By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller
The Federal Open Market Committee releases its transcripts on a five year time lag. Last week, we learned what they were saying in 2005. Dylan Ratigan blogged an interesting catch: Dallas Fed President Richard Fisher expressed his frustration about Chinese imports. Not, of course, that there were too many imports, but that our ports weren’t big enough to allow all the outsourcing American CEOs wanted.
Fisher is just the latest Fed official to applaud this trend. Here's the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn't like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped.
There were all sorts of excuses for why this was a good idea "“ we would do the "?high value add' work in America, like research and development, while the "?low quality work' like manufacturing went abroad. And everyone would benefit "“ sure you wouldn't get a raise, but you'd get low prices at Walmart (Walmart shows up all the time in FOMC meeting transcripts). But basically this was a way of ensuring that banks and creditors could make a lot of money that would instead go to workers. It was known as "?the great moderation', a term coined by Bernanke, and was considered a great success.
As late as 2005, Richard Fisher was celebrating this trend. In that same meeting where he complained about too few Chinese goods coming into the US, he bragged about the weakness of one of the most significant employers in the United States: "My most delicious irony is the fact that similarly dated Vietnamese debt now trades on a price basis richer, and on a yield basis lower, than that of Ford Motor Company. [Laughter]"
The Fed’s strategy is not without cost to the elites, and the bill will come due. The problem is that if you want to consume stuff from abroad, someone has to make it. And if it's not going to be American workers, it's going to be foreigners. But whoever it is, they wind up taking dollars when they sell it to the US. So pretty soon, these foreigners had a lot of dollars that they got in return for all the crap we were buying at Walmart and our rich were buying to fuel their private jets. For instance, China is believed to hold about 60% of its foreign exchange reserves, or well over a trillion dollars, in US currency (and oil producers have even more). There aren't very many places you can put a trillion dollars, so rather than keep it in cash, China simply lent that money back to us. And that enormous flow of money recycled back into the US (through the big banks) helped create our massive debt pile-up. This process is known in econo-speak as "?recycling global trade imbalances.'
As Jane D'Arista and Korkut Erturk, point out in a penetrating analysis of the financial crisis, this had a lot to do with causing financial instability. To fill our Walmarts and private jets with stuff, we had to borrow money from the Chinese and Arabs to buy it from the Chinese and Arabs. As D'Arista and Erturk said, "US households came to absorb an ever larger part of these global surpluses over time and thus became the epicentre of debt build up." And household debt, in this case mortgage and credit card debt, is the least productive kind of debt. It’s not as if the US was borrowing to invest in its future; the US was borrowing to create an illusion of prosperity while it was actually hollowing out of its economy.
Hot pools of money flowing around the globe are a pervasive source of global instability. It’s something Keynes thought hard about this problem and sought to fix it after WWII, though we ended up not with his intended stable regime for managing trade imbalances but a crippled and narrow IMF and a creaky system of public recycling of these flows. Since American economic dominance was so profound after the war, the weaknesses of this system were masked until the early 1960s. As the instability became more and more obvious, the American financial elite began pushing for deregulation to compensate for the loss of American economic strength. They could profit from the boom times, and get bailouts during the bad.
Since the 1970s, the bailouts have become progressively larger; the Latin-American debt crisis made the money center banks insolvent, the S&L crisis was massive, and of course, the 2007-2009 crisis crashed us into a depression. This deregulation is how elites reacted to an increasingly imbalanced set of trade flows, which were themselves caused by declining American competitiveness. They crushed unions, and the public mechanisms for intermediating financial flows gradually were privatized into large private TBTF institutions. Citigroup’s payment system is now simply an essential piece of infrastructure for global commerce, and the bank itself has $500B of foreign deposits that sit in the bank in a constructive zone of ambiguity as to who insures them.
This instability is leading to declining standards of living around the world, which is resulting in civil unrest in Europe, increasingly nationalistic rhetoric, global lawlessness in the form of cyber-attacks and piracy, and military build-ups. The big banks that intermediate these flows like this situation. So does China, whose mercantilist policies are allowing the acquisition of a massive industrial base. And the oil producers do as well, because of the wealth and power they acquire through a global dependence on their resource.
The only way out of this box is to establish a new international order of trade, which both handles balance of payments problems effectively, ends the arbitrage of labor, and directs resources into common global problems like pollution, energy deficits, pandemics, and extreme poverty. This means, though, that the big banks simply must become less important. Trading flows have to be managed by trusted public entities, new business sectors that drive value from innovation must supplant the exist outsource predatory model, and workers must find representation in some sort of forum to allow them some economic power.
The financial crisis seems to be evolving into a currency war. The structural imbalances mainly between China and the US are being played out in their currencies. Both are heavily manipulating them. Both want to keep their currency low relative to the other to help exports but people that own these currencies (ie have bank accounts) don’t want to see them devalued too strongly as this damages their buying power (ie is inflationary). QE2 is the US manipulation by printing dollars to bail out the toxic assets related mostly to the housing bubble. The US doesn’t want to do the structural reform of a heavy overhaul of the current banking system and overvalued stock market. The banking system is still allowed to make casino-like bets on such things as precious metal futures and QE2 money is also used to buoy the stock market.
China is very irritated by all this QE2 as it lowers the value of their dollar reserves. But they got themselves into this problem by buying all those dollars to take them out of the system and thus increase their value relative to the yuan. They don’t want to do the structural reform of increasing domestic demand by increasing wages which would be damaging to their export driven economy.
Both countries are basically trying to protect their economies and their employment levels. This will necessarily hurt all other countries that aren’t able to match these levels of manipulation. Also manipulation is not a good way to run a global economy. Adult supervision such as Stiglitz’s plan for a global currency is probably needed here.
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http://www.marketoracle.co.uk/Article23074.html
Deep Economic and Debt Frictions Triggering Competing Currency Wars
http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html
Currencies clash in new age of beggar-my-neighbor
“The only way out of this box is to establish a new international order of trade, which both handles balance of payments problems effectively, ends the arbitrage of labor, and directs resources into common global problems like pollution, energy deficits, pandemics, and extreme poverty. This means, though, that the big banks simply must become less important. Trading flows have to be managed by trusted public entities, new business sectors that drive value from innovation must supplant the exist outsource predatory model, and workers must find representation in some sort of forum to allow them some economic power.”
And there’s the rub: “trusted public entities” do not exist. so, dream on. In spite of all the trust that has been squandered.
Exactly. Stoller’s objective of ‘handling balance of payments problems’ was managed fairly effectively by the gold standard during 1871-1914, and again during Bretton Woods I (1946-1971). But piling on multiple objectives such as ‘ending labor arbitrage’ is just as problematical as the Fed’s dual mandate.
It ends up sounding like global managed trade, administered by central planners who (like today) would end up doing the bidding of multinational giants at the expense of small businesses and consumers.
Hello, black market! As the vast international trade in illegal drugs indicates, smugglers will run rings around a managed trade regime, with the heightened incentives it would provide for blockade busters.
new business sectors that drive value from innovation
maybe you mean ‘derive value’ from innovation.
China will sell us the rope to hang capitalism.
I’m sorry, I’m not buying this BS. Sure the American Industrial elite sold the American worker down the river, but that no excuse for the New World Order to establish Global “international order of trade”. The problem is CDO’s and CDS”s sold by the Bankster Con men that pollute the financial holdings of Banks, Municipalities, Pension funds and investment portfolios globally. Sometimes, when I get particularly paranoid, I feel that we are being set up for the NWO. I mean what better way for the elites to set up their World Government than to make things so bad that the people actually ask for it simply because it is the only option offered. It’s not too late to dismantle TBTF and their toxic creations and there is no need for a global government to do it.
Let’s remember something, china and the Arab world did not force American banks to borrow from them, nor did they force American banks to loan money in an irresponsible manner to the American consummers. It was American banks who dropped their lending standards, and who came up with lending promotions to entice the American consummers to go into debt to buy more stuff. The responsibility for this mess lies with both the American consummers and the banks, not with China or the Arab world. Mind you, since banks have hundreds of years of experience in lending, and are full of all the ‘talented’ personnel who should know the business of banking, a heavier portion of the blame lies on the banks, for loaning money to people who, based on their employment income, could never hope to pay them back.
I'm sorry, I'm not buying this BS. Sure the American Industrial elite sold the American worker down the river, but that no excuse for the New World Order to establish Global "international order of trade".
Trading systems exist. They are either chaotic and lead to wars, or they are peaceful and well-managed. I guess you could wish away the rest of the world, and there are also plenty of blogs where you can discuss your favorite unicorn colors.
Speaking of unicorns, a policy recommendation that depends on “trusted public entities,” and yet gives no indication where such entities are to be found, or how they are to be created, is mighty close to being in unicorn territory itself.
Yes, I’m sure concentrating all global power in a new world order run by “trusted public entities” will make everything better. For the apparatchiks, technocrats, and authoritarians.
Or we could stop whining, realize that a people in other countries might also desire jobs and that the cheapest bid probably deserves it, and learn to live with a global flattening of wages and, yes, even living standards. It’s going to happen eventually, let’s try not and start wars over it.
Dojostar you wrote: ‘Or we could stop whining, realize that a people in other countries might also desire jobs and that the cheapest bid probably deserves it, and learn to live with a global flattening of wages and, yes, even living standards. It's going to happen eventually, let's try not and start wars over it.’
Dojistar… You should lead by example. When you are willing to work for $0.85/hr, 7 days a week, 12 hours a day, and are still willing to preach the merits of letting work go to the cheapest bidder who also completely neglects the environment, then your thoughts might have some credibilty. But if you feel that this would be a ‘unpleasant’ experience’ for yourself, then do not wish it upon others.
Ming, as my rapidly declining living standards prove, I am leading by example. I am (globally) worth a little more than a factory laborer (for now may not last), but I live no better than competitors domiciled elsewhere (actually, probably much worse). In my profession, people have had to compete globally since around the invention of the telegraph, perhaps even since trans-ocean sailing ships. This perhaps excuses my lack of sympathy.
The problem with protectionism is that it’s saying “it’s ok to steal money from other people in my country (via taxes, trade barriers, etc.) because someone elsewhere in the world works cheaper than I want to.” Really, why? It’s intensely jingoist. Why is someone else in your own country somehow more deserving of a higher wage than someone in another country? I’ve never heard a decent moral defense of nationalism.
And as for environmental arbitrage, why should developed nations alone get to unilaterally dictate global environmental standards? Their military might? The way they ran the globe so well during the imperialist colonial era? Maybe people elsewhere value economic growth a little more than North Americans or Western Europeans. I think they deserve that option.
I think it’s finally time for me to unsubscribe from this blog after a couple of years. I’ve never commented, but I’ve been a faithful reader. The economic content is often good… But the whole anti-globalization/anti-business/anti-free market meme has gotten to be too high a percentage of the content. This article was about the nadir.
— I feel that we are being set up for the NWO —
The NWO is here in the guise of multinational corporations.
But since they finance the WSJ, Fox News, etc., the revolution was not televised.
“The Fed's strategy is not without cost to the elites, and the bill will come due.”
Really? When will this happen and in what form? “Flattening” of THEIR living standards down to being millionaires while the rest of us fight over scraps?
I would love to believe this is true, but haven’t seen any evidence that the elites have EVER paid any price for their bills. Not since 1789.
Many of them disliked the 1930s, and they don’t tend to like pandemics or global wars.
Now, this is in fact a scary article. Did you copy it from a new Stephen King movie? Everyone needs to cut and paste the last paragraph, enlarge the words, scan it and send it out to everyone they know with the following message: BEWARE AMERICA!
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