25 November 2011 23:16

Mark Anderson:

Tim, how do you see Britain’s economic future?

26 November 2011 14:09:

Tim Coldwell:

Northern Rock sale raised £750m, “enough to finance the UK state spending machine for about 9 hours”

In a nutshell, the old French jibe that Britain is a nation of shopkeepers comes to mind. At last someone (Andy Haldane of B of E) has published a good paper to refute the bankers’ claim that the city is so important to the UK economy.

Hot topic this last week:

There is much talk of doing something about excessive executive pay. The government are “consulting”. I’ve yet to hear anyone suggest that outside directors who are involved in corporate remuneration committees should be both elected and paid solely and directly by shareholders (aka owners) rather than the corporation. FTSE 100 senior execs getting a 49% pay rise (aided and abetted by pay consultants) when the general population suffers falling real incomes is not smart.

Economic future

The UK’s economic future looks grim. If the usual technique of attracting inward investment (gateway to Europe concept like Ireland) with low corporate tax rates is used I suspect an EU backlash may result. Pushing down the £ FX rate a few years ago did not go unnoticed. And, if the Euro survives it’s hard to see it holding its current strength if, as most expect, printing a lot of new money will be needed to bail out weak EZ countries which assuming little is sanitized QE will restart UK QE to continue the “currency wars”.

2 years ago I told Jon Moulton when he was indicating support for the latest government plan to cut public expenditure to increase private investment etc., that I couldn’t see sufficient aggregate demand anywhere to support this plan.

Lo and behold, government borrowing is now forecast to be less than 1% different than would have been Labour’s plan. Growth is going to be flat for years at close to zero.

Meanwhile articles such as this cause much head scratching amongst the talking heads.

A little data that makes me smile:

England is twice as crowded as Germany, three and a half times France and has more people per square km than India.

Sorry this is short and rambling but there is not a lot, good or bad, to report

Tim

26 November 2011 14:28:

The euro zone

Is this really the end?

Unless Germany and the ECB move quickly, the single currency’s collapse is looming”

www.economist.com/node/21540255

Tim

26 November 2011 14:35

And:

How to stop the bogus bonus

Successful oversight is going to require more transparency about what trades are being made. But transparency is a scarce commodity

“It used to be so easy to “earn” a performance bonus in financial services. Step one: agree a contract whereby you are paid if you exceed a modest benchmark with the funds you are managing. Step two: borrow money and invest it in risky assets. Step three: profit! Step three does not follow automatically, of course, if the risky asset does not pay off. But from the point of view of the fund manager and his bonus, itā€™s a case of ā€ heads I win, tails the investor loses.

http://timharford.com/2011/11/how-to-stop-the-bogus-bonus/

26 November 2011 14:56

And a very good review of the current status, focussed mainly on Europe (UK is a side issue) from [John Mauldin, writing at Barry's "The Big Picture"].

Changing the Rules
When Even Germany Fails
European Inverted Yield Curves
Time to Review the Bang!Moment
The Risk of Contagion in the US
Time to Start Watching China
New York, China, and Some Links

27 November 2011 12:29:

Treasury subsidises small-business loans

Global Economy

What’s the matter with Spain?

What’s the matter with Italy?

Is the euro about to capsize?

How might Greece leave the euro?

Too-clever banking may have played a role in getting us into the economic and financial mess we’re in.

But the Treasury hopes that a bit of financial engineering of its own will help to get us out.

The Chancellor, George Osborne, is aiming to use limited quantities of taxpayers’ money to unlock private-sector cash and to stimulate activity by private-sector businesses, at a time when those businesses are scaling back investment and expansion ambitions.

The most eye-catching initiative, which goes by the name of credit easing, could reduce the interests costs on £20bn of loans for small and medium size businesses by around 1% over the next couple of years.

Then there’s a separate proposal to subsidise to the tune of £1bn the creation of new private sector funds that would lend to all but the very biggest businesses – in competition with the banks that currently dominate business lending.

Finally, the Treasury will be giving technical assistance to pension funds, to unlock around £20bn of British pension savers’ cash for investment in roads, rail, and other infrastructure projects – to get British pension funds providing capital to improve infrastructure in the way that Canadian and Australian pension funds already do.

http://www.bbc.co.uk/news/business-15908514

Pushing on a string?

Tim

27 November 2011 13:08:

ECB couldn’t inflate even if it wanted to: Warren Mosler http://t.co/0J7zWyKA

If true, is this good or bad news for UK (and US)? It seems to imply that ECB could print (without sterilisation), not weaken the Euro and EZ could take over from US as the the world’s consumer of last resort.

Somehow I doubt it The newly printed Euros would eventually get sold for $s, Yuan etc. to pay for increasing imports while EZ exports slump. Then the fake status of a kind of “reserve currency” would become obvious to investors in Euro denominated debt …. etc.

Or can everyone play the Japanese game now …. until no-one can?

Tim

27 November 2011 13:34:

Germany and the Eurozone: Clutching disaster from the jaws of victory?

John Muellbauer
25 November 2011

For months economists have been arguing that Germany holds the key to ending the Eurozone crisis. Should it relax its anti-inflation stance and allow the ECB to inflate away sovereign debt? Or should it write a cheque of its own to the EFSF? Neither, says this column. There is a simple solution, if only Eurozone leaders can see it. Eurobonds are the answer – but wiith conditions.

http://www.voxeu.org/index.php?q=node/7332

Mark,

This might be close to the real plan. But does it address demand? Not directly, but a halt to the EZ crisis might help sentiment, bearing in mind that the EU is the world’s largest economic zone. Therefore this would be good for UK (and US).

Tim

27 November 2011 13:44:

Reviving manufacturing
No land of giants
A lack of big companies hampers efforts to boost manufacturing

Nov 26th 2011 | from the print edition

Its effect on the economy is even mightier

THREE decades ago a Conservative government led by Margaret Thatcher removed many of the props that had supported manufacturing, revealing its weakness and causing factories to collapse. Now manufacturing is modish. The business secretary, Vince Cable, talks of polishing the image of an industry associated with dirt and decline, and of rebalancing the economy away from financial services toward more tangible stuff. On November 17th David Cameron attended the launch of a new engineering prize and opened a factory in Surrey that will make 4,000 expensive supercars a year.

In the early 1980s about 6m people worked in manufacturing; today the figure is barely 2.5m. Once-famous firms such as British Leyland, GEC and ICI have fallen apart or been taken over and dismembered. Stronger growth in other sectors means manufacturing has slumped from 25% of the economy to 11% today. Yet manufacturing output was rising before recession hit in 2008. Foreign firms like Nissan, Honda and Toyota opened car factories that became efficiency leaders in Europe, taking British car production back up to 1.5m vehicles a year. Some four-fifths of the output of such factories is exported.

www.economist.com/node/21540267

See also: www.wisegeek.com/what-are-the-top-manufacturing-countries.htm

China was once before the world’s leading manufacturer — way back in 1830, the country was responsible for 30% of the global industrial output.

Tim

27 November 2011 14:00:

Juergen Stark explains ECB opposition to monetisation is not about inflation

Conclusion: central bankers always prefer to force elected officials to make the tough political choices that are the essence of fiscal policy. The fiscal agent adds and subtracts net financial assets in the private sector by deficit spending, or cutting spending and raising taxes. Central bankers want the fiscal agent to use these tools as the driver of macroeconomic policy while the monetary agent is tasked with more narrow aims.

www.creditwritedowns.com/2011/11/juergen-stark-on-ecb-inflation-monetisation.html

Mark,

This is why the ECB is what I call a “fake” central bank, hence the Euro is, perhaps, a “fake” currency.

This is not to say I think CBs bailing out idiotic banks with taxpayer money is part of their role

Ed Harrison’s take:

In an interview with the Frankfurter Allgemeine Zeitung, a leading German broadsheet, the ECB chief economist explained his resignation and that of Bundesbank head Axel Weber in terms very similar to these. The argument is clear. Whether the ECB eventually is forced to take on this quasi-fiscal role by the escalating sovereign debt crisis is another matter. I have said the ECB will be forced into this role because of Italy, though I do have my doubts.

Below is my translation of the Stark interview. Note his commentary on commodity and asset-price inflation and the distortionary asset-based economic model based on cheap money that is practiced in the US. His is a framing of the problem with which I agree due to the altered private portfolio preferences this Greenspan/Bernanke put engenders.

However, I do not agree with Stark’s framing of deficits as the “root causes” of the crisis. Spain and Ireland had no deficits pre-crisis. The problem was the incomplete institutional arrangement of the euro zone currency union. Any solution that does not address this will fail.

Also notice his framing of the Eurobond/fiscal union issue. He doesn’t rule out Eurobonds. Rather, he says it must be fiscal/political union first and only then Eurobonds.

Political union is a dream, fiscal union may be possible but will still take years to achieve, meanwhile …

Tim

27 November 2011 14:07:

Sources: IMF to offer Italy a 600 billion euro bailout via ECB funding

According to Austrian daily Der Standard, Italy is to receive a 600 billion euro bailout courtesy of the IMF. Note: the article has what I assume to be a typo, referring to 600 million euros instead of 600 billion. I have fixed that in the translation below. Also note that the ultimate source of this information is La Stampa, an Italian daily newspaper.

www.creditwritedowns.com/2011/11/imf-ecb-italy-600-billion-euro-bailout.html

Mark,

So, indirectly the US taxpayer may now be on the hook to the ECB and Italy too. But, of course, the IMF never takes a haircut

Tim

27 November 2011 14:18:

Some related tweets:

RT @economistmeg: The EUR600bn IMF plan might look something like this (as I did the calculations 10 days ago) http://t.co/069tXbnW

edwardnh:
There’s a lotta lotta going on in Europe this weekend. throwing stuff on the wall to see what sticks. I anticipate a strong market reaction

RT @trumanfactor: “When a central bank has financed states in grand style, it has always led to disaster.” (Juergen Stark) http://t.co/ORCLQGKT - via @polit2k

RT @hblodget: IMF said to be bailing out Italy… which means US taxpayer is bailing out Italy http://t.co/plnfDWwp

Tim

27 Nov 2011 14:41:34:

John Rentoul: Labour wakes up, fuzzy and too late

As Osborne fiddles, Miliband, rather belatedly, is beginning to think about balancing the books

www.independent.co.uk/opinion/commentators/john-rentoul/john-rentoul-labour-wakes-up-fuzzy-and-too-late-6268529.html

Mark,

Alternative title: “2 men in a boat … up the creek … without a paddle between them”

Tim

PS: And more tweets from @economistmeg:

An IMF bailout for Italy would be followed immediately by IMF bailout for Spain. Hope they’re considering that in their calcs for It bailout

EZ crisis key dates ahead http://t.co/8W2CVayV

27 Nov 2011 21:15:32:

The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland
Read more: www.businessinsider.com/sweden-vs-finland-2011-11

and:

http://krugman.blogs.nytimes.com/2011/11/27/the-euro-curse

Mark,

Is the ECB now being seen as a fake CB because it denies LOLR role? In a crisis investors look much further than they normally do when doing risk analysis.

Tim

27 November 2011 22:05:

Mark Anderson:

Hi Tim,

1. yes.
2. we are thinking of posting this whole run on the abrightfire.com site, instead of in the letters section as last time. ca va?

mark

28 November 2011 01:17:

Mark Anderson:

Would you have any interest in writing a Special Issue for us?

Tim Coldwell:

OK with me. Bit of a mouthful?

Latest:

Roubini doubts the La Stamp article re IMF €600 billion for Italy. [ Me too ]

RT @Nouriel: Only way to get €600bn to italy is to combine IMF, NABB, ECB/SMP, new SDRs & bigger EFSF. To get there EFSF has to be turned into a €1tr ESM.

Should the Fed save Europe from disaster?

www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

ZekeJMiller‚
Obama and EU leaders will make statements at 1:40 tomorrow. Will discuss the global economy in the Roosevelt Room.

Hmm

28 November 2011 04:19

This time it’s Steve Keen on the hot seat on HARDtalk. Now, Steve is one of the few economists who actually predicted the global financial crisis. But what about the possibility of another Great Depression? That possibility and how to avoid it were the topics of conversation in this 25-minute interview. Great stuff.

www.creditwritedowns.com/2011/11/steve-keen-on-hardtalk-on-the-financial-crisis-and-the-economy.html

Tim

28 Nov 2011 04:23:41

The eurozone really has only days to avoid collapse
By Wolfgang Mȕnchau

“Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.”
RT @pkedrosky: .@zkiraly If you can’t access the Munchau piece in FT, try this: http://t.co/riBynPU2

Economists say the recession ended in June, 2009, but for many of us, it’s hard to tell the difference. Unemployment remains high and the economy is growing slowly.

This month on “The Digital Future,” Strategic News Service publisher Mark Anderson and KPLU’s Dave Meyer look at the bright spot of the economy:  the technology sector.

Listen here

“This is basically a kind of insurance product. The main issue is: how good is the party issuing it? If it’s going to be paying out huge numbers in the event of a crisis, will it be able to meet it obligations? Insurers can buy reinsurance for their liabilities, but the buck has to stop somewhere – there’s a limit to how much a private insurer can pay out. Only the government can cover unlimited losses,”

http://www.risk.net/risk-magazine/news/1590861/citi-plans-crisis-derivatives

and from Felix Salmon | Reuters

Citi reinvents end-of-the-world insurance

In hindsight, one of the silliest and most dangerous excesses of the Great Moderation was the large number of companies — foremost among them AIG, although there were lots of monoline insurers in the same trade — basically selling insurance on the world coming to an end. It’s a great trade: either the world doesn’t come to an end, and you make lots of money, or the world does come to an end, and it doesn’t matter ‘cos you’re bust anyway. Now, however, after seeing how that trade worked out, we’re wiser, and no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance. Would they?

http://blogs.reuters.com/felix-salmon/2010/02/08/citi-reinvents-end-of-the-world-insurance/

Meanwhile in the real world

Payback’s A Bitch For Banks Stuck Holding Euro Debt

First the governments bail out the banks who were (are) basically insolvent. Then these governments, especially in Europe, see their balance sheets explode and face escalating concerns over sovereign default. The IMF now predicts that the government debt-to-GDP ratio in the G20 nations will explode to 118% by 2014 from pre-crisis levels of around 80%. Now, the ball is put back onto the banks because many have exposure to the areas of Europe that are facing substantial fiscal problems right now. According to the Wall Street Journal, U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. Contagion risks are back. Stay defensive and expect to see heightened volatility. In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

http://www.businessinsider.com/rosenberg-paybacks-a-bitch-for-banks-stuck-holding-euro-debt-2010-2

and a really downbeat view of tea parties, politicians and the US economy:

We’re Weimar

By James Howard Kunstler | February 8, 2010 6:35 AM

As the contest heats up this year between Tea Partydom and the Weimar-like remnant of the party in power expect to see a political vortex form that will suck the little remaining coherence out of American life. Personally, I’d like to see Mr. Obama have a little fun with his adversaries, even if it seals his fate as a one-term president.  I’d like to see him start by using the just-proposed national forum on health care reform as a rope-a-dope moment to expose opponents to reform as the bought-and-sold errand boys they are.

And a good overview of the state of play in Europe from Edward Harrison dated Feb 2009: It’s much worse now!!

The European problem

Europe is having a problem right now. In truth, it is many problems more than a single problem. Countries in the former Soviet bloc are in a deep downturn which has been significantly worsened by turmoil in currency markets. Western European banks are hemorrhaging losses – some will probably be nationalized. Spain, the U.K. and Ireland have all seen massive property bubbles implode. Greece, Ireland, Spain, Portugal and Italy have all seen credit warnings and downgrades. And Ukraine, Hungary and Latvia are but three nations that have been forced into the arms of the International Monetary Fund for a bailout. Clearly, the credit crisis has moved to Europe in a massive way. In my view, this was always inevitable given the available evidence after the panic in September.

read more: http://www.creditwritedowns.com/2009/02/the-european-problem.html

Tin hats time again?

Tim,
Le Touquet, France

[Ed: view the original article by David Brin below.]

[Ed: Russ Daggatt has another interesting and well-documented commentary, this time eviscerating the fear-mongering campaign over bringing Guantanamo terror suspects to New York for trial: hannibal lecters zombie army invades new york.]

David,

I agree with your general point: The US has been unique among great empires in consciously adopting a counter-mercantile model to aid the development of other countries post-WWII. Along with the establishment of a web of international institutions, that led to unprecedented era of global stability and relative peace. That model made sense in the aftermath of WWII when most other major industrial economies had been destroyed by war. It makes less sense now for reasons I will outline below.

First, quibbles on a few minor points:

You state: “… Marshall designed the ultimately victorious policy of patient containment of the USSR until, after many decades, that mad fever broke. (Certainly, he deserves at least as much credit as Ronald Reagan.) ”

Of course, you are right that primary credit for the US “victory” in the Cold War came from the bipartisan policy of containment started by Truman, Keenan and Marshall and supported for 40 years by administrations and Congresses of both parties. But you seem to implicitly endorse the myth that Reagan played a major role — perhaps even the lead actor — in the dénouement of that drama. I wrote about that at length here: http://daggatt.blogspot.com/2009/10/great-myths-of-ronaldus-magnus.html . From the context of your comments, I assume you agree. Republicans have done a GREAT job of systematically and firmly establishing the myth that Reagan single-handedly brought down the Berlin Wall, ended the Cold War, etc.– to the point where it is now rarely challenged, even by liberals. We need to help re-establish the counter-narrative.

My second quibble: Another myth that has been firmly entrenched (this one was actually started by the Wall Street Journal editorial page about 30 years ago) is that the Smoot-Hawley tariffs were a major factor in the Great Depression. You state: “The Democratic Party, under Truman, and Republican moderates, such as President Dwight Eisenhower, held fresh and painful memories of the Hawley-Smoot tariffs, instituted under Herbert Hoover and the Republican Congress of 1930, which triggered a trade war that deepened the Great Depression.“

Ben Stein (unlike his late father, Herbert) is an idiot when it comes to economics, and mercifully the New York Times has finally dropped his Sunday Business column on the subject. (Stein should stick with acting roles, like his famous turn as the stultifyingly-boring economics teacher — talking about Smoot-Hawley, as it turns out — in Ferris Bueller’s Day Off). But he was actually right on the mark on this topic (even a blind squirrel finds a nut sometimes: www.nytimes.com/2009/05/10/business/10every.html?_r=1):

“At the time of its enactment, exports were only about 5 percent of the economic output of the United States and still outweighed imports. (Even now, exports are a smaller part of output in the United States than in any other large developed nation.) To say that the act, which applied to a distinct minority of imports and which raised tariffs generally by only about six percentage points, caused the Depression is almost comical. It did no good, but compared with the titanic monetary policy disasters of the era, the effect of Smoot-Hawley was probably very small, or so most mainstream economists believe.

“However, a number of well-known people, especially my former colleagues at The Wall Street Journal editorial page, the late Robert Bartley (a genuinely great guy) and Jude Wanniski, began in the mid-1970s to popularize the notion that Smoot-Hawley and not monetary policy mistakes was the real cause of the Great Depression.”

GDP declined by 33% during the Great Depression. Even if Smoot-Hawley killed 100% of US exports at the peak of the Depression (it didn’t) that would have accounted for only a small fraction (15%) of the decline in GDP. (More on the subject in this post of mine: http://daggatt.blogspot.com/2009/05/new-new-deal.html .)

I would argue that the causation went the other way — the Great Depression caused the decline in world trade, not the other way around. We saw the same forces at work over the past year of the Great Recession. Despite the lack of any major new trade restrictions, world trade plummeted. Check out this interesting chart (www.voxeu.org/index.php?q=node/3421) comparing the decline in trade during the Great Depression with the decline in trade during the Great Recession:

Final minor point: I will refer you to my post on the anniversary of 9-11 which makes somewhat related points, that there is much to be proud of in accomplishments of the United States government: http://daggatt.blogspot.com/2009/09/on-anniversay-of-9-11.html . It is the right, not the left, that has become the primary domestic source of hatred of the US government and what it represents.

Now to the main point. While this is oversimplifying somewhat, basically as long as we run large trade deficits, we will run large federal budget surpluses, and vice versa. The relationship is not absolute, and there are adjustment mechanisms (primarily effects on private savings and investments). But we aren’t going to be able to bring our long-term federal budget into balance without addressing our persistent trade deficits. This is what is known as the “twin deficits hypothesis”, which is summarized well in Wikipedia:

The theory goes as follows:

Y = C + I + G + NX

where Y represents National Income or GDP, C is consumption, I is investment, G is government spending and NX stands for net exports. This represents GDP because all the production in an economy (the left hand side of the equation) is used by consumers (C), investors (I), and the government (G), and the leftover production is exported (NX). Another equation defining GDP using alternative terms (which in theory results in the same value) is:

Y = C + S + T

where Y is again GDP, S is savings, and T is taxes. This is because national income is also equal to output, and all individual income either goes to pay for consumption (C), to pay taxes (T), or becomes savings (S).

Proof:

Since Y = C + I + G + NX, and Y = C + S + T, then C + I + G + NX = C + S + T, which simplifies to (S − I) + (T − G) = (X − M)

If (T-G) is negative, we have a budget deficit.

Now, assume an economy already at potential output, meaning Y is fixed. In this case, if the deficit increases, and savings remains the same, then this last equation implies that either investment (I) must fall (see “Crowding out (economics)), or net exports (X-M, or NX) must fall, causing a trade deficit. Hence, the twin deficits.

Though the economics behind which of the two is used to finance the government deficit can get more complicated than what is shown above, the essence of it is that if foreigners’ savings pay for the budget deficit, the trade deficit grows. If the countries own citizens’ savings finance the borrowing, it may cause a crowding out effect (in an economy at or near potential output, or full employment).

As I noted, the correlation isn’t absolute, especially in the short term, but it is strong (http://en.wikipedia.org/wiki/File:TwinE.PNG) over the long term:

FT’s Martin Wolf (the best financial journalist in the mainstream media) had a good column last week on the need for China to let its currency float against the dollar (“Grim Truths Obama Should Have Told Hu”).  This is probably the greatest source of instability in global financial markets.  Unless it is addressed, we are being set up for another crash — and this time we will have fewer policy tools at our disposal to cope with it.
Keep up the good work.
Cheers
Russ

—

David Responds:

Russ, when you are tilting at a windmill as huge (though illusory) as “Reagan defeated the USSR” you need to use some rhetorical method.  “Certainly, he deserves at least as much credit as Ronald Reagan” is both a true statement and about as much as I would be able to convincingly get across, nudging people toward sanity.

I am in complete agreement that Hu and the Chinese face a watershed moment.  If they try to squeeze more golden eggs out of the tired American goose, they will be penny-wise and very foolish.  As they are to foster any nationalist resentment of the US.

THEY are the ones I actually wrote the article for, pointing out that every one of their dynasties fell for the same mercantilist pattern that they think is oh-so-clever.  It was only clever because we cooperated, for 60 years.

Thrive

d

[The following was first published November 24, 2009, in the San Jose Mercury News, and is adapted here, with permission, for the Strategic News Service.]

Only now, having offered one on-target bullet aimed at the loony right, let me do one of my patented “contrary” turns to bring up a perspective that may offend just about everybody, including many on the left, along with most of my friends in Europe and Asia.

Please, dear people and fellow believers in tomorrow — bear in mind that I am an internationalist and have opposed jingo-chauvinists, all my life. And yet, I feel it is past time that someone spoke up in defense of Pax Americana (PA).

How Americans Spent Themselves into Ruin… but Saved the World

Sure, that phrase (PA) fell into disrepute during the era of the mad neocons, whose misrule left the United States far worse off by every clear metric of national health. During their time in near-total power, steering the American ship of state, fellows like Richard Cheney, Richard Perle, Kenneth Adelman and their ilk made a point of proclaiming imperial triumphalism to the world — extolling an America invested with sacred, perfect and permanent rights of planet-wide dominance, based upon inherent qualities that were said to be unaffected by any objective-world considerations, like budgets or geography; like world opinion or the end of the Cold War; like science or technology; like rationality or morality or the physical well-being of our troops.

Indeed, the only factor that they felt might undermine America’s manifestly-destined and eternal preeminence might be a failure of will, should the wimpy liberals ever have their way. But if led with a firm-jawed will to overcome all obstacles, the American pax could linger indefinitely, with all the privileges of governing world affairs and few of the responsibilities or cares.

Sure, it has been proper to oppose the policies of such deeply delusional men — policies which unambiguously and uniformly brought ruin to the very things they claimed to hold dear. Capitalism, freedom, fiscal and national health, as well as U.S. influence in the world, all plummeted under their rule. (These metrics all skyrocketed under Bill Clinton, whose endeavor in the Balkans was inarguably one of Pax Americana’s finest hours.)

The Left Goes Too Far the Other Way

And yet, something is very wrong with the unselective manner in which some folks on the other side have allowed those neocon nincompoops to define the argument. It is an unfortunate habit of the left to assume that any appreciation of the American contribution to human civilization must be inherently fascistic. This reflexive self-loathing has given (unnecessarily) a huge weapon to the right, in their ongoing treason-campaign called “Culture War,” allowing them to retain millions of supporters who might otherwise have abandoned them.

By abrogating the natural human phenomenon of patriotic pride, these fools on the left have allowed guys like Sean Hannity to claim love-of-country as a sole monopoly of the right! If they get away with pushing simplistic “greatest nation ever” rants and portray themselves as the implicit opposite of homeland-hating liberals, that gift comes gratis from the left.

Moreover, there is another reason for liberals to re-examine this reflex and to find good — and even great — things to proclaim about America. Because, without any doubt, America deserves it. Yes, self-criticism is a useful tonic, and there definitely were crimes committed, during our time on top. Nevertheless, the net effects of Pax Americana have been generally positive, compared against every single previous era in human history.

This can be proved, with an example that has spanned an entire lifespan. One that is as decisive as it is ironic.

The Miracle of 1946

Mr. Wu Jianmin is a professor at China Foreign Affairs University and Chairman of the Shanghai Centre of International Studies. A smart fellow whose observations about the world well-merit close attention. Specifically, in a recent edition of the online journal The Globalist, Wu Jianmin’s brief appraisal of “A Chinese Perspective on a Changing World” was insightful and much appreciated: www.theglobalist.com/StoryId.aspx?StoryId=8035 .
However, I feel a need to quibble with one of his statements, which reflected a widespread assumption held all over the world:

“After the Second World War, things started to change. Japan was the first to rise in Asia. We Asians are grateful to Japan for inventing this export-oriented development model, which helped initiate the process of Asia’s rise.”

In fact, with due respect for their industriousness, ingenuity and determination: the Japanese invented no such thing. The initiators of export-driven world development were two military and diplomatic leaders of Pax American at its very peak: George Marshall, who was Secretary of State under President Harry Truman; and Gen. Douglas MacArthur, during his time as military governor of Japan, in the ravaged aftermath of the Second World War.

While Marshall crafted a historically unprecedented, receptively open trade policy called “counter-mercantilism” (I’ll explain in a minute), MacArthur vigorously pushed the creation of Japanese export-oriented industries, establishing the model of what was to come. Instead of doing what all other victorious conquerors had done — looting the defeated enemy — the clearly stated intention was for the United States to lift up their prostrate foe, first with direct aid. And then, over the longer term, with trade.

Look, lest there be any misunderstanding: I am not downplaying the importance of Japanese, Korean, Malaysian, Chinese and Indian efforts to uplift themselves through the hard work of hundreds of millions who labored in sweatshops making toys and clothes for U.S. consumers. Without any doubt, those workers… (like those generations who built America, before 1950, in the sooty factories of Detroit and Pittsburgh)… were far more heroic and directly responsible for the last six decades of world development than American consumers, pushing overflowing carts through WalMart.

Nevertheless, those consumers — plus the trade policies that made WalMart possible, plus a fantastically generous and nearly unrestricted flow of intellectual capital from West to East — all played crucial roles in this process that lifted billions of people out of grinding, hopeless poverty. Moreover, it now seems long past time to realize how unique this was, in the sad litany of human civilization.

The Thing About Empires

Let’s step back a little. First off, if you scan across recorded history, you’ll find that most people who lived in agricultural societies endured either of two kinds of global situations. There were periods of imperium and periods of chaos. A lot of the empires were brutal, stultifying and awful, but at least cities didn’t burn that often, while the empire maintained order. Families got to raise their kids and work hard and engage in trade. Even if you belonged to an oppressed subject people, your odds of survival, and bettering yourself, were better under the rule of an imperial “pax.”

That doesn’t mean the empires were wise! Often, they behaved in smug, childish, and tyrannical ways that, while conforming to ornery human nature, also laid seeds for their own destruction. Today, I want to focus on one of these bad habits, in particular.

The annals of five continents all show that, whenever a nation became overwhelmingly strong, it tended to forge mercantilist-style trade networks that favored home industries and capital inflows, at the expense of those living in satrapies and dependent areas.

The Romans did this, insisting that rivers of gold and silver stream into the imperial city. So did the Hellenists, Persians, Moghuls… and so did every Chinese imperial dynasty. This kind of behavior, by Pax Brittanica, was one of the chief complaints against Britain by both John Hancock and Mohandas Gandhi.

It was a habit based in human nature. A natural outcome of empire. Over the long run, it almost inevitably contributed to self-destruction. And everybody did it, when they could. Except just once.

The Exception to the Rule of Imperial Mercantilism

In fact, there has been only one top-nation that ever avoided the habit of imperial mercantilism, and that was the United States of America, upon finding itself the overwhelmingly dominant power, at the end of World War II. The U.S. had ample opportunity to impose its own vision upon the system of international trade. And it did. Only, at this crucial moment, something special happened.

At the behest of Marshall and his advisors. America became the first pax-power in history to deliberately establish counter-mercantilist commerce flows. A trade regime that favored the manufactures of many foreign/poor countries over those in the homeland. Nations crippled by war, or by millennia of mismanagement, were allowed to maintain high tariffs, keeping out American manufactures, while sending shiploads from their own factories to the U.S., almost duty-free.

Moreover, despite the ongoing political tussle of two political parties and sometimes noisy aggravation over ever-mounting deficits, each administration since Marshall’s time kept fealty with this compact — to such a degree that the world’s peoples by now simply take it for granted. Forgetting all of history and ignoring the self-destructive behavior of other empires, we all assume that counter-mercantilist trade flows are somehow a natural state of affairs!

Why Did This Happen?

Now, of course, more than pure altruism may have been involved. The Democratic Party, under Truman, and Republican moderates, such as President Dwight Eisenhower, held fresh and painful memories of the Hawley-Smoot tariffs, instituted under Herbert Hoover and the Republican Congress of 1930, which triggered a trade war that deepened the Great Depression. Both Truman and Ike saw trade as wholesome for world prosperity — and as a tonic to unite world peoples against Soviet expansionism. (Indeed, as another example of his farsighted ability to plan ahead for decades, Marshall also designed the ultimately victorious policy of patient containment of the USSR until, after many decades, that mad fever broke, for which he deserves at least as much credit as Ronald Reagan.)

Nevertheless, if you still doubt that counter-mercantilism also had an altruistic component, remember that this entirely new and unprecedented trade regime was instituted by the author of the renowned Marshall Plan — both a name and an endeavor that still ring in human memory as synonymous with using power for generosity and good. Is it therefore plausible that Marshall — along with Dean Acheson, Truman and Eisenhower — might have known exactly what export-driven development would accomplish for the peoples of Europe, Japan, Korea, and so on?

Alas, No One Seems to Notice

Unfortunately, while recipients of the Marshall Plan’s direct aid could clearly see beneficial results, right away, effects of other parts of the program — especially counter-mercantilist trade policy — were slower in coming, though far more vast and important, over the long run.

What it amounted to, however, was nothing less than the greatest unsung aid-and-uplift program in human history. A prodigious transfer of wealth and development from the United States to one zone after another, where the “cheap labor” transformed, often within a single generation, into skilled and educated worker-citizens of a technological nation. A program that consisted of Americans buying continental loads of things they did not really need. Things that they could easily have done without and stopped buying, any time that they, or their leaders, chose to call a halt.

Yes, yes. There are a few obvious cavils to this blithe picture. One might ask — does anyone deserve “moral credit” for this huge and staggeringly successful “aid program”?

Well. Perhaps not the American consumers, who made all this happen by embarking on a reckless holiday, acting like wastrels and spending themselves deep into debt. Certainly, even at best, it seems less ethically pure or pristinely generous than other, more direct forms of aid.

Moreover, as the author of a book called Earth, I’d be remiss not to mention that all of this consumption-driven growth came about at considerable cost to our planet. For all our sakes, the process of ending human poverty and creating an all-encompassing global middle class needs to get a lot more efficient, as soon as possible. Call it another form a debt that had better be repaid, or else.

Nevertheless, if credit is being given to the Japanese, “for inventing this export-oriented development model,” then I think it is time for some historical perspective. Because the impression that one gets from many, especially in the East, is that the West must forever remain counter-mercantilist as if by some law of nature, and that the vigorously pro-mercantilist policies of the East are some kind of inherently perpetual birthright. Or else these trade patterns are purely the result of their cleverness, outwitting those decadent Americans in some kind of great game

This view of the present situation may feel satisfying, but it is wholly inaccurate. Moreover, it could lead to serious error, in years to come.

What Might the Future Bring?

Even if America is exhausted, worn out and a shadow of her former self, from having spent her way from world dominance into a chasm of debt, the U.S. does have something to show for it the last six decades. A world saved. A majority of human beings lifted out of poverty. That task, far more prodigious than defeating fascism and communism or going to the moon, ought to be viewed with a little respect. And I suspect it will be, by future generations.

This should be contemplated, soberly, as other nations start to consider their time ahead as one of potential triumph. As they start to contemplate the possibility of becoming the next great pax or “central kingdom.”

If that happens — (as I portray in a coming novel) — will they emulate Marshall and Truman, by starting their bright era of world leadership with acts of thoughtful and truly farsighted wisdom? By evading the mistakes that are written plain, across the pages of history, wherever countries briefly puffed and preened over their own importance, imagining that this must last forever?

Is Anybody Still Reading?

Probably not. This unconventional assertion will meet vigorous resistance, no matter how clearly it is supported by the historical record. The reflex of America-bashing is too heavily ingrained, within the left and across much of the world, for anyone to actually read the ancient annals and realize that the United States is undoubtedly the least hated empire of all time. If its “pax” is drawing to a close, it will enter retirement with more earned goodwill than any other. Perhaps even enough to win forgiveness for the inevitable litany of imperial crimes.

But no, even so, the habit is too strong. My attempt to bring perspective will be dismissed as arrogant, jingoist, hyper-patriotic American triumphalism. That is, if anybody is still reading, at all.

Meanwhile, on the American right, we do have genuine triumphalists of the most shrill and stubborn type — mostly moronic neocons — who share my appreciation for Pax Americana… but for all the wrong reasons, and without even a scintilla of historical wisdom. Indeed, it is as if we are using the same word for entirely different things. If they are still reading, I can only point out that their era of misrule deeply harmed the very thing they claim to love.

Alas, my aim does not fit into either stereotypical agendas of left or right. Instead, I am simply pointing out the necessary sequence of causation events that had to occur, in order for the International Miracle of export-driven development, of the last sixty years, to have taken place at all. Indeed, it is the fervent, tendentious and determined denial that American policy played any role at all, that beggars the imagination.

And so, at risk of belaboring the point, let me repeat. If the U.S. had done the normal thing, the natural human thing, and imposed mercantilist trade patterns after WWII — as every single previous “chung kuo” empire ever did before it — then the U.S. would have no debt today. Our factories would be humming and the country would be swimming in gold…

…but the amount of hope and prosperity in the world would be far less, ruined by the same self-centered, short-sighted greed that eventually brought down empires in Greece, Persia, Rome, China, Britain and so on.

Also, by this point, every American youth would be serving in armies of occupation, and the entire world would by now be simmering and plotting for the downfall of the Evil Empire. That is the way the old pattern was written. But it is not how this “pax” was run. Instead, the greater part of the world was saved from poverty by the same force that rescued it from the fascistic imperialism and communism.

Yes, America’s era of uplifting the globe by propelling the world’s export-driven growth must be over. Having performed this immense task, Americans cannot expect (if Wu Jianmin is any example) any credit or thanks.

But that is okay. Nobody needs to be angry, and we certainly do not have to be thanked. It simply is done. Other dire problems now stand waiting for this much richer world to address them. And meanwhile, the U.S. must rebuild.

In other words, soon it will be time for someone else to start buying, for a change. The products, the services, and especially the ideas.

New ideas, for a new century, when efficient production and care for the planet will combine with far-sighted mindfulness of generations to come. Ideas that — just like George Marshall’s — the world will need and want.

And just watch. America will be happy to sell.

==========

*David Brin is a scientist, technology speaker, and author. His 1989 ecological thriller, Earth, foreshadowed global warming, cyberwarfare and the world wide web. A 1998 movie directed by Kevin Costner was based on Brin’s The Postman. His fifteen novels, including New York Times Bestsellers and winners of the Hugo and Nebula awards, have been translated into more than twenty languages. David appears frequently on History Channel shows such as “The ARCHITECHS,” “The Universe,” and “Life After People.” Brin’s nonfiction book The Transparent Society: Will Technology Make Us Choose Between Freedom and Privacy? won the Freedom of Speech Award of the American Library Association.

On this month’s Future in Review with Mark Anderson [of Strategic News Service], Mark predicts the technology sector will recover before the rest of the economy does. He tells KPLU’s Dave Meyer to keep an eye on computer chip sales.

Listen Now!

You may have noticed that the big banks have been reporting upbeat “earnings” figures in recent days. Just yesterday, Bank of America reported a staggering $4.2 billion in first quarter “earnings.” But it’s share price declined by an also staggering 24% What’s up? Surely investors saw the impressive “earnings” numbers. Of course they did. Which is why Bank of America’s share price went down. Those “earnings” are just more of the financial gimmickry that got us into this financial crisis. Bank of America’s deposit base (excluding acquisitions) actually declined and defaults on every kind of loan increased sharply. Its credit card division lost $1.8 billion; it’s mortgage division lost $500 million. But it resorted to every trick in the book to manufacture “earnings.”

Can anyone explain to me why Ken Lewis is still chairman and CEO of Bank of America?

As Andrew Ross Sorkin writes in today’s New York Times (“Bank Profits Appear Out of Thin Air”):

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

Goldman Sachs even made an entire month disappear. In the course of changing its fiscal year, Goldman left behind an “orphaned” December 2008 which just happened to include $1.5 billion in losses. (As the Church Lady would say, “How convenient.”) Bank of America, Citigroup and JPMorgan Chase all booked gains from the decline in the value of their bonds. (Funny how that works – the banks’ debtors think their odds of defaulting have increased and that results in an increase in paper profits for the banks.)

This is all part of a campaign on the part of the big banks to convince the world that they really are solvent and that they can survive without government funds (while they hope that a recovering economy eventually bails them out).

Some bank CEOs have been whining lately about having been “forced” by Bush’s Treasury secretary – former Goldman Sachs CEO Paulson – to take TARP funds (i.e., equity infusions) from the Federal government last fall as the global financial system was melting down. They didn’t express their concerns back then when their survival was at stake. Rather, it was subsequent threats to their seven and eight figure bonuses (and government success in stabilizing the financial system) that prompted this new distain for government help.

(To some Republicans in Congress, and assorted teabagging wingnuts around the country, it has somehow become Obama who “forced” the banks to take bailout funds and any actual or proposed restraints on banks that have received tens of billions of dollars of taxpayer aid is evidence of his “socialism” or even “fascism”.)

Of course, if the bank CEOs were more concerned about their shareholders than about restrictions on their compensation, they would presumably want to maintain strong balance sheets for the (still real) possibility of worse times ahead. But they have never shown any particular concern for the long-term interests of their shareholders.

Lately, Goldman has been leading a PR campaign intended to allow them to get out from under TARP restrictions. Recall, Goldman received extraordinary permission to convert from a relatively-unregulated investment bank to a heavily-regulated bank holding company precisely so that they could avail themselves of the federal bailout. (It’s a nice trick – enjoy the benefits of being an investment bank when times are flush and there is huge money to be made, and then convert to being a commercial bank holding company when the whole system melts down. Sort of like being allowed to buy a fire insurance policy after your house is in flames.) They have even raised $5 billion as evidence that they no longer need the federal funds. But that would actually seem to be evidence that they needed the federal funds. As former Bush Treasury Secretary Paul O’Neill pointed out, “If banks now claim they want to return the money because they don’t need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?”

Goldman received “only” $10 billion in TARP funds. But they also received $13 billion in payments from the AIG bailout, which they are not proposing to pay back. (Goldman claims that they were fully hedged against their losses as an AIG counterparty and that, therefore, they didn’t need AIG bailout funds. Which, of course, raises the question as to why they received those funds – which the public was led to believe were required to avoid the “systemic risk” of losses to counterparties. If Goldman was fully hedged against losses from AIG, then presumably there was no systemic risk to justify those payments. It also raises the question whether Goldman hedged in a manner that resulted in them being paid twice for the same exposure to AIG. No one is saying – certainly not Goldman. Alan Abelson in Barron’s raises the possibility that those AIG funds may account for part of Goldman’s recent “earnings.” There has been absolutely no transparency on these issues, so we really don’t know. But that is the subject for a separate post.)

The Goldman bailout doesn’t stop just with the TARP funds and the AIG counterparty payments. As the New York Times noted in a good piece last week, the ability of Goldman and other banks to access the credit markets is a result of their ability to tap into the AAA credit rating of the federal government. Goldman alone has issued over $28 billion in FDIC-backed bonds. Needless to say, they aren’t proposing to pay off those bonds and let the taxpayers off the hook for their guarantee.

From the New York Times piece:

Eager to escape the long arm of government, Goldman Sachs is preparing to return $10 billion in taxpayer funds as fast as the ink can dry on the check. But the bank, and a number of others, is quietly holding on to other forms of public support that come with virtually no strings attached.

Banks have been benefiting from an indirect subsidy adopted by the federal government at the height of the financial crisis last fall that allows them to issue their debt cheaply with the backing of the Federal Deposit Insurance Corporation.

That debt — more than $300 billion for the banking industry so far — helped otherwise cash-strained banks to keep their businesses running even when it was virtually impossible for other companies to raise funds. The program will continue to bolster scores of banks through at least the middle of 2012.

The value of the assistance, economists say, is incalculable, because it helped keep participating banks alive despite the panic sown in financial markets after Lehman Brothers collapsed.

“I don’t know how you measure that subsidy,” said Mark Zandi, the chief economist

at Moody’s Economy.com. “That’s why they say it’s invaluable. It’s an infinite subsidy. It’s their franchise value.”

The program has allowed Goldman to issue $28 billion in debt over the last six months. The debt totals more than $40 billion each for Bank of America and JPMorgan Chase, and $23 billion for Morgan Stanley.

The F.D.I.C. program does not come with the compensation and other regulatory conditions attached by Congress to the $700 billion bailout, but it charges the banks a small fee. Rather than relying on a direct infusion of taxpayer money, the agency is helping the banks raise debt from private investors by endowing them with the equivalent of an AAA rating. If any of the banks relying on the guarantees ran into trouble, the F.D.I.C. would make good on those bonds. …

Goldman was the first bank to take advantage of the debt program when it was introduced in November, when the financial crisis made it nearly impossible for companies to raise cash. Morgan Stanley and Citigroup were quick to follow. More than 119 debt deals have been issued with the F.D.I.C.’s backing, according to Dealogic. Larger banks are using the program more than smaller ones, because they have capital markets businesses that depend on financing in the public markets.

Bank executives are quick to acknowledge that the program was critical to their survival.

“We would have had a real problem in the capital markets,” said David A. Viniar, the chief financial officer of Goldman. “The market shut down.”

I am picking on Goldman here because they have taken the lead in elevating these issues and seemed the most determined to get out from under the TARP restrictions. (And because it was their own former CEO, Paulson, who gave them the money in the first place. And it was another Goldman guy, Neel Kashkari who has been administering the TARP program.) But the same points apply to other banks. The irresponsibility of these banks has cost taxpayers and the Fed trillions of dollars in equity infusions, loans and guarantees. According to Bloomberg all these forms of assistance now total almost $13 TRILLION – almost equal to annual US GDP.

The truly amazing thing is that the banks haven’t been able to generate REAL earnings despite a $13 trillion bailout. From the Sorkin piece:

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

(Remind me again why Ken Lewis is still running Bank of America?)

We can’t let these banks off the hook as soon as the immediate crisis shows signs of stabilizing somewhat. The federal government continues to be lax on the banks. Metaphorically speaking, the federal government should keep its foot on their throats until we have put in place a new regulatory regime that ensures the crisis isn’t repeated a few years down the road. We can’t return to a world where the financial sector sucks up 40% of all the earnings in the economy through essentially infinite leverage while creating little of actual value for the economy. This is just casino capitalism where the gains are privitized and the losses are socialized (leaving us with the worst of both systems).

It’s hard to be upbeat these days, when every statistic is worse than the last.  But the other day, as I was considering predictions for the coming year, a thought occurred to me: we are experiencing the waning days of the administration I have repeatedly called the worst in US history.  Of course things look dark.

Is it possible, once the new administration is in place, that hearing daily announcements of LIPs (leadership, ideas and plans) put forward by people who are both smart and qualified, will have the opposite effect on the public from the constant drumming of fear we continue to have today?

Of course.

Is it also the case that markets react more to perception than to ground truth? 

Generally, yes.

So I asked myself, what will the state of mind be of the average American, say, three weeks into the next administration – let’s say, by Valentine’s Day, February 14th?

If their house has just been foreclosed and their car repossessed, we know what they’ll be thinking.  But otherwise, I expect it will be radically more optimistic than it is today.

Is that enough to provide a market rebound?  It could be.

SNS members will hark back to February of 2007, when I was able to figure this puzzle out for the first time.  In March I gave warning on CNBC Europe that the carry trade had created too much liquidity, leading to asset bubbles, and recommended that people go into cash.  I put the same advice out to members the prior month.

The currency re-adjustments of Friday are carrying several stories, I think, but this is the most important: that a very large amount of the equities positions in the world were funded by “free money” from Japan.  What we saw Friday was the above charts, showing Part I of the unraveling, as investors sold leveraged equity positions to get back into Yen to pay off their debts, and Part II, a rush into U.S. Treasuries at any price.

The Yen ended up the strongest it has been for many years, followed by the dollar, and all other currencies took massive hits, or stopped trading altogether.

I’ll be writing more about the meaning of this carnage, where it goes next, and who the real winners might be, in our SNS Newsletter.  (New readers can sign up at www.stratnews.com. )

Meanwhile, for what it is worth, it appears that Friday’s trading has put proof to the theory that led to the initial warnings of a global liquidity contraction.  At this stage, one can only hope that the big kids stop putting out each new brushfire, and turn their attention (perhaps at the coming Bretton Woods meeting Nov. 15th) to the global systemic problems that allow this kind of arbitrage.