http://www.foreignpolicy.com/articles/2010/01/04/it_didnt_happen
Moises Naim is the Editor in Chief of Foreign Policy and a well respected thinker on international issues of note. His perspective is that the worldwide financial crisis didn't cause the dollar to crash. Tariffs didn't come roaring back. The world's economies didn't grind to a halt.
Obviously, some of that is because of actions like the Federal Reserve (Ben Bernanke) sending $350 billion to the European Central Bank before the U.S. even had a stimulus bill pass at the very outset of the crisis. So, actions were taken to avert a worse outcome.
Naim points out that the International Monetary Fund estimated that the global economy's new and permanent trajectory is a 10% lower rate of GDP growth than before the crisis. But, that's not the same thing as a worldwide "depression". Naim lists the six most common predictions about the crisis that have been proven wrong:
The international financial system will collapse. It didn't.
The economic crisis will last for at least two years and maybe even a decade. It didn't. By the fall of 2009, the economies of the United States, Europe, and Japan had begun to grow again, and many of the largest developing economies, such as China, India, and Brazil were growing at an even faster pace.
The U.S. dollar will crash. It didn't. It's value actually increased 20% between July 2008 and March 2009.
Protectionism will surge. It didn't. Trade flows did drop dramatically in late 2008 and early 2009, but they started to grow again in the second half of 2009 as economies recovered.
The crisis in rich countries will drag down developing ones. It didn't. As the economies of America and Europe stalled during the first quarter of 2009, China's economy accelerated. China replaced the U.S. as Brazil's top export market. Thanks to Milton Friedman, countries like Chile were now being run conservatively in anticipation of potential worldwide economic problems.
Violent political turmoil will become more common. It didn't. We haven't seen it.
Overall, Naim has a point.
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Hurray! The world is learning.
ReplyDeleteI hope this trend continues as international problems grow more complex.
For the dollar to crash or end as the global reserve, an alternative must exist. As bad as the USA economy was, other economies were worse.
ReplyDeleteChina's currency would be an attractive alternative except it is not exchangeable; it is fixed to the USA dollar. Strangely enough, this actually helped to support the USA dollar. The USA dollar was indirectly supported by the full faith and credit of China. To insure that China still had export markets to sell goods to, China bought 100s of billions in USA 10-yr bonds at almost 0% interest (as well as lots of other people).
YAY ... free money.
Whenever someone claims that China can harm the USA economy by dumping American bonds, ask that person, "So who is dumb enough to buy 0% bonds, nowadays?"
By the way, was it really smart to put so much of China's vaunted reserves into 0% USA 10-yr bonds? I guess USA does not look so stupid after all; 0% bonds means it is worth less every year.
Some investors decided that the Euro would be a better place to use as their reserve currency. Unfortunately Sarbanes-Oxley never made it across the Atlantic to Europe, so when the cooked books finally saw the light of day ... well, let me ask this, "How is all that Euro-trash working out for you?"
Geez, I am sure lots of people really are proud of all those Portuguese, Irish, Greek, and Spanish bonds. "Hey Bernanke, how did that $350 billion investment in Europe work out?" I am sure when PIGS fly that we might see only a 90% loss.
So, Naim does not have a point; unless his point is that the USA survived in decent shape, all things considered, because everyone else was even more "suckier", dumber, and crooked.
PS to Naim: Read Porter's five forces, particularly the part about substitutes.
ReplyDeleteGreat comment(s) Dale!!! Sometimes our "comments" are even better than the "posts" they comment on! It is my privilege to have such outstanding readers!
ReplyDeleteCharlie,
ReplyDeleteIt is the hight of arrogance to believe that there is no alternative to the dollar.
Hard currencies have a built in scarcity that protects them from inflation. If you move away from gold and silver into iron, copper, aluminum, more plentiful, but more productive metals, then not only do you have a store of wealth, but production possibilities. If it comes to that, we will see bartering over currencies.
Further, the historic lows between the US overnight window and the LIBOR rate suggest that US sovereign debt is no longer considered risk free. Add together the ponzi scheme of issuing debt and having the treasury purchase it, and we are on shaky ground indeed.
Errata: What I mean by historic lows, are historic low spreads between the overnight window and the LIBOR rate.
ReplyDeleteOh, and I'm not saying that you are arrogant. Dale, of course said there was no alternative.
ReplyDeleteMr. Brimer,
ReplyDeletePIIGS (I think Italy is in there) do impact the larger system. You know the saying a spoiled apple ruins the whole barrel? Chairman Bernanke knows the most about central banking on the planet. Although his actions might appear misguided from our perspective, a view from his enormous experience and expertise will look much different. You should trust in people like Bernanke, because they do not get any better. Also, count your blessings. Things could have gone worse. Those crooks and idiots you disfavor considerably impact USA GDP. Although we would like to live in a better world, things are the way they are. It will only change by action, not observation. Regarding China, their insistence on investing in the dollar at 0% tells us that reinvesting in their country is more risky. Perhaps they should have given it to Goldman Sachs to invest? Well... USA Government might disallow that as they disallowed China to buy up certain American oil fields from failing companies (Professor Hazzard can elaborate). Also, remember China revoking Coke's bid to buy up Huiyuan Juice Group? I would not be surprised if governments impeded Chinese investments, pushing them to buy up dollars. There is usually method to the madness. Although corruption and idiocy (ignorance rather) prevail, the larger scope of activity is rooted in legitimate logic.
Mr. Odaselementales,
There are alternatives to the dollar, but moving to them would be difficult. The dollar is intertwined into every economy in the world, far more than any other currency. Trading with a number of other currencies or commodities is less efficient and would raise costs of international transactions. The rise of China (eventually) will certainly change the dynamics of international finance. Whatever currency China chooses to use globally will dominate markets as the dollar does now. However, that transition and the hypothetical transition you suggest will and would not go without a bumpy ride, raising costs of international business. You could suggest hedging, but that does not always work out nor eliminate all the costs.
I just want to emphasize: be happy, it could have been worse (read history). We have little fighting, functioning markets, and economies back on track. Modernization of developing countries will now continue and developed economies will increasingly return to business as usual.
People: Your comments couldn't be better! You make for enjoyable reading! Keep it up!
ReplyDeleteI tend to agree with both Dale and Odaselementales.
ReplyDeleteThe reason the dollar has not experienced a worse drop in value is because at the moment there is no other viable alternative. However, if there were an internationally accepted currency backed by real assets and not government debt, I am convinced this currency would replace the dollar as the main reserve currency. The reality of the matter is, at some point in the future the costs of switching from the dollar will be outweighed by the costs of continuing to use the dollar (inflation and loss of value).
Josh: I disagree that we should blindly follow along and agree with a public official appointed by Bush and then Obama (clearly brilliant economists themselves). I do not believe that politicians and their appointees always know best. Where does your assertion that Bernanke knows the most about central banking come from? What about previous Fed Chairmen: Greenspan or Volcker? What about economists that were passed over for the job because their standing on economic debates did not coincide with the goals of the politicians make the appointments? As Professor Hazzard brought up in a previous post, the field of economics is far from a solidified single theory that all economists agree on.
Finally, I have been wondering for some time why China has continued to purchase US Debt especially at the low rates of interest it currently yields. Although we cannot know for sure, my guess is that they feel that the risk of losses from continuing to invest in dollars are lower than the expected losses on their current investments (at the end of 2009 they held nearly $900 Billion of US Government Debt, this doesn't include other assets denominated in dollars they hold) if they contribute to a collapse of the dollar by ending their purchases of Treasury notes.
Aaron: another excellent observation! As one Chinese senior official said, and you saw on one of our slides, "We hate you guys but we need you!" And, until China can get away from being an export economy, our "dollar" is buying their products. Now we have a new complexity: China is experiencing labor shortages in their critical coastal cities which are causing hourly rates to rise which, in turn, well, you know...and, about China being ahead (of the U.S., or other countries)in "wind-turbine" manufacturing (to use an example), their "manufacturers" have quality issues that cause them to lag GE, Vestas and Siemens which will effect, over time, whatever lead they have in installing one of the most important products in the green revolution. Just an example of how China may be more determined than the U.S. but less of a threat, perhaps, than all this "saber rattling" over the dollar and letting the yuan float. Projections of China's economic growth seem to shortchange the country's pending demographic crisis: it is going to be the first nation in the world to grow old before it gets rich.
ReplyDeleteWhat a discussion! Very enjoyable and great insights by all.
ReplyDeleteTracey: thanks so much - great students/former students and super comments!!!
ReplyDelete