David Altig on "Hard Landings"

From his lair in the Cleveland Fed, David Altig moves the ball forward on the question of how should the Fed watch out for and avoid a "hard landing" whenever Asian central bank dollar-denominated reserve accumulation ceases:

http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a.html
http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a_1.html
http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a_2.html

The last is mostly excerpts from a very nice speech by his boss, President Sandra Pianalto of the Cleveland Fed.

Comments

[Allen K.]

Insofar as this blog seems to be the clearinghouse of hard vs. soft landing theorizing, could someone comment on Sen. Schumer's bill to force China to revalue renminbi?

Ignoring the "protectionism is bad" aspect for the moment, it seems like this will be really bad for the American consumer. On the other hand, if it's inevitable anyway and doing it earlier than later hurts less, then it's good, right?

(Obviously I'm also confused by the fact that "good guy" Schumer is pushing this, with the tacit support of "bad guy" Bush. What should I believe?)

[Maynard Handley]

Allen,
To some extent the answer depends on whether you are interested in the next three years or the next thirty years, which to some extent boils down to whether you care about economics or politics.
What economics won't tell you is what becomes of the following two very important issues:

(1) For the short term, does the Chinese government, frightened of a US-induced recession, rally round the flag with all that implies --- sell off US treasuries, make deals with US enemies (exclusive oil from Venezuela and Iran for example) and so on? In the most extreme case this means taking over Taiwan. You think it won't happen, that the Chinese are more interested in getting rich than in saving face? So then, explain the recent anti-Japanese riots. The US electorate has shown us that no matter how wealthy you are, emotion whipped up by politicians trumps economic self-interest. (Heck, WW1 showed the same thing.)

(2) For the long term, well a correction that occurs "naturally", along with depression in bothe the US and China will be remembered in China one way, A depression forced on the country by the US will be remembered another way. Once again, let me remind you, this is a country that remembers (and is damn pissed off about) what happened sixty to seventy years ago. The fact that the US population can't remember whether it was demonising EastAsia or Eurasia last year doesn't mean everyone else has as short a time-frame.

[Jörg Wenck]

If the Chinese have a conception of national interest that is even remotely compatible with the idea of maximizing utility for the majority, then they will re-peg the renminbi in the medium term. What they may be doing before, is a) implement changes in their rather costly policy of subsidizing export producers located in the coastal provinces, b) spend a substantial percentage of their fx reserves on bailing out thousands of bankrupt state companies, c) spend relatively less attention to the dollar exchange rate than the euro and yen exchange rate of the renminbi in comparison to how they set priorities in the past.

Of course, if the Chinese decide to mimic the Republican style of policymaking - maximizing utility for a minority -, then all bets are off. There just have to be some actors in this game that take care of avoiding a slide into the space of lose-lose non-solutions. Unfortunately the twin-deficit hypothesis does belong to that space. It has been disproved in both Japan and Germany, and in the long run it will continue to be disproved in other countries on a flexible fx-rate regime as well, including the U.S. - if they don´t decide to switch to a gunboat standard, that is.