the not the best place to live in the 2010s and 2020s.

Posted by: Robin the Hood at January 15, 2005 03:25 PM


'not surprisingly the Japanese giant fell to its knees within a few years'

One factor in Japan's deflation was the forward market's expectations of sustained yen appreciation due to continued American pressure. That would mean that, far from being sneaky neighbor-beggarers caught in the act, the Japanese bent over too far for us. They were sacrificed to placate US industrial lobbies.

Posted by: psh at January 17, 2005 11:23 AM