External Imbalances and Adjustment in the Pacific Basin

My contribution to this week's conference at the Federal Reserve Bank of San Francisco's Center for Pacific Basin Studies:

---

On March 2, 1995, the Washington Post announced that I was a genius. I had, it wrote, warned Treasury muckamucks in April 1994 that they should "pay careful attention" to the late Rudi Dornbusch's predictions of a coming peso crisis, and had written "bottom line: peso overvalued." "TREASURY AIDES' MEMOS WARNED OF PESO PLUNGE... ADMINISTRATION DIDN'T HEED SIGNALS" was the headline that the Washington Post editors gave to reporter Clay Chandler's story.

But Clay Chandler was wrong. I was not a genius. Rather than representing my policy-analytic zenith, my few and brief memos on Mexico in the spring of 1994 represented my policy-analytic nadir. I did write--eight months before the Mexican peso crisis--that everyone should "pay careful attention" to Rudi's analysis. I did write that Rudi's bottom line was that the peso was overvalued and headed for crisis. But Clay Chandler was at that moment doing the bidding of Senator Alfonse D'Amato, who wanted to gin up accusations of incompetence against Clinton political appointees. Thus there was no space in his article for him to report my own bottom line: My bottom line was that I could not conceive of a world in which long-run capital flows from America to Mexico netted less than $20 billion a year, and that given that magnitude of fundamental capital flow, the peso was not currently overvalued.

I'm still not sure where I went wrong. U.S. rich and capital intensive. Mexico poor and capital scarce. Mexico moving from a kleptocratic bureaucracy toward a more open political system more interested in capitalist development. Mexico gaining guaranteed tariff-free access to the largest consumer market in the world. It seemed to me that the consequence had to be a large capital inflow into Mexico--and thus that the fundamental value of the peso was one that supported a substantial Mexican trade deficit.

But American businesses' desires to locate their capital to earn higher profits by taking advantage of Mexico's relatively low wages and relatively literate workers was outweighed by the desires of the Mexican rich to locate their savings in places they regarded as safe. The big risk they thought they faced was something going wrong politically in Mexico, and so they thought one had better have a large Citicorp (or Barclays) account in case one had to suddenly cross the Rio Grande in a small rubber boat. The capital flow in the mid- and late-1990s--the capital flow today--was not out of but into the United States, and the true "fundamental" value of the peso was a low-value one that supported substantial net capital exports from Mexico, not a high-value one that supported substantial net capital imports.

As I said, my policy-analytic nadir. What I had thought was external balance--Mexico's current-account deficit--turned out to not be balance at all.

Since I am here replacing Dooley, I have to ask: Is it possible that what we now see as imbalance is not really imbalance at all? Back in the late-1990s, the standard talking points were that the world economy was out of balance, that it could not function indefinitely with the U.S. serving as importer of last resort, and that it was important that the world economy balance up and not balance down because balance it would, and balance soon.

Since then the U.S. current-account deficit has only grown.

Is the current situation "unsustainable"? For how long could the U.S. continue to run a current-account deficit of, say, 7% of GDP?

We can all do the math. Assume a U.S. real growth rate of 3.5% per year, a real rate of return on foreign capital invested in the U.S. of 4% per year, and a constant 7% of GDP current-account deficit, and find that in 2022 the U.S. net foreign asset position crosses -100% of GDP, with a current-account deficit of 7% of GDP, a trade deficit of 3% of GDP, and net income payments to foreign owners of capital of 4% of GDP. A net foreign asset position of -100% of U.S. GDP is conceivable: Britain, after all, had a net foreign asset position of +150% of then-British GDP in 1913. The trade deficit between now and 2022 has to shrink by an average of a little less than a quarter of a percentage point per year. That's a very gradual rate of closure of the trade deficit. Is the real exchange depreciation necessary to support such a gradual closing of the U.S. trade deficit large enough to make investments in dollar-denominated securities a bad deal at current exchange rates? The private market has voted "no": while it is no longer eager to take up the flow of dollar-denominated assets moving abroad, it is still more than happy to hold the stock of dollar-denominated assets that move abroad in the past.

There is an alternative scenario, one in which foreigners'--including foreign central banks'--desired holdings of dollar-denominated assets shortly hit the wall, and the asset price shifts that result from desired holdings' hitting the wall reduce, or do not increase, confidence in the dollar.

In this alternative scenario, the U.S. has to move about ten million workers out of currently-favored sectors--construction, home-equity-credit financed consumer expenditures, and so on--into export and import-competing manufactures. How much structural unemployment does such a sectoral shift require, and how long does the structural unemployment last? Other countries have to shift up to forty million workers out of export manufactures into other industries, and to generate demand for the products of those industries (without destabilizing their own monetary systems and asset prices, as Japan appears to have done at the end of the 1980s). The U.S. Federal Reserve would have to cope with whatever inflationary pressures are generated by rising import prices. Foreign central banks would have to cope with whatever stresses on their own asset prices are created by enormous losses of value in the stocks and bonds of their exporting companies.

I suffered a big enough shock from my policy-analytic nadir moment a decade ago that I am very cautious about declaring that I know a fundamental external imbalance when I see it. But one thing makes me exceptionally nervous--makes all of us exceptionally nervous right now. The market's current prices appear to give a zero weight to the hit-the-wall hard-landing scenario, and 100% weight to the U.S.-acquires-an-enormous-negative-net-foreign-asset position.

Comments

[monkyboy]

I think foreigners'desired holdings of dollar-denominated assets have already hit the wall, but there aren't any real alternative investments yet. Would you put your hard-earned currency into a country whose leaders continually spout religious mumbo-jumbo while looting every government program and company in sight if you didn't have to?

I think when the legalities of the Chinese stock market and real estate market are hammered out we'll hear a giant sucking sound coming from across the pacific...

[Movie Guy]

Brad,

Good post.

We will never make it to 2022 without a major crisis. We probably will not make it to 2012.

Your alternate scenario:

"In this alternative scenario, the U.S. has to move about ten million workers out of currently-favored sectors--construction, home-equity-credit financed consumer expenditures, and so on--into export and import-competing manufactures."

This will not happen without a U.S. dollar devaluation on the order of 40% to 50%. And it will not happen at all on this scale without one. A 30% devaluation across the globe starts moving the U.S. in the right direction if the intent is to grow exports, but that level won't support a 10 million employment move. Imagine how many factories you are talking about in order for this effort to occur. It's a huge industrial move. And a U.S. devaluation large enough to shift 10 million workers "into export and import-competing" manufacturing sucks the life out of other global economies. Hence, they slide into recession or positions which do not guarantee destinations for U.S. export growth.

"Other countries have to shift up to forty million workers out of export manufactures into other industries, and to generate demand for the products of those industries (without destabilizing their own monetary systems and asset prices, as Japan appears to have done at the end of the 1980s)."

This also will not happen unless the same devaluation conditions as described above occur.

The hard landing is on. Too much wishful thinking by the American market forces has all but guaranteed it. Lalaland and Good Ship Lollypop thinking is almost over. It's headed for the dumpster.

The following author thinks that the imbalances are already too great to correct with normal mechanisms:

Ultimate Crisis for Dollar Moves Beyond Possible Remedies
http://www.gillespieresearch.com/cgi-bin/bgn/article/id=596

[glenn hefner]

"The market's current prices appear to give a zero weight to the hit-the-wall hard-landing scenario, and 100% weight to the U.S.-acquires-an-enormous-negative-net-foreign-asset position."

By what basis are you asserting this?
The prices of all dollar-based assets?
What would be a more appropriate price?

[glenn hefner]

What strikes me is that if one looks at just about all of the economic data, without knowing the country, one would assume we're speaking of an emerging market with a weak(ening) currency. But then when people - investors and (foreign) politicians - see the same data and attribute it to The United States, they're mollified. They feel less risk here. So either the US is truly the world's largest emerging market and the currency falls, or investors and the foreign politicians and treasury officials don't let the greenback get too weak.

[James Wimberley]

Conspiracy theory explanation for the otherwise incomprehensible incompetence of the Bush foreigh policy: the real aim is to make the rest of the world so scared of the next random policy shock coming out of Washington that capital flight to the US keeps funding the US current account and budget deficit. But would bombing Iran would really stave off the next financial crisis?

[ilsm]

Interesting comparison to Great Britain in 1913.

In 1913 the Royal Navy matched the total of all the world's Navies. Both the Kaiser and Teddy Roosevelt lusted toward such largesse for their fleet building constituencies.

Today the US spends 50% or more of the world's outlays on arms, as it wastes its resources in Iraq and Afghanistan. That is nearing 4% of GDP.

In the early 1990's as the Soviet threat, which was overstated by huge sums during the 70's and 80's, slid into the past the part of GDP for defense declined from nearly 6% to less than 3%. This disruption of the defense industry was locally difficult and the surviving work may not have been any thing more than pork, but I suspect it helped the Clinton surplus.

So, is there a pair of deficit hawks like Graham and Rudman who will rein in the deficit with broad brush spending controls and so move to a rational landing?

We could not foresee a category 4 hurricane ruining the dikes in New Orleans, but we can pay $10 billion a year for a science project called Star Wars which has little chance of working and less apparent need.

This list of programs needed to 'transform' Rumsfeld's military is long and fictitious and will need to be cut.

It is mainly largesse for fleet/tank/aircraft building constituencies. Pork is part of the problem.

[glenn hefner]

Sure, there's alot of waste, but there's always been alot of waste, but I don't think it's zero-sum. ALOT of military spending and R&D eventually bleeds out for advancement and non-military uses. Would that money be better spent if used for pure R&D? Possibly, sure, but it's not like all of that money is wasted.

[ilsm]

Basic research is a small amount of R&D.

The money in R&D is mostly spent on engineering specific stuff like the MV-22 which took three times as long, huge cost overruns and cost thirty lives to keep the Marine amphibious groups on the leading edge. To assault Iwo Jima again.

That is a lot of money for a technology which has no market. The operating costs and reliability will kill it in a scheduled commercial environment.

DoD cannot tell you what it really costs to engineer the things, nor what they cost to operate.

TANG was a very expensive product indeed.

[david]

How much of your mistake on Mexico could have been based on the belief in the new-PRI and the PAN and the reforms they would bring? Disciplinary bias plays a role in my question, but my time in Mexico also made me very skeptical of the claims for reform.

[John]

I'm surprised I haven't seen more people bring up the awe and beauty of efficient markets. Aren't those supposed to provide for a systematic and orderly rebalancing of the imbalances?

[Bill]

What I like best about Brad's post is the sense that, hey, these are really hard things to predict because there are really far too many variables for most people to keep in mind. Personally, I do feel that a significant dollar drop is in the offing, but I have no idea on the timing. I think most of us suffer too much myopia - we see certain failings in our own system, but fail to line up those failings against the failings of all the other players on a relative basis. One reason why we fail is that the task is impossible for a human being. I've spent a couple of years in parts of Europe and can't even begin to compare their systems with our, except on a most rudimentary basis. The worst personal example I have is that I lived in Ireland in 1987. The place was an economic waste land and there was no way I would have ever predicted the growth it's seen since then. From would I could tell, they were doing everything wrong. That experience (prediction-wise) was truly humbling.

[Anthony]

If ever more wealth of a nation is placed in fewer and fewer hand, the system become unstable. Macroneconomic/statistical analysis become group psychology of the rich. The more they feel insecure the less likely their interest converges with national policy. These are the people who are close to decission makers and analysts afterall. They are the ultimate insider.

Compared that to large middle class situation, where macroeconomic analysis and statistic behave nicely.

[Matt]

On this set of issues, we are where we were two, three, or even four years ago. (I gave my first presentation on the sustainability of the U.S. current accont deficit more than eight years ago.)

Everyone recognizes that the U.S. current account deficit is unsustainable.

Everyone knows that sustainability will entail a much weaker dollar, and significant changes in the structure of the U.S. economy.

No one can think of a convincing reason why the current pattern of global imbalances can't go on for a while longer.

No one can tell if adjustment will be swift and painful, or smooth and equilibrating.

Absent an identifiable catalyst, market prices give roughly a zero weight to the swift and painful scenario.

On your policy nadir: It's now clear that "capital rich" doesn't imply low returns, and "capital poor" doesn't imply high returns. We know the proximate cause for Lucas's puzzle, but only dimly the deeper causes.

On updating DeLong and Summers on equipment investment and growth: see NBER 11551 and 9701. I think the challenge is to explain the large cross-country variation in the relative price of equipment. Differences in investment rates look like the wrong answer (or at best, a circular answer) given the evidence in these papers.

Also, has it occurred to you that DeLong and Summers implies that being a net international creditor is a bad thing (to the extent the outflow would have gone to domestic equipment spending)? I've been expecting you (or someone) to posit lost externalities to equipment spending as the source of Britain's late 19th/early 20th relative decline.

[Stormy]

Picking up on the alternate scenario that movieguy explored: NAFTA (signed 1993) is a case worth studying:

U.S. trade deficit is now around 50 billion with Mexico, growing by approximately 5 billion a year. Read the following from 1996:

“NAFTA opponents forecast disaster. The public believed them. Public opinion polls in both the U.S. and Mexico consistently found a majority of people opposed to NAFTA. Arrayed against the people were the White House, the leaders of the Republican Party, big business, virtually all economists and 99 percent of the country's media.
“President Clinton won a come from behind victory. "I courted some of these congressmen longer than I courted my wife," boasted Treasury Secretary Lloyd M. Bentsen. Yet it was not Democrats that put NAFTA over the top. Sixty percent of the Democrats in the House voted against Clinton. It was Newt Gingrich's aggressive intervention and Republican votes that made the difference.
“Two years later the results are in. The people were right. The pundits, the business leaders, the economists, the White House and Newt Gingrich were wrong.”
http://www.ilsr.org/columns/1996/11March96.html

From 1993 when NAFTA was signed to 1996, trade deficit jumped from approximately balanced to 17 billion. Since then the trade deficit has grown to on average 5 billion a year.

Now, what exactly happened? Our manufacturing went south: Sweetheart tax deals, cheap labor, no environmental controls.

And what happened to Mexico? Did it gain? Oh, yes, now they have a favorable trade balance. But did they gain?

Curiously enough, NAFTA did not stop the flood of poor across the border. Why not? Wages were kept artificially low. Try the following site for some interesting facts on the effect of NAFTA on Mexico.

http://www.mexconnect.com/MEX/lloyds/llydeco0204.html#d

“The minimum wage in Zone A (Mexico City, Baja California, Baja California Sur, Acapulco, several major border cities and parts of Veracruz) rose by 3.65% to 45.24 pesos (just over four dollars) a day. In Zone B (Monterrey, Guadalajara, Tampico, Altamira and some other medium-sized cities) the daily rate increased 4.5% to 43.73 pesos, and for Zone C (the remainder of the country) the rate rose 4.5% to 42.11 pesos. “
The simple answer is “No.” If not Mexico, who or what is making that money off that trade deficit? The kleptocracy of Mexio?

May I suggest the kleptocracy of the United States as a more appropriate villain? For every Mexican kleptocrat, I will show you ten from the states now in Mexico. Look at the flow of US manufacturing to Mexico?

Is there a liberal economist who will actually look at the real winners in this trade imbalance? At who is really cashing in? One bloody hint: American capital, very big American capital. Big Business. Hell, look at the rising wage disparity in the U.S. Average CEO now makes 34 million.

Let me paint a simple picture for you: Companies are cutthroat—the nature of the beast. There will be losers and winners as they all work to soak squeeze maximum profits. Environment and labor are always afterthoughts or a PR ploy.

I have a lot of time reading economic models, economic forecasts, economic pundits and economic analyses. The bias is clear: All are interested primarily in how the profit game is going. Look at how economic models are framed: Always the profit motive. As I have said before, economists are the Jesuits of Big Business: they provide the intellectual framework and cover for what is happening.

We now have the rest of undeveloped world with which to play, juiced with tax cuts and promises of an endless supply of cheap labor. Ninety per cent of the USA’s top 500 multinationals are now in China. India next.

Will someone start talking about real solutions for a real world? WTO, NAFTA, CAFTA are jokes: classy looking prostitutes for pimps behind the scene. They have set up profit taking for the very few. They benefit no one else, neither the west nor the undeveloped world. Their terms are monstrous rip-offs.

[Camilo]

David,
"...but my time in Mexico also made me very skeptical of the claims for reform."

Your skeptisism is wise. Just two days ago, Vicente Fox sent his energy reform package to congress. Energy reform in Mexico is crucial. Our electric and petroleum infrastructure is obsolete, costly, and at times even deadly: explosions at PEMEX centers have cliamed many lives. Yet our state owned energy companies are hostages of powerful unions tied to political leaders. In fact, everything in our public sector is run by powerful, self-interested unions. Except security, which is run by organized crime.

Mexico will not change significantly any time soon. Consider this: after the 95 peso debacle, poverty shot up to something like 85% or more...we're at 70% now, just below the 71% or so before that crisis. Fox considered that a notable victory.

[Camilo]

Stormy,
Good heavens! The topic sure does make you emotional. Listen, I agree, big business runs the show and big business only cares about itself.

But don't let us thirdworlders off the hook so easily. All those conditons that you point out that attract big buisiness to our countries exist because we made them. Mexico, for example, was a very unpleasant place for the average person way before the U.S. ever even existed. Way before even bis business existed. In fact, even before "capitalism".

The real solution lies in us getting our act together. Like Ireland, for instance. Or Japan. I mean, the U.S. actually nuked Japan and yet look at them now.

[Michael Cain]

"But American businesses' desires to locate their capital to earn higher profits by taking advantage of Mexico's relatively low wages and relatively literate workers was outweighed by the desires of the Mexican rich to locate their savings in places they regarded as safe."

I occassionally find it curious that economists make forecasts, particularly predictions about the outcome of policy changes, without considering the stratified nature of most economies. Granted, it makes it much more difficult to build models of the situation -- if one must consider the propensity of the Mexican rich to save outside their country as well as invest inside it. But if an economy's wealth is, in large part, controlled by a small portion of the people, consideration of how those people will act -- rather than some "average" person -- can be very important.

[camille roy]

Brad, great post. Stormy, great comment.

"Personally, I do feel that a significant dollar drop is in the offing, but I have no idea on the timing."

I am worried that domestic supports to our economy (manufacturing infrastructure, for example) are weakening and that from now until a dollar plunge of 50%, essentially value is being extracted from our country in order to propel the high growth esp of China.

When the crash comes will we be able to deal with it?

[Francis]

Professor, and the other smart people who post here:

I have a difficult time connecting the fact -- Mexico poor and capital scarce -- with the conclusion -- capital inflow.

It seems to me that the rational international investor would want a very high risk premium for investing in a country with an unstable currency and unreliable rule of law. But I don't see why any particular investment in Mexico will generally pay the necessary premium.

Knowing nothing about how international trade actually works, I would think that the kind of products that Mexico could develop for export are the kinds of things for which there is a great deal of competition -- whether from Jamaica, Vietnam or China. Due to that competition, borrowers cannot pay the necessary risk premium and money then chases reliable investments in the US.

Does the claim by Warren Buffet that there are no good places to invest right now (and the claims of capital surplus) support this hypothesis? IANAE (i am not an economist) but it appears to me that this is so.

look forward to the comments.

[anne]

Dear Brad,

Watching the Mexican currency crisis of 1994-1995 was like watching a who-done-it and knowing who-done-it. Mexico had revalued the Peso several times before just after Presidential elections which are at 6 year intervals. Fidelity Investment company had used high yielding Mexican debt in a number of the largest mutual funds to bolster returns. Indeed, Fidelity was not only the largest holder fo Mexican debt but Fidelity held about 60% of the debt. Several months before the elction and crisis Fidelity was asked openly about a Mexican devaluation, and answered officially that a devaluation was impossible for Mexico would then have no credit standing.

Well, there was the election and speculators knew just what to do. Go after the Peso. If the Peso is devalued you win, if not you do not lose since the exchange rate stays fixed against the dollar. Mexico of course could not hold and devalued and Fidelity mutual fund owners lost quite a lot though almost none ever knew why.

Oh well :)

[elliottg]

What I find interesting is that Professor Delong thinks that any scenario can move 10 million workers into export producing or import competing jobs in the US. This is a belief in labor market equilibrium that seems wholly unjustified to me. More likely 10 million jobs would simply disappear. Although this is a 7% decrease in the labor force, the effect on GDP is less than 2 years of GDP growth. These 10 million workers and their families disappear off the radar screen. Capital returns to foreign money except that invested in government bonds remain attractive. Wash, rinse, repeat. From a global financial point of view, it is fine. This is not a hard landing; it's still a soft landing and is preferable for foreign investors to all other scenarios (just avoid government debt leaving that to central banks since they can afford the negative returns in the interest of stability). For the workers in the US, it's a lot less pleasant. The real risk is that some political upheaval alters the potential returns to capital in the US, but that seems unlikely whether Republicans are elected or Democrats. With Democrats being the party of fiscal reponsibility, any movement towards Democratic control of the federal government imporves the picture. Of course, there is the hard, hard landing with a US depression and catastrophic loss of confidence in the dollar triggering global depression, but noone wants to contemplate that so they discount it to zero. (Why prepare for nuclear war if you can't conceive or don't want to live in the aftermath.)

[Camilo]

Michael Cain
"...if an economy's wealth is, in large part, controlled by a small portion of the people, consideration of how those people will act -- rather than some "average" person -- can be very important."

How true that is...

[Rodolfo Martinez]

Aja. Well done. This is becoming clearer and clearer in your head and ours. The controversy I think can be dissected based on the following posibilities:

A) The likelihood of a big crisis so close to zero that even though markets value it correctly, its value is imperceptible. The main short run argument is that the US is the big empire. Nobody will run from the US for a long long time. The main argument for the long run is the US is in dire condition, but not nearly as dire as the debt is big but not quite the 150% to GDP Japanese debt, the hundreds of billios of bad debts of chinese banks, the 2 to 1 worker to retiree ratios comming up soon across the board in europe, china, japan, even mexico is younger but moving faster to an old population. These countries better sell something to the US now that they can. they're just saving for their retirement.

or...
B) The big crisis scenario is no such thing. Big crisis for most flexible economy in the world, with own-currency denominated assets, still an only half way open economy, a inmensly sofisticated and sucessful central bank is nothing to worry about. Gagnon's paper is a reasonably convincing piece of evidence in this respect. (although I still don't know why he didn't show what real rates were doing).

C) Markets do not see the crisis coming. Somehow the marginal investor is not too intelligent or is fooled by the recent past or it is not the marginal investor but central banks across the world setting prices.

Barry Eichengreen would push for C or B as I understand his work and I think he has to be right. and Al. Greenspan with his 'low valuation of risk periods have not lead to anythign good speeches' is also pushing for C. A cannot be true. Markets are too volatile, they're scared of anything, even a 0.01% chance of a financial market meltdown should show up. They are hit by a word from greenspan, by a huricane, etc. How could they have resonably incorporated the value of a 50% decline in the dollar? A millions of workers displacement and a million crisis abroad from export declines?

The compatibility of B and C is really up in the air. Can the dollar price, the interest rate and the stock market all change dramatically without a bit of meltdown? Without greenspan at the helm? unlikely.
ok.
see you.

[anne]

Remember, the Peso was pegged to the dollar and the interest rates on Mexican debt were high enough to offer stock-like returns t6o investors. There were however notably few individual investors willing to buy Mexican debt, but mutual fund companies, or Fidelity in particular, could stuff Mexican debt in funds and make interest returns well over 10%. But, there simply was no massive capital flow to developing Mexico. The flow to Mexico was heavily speculative.

[anne]

Taking another tack, there is no reason to believe the dollar will be significantly pressured in the near term. The issue is not just China, but Japan and other Asian central banks that do not wish to have currencies significantly rise in value against the dolar. As for the Euro, political uncertainties make a significant rise in value of the Euro against the dollar unlikely for some while. Actually the relative value of the dollar is about what it was 10 years ago.

[Caro]

I would ask you economically literate people for recommendations for a couple good books on the Mexican economy. I live and work in Oaxaca, which tops only beautiful Chiapas as the poorest state in Mexico. I'd be very interested to read more about how it got that way. My history books cover some but I want to understand more--I know there are Mexicans slipping over the Rio Grande but you can watch the midnight train leave my town with Central Americans clinging to the sides. Everyone in heading North. Can it/Should it be stopped? Isn't it in the States best interest to keep the neighborhood economically stable? I haven't heard much about CAFTA in this discussion . . . Ah, well. If anyone could give me some ideas of where to look for information I will look into it the next time I'm in a big city (I can read English and Spanish, so Mexican-authored would be great, thanks.)

[anne]

http://www.nytimes.com/2005/09/23/business/worldbusiness/23cnd-yuan.html

September 23, 2005

China Currency Move Signals Cautious Policy
By KEITH BRADSHER

HONG KONG - China made an important technical adjustment to its currency management system this evening that underlined the country's reluctance to allow the yuan to rise significantly against the dollar.

The announcement by China's central bank came hours before Finance Minister Jin Renqing and the central bank's minister, Zhou Xiaochuan, were scheduled to meet in Washington with the finance ministers and central bank leaders of the Group of Seven industrialized countries.

The People's Bank of China announced after the close of currency trading in China that it would allow the yuan to fluctuate more widely in value against currencies other than the dollar. But the central bank made no change to the tight trading range between the yuan and the dollar.

The United States Treasury is preparing for release next month its semi-annual report on whether China manipulates the value of its currency, known as the yuan or renminbi. There was no immediate American reaction to the Chinese announcement early this evening in Beijing, which was before dawn in Washington....

[Stormy]

Camille roy,

Thanks. Some time ago I was somewhat “restrained.” Now I figure, what the hell. If I am going to be ignored, I might as well as get some satisfaction by yelling. Yes, the economists I see are just intellectual muscle for the Big Boys, for more of business as usual.

Economic theory rarely measures FDI in terms of lifting all boats—improving working conditions or the environment. They just promise, knowing full well it can't happen.

All they have is some foolishness about trade balancing out. These models do not even remotely reflect what is happening.

As far as letting third worlders off the hook, I did not mean to imply that at all. In fact, they have help “set the hook.” From Mexico to China to India and beyond, they are all culpable. Wages are kept low, environmental regulations are ignore—all to set that hook firmly. Are third world leaders really interested in their own people?

It is about time for some economist to look carefully at the tax deals along with the labor and environmental policies that third world countries are offering. Those deals simply cannot be matched. China: Long-term investment, no taxes for ten years. Where, in actual fact, does the money go? No taxes; I repeat, no taxes. Does anyone understand what that means?

If China’s dollar surplus is so large, do the math for the multinational coffers. Maybe the multinationals are just parking the cash here. Further, China is slowly becoming an ecological nightmare—hard to breathe in some areas.

Where was the myopic WTO when it granted China membership? What were the conditions? Is there anyone their with brains or even a modicum of foresight? Clinton had absolutely none. He wooed special interests more than he did his wife. The Democrats are a joke.

Go to the US Chamber of Commerce website. Read a bit. Go to any trade journal. Take a gander. This is robbery on a grand scale. Sheesh, cruise ships sit off the California coast filled with foreign programmers—just outside the five-mile border. And guess what these programmers are paid.

Companies set up offshore headquarters to avoid state taxes. Tax havens proliferate.

And where is the investment into new US industries? Why has the stock market remained flat?

Brad Setser somehow thinks that revaluation will make US industries more competitive, but he ignores the fact many US industries have simply set up shop overseas. Are we simply going to establish new business to compete with those U.S. businesses that have fled the country? Are we going to compete with offshore US businesses? I mean, really. The insanity of saying that we now must compete with ourselves boggles the mind.

Be all that as it may, my real distress is how we are doing business—unrestrained pillage of both human and environmental resources. No regulation, no labor laws, no environmental safeguards, no energy policy. All this as global warming slowly approaches. Have we, all of us—American, Mexican, Chinese, Indian—any sense? We have created an economic model that will simply swamp us all. Forty or fifty years is not far away. One generation.

That economists will simply not look at all this makes them as shameful as Bush Jr.

[anne]

Caro:

http://www.nytimes.com/2005/09/11/international/americas/11chiapas.html?ex=1284091200&en=dc36499ed9c1f1c9&ei=5090&partner=rssuserland&emc=rss

September 11, 2005

Where Poverty Drove Zapatistas, the Living Is No Easier
By JAMES C. McKINLEY Jr.

PATIHUITZ, Mexico - The shooting war between the Mexican government and Zapatista rebels in these fertile hills ended long ago, but the struggle for the hearts and minds of ordinary people like Rigoberto Álvarez goes on, with no clear winner in sight.

Mr. Álvarez spent 15 years in the Zapatista rebel army, training in the mountains of southeastern Mexico, but quit four years ago, at the age of 46. Why? He had eight children he could not afford to educate. The government was offering cash incentives for each one in school.

"If I don't find a way to put them through school, my children won't learn to read and write any more than I do," he said as he waited for hours recently under a broiling sun for the chance to enroll his son in a new secondary school. "The struggle is too long. I am already old."

In recent years, the government has poured more money into roads, health clinics, schools and electrification projects in the mountainous backcountry where the Mayans live. Patihuitz, for instance, has electricity, running water and the new secondary school (the classes are to be held in a borrowed house). Officials have handed out cash scholarships and roofing materials.

The Zapatistas, who long ago ceased to be a military threat, have set up communities that reject government aid and organize community projects. In some places, they have also set up farming cooperatives and small factories.

But the grinding poverty that provoked the first rebel uprising in 1994 continues to trap the Indians. Neither the rebels' attempts at self-government nor the government's antipoverty programs have done much to change the odds against indigenous children in these rugged, jungle-covered mountains, according to Mayan farmers inside and outside the Zapatistas.

"It's the same as it ever was," said Manuel Marín, a 46-year-old farmer in Patihuitz, as he gathered beans from one of his fields. "There is no way to change this life."

Many adults are barely literate and speak little or no Spanish. Most of the schools the government has built are too small. Secondary schools are scarce and charge enrollment fees.

The new clinics are often short of medicine. And while the cash grants for children in school buy food and clothes, they are not large enough to make saving possible, many parents say.

"Chiapas continues to be the poorest state in the country, as it was in 1990," said Julio Boltvinik, a professor at the College of Mexico who studies poverty. "The indigenous people really don't have anything that we would call a humane, dignified, modern developed life. They are living in an abysmally precarious state."

Nearly everyone works hard, but there is little profit for most. The 1994 free-trade agreement with the United States has driven prices for corn and beans brutally low. Government crop subsidies and supports have disappeared, erasing any gain from new welfare programs.

As a result, farmers here must spend more to grow crops like corn than they can make selling them. So most now farm only a small section of their land, growing just enough corn and beans to survive and leaving the rest fallow. They look for other ways to earn cash, either hiring themselves out as labor for better-off farmers in the region or migrating to northern Mexico or the southern United States to pick fruit, several said....

[Lord]

A different sort of crisis might be the US falling into recession and the resultant decline of the export market for the rest of the world triggers instability in foreign markets, perhaps leading to revolution in China. Money flows into the US.

[Julian Elson]

So, supposing that the capital-to-output ratio in the United States is around 5. Then, our theoretical net indebtedness from foreign equity investment in the U.S. (if not consumer loans) maxes out at about 500% of GDP, right?

This assumes that no Americans own any capital, here or abroad, anymore. I don't think that'll happen. I think.

How can I tell Hu Jintao how much I dearly like him and his friends, and what good economic sense their acquisition of T-bonds makes, and how Chinese people are very much satisfied with his administration and don't want higher consumption at the expense of few T-Bond acquisitions? Does anyone have his e-mail?

[Ari]

There will be no revolution in China. Time to understand just how powerful and successful the development path of China is proving. Sure there are problems, as there were problems in America as we grew between 1880 and 1920, but China is changing development prospects for 1.4 billion people and deserves respect for accomplishments.

[Ari]

Assuming the Chinese leaders and their advisers are fools, is absurdly arrogant. Travel about China for a few weeks, let alone live there for a year as I have, and there will be immense respect for what is being accomplished.

[Ari]

Anne, thanks for the notes on Mexico. The story about Fidelity is a stunner and typical for a powerful mutual fund company. Several investment companies have dumped off junk bonds they bank, foreign and domestic, on the mutual funds they control, and eventually left investors with large losses.

I too would like to know more about how Mexico is fairing.

[anne]

http://www.nytimes.com/2005/04/09/international/americas/09mexico.html?ex=1270699200&en=002dab476b252724&ei=5090&partner=rssuserland

April 9, 2005

At 15, Dreaming Big Dreams: Oh, to Be a Scholar
By TIM WEINER

MEXICALI, Mexico

ALICIA ÁLVAREZ lives two miles from the American border and light-years from the American dream.

Growing up in Mexicali has made her a realist at 15. She has no taste for romances and soap operas. Harry Potter stories and a horror movie at the mall are as far away as fictions take her from her city's heat and dust.

Alicia has a fierce intelligence, and it fires her only soaring ambition: to get a decent education, schooling that could lift her up and out of her surroundings into a better life. It looks to her as likely as a trip to Mars.

"It seems impossible," Alicia said with a shy, distant gaze. She has started high school, having proved herself one of the brightest girls in her city, a straight-A student with an exceptional aptitude for math.

"My family has no money for college," she said. "I probably will never get to a university, though I would love to.

"My education has been hard. My teachers are trained in teaching, not in math and science. It's a struggle for them to teach me what I need to be taught. To learn what I want to know. And I want to know so much."

She finds herself, like her country, poised with one foot in the door of opportunity and one stuck in the poverty and powerlessness of the past. But with her fine mind, the idea of having a better life than one's parents, while distant, is still a shimmering possibility.

Her father, David Osuna, 46, works part time selling used cars. He has good weeks and bad weeks. Her mother, Alicia Álvarez, 48, keeps house. They have provided their children with the basics of life: food, clothes, shelter. Their slender, dutiful, deep-thinking daughter is a bit of a mystery to them.

Alicia's brothers, David, 21, and Luis, 16, are in awe of her intelligence, respectful, sometimes distant. David is the one in whom she sometimes confides her dreams.

Alicia's uncle and godfather, Abel Álvarez, 56, knows her aspirations. He grew up behind a plow, and then crossed over the border when he was her age to work the fields of the Imperial Valley in California. He now earns a good living in construction, a self-made man who builds malls in El Centro, Calif., 15 minutes north of Mexicali.

He has watched Alicia grow up with a mixture of pride and worry.

"It's not a lot easier growing up in Mexicali now than it was 40 years ago," he said. "The pie's a little bigger, but a lot more people want a slice. Growing up here, you go up against all that, and with the United States and all its riches just over the line."

Mexico's economy has been flat for almost five years. Poverty is ever-present. The middle class is small; it has been shrinking for a generation. Stealing into the United States is often the only way out....

[Tom]

Caro asked "I live and work in Oaxaca, which tops only beautiful Chiapas as the poorest state in Mexico. I'd be very interested to read more about how it got that way." Let me first suggest that rather than try to figure out how Oaxaca got so poor, you instead try to figure out how other places got so rich. To that end, let me provacatively suggest _The Other Path: The Economic Answer to Terrorism_ by Hernando De Soto and June Abbott, which is about Peru and was originally published in Spanish. On one hand, this is a good book that could help move your understanding forward a great deal, and would be very well worth your time. On the other hand, I hope that my suggesting this will provoke others on this thread to recommend additional, hopefully even better, books for you.

[Barkley Rosser]

Stormy,
The reason for the failure of wages in the industrial sector of Mexico to rise is not due to American capitalists controlling them. It is due to the unequal treatment of the agricultural sectors in the US and Mexico in NAFTA. Mexico eliminated its subsidies for corn/maize production, whereas the US has increased its subisidies. Upshot has been collapse of corn/maize sector of Mexican economy, its poorest and most traditional, with many people pouring off the countryside into the industrial sector, thereby lowering wages there. It was unhappiness over this that led Fox to complain about this at the Cancun WTO meeting and support the complaints of the Cairnes free-trade-ag group against the rich countries' protectionism of their ag. This disagreement led to the breakdown of that conference.

It should be kept in mind that Japan, China, Taiwan, and South Korea do not need to get high returns on the reserves they hold. They do not have to panic sell.

[Stormy]

Barkley,

Then I guess "free trade" is never "fair trade," however you slice it. Isn't this but another example/form of rough-shod capitalism?

[anne]

http://www.globalpolicy.org/socecon/bwi-wto/wto/2003/0303mexi.htm

March 3, 2003

Why Mexico's Small Corn Farmers Go Hungry
By Tina Rosenberg - New York Times

Macario Hernández's grandfather grew corn in the hills of Puebla, Mexico. His father does the same. Mr. Hernández grows corn, too, but not for much longer. Around his village of Guadalupe Victoria, people farm the way they have for centuries, on tiny plots of land watered only by rain, their plows pulled by burros. Mr. Hernández, a thoughtful man of 30, is battling to bring his family and neighbors out of the Middle Ages. But these days modernity is less his goal than his enemy.

This is because he, like other small farmers in Mexico, competes with American products raised on megafarms that use satellite imagery to mete out fertilizer. These products are so heavily subsidized by the government that many are exported for less than it costs to grow them. According to the Institute for Agriculture and Trade Policy in Minneapolis, American corn sells in Mexico for 25 percent less than its cost. The prices Mr. Hernández and others receive are so low that they lose money with each acre they plant.

In January, campesinos from all over the country marched into Mexico City's central plaza to protest. Thousands of men in jeans and straw hats jammed the Zócalo, alongside horses and tractors. Farmers have staged smaller protests around Mexico for months. The protests have won campesino organizations a series of talks with the government. But they are unlikely to get what they want: a renegotiation of the North American Free Trade Agreement, or Nafta, protective temporary tariffs and a new policy that seeks to help small farmers instead of trying to force them off the land.

The problems of rural Mexicans are echoed around the world as countries lower their import barriers, required by free trade treaties and the rules of the World Trade Organization. When markets are open, agricultural products flood in from wealthy nations, which subsidize agriculture and allow agribusiness to export crops cheaply. European farmers get 35 percent of their income in government subsidies, American farmers 20 percent. American subsidies are at record levels, and last year, Washington passed a farm bill that included a $40 billion increase in subsidies to large grain and cotton farmers.

It seems paradoxical to argue that cheap food hurts poor people. But three-quarters of the world's poor are rural. When subsidized imports undercut their products, they starve. Agricultural subsidies, which rob developing countries of the ability to export crops, have become the most important dispute at the W.T.O. Wealthy countries do far more harm to poor nations with these subsidies than they do good with foreign aid.

While such subsidies have been deadly for the 18 million Mexicans who live on small farms - nearly a fifth of the country - Mexico's near-complete neglect of the countryside is at fault, too....

[anne]

http://www.getty.edu/art/collections/objects/oz105201.html

Fable of the Dog and the Cloud

[By the way, should you happen to be in Los Angeles visit the Getty Museum and you will find the astonishing photographs of Manuel Alvarez Bravo.]

[Caro]

Thanks to everyone for the additional sources of information. I try to keep up with the swirl but it get's hard out here in the centro de nada. But let me say as someone who lives here that the two biggest problems I can see are corruption (of which the drug problem is a honking, massive symptom, not a cause) and education. I'm a teacher at a local university and some of my students are so intelligent but just haven't had training. It's tragic.

We're going to have to watch the elections next year to see really what's on the horizon. Keep your ears open for the name Obrador, he's going to be the guy to beat with all the problems in PRI and PAN. Most of my friends and co-workers are looking to see if the narco problems are going to escalate with new leadership on the rise --and they probably will. Good thing I love living here.

[anne]

http://www.odiousdebts.org/odiousdebts/index.cfm?DSP=content&ContentID=8368
http://www.odiousdebts.org/odiousdebts/index.cfm?DSP=content&ContentID=8369

August 10, 2003

The Taint of the Greased Palm
By Tina Rosenberg

Dec. 1, 2000, he carried with him a huge burden: the public's expectation that he would liberate from corruption a country that had become symbolic of the scourge. Fox was the first Mexican president from an opposition party after 71 years of autocratic control by the Institutional Revolutionary Party, or P.R.I., which maintained its grip on Mexico principally through corruption.

Mexico's hopes for Fox were extraordinary, but new presidents nearly everywhere assume their nations' leadership with the expectation that they will clean up graft of some kind – usually because they have promised it. Perhaps candidates in Finland, the world's least corrupt nation, don't tend to run on an anticorruption platform, but they do in most other nations, and not just poor or authoritarian ones. Inaugural speeches in capitals across the globe are filled with condemnations of past misbehavior and vows that tolerance for theft and bribery has ended; in his inaugural address, Fox said that combating corruption, "until now a goal of secondary importance, will from today on be a national priority."

Yet just as sure as a new leader's pledge to clean up the corruption of his predecessor is the certainty that his successor will, in a few years, be doing the same. Presidents who come to office promising to fight graft almost always fail – occasionally leaving office several million dollars richer themselves. Arrests are made – but often only of political rivals. Anticorruption campaigns come and go – and still it requires a 30 percent payoff to build a highway, buildings fall down because inspectors are bribed and drivers prepare for an assault on their wallets when they see a cop.

There is, however, a curious assortment of places where, in recent years, things have changed. Australia, now one of the world's cleanest nations, was a longtime Wild West of lawlessness. Singapore is now a model of probity, but in the 1950's it was awash in corruption. Bolivia is one of the world's most corrupt nations, but for a time a reformist mayor gave residents of its biggest city, La Paz, a reprieve. Ferdinand Marcos, of all people, cleaned up the Philippines' tax bureau. Even in many nations where fraud is rampant, some agency or region stands out for integrity.

Until a few decades ago, corruption-fighting programs consisted mainly of lamenting the human character. Academic studies of corruption were hindered by the reluctance of scholars to seem patronizing to third-world countries. When scholars did look at corruption, their major focus, absurdly, was the question of whether it was harmful.

Today, the costs of corruption are widely discussed, and they are stunning. Francisco Barrio, until April Mexico's anticorruption czar, estimates that graft costs his country 9.5 percent of its G.D.P. – twice the education budget – and Mexico ranks only in the middle of the corruption charts. Corruption also distorts spending. There is evidence that when levels of graft are high, governments spend less on education and health and more on public works – projects chosen not for their value to the nation but for their kickback potential. Corruption greatly discourages foreign investment. And with globalization, its effects have become borderless: when the Bank of Credit and Commerce International went down in 1991, 40,000 depositors in Bangladesh lost their life savings.

As the world turns its attention from whether to fight corruption toward how, some surprising lessons are emerging:

The most corrupt nations are indeed poor ones, but grand corruption can be found everywhere: illicit deals between top officials and big business have brought down governments in Japan and Europe. Money distorts America's political system as well – that it is largely legal does not make it less corrupt.

Big governments tend to be less corrupt. It might seem intuitive that a large role for government in the economy would provide a large opportunity for mischief, but in fact weak states often lack the mechanisms to fight graft....

[Barkley Rosser]

Stormy,
I would say that you are at least partly right. However, more often than not the source of the "unfairness" in free trade agreements is that they do not go far enough to eliminate the protections and favoritisms used by one side or the other, usually the more powerful and richer of the two. This was certainly the case with the US and Mexico in agriculture.

In this regard, my biggest problems with CAFTA involve such continuing proctectionism on the US side as for example for the sugar industry. Excuse me, but this is simply inexcusable and completely unjustifiable. However, this is not the sort of thing one will hear out of the increasingly shrill protectionists who are taking over the Democratic Party in the US.

BTW, the obviously most reasonable spending cut that could be made to provide an offset for all the extra spending that will occur for Katrina and Rita's victims and fixup would be a major cut in those ridiculous US agricultural subsidies. However, this is unlikely to happen. If there are any cuts, they will be to dinky programs unliked for ideological reasons by Republicans in the Congress, not enough to make any difference but enough to say they are doing something while providing red meat for their core lunatics.

[nate]

the mexico peso situation may have given professors some good material to confuse me toward the end of my undergrad days.

[Movie Guy]

Here is what involved if one assumes that Brad DeLong is correct in his projection. And I agree with his assessment regarding the size of the current account deficit which he has mirrored with job creation needs. But I find hard to believe that the jobs and plants will be created to bring about the correction.

TASK: 10,000,000 U.S. export and 'previous import goods' production jobs to be created.

This translates into the following.

New plants or equivalent production capacity and efficient employment to be added:

5,882 new plants - 1,700 employees - one shift operation
11,764 new plants - 850 employees - one shift operation
17,667 new plants - 567 employees - one shift operation

2,941 new plants - 1,700 employees - two shift operation
5,882 new plants - 850 employees - two shift operation
8,833 new plants - 567 employees - two shift operation

1,960 new plants - 1,700 employees - three shift operation
3,921 new plants - 850 employees - three shift operation
5,889 new plants - 567 employees - three shift operation

Now, do you really think this is going to happen?

Come on, people.

Perhaps some only understand economic theory and not the realities of line production or logistics management, but even a handful of economists have to know that they are dreaming when talking about creating this many new plants, factories, or their equivalent in terms of output production. It's a massive undertaking.

The trade deficit hole is already too large. It was too large when the U.S. Trade Deficit Commission issued its report five years ago.

[nate]

"obviously most reasonable spending cut"

can you explain to me how it is obvious and reasonable?

[psh]

'the desires of the Mexican rich to locate their savings in places they regarded as safe. The big risk they thought they faced was something going wrong politically'

Ignoring capital flight: an understandable oversight, endearingly idealistic at a time when idealism seemed justified. But sometimes capital flight is the only remaining check on entrenched corruption and parasitic government. The really difficult leap will be to recognize when that's our sole remaining option here. With corruption institutionalized, with accountability negated by gerrymandering and organized electoral fraud, with the rule of law suspended for perpetual emergencies, what other options do rational people have? Let's face it, it's the only vote that counts.

[realist]

japan and germany have huge trade surpluses, but the quality of life in both countries is anemic. the u.s.,g.b. and austraila have large trade deficits, but the quality of life in those countries is high. unfortunately, it may be unsustainable.

[sm]

Realist, are you kidding?

[realist]

sm

one of my former students is one of only 250 american attorneys working for japanese companies. he paid $700,000 dollars for his 850 sq.ft. house, where he lives with his wife and three children. his wife's parents gave him $100,000 for the down payment, and his parents matched that sum. he makes almost $300,000 a year, and after expenses, has almost no money to invest. he says his taxes, and the high cost of living, keep him living from paycheck to paycheck. he states that late night rides home in the train can turn into drunken free-for-alls. everyone tells him he is lucky.

germany has high unemployment, yet one of the strongest trade surpluses in the world. their citizens do not live with the same material wealth that u.s., or g.b., or australia enjoys. when was the last time japan or germany enjoyed the material trappings that are by-products of a housing bubble? it's only been in the last few years, that the average japanese citizen can finally afford to eat out.

to a lending institution, a japanese house older than 10 years, has no value. it's a knock-down, and the only value is in the land. because labor is so expensive there, the construction of dwellings is of the lowest quality. in view of its aging and shrinking population, retrofitting elevators to multifamily buildings has become one of the country's lagest construction needs.

no, i was not kidding.

[Norton]

psh - "The really difficult leap will be to recognize when that's [relocating savings] our sole remaining option here."

You mean you haven't moved your money out already? Suggest a cantonal bank in Switzerland or even a midsize bank in Canada with a small mortgage portfolio.

[a different chris]

Sorry to see that you "weren't kidding" because you are looking pretty silly by your very own words:

"working for japanese companies. he paid $700,000 dollars for his 850 sq.ft. house"

Ok, what pushes prices up? Lots of people with lots of money. So I'd say a place that can command damn near 1K/sq ft residential is pretty damn wealthy.

And then you turn around: "when was the last time japan or germany enjoyed the material trappings that are by-products of a housing bubble?"

So, in Japan high costs are a sickness and in Germany low costs are a sickness. Mmmm. Kay. Sounds to me that you have your answer "US good!!! Europe/Japan bad!!" figured out and you just backfill with whatever.

[Martin James]

A couple questions about the scenario.

Why would you be assuming a 4% real return for foreign capital. If they stay in treasuries, particularly short treasures aren't you looking at more like 1% real?

IF teh economy grows at 3.5% real, real return on foreign investments is 1% real, then the only requirement to avoid a long run runaway process is for the current acount deficit to grow a some less fast in real terms as the economy.

[realist]

a different chris

that's the point. japan is a wealthy country, but the people who live there do not have a high standard of living. japan was so "wealthy" in the late 1980's, that the imperial palace grounds were valued to be worth as much as the state of california. the populace counld not afford to live there, then, and it's still expensive for them to live there, now.

i'm stating that it is ironic that countries like the u.s., with high trade deficits, afford its citizens with a higher standard of living than japan and germany, with their high trade surpluses. i am not saying that the u.s. is good and europe bad. i believe that our high standard of living is synthetic and unsustainable. we are a country living on borrowed time and borrowed money. i'm just pointing out that profits from large trade surpluses do not, necesserally, "trickle down" to the general populace. it was stated in this blog, that this country could convert its economy to one that is based on exports. i don't believe that can happen, and if it does, it doesn't always bring with it a higher standard of living.

[realist]

a different chris

i didn't say that germany has a low cost of living, i said it has high unemployment. the people have a lower standard of living than those in the u.s., because their incomes are to low to afford them the same level of materialism that we enjoy.

[Ari]

Realist

Possibly tempering criticism just a little might help. People in Germany and Japan live very well, very comfortably on their own terms. The Japanese can even even even afford to eat out, and have long long long been able to afford to eat out along with other niceties. Why the Germans can even afford restaurants, as wandering about Germany would show. There are economic problems in Germany. There are economic problems in Japan as well, but a lawyer moaning about living from pay check to pay check while riding around in trains of orgying drunkenness while earning 300,000 dollars a year seems more than a little absurd.

[ash]

"I'm still not sure where I went wrong."

Oh...

"Mexico moving from a kleptocratic bureaucracy toward a more open political system more interested in capitalist development."

Right here. Besides the problems mentioned above, Mexico in some ways resembles Iraq. A really poor Maya south, an Aztec center that runs the show by being in the center, and a poor north run by organized crime. (On the border of Texas, the drug guys shot the sheriff. Then, they shot the next sheriff. They shot the new sheriff appointed the day he was sworn in. Then the federales poured in to restore order. It didn't matter; the point had been made. The news out of northern Mexico has sounded like that for 30 years. Of course, we've been spraying marijuana fields for however long and that didn't work either.) All presided over by a micro-elite that looks at Mexico as a large plantation.

"Mexico gaining guaranteed tariff-free access to the largest consumer market in the world."

Which killed Mexican-owned manufacturing because the microelite could sell out to the Americans and let the Americans run the show while the elite clipped coupons. And then the Americans discovered that lots of manufacturing was cheaper in Asia, and you wouldn't have the bribery problem.

ash
['If they had 'good governance' the trade pact would be icing. If they don't have 'good governance' the trade pact is just an excuse for looting.']

[realist]

ari

that was so so so condescending. tokyo and osaka are the two most expensive cities in the world, and they contain about one sixth of japan's population. the average japanese citizen makes less than the average american citizen. japan has a huge trade surplus. the u.s. has a huge trade deficit, but, economically, we live better (for now). and yes, you were right, people in japan and germany go out to eat, but they pay more and get less.

[pink]

afta nafta

perhaps
wealthy mexican nationals

stuck before hand
with sub optimal" safe holdings "in gringo land

took the opportunity
of an expected sellers market
to re adjust their portfolios
a one time shift

they all got
caught in a wrong call

that self full-filled
as
a ghastly rush for the exits

[pink]

on another point

the every brilliantly resourceful anne
lost me
on her "fido" story

gotthe bit about the pre crump
high rates play

but what did fido do
to trigger that baleful run to el norte ??????

[psh]

norton -

Hmm, nice tip, Canada. and smaller private banks in London, & Luxembourg's really good too. I hope the EU remembers that capital flight is now often a check on official corruption rather than a sign of it: not officials squirreling bribes away, but private persons putting assets out of reach of official graft and government incapacity. Capital flight: it's not just for syphilitic African dictators anymore.

Foreign central bank reserve flows are the cynosure now, but if the domestic capital stock takes fright, they will not matter. So far very few people have thought about getting out of dollars and offshore.

[Ari]

Realist,

Sorry, I was playing but on the Internet that can come out harshly. I will be more polite from here on. I respect your strong opinions but was trying to tone down these comments on Japan and germany. The point for us is not to underestimate the strength of either the Japanese or German economies or the living standards in either country. An example would be the comprehensive health care provisions in both countries, compared to the large and growing health insurance gap that we confront.

[anne]

http://www.nytimes.com/2005/04/16/international/europe/16germany.html?ex=1271304000&en=b17a3c95970b5b5a&ei=5090&partner=rssuserland&emc=rss

April 16, 2005

For 3 Girls and Their Nation, Sober Parallels
By RICHARD BERNSTEIN

HOHENWARTHE, Germany

ANNA RAUWALD, Marleen Merk and Sarah Liepert, 15-year-old girls from this small town in the former East Germany, are almost exactly the same age as the newly reunited Germany.

Born just after the fall of the Berlin Wall in 1989, and a few months before Communist East Germany formally ceased to exist, they are the first generation to grow up in the former East without any experience of either the Nazi or the Communist past.

Theirs is a world of fewer borders and greater freedom than the world of their parents and grandparents, though they seem to have only a vague notion of it, not thinking much, at their ages, about their own moment in history.

In many ways, their lives are quite similar to those of middle-class young people from the former West Germany or even the United States. They watch "Friends," "Sex and the City" and "The Simpsons," dubbed in German. They have cellphones, they Google, they have traveled - Anna as far as China, and Sarah several times to America.

But even at this early age, the girls have inherited the rituals and habits of mind, in altered form, of the East Germany that was dying as they were born. They look at the future from a point midway between the high expectations of a united Germany and the sense of limitation imposed by reunification's failures, especially persistent high unemployment.

They talk in modest terms of their ambitions and expectations, as if coming of age in the former East Germany today is, above all, to come to terms with economic reality.

Asked about the things most important to her once she finished school, Anna had a ready reply: "A job, which seems complicated to get." She said she wanted to be a journalist; her father is a regional editor for the local daily, Volksstimme.

"Not to be alone," Anna continued with her list. "To have friends."

What would she like her life to look like when she turned 25? "I hope I'll have graduated from university," Anna said. "I don't want to be a lazy student," one who spends years, as many German students do, hanging around the university, where tuition is covered by the state.

That was nearly a year ago, when Anna, Marleen and Sarah were first interviewed....

[Barkley Rosser]

Nate,
Well, we could cut the money we are spending on war in Iraq by pulling out, but that is not likely to happen soon. In terms of large (more than $50 billion/year programs), ag subsidies look to me like the most useless and pointless of them, although one can also easily go digging around in the defense budget some more. Just what did you have in mind besides these too as "more obvious and reasonable" that amounts to more than a hill of beans?

Japan has the longest life expectancy in the world. Housing and food are more expensive, but electronic products and health care are less expensive. People are sending each other long messages on the Tokyo metro. You cannot do that on any US subway system I am aware of. If terrorists attack the Japanese metros, people will be able to communicate out. Not so able in the US anywhere at all. Also, Japan had the greatest housing bubble of anywhere. What we see now is the long aftermath of it. Will we see something like that in the US? Japan is clean and has a much lower crime rate, and the quality of the food is much better, if more expensive. Given that both Germany and Japan are much more densely populated than the US, it is to be expected that housing will be more expensive.

Germany was doing much better than the US (as was Japan) in growth for most of the decades of the post-WW II era (both were in ruins at the end of the war, unlike the US). They have been slower than the US since 1990, but Japan had its major bubbles crash, and Germany has had to deal with the problems of reunification with its much trouble eastern part. Got any suggestions on how they should deal with that, Mr. "Realist"? (a bit of a joke of a "name," frankly)

[camille roy]

I would like to get a better understanding of how American citizens are considered to have a higher standard of living than Germans or Japanese. How is this calculated?

I think Americans struggle right at the edge of affordability for some crucial services and goods:

1. healthcare.
2. education at all levels. In many cities the middleclass doesn't use the public system because it is abysmal and unsafe. And then the price of college!
3. secure pensions and retirement benefits (remember them?)
4. the 'housing bubble'.

Need I add, in this crowd, that 50% of family bankruptcies are related to health care costs?

When I contemplate life in Germany or Japan the level of economic anxiety for the middleclass seems vastly lower, because of 1 & 2 & 3.

Perhaps the reason surveys of American consumers show such gloom is because of 1 & 2 & 3.

Perhaps economists measures of affluence are biased in favor of a low priced and varied market for consumer goods. Folks, if so, it doesn't capture reality!

I would chuck this 'teevee in every room' lifestyle in a moment if it would give my family some security in terms of 1 & 2 & 3.

[realist]

ari

i know that japan has much going for it. instead of spending ungodly amounts on defense, the japanese govt ran up its domestic spending debt on improving the country. no one in japan is illiterate, without healthcare, and most can take public transportation to work.

japan and germany are far more solvent than the u.s. those, who make up the older generation in japan, are great savers, and even with a shrinking population, these people should survive retirement. germany still hasn't come to grips with its amalagation problem, but i don't see its baby boomers as pensionless.

none the less, i stick by my premise, that average citizens in the u.s., g.b and australia, whose countries run big trade deficits, are presently living more materially abundant lives than the average citizens of germany and japan, countries that are running large trade surpluses.

[Barkley Rosser]

Realist,
Better last post. Apologize for mocking your moniker.

It is correct that measured real per capita consumption in the countries you name (as of 2000, OECD stats) put the US, Australia, and UK ahead of Germany and Japan. Top ten on that list in order are:
US
Luxemburg
Switzerland
Iceland
Australia
UK
Canada
Austria
Germany
Japan.

However this list leaves off quality of goods and leisure time. Germans take six week vacations. Some commentators in the US sneer at them, but in Europe they claim to "work to live" while in the US we "live to work." I am aware of a lot of people frenzedly working to buy a house in a neighborhood with decent schools for their kids. Clothing, food, electronic products, and many other items are much higher quality in Japan than in US while no more expensive.

Another issue is poverty and income distribution. According to the latest UN Human Development Report Japan has the lowest Gini coefficient in the world, slightly more equal than its closest rivals Finland and Hungary. I spent three weeks this summer in Tokyo and went all over. Never saw a beggar, a homeless person, or even someone who "looked poor." The same cannot be said for major cities in US, UK, or OZ.

Regarding child poverty rates in the mid-90s, among OECD countries the top three in order were
US (24.9%)
UK (18.5%)
Australia (15.4%)

Japan was surprisingly high at 12.2%. Germany was at 8.6%. The lowest (big surprise) were Sweden at 3.0% and (hah!) Finland at 2.7%.

[Norton]

realist: "average citizens in the u.s., g.b and australia, whose countries run big trade deficits, are presently living more materially abundant lives than the average citizens of germany and japan" No doubt about it, the English-speaking countries are on an incredible spending binge. How will it end? Probably not at all well, which brings up the question of where those of us not totally in hock should park our savings. Do we trust Bush and the Federal Reserve and the Treasury (do we still have one?) to manage well the unwinding, or do we expect an Argentinian-style flopping around and not-facing-reality approach. Currency controls anyone? Wanna buy a bond?

[cm]

realist:

(1) "Material abundance" is "standard of living", not "quality of life". I'd say I have a fairly high standard of living, or at least the potential of it, but my (perceived) quality of life, largely in terms of spare time, does not measure up to it.

(2) Exchange rate based nominal income/tax rate/cost of living comparisons are grossly misleading. I'm making about twice as much here in the US as I made in Germany in a similar job, but my bread cost more than twice, my rent is disproportionally higher, I pay much less in healthcare insurance but more out-of-pocket when using it, etc. Gas is cheaper but I have to use more of it. My taxes and unemployment/social security premiums are lower, but infrastructure investment is lower as well, and I & others stand to receive much fewer and lower benefits if in the situation to need them, and so on.

I would say the most important plus in quality of life that I experience here is the good climate and easy access to a diverse nature & high-quality recreation areas.

But then again, too little time to enjoy. Most people are running a precarious balance between fun and sleep.

[Ari]

Realist

We are agreed that government budget balances and trade balances are not an indication of the well being of a population, and you have nicely opened the topic to consideration of what well-being consists of. This is a subject to be carefully considered. Thank you.

[Tim]

Realist

If quality of life is higher in the anglo-saxon countries why is life expectancy so much lower than particularly Japan. Having spent time in both Japan and the US and living in London I just don't believe you. You can buy perfectly nice flats in Tokyo for cheaper than in London ( the bubble in Japan is long gone), the food is cheap and excellent ( the stories of expensive food and drink are mainly from culturally illiterate foreigners who misunderstand corporate entertainment in Japan, a large point of which is to be ripped off to prove the worth of your client). Transport works, things are clean and crime is negligible. People in the US live in big houses in the middle of nowhere, food is abundant but generally low quality as are the cars which provoke laughter among Europeans. To be honest a true comparison is all but impossible but it is hard to claim any great superiority for one lifestyle over another, using purely financial measures however is clearly wrong.

[Lord]

Assuming the Chinese leaders and their advisers are fools, is absurdly arrogant.

Then you shouldn't assume this. China is developing at a marvelous pace, but growth, particularly when it is so narrowly focused on exports, creates a lot of stresses and strains. Should growth fail for any reason, the natural tendency will be to blame those in authority. The Asian tigers certain felt it in 1997. With their cash hoard and local production they will be in good stead to combat any ills, but to do so would mean exchange appreciation and further export diminishment and falling real prices to meet local demand.

[Norman]

Balance, Shmalance. Lets look at who is placing the proper bet. The gorilla is China. One of the major effects of its policies is the enormous size and growth of their foreign reserves now at $740B and growing at $350B per year in a $1,700B economy. (Makes our 7% of GDP Current Account deficit look small, doesn't it?)
So, this is the gorilla question: Is China making the correct bet by accumulating foreign currency of this magnitude?
The answer seems easy: No. For in such a high growth economy (9% as far as the eye can see?) certainly the 4% foreign currency return with a high potential for a currency loss is a lousy bet. China is going to have to reverse this bet. (Does anyone have a doubt about this?)
And when they do, what the economists need to help us with is what will happen to world's economies when China does say, No Mas?

[gary lammert]

From a global macroeconomic the nearly tapped out American consumer still runs the show ...near the twilight - the current (remarkable) equity fractal perspective....

The macroeconomic world appears to operate and, operate exquisitely, according to three saturation fractal growth phases, followed by a saturation fractal decay phase. The idealized time unitsthat compose the three growth phases and decay phase, as delineated in the main page of the Economic Fractalist are x/2.5x/2x and 1.5x respectively.

Because equity valuation fractals exactly represent the complex
money-debt-asset system, the larger the equity index, the more
perfectly representative the index is of the underlying global
macroeconomy. This is why the Wilshire 5000 , TMWX, which represents the near summation US equity position is useful in fractal analysis. Even though other Euro-Asian equity markets have had better performance, it is the American economy represented by TMWX that has driven recent global economic growth.

Each day new valuation information is added and the consistent fractal patterns and overall fractal puzzle gains greater clarity.
Periodically review of the entire fractal evolution provides possible new insights. In this context a most remarkable balanced fractal picture has come into focus. It is a fine extension of the prior estimate of future fractal evolution rather than a departure. The echo housing bubble created by the lured debtor of last resort, the American consumer, has crested. This plateauing has been confirmed by such proxies as IYR and HGX and the greater TMWX index. US overconsumption, overvaluation, asset inflation,and servicing of debt
have become predominant factors over ongoing new debt and money creation in the complex money system.

Since 12 March 2003, the beginning of the current major three phase fractal growth period, the idealized fractal evolution has been simply exquisite. In general, major growth fractal units of significant length, e.g., weeks and months, are determined by low valuation points and the connecting underlying slope line which contain all interval points. The below data for TMWX can be easily confirmed by using 'Big Charts'.

First growth fractal (x): 103 days (12 Mar 2003 -6 August 2003)

Second growth fractal (2.5x) 258 days (6 Agust 2003 - 13 August 2004)(note nonlinear drop on August 6, 2004 denoting the hallmark of a second fractal)

(The exact idealized time frame is 103 x 2.5 = 257.5 days. Notice that the closing low is actually lower on 12 August 2004 with an intraday lower low on 13 August for exactly 257.5 days-exactly matching the idealized low).

The idealized expected third growth phase and the idealized decay cycle would be:

Third growth cycle idealized (2x) 206 days
Decay cycle idealized (1.5x) 154.5 days

Notice that the sum of the first and second growth cycle equals the sum of the third growth cycle and decay cycle: 103 + 257.5 = 206 + 154.5 = 359.5 (The first and last day are double counted requiring a subtraction of 1)

Now look what has happened in the real fractal evolution of the third growth cycle starting 12 August or 13 August 2004. It has been composed of three subfractals:

First subfractal: (y) 51-52 days 12/13 August - 25 October 2005

Second subfractal (2.5y) 129-130 days 25 October 2005 - 29 April 2005 (note nonlinear drop on April 15,2005 denoting hallmark nonlinear devaluation of the second fractal)

Third subfractal (2y) 103-104 days was ideally completed on Friday 23 September 2005.

Remembering that the sum of the first two growth fractals equal the the sum of the third growth fractal and the decay fractal, the decay fractal should be equal to:

Expected Decay Fractal: 51.5 +129.5 minus 103.5 (-1 for double counting) = 77.5 days.

Notice the sum 51.5 + 129.5 + 103.5 + 77.5 (-3 days for double counting) = 359 days.

This most remarkably agrees with the above idealized expected third growth cycle and idealized decay cycle within half a day.
Macroeconomically this might be explained by continued (excess) growth capacity to be had from ongoing debt creation and credit from existing asset valuation. The idealized third fractal incorporated this excess growth et, al. and rearranged itself into a new integrated sequence - with exactly the same number of days to the end of the idealized cycle.

This total cycle equivalent day fractal rearrangement potentially
provides a much better solution for the final decay fractal sequence. Retrospectively, using this solution, the recent fractal valuation behavior of the last 2-3 months becomes understandable and perfect in its evolution.

The base containing the 3 August 2005 Wilshire high starts on 18 July 2005 and is 16 days in length - vice 14 days. The evolution is 4/8/6 days. Rather than being the actual primary decay base, it appears to be a bridging intermediate base whose second fractal sequence contains the actual base for the primary devolution.The expected low of a second fractal with base of 16 days is on day 40(2.5x). This last Friday, September 23, was day 34 of this 40 day sequence. Using a 16 day base, there should be 6 more days to a low.

Likewise including the TMWX secondary peak(in reference to March 2000), 3 August 2005, is a potental interlocking confirmatory base sequence starting on 29 July 2005. This base sequence is following the classical x/2.5x/2x/1.5x and is 7/17/14/and 5(as of 23 September 2005) of 10-11 days. Noticed that the expected low occurs on the same 40th day(or one day earlier) of the 16/40 x/2.5x sequence as delineated
iin the preceding paragraph.

The potential real first decay fractal base is contained within these two above interlocking fractal patterns and appears to be 3/7/2 (as of September 23) of 7-8. The primary decay base would consist of 15-16 days starting on the lower high of 12 September 2005.

The idealized decay pattern would be either( for a total of 78 days from the 103-104 day third fractal third subfractal lower high):

15/37.5/37.5 x/2.5x/2.5x or
16/40/32-33 y/2.5y/2y.

By this fractal reckoning the first decay base low will be reached in 5-6 more days and the entire three phase fractal decay cycle will be reached in 77 more trading days. Considering the enormity of imbalances, entitlements, and outstanding debt, this devolution could potentially represent the 147 year nonlinear fall into the abyss. The collapsing financial picture will tax the American banking system with its inadequate fractional cash reserves in its ability to redeem deposits of concerned savers.

This is not investment advice. It is a rather specific prospectively identified potential pattern that can be tested. Again as the daily fractal valuations evolve, further prognostic refinements may be indicated.

However, the odds that the preceding identified daily Wilshire's fractals since March 2003, characterized by easily identifiable
valuation lows, are occurring by chance and randomness alone - resulting in exquisitely perfect quantum fractal patterns must, from a statistical point of view, approach zero. Based on this significant statistical improbability, the macroecomony may very well operate via its own predictable and scientific fractal law. Time will tell. Gary Lammert http://www.economicfractalist.com/

[realist]

tim

the word, or concept of, "superiority" was nowhere in my posts.

as far as cost of living, the worldwide 2005 cost of living survey gives us tokyo at 134.7, osaka at 121.8 and london at 120.3. so while it is certainly possible to find a flat in tokyo for less than one in london, the numbers, close as they are, are still the numbers. major american cities have lower numbers.

as far as longevity, many factors come into play. race may be one of them, and diet may be another. the average life expectancy of a native american is around 71 years of age. of the leading causes of native american death, 5 out of ten are diet related. i haven't checked, but i'm guessing than anglo-americans have a greater life expectancy than african-americans. diet, while maybe not the most important factor, will still probably prove to be a major factor in the difference.

the japanese do have a very high life expectancy, and, of the japanese, the okinawans have the longest life expectancy. studies attribute this to their diet, which largely consists of cold water fish, tumeric, bitter mellon, rice and pork broth. walking is also a major mode of transportation in okinawa, and families do not cast out the elderly. okinawans, who move to the u.s. at an early age, have average american life-spans.

[cm]

realist: Comparing numbers is one thing (and are your numbers in purchasing power equivalents or exchange rate equivalents?), and then there are tangible & intangible differences in goods and lifestyle.

E.g. some people live in shacks that take a heck of a lot of energy to heat & cool, with their power & phone cables on poles that topple when there is some wind (which is therefore called "storm"), while others live in real stone houses with buried cables where power is available even after storms. Of course, the latter comes at a higher cost in construction & maintenance.

Some eat food produced to stringent quality standards, while others grow out of shape from consuming too much hormone meat.

Some enforce higher ground water and other pollution standards than others, etc.

Some take better care of the unsuccessful (which apparently we don't consider for comparing standards) than others. In some places they get welfare, in some unemployment is "masked" by government make-work programs or making it hard for employers to lay off people.

All of the above lead to different cost structure and social organization.

And then what people look for in "quality of life" is also culturally and individually different. E.g. preference for spare time, or surrounding yourself with top-of-the-line gadgets instead of basic gadgets.

[andres]

"I'm still not sure where I went wrong. U.S. rich and capital intensive. Mexico poor and capital scarce. Mexico moving from a kleptocratic bureaucracy toward a more open political system more interested in capitalist development. Mexico gaining guaranteed tariff-free access to the largest consumer market in the world. It seemed to me that the consequence had to be a large capital inflow into Mexico--and thus that the fundamental value of the peso was one that supported a substantial Mexican trade deficit."

Tsk tsk Brad. Sounds like you need to read more Post-Keynesian economic literature. For that matter, any good economist well-acquainted with conditions in Latin America would give the following line of argument with respect to where you went wrong:

A "more open political system more interested in capitalist development" is something of a stretch, as that open political system had just held a fraudulent presidential election back in 1988, and the idea that the PRI's leaders weren't interested in capitalist development would have been news in the 50's and 60's. What you really mean, I think, is a more _open_ capitalist system.

But when you get the usual doze of capital/financial account liberalization combined with the privatization of state physical assets is that the corruption and fraud is simply transferred from the state sphere to the private financial sphere. Capital initially flows into such a country not because there's a perception that Mexico is capital poor and therefore has higher returns, but because of herd effects caused by the perception of "correct" policies combined with high bond returns caused by tight money and the (correct) belief that Mexico's government _would_ be bailed out if the worst came.

And the worst did come because the large capital inflows coming in during the early 1990's were turned over to a financial system that had been liberalized but was still not sufficiently well-monitored: huge amounts of capital vanished in bad loans, or outright embezzlement, or went right back out again as capital flight once the underlying corruption of the government became apparent in the wake of assassinations. It was then that the risk premium for turning wealth into dollars became higher than anything that the Bank of Mexico could possibly hope to match.

Bottom line: capital scarcity does _not_ imply higher returns to capital. On the contrary, capital scarce countries tend to have more unstable political systems and more opaque financial systems, and so the fundamental uncertainty of investment in such economies is much higher, resulting in domestic interest rates having to compete with huge foreign asset risk premiums. So it is not surprising that there is an overall tendency for capital to move from developing to rich countries rather than vice versa: developing countries with governments and financial systems as clean as Chile's tend to be few and far between.

None of the above is new, by the by: economists such as Carlos Diaz-Alejandro or Enrique Iglesias are well-versed in this chain of events and wrote about it at least 20 years ago.

[norton]

Discussed this thread at dinner last night with friends who live part time in Sapporo and part time in SF. They said housing/food costs are comparable. However, medical care is universal and high quality. A major difference: in the US two salaries are needed to support a family but just one in Japan. Also, no crime.

[Barkley Rosser]

realist,
I grant that many factors enter into the life expectancy results. It is indeed a bit odd that Japanese men live as long as they do given the high rates of smoking and excessive drinking that go on. Of course, Japanese women are easily number one in the world for a gender/nation group.

OTOH, Japan is near the top with Sweden in the low rate of infant mortality (Germany does pretty well too). The US is 34th in the latest stats. While this may have to do somewhat with lifestyles of mothers, it has an awful lot to do with poverty rates and quality/availability of basic health care. The US simply sucks in that category despite paying a good 60% more per person than our nearest competitors in medical costs (Switzerland, Norway, Luxemburg). This is pathetic, even if a rich person with an obscure, non-fatal ailment will probably be able to get the best treatment in the world in the US.

still_at_ten,
1) I rode in and out of Shinjuku station nearly every day and visited all the parks. If there were homeless, they were doing a good job of blending in (I am not saying there are no homeless at all in Japan). For those who do not know, Shinjuku is the world's busiest metro/subway station (and Tokyo's metro system may be the world's most efficient/best run).

2) See my above comments in response to realist.

5) Latest UN Human Development Report puts the Japanese Gini coefficient at .245, lowest in the world
by a hair. I was surprised at how low that reported number was (I keep track of those stats as part of one my research programs). Even if it is too low, there is indeed a high rate of equality and a low rate of poverty in Japan.

Most of your other points are reasonably well taken, more or less, although the "vacation" of the universities follows a much more demanding and stressful (and higher quality of teachers) high school than one finds in the US. For sure, where the US is ahead of everybody is our large amounts of housing, which are not as relatively cheap as they once were given our ongoing housing bubble (will the hurricanes puncture this?).

[piotr]

I gave some thought to the Mexican crisis back when it happened because I lost ca. 15k in a mutual fund devoted to government securities in NAFTA countries that had at least 1/3 assets in Mexican papers, due to their higher yield.

I am not sure if artificial revaluations were an issue, because for a year or two before the crisis peso was regularly sliding down, which in turn was balanced with higher interest rates. Corruption was not becoming any worse, direct foreign investments in Mexican economy were doing quite well and Mexican exports were picking up due to NAFTA. Fundamentals seemed fine.

My theory is that Mexico suffered the phenomenon that you may observe in a tilted tray filled with water, or in Bay of Fundy. As fundamentals seemed fine and country risks were estimated to be low, peso securities became safe enough for mutual funds attracting schmucks like yours truly which created many billions of "hot money" that rolled into Mexico. The tide came in. These investments were doing OK, but not particularly well, due to continuous devaluation of the peso. For a tax-paying investor, this is actually a nasty combination: I paid taxes on the nominal interest rate while having capital losses with smallish tax benefits.

As the tide came in, it crested and went in reverse. Someone figured that Mexico is absorbing too much debt, perhaps inflation picked up a little, so devaluations picked the pace a little as well, so the real rate of return was dropping to Canadian level, and the tens of billions that went in started to pour out in a torrent. Being somewhat (painfully) aware of similar situation that happened before with Australia dollar, I stayed put, waiting for the peso to rebound. Then I gave up.

I think that the amount of debt that a country or a company can carry is to a degree a matter of perception. As long as perceptions are favorable, the debtor can keep on refinancing. But if a large proportion of the debt is in short-term instruments kept by panic-prone individual investors, the perception can drop precipitiously, even after the "market" have "discounted all the bad news". Brad calculated or estimated the tide amplitude in the open ocean while Mexico became a shallow funnel-shaped bay.

[nate]

george burns

[anne]

Piotr

No; Peso bond investments were giving double digit returns before the devaluation. The interest rates offered were double digit and the Peso was quite stable against the dollar. Investment banks were well rewarded for marketing Mexican debt and found an ideal please for Mexican debt in mutual funds, especially in Fidelity mutual funds. Investors for the most part had no idea that supposedly reasonably conservative funds were heavy with Mexican debt. Fidelity alone held more than half of all Mexican debt in its mutual funds.

[J Thomas]

Realist's points imply to me not that japanese and german standards of living are unexpectedly low, but that american standards of living are unsustainably high.

How could we reduce them? Obvious choices are reduced healthcare and reduced food quality. Plus minor things like less heating and cooling of residences.

If things got worse we could subdivide city apartments and move several families into each -- cf Moscow. People don't absolutely have to put up with long commutes, and will only do so when their incomes allow it. As automobile ownership and use got more expensive we could easily get expanded bus services in most cities.

People who couldn't afford cars could still show their status with expensive clothing, and people who couldn't afford impressive homes could still impress guests by taking them to expensive restaurants.

Putting that aside, why is all this going on? Sure we've got increasing population and decreasing oil, but how can it be that the world economy depends on unsustainable US consumer consumption?

Try this possibility: We're still adapting to the computer and the automation stuff. A lot of jobs that used to take skilled workers no onger take that, so wages are down. Even while we can produce with fewer people, we have fewer people getting paid enough to buy what we produce.

In 1970 a fast food guy had to know how to use a cash register. He had to know how much everything cost and enter it correctly. Now he can push keys with pictures on them. Less skill, easier to replace, he's less valuable. In 1970 he had to know how to work the machinery. He still does, but to a much larger extent the machinery tells him what to do, and the training-by-video etc is cheaper.

Lots of jobs have been automated away, lots of the remaining jobs have been simplified. Those workers can produce more but they can afford less.

I remember in 1970 I was riding a bus and a black guy with dirty hair asked to borrow my comb. I took my comb out of my pocket and gave it to him, and he combed his hair and handed it back. I told him to keep it and he got mad. "Are you saying my hair is dirty? Are you too good to use a comb after me?" And I told him it cost ten cents, and I pulled a second comb out of my pocket to show him I didn't need it. I bought them in a convenience store, they had a round plastic thing full of them on the counter beside the cash register. Now if I walk into CVS I can get a comb for a dollar, they have it in bubble wrap on a piece of cardboard with a bar code. It isn't worth selling things for ten cents just like it wasn't worth selling things for a penny in 1970. I wonder what kind of comb you could buy in 1905, or in 1870. Surely they had mass-produced combs then, didn't they? Made of celluloid? I have a vision of a craftsman standing over a jig with a hundred forty four comb blanks clamped in it, and he's sawing a tooth in all of them at the same time.... When I was a kid my godmother sent me a toiletries kit for christmas. It had a comb and brush etc in a carrying case. It seemed like those things were supposed to be valuables that you'd carefully keep for years, like they were capital equipment and not suplies. Now we have plastic injection molding, we can make lots of practically any shape cheaply once we go to the expense of figuring out how to do it the first time. As long as it's plastic.

We can move a factory to a third-world country a lot easier now than we used to, because it doesn't take nearly as much skilled labor to run it. Mass production made it easier, you could get by teaching each worker one simple job. But now a lot of the simple jobs are automated away completely, and each one that's gone is a job you don't have to teach somebody across a language barrier.

Medical care is expensive partly because it has to use skilled workers. We wouldn't have it any other way. They're expensive -- money is one of the big incentives for getting people to put up with 8 years of sleepless hell learning the trade. And then we want them to somehow be affordable for minimum-wage workers....

Modern mechanised agriculture might use highly-skilled people, but it doesn't use very many of them. I don't know whether it would be affordable without the subsidies, but certainly it keeps putting people out of work the way it's done now.

The better we do at producing more with fewer people, the fewer people can afford to buy the stuff. People talk like the US debt is all that's keeping the rest of the world going -- nobody can afford to buy the stuff they make, they'd have a downward spiral of increasing unemployment and dropping demand except that we nobly sacrifice and spend money we don't have to give them a market.

Is there something fundamentally wrong here?

[piotr]

Anne,

I have no access to the historical charts of the exchange rate of peso. However, it seems consistent with both of our versions that once Mexican debt paper reached huge retail market of investing, much more money went to Mexico than, a posteriori, it seemed prudent, and when this "a posteriori" moment happenned, there was huge panic.

The only open point is if managers of mutual funds are herbivores and follow herd instict or carnivores and feast on bone and marrow of the customers. Herd instinct: it was not just Fidelity, and it was a financial analysis that was not so different from Brads. Once such an analysis is in circulation, it becomes common wisdom, the news hits the retail branches of Fidelity, Morgan Stanley etc. and STAYS THERE until the panic is in full swing. Carnivores: didn't they feast on bone and marrow? Herbivores: fees of money managers are more like grass than bone and marrow. Margins were thin, there was no spectacular churning and what not. Carnivores: thin margins? thin billions of dollars?

But in a mager schema of things, herbivore/carnivore question does not make much difference. The peculiarity of smallish markets is that they can be demolished by overconfidence that starts as a very reasonable confidence.

The question is: can the huge market like American dollar be demoslished by overconfidence? The problem is that the very minute we prove that this is impossible it becomes possible. Liar paradox.

[Billmon]

"find that in 2022 the U.S. net foreign asset position crosses -100% of GDP, with a current-account deficit of 7% of GDP, a trade deficit of 3% of GDP, and net income payments to foreign owners of capital of 4% of GDP"

If this were any other country, I would say this suspiciously resembles the debt trap scenario -- a country that is paying 4% of GDP in net income to foreigners for the privilege of running a 3% trade deficit would be better off defaulting on its debts and sacrificing the 3% to keep the 4%.

Logically, foreign investors would recognize this ahead of time, and either refuse to continue lending or demand a risk premium that would quickly make default look even MORE attractive.

But of course, we're talking about the United States of America, so the ordinary rules of logic don't apply.

[Jussi]

Barkley

I liked your post, but don't understand why you say this:

"The lowest (big surprise) were Sweden at 3.0% and (hah!) Finland at 2.7%."

Why is this a surprise?

[anne]

Jussi

Barkley's comment was a mild irony. Many of us would indeed guess that the Nordic countries are remarkably low in incidence of medical problems about birth.

[Jussi]

Anne

He was talking about child poverty, and his numbers are accurate according to 2005 studies.

My question is why he's surprised Sweden's numbers are good.

[anne]

Oh, I found the reference, but the answer is the same. There is no surprise either for low incidence child poverty or health problems about birth. I am certain the comment was irony.

[Jussi]

Anne and Barkley

Apologies! I understand now

[Barkley Rosser]

still_at_ten (remo williams)
Have checked and you are right UN report uses out of date number. Still they are more equal than US. I would however continue to contest the view that everything is wonderful with our medical care compared to the Japanese. Where I was lecturing there was a medical facility with doctors in the building. How many places in the US do you see that? And why are the Japanese life expectancy and infant mortality numbers so good and those in the US so clearly bad?

Jussi,
Anne is right. I was being ironic. If you see the brad thread on Euro welfare states, all of us were drooling on and on about how wonderful Finland is. Presumed all readers aware of this previous discussion.

J Thomas
You've got to be kidding when you suggest that what the US needs is poorer medical care and lower food quality? I would say let us face higher gasoline prices and cut down the size of some of our ridiculous monster houses. Quality of health care and food are areas where much of the rest of the world is well ahead of the US, although our food is cheap while our medical care is the most expensive there is anywhere.

[Barkley Rosser]

remo, still_at_ten,
Well, I was in Shinjuku after ten several times and never did see your homeless in boxes people. However, it is a big station, so maybe I was just in the wrong parts of it.

[J Thomas]

Barkley, I'm not talking about what we *need*, I'm talking about what we can get.

If US families have less money to spend, where will they cut? Say we followed your idea of increasing gasoline prices -- that would tend to make everything that gets transported by truck, train, or by air more expensive, and also to the extent people felt they had to just pay for the gas instead of drive less, they would have less money for everything else. So what would they cut? Food is an obvious place to cut. People who are serious about stockpiling emergency food supplies face the problem that those supplies are expensive. So they are gravitating toward cycling through their emergency stocks. The result is they eat a whole lot of canned food that's close to its expiration date. They have the advantage of actually having emergency food on hand that they otherwise could hardly afford, and the disadvantage that their diet is pretty bad even before the disaster they're preparing for.

Similarly, more and more jobs don't pay for health care, or pay for inadequate healthcare. And if your job doesn't pay for adequate healthcare for your family, it's real unlikely that you'll have the money to make up the difference. So you'll settle for simply less healthcare.

Of course less residential heating and air conditioning. And businesses can cut back on those expenses except in the places that get visitors where they need to show off.

If you happen to own a monster house, how do you cut expenses by cutting down on its size? Would you use a chainsaw? Maybe you could block off part of it and just heat the part you live in.... If it's in a good location you could split it up into tiny apartments and rent them out. But that's only if it's a good location. Otherwise you're just stuck. Maybe if it burns down you could get out from under?

But my point is something completely different. Here's my point: Labor productivity keeps going up. So it takes fewer people to make enough stuff for the whole world. Fewer people getting paid (collectively less) to make all the consumer goods -- who can afford to buy all that? US debt is driving the world economy because nobody else has solved this puzzle either?