Travel Fad Du Jour: PRC Communist 'Red Tourism'

♠ Posted by Emmanuel in , at 8/31/2011 12:24:00 AM
Revisionism, or Right opportunism, is a bourgeois trend of thought that is even more dangerous than dogmatism. The revisionists, the Right opportunists, pay lipservice to Marxism; they too attack "dogmatism". But what they are really attacking is the quintessence of Marxism - Mao Zedong

So we've heard of eco-tourism and political tourism. Without irony, an unrepentant Marxist professor here in the UK I know boasted of how one of the main benefits of the West opening up to China has been the Communist Party profitably commissioning him to do research into Marxist thought. Even with the PRC's bastardized "market socialism," "market authoritarianism," or whatever your pet name for it is, there remains an innate drive to prove that they are socialists at heart. Strange but true.

Hiring British political scientists aside, what better way is there than to create a Disneyfied version of the CCP's history than with various locales packaged as placeholders for a proud tradition? The Hongyan Village Revolutionary Memorial Hall awaits. Elsewhere, they call it the stuff of national myth. However, in the land of these profit-seeking "Marxists," it was perhaps inevitable that they too would retell their history of the workingman's triumph [sic] in a profitable fashion. Ah, the paradoxes of modern China filtered through the exigencies of tourism. From TIME:
[T]he project shows the scale and ambition behind China's push to revitalize red tourism. For years, the industry has been dominated by sleepy tours of leaders' homes and historical sites. That's changing. Chongqing's Hongyan village, where hundreds of communists were rounded up and killed by Chiang Kai-shek's forces in the late 1940s, is a prime example. Tourists now swarm the village's museums, where the local government recently staged a play about its historical events. Along the trail of the Long March, tourists take classes on making straw shoes, the ad hoc footwear the communist soldiers famously wore during the epic 1930s walk. The government in Sichuan province also recently announced a plan to spend $375 million on building nine highways connecting the region's major red-tourism attractions.

Red tourism is a big business. Between 2004 and '10, a total of 1.35 billion people have gone on red tours, an average year-on-year increase of 20%. According to the country's state-run news agency, Xinhua, China's revenue in red tourism totaled $20.3 billion in 2010.

However, the red-tourism market depends heavily on government-sponsored group tours, says Wu Chengzhong, associate professor of public administration at the University of International Business and Economics in Beijing. For example, Xibaipo village, which is located 170 miles to the southwest of Beijing and briefly served as the Chinese Communist Party's headquarters in the late 1940s, would have been an unlikely tourist destination if it hadn't been for government-sponsored red tourism. "For most people, it's not exactly a tough call between vacationing on the beach and visiting some run-down buildings in the middle of nowhere," Wu says.
For realism's sake, I'd suggest overnight stays at reeducation camps instead of posh hotels for that genuine Cultural Revolution feel. So, er, pay up you capitalist roaders, and retake the righteous footsteps of Mao Zedong's ideological heirs. Or something like that ;-)

When Corporations Ruled...Creditworthiness

♠ Posted by Emmanuel in , at 8/30/2011 12:28:00 AM
I enjoy the writings of Gillian Tett of the Financial Times for a very good reason. In contrast to the usual mindless econo-blather you get from financial journalists and the economists they cover, she is a social anthropologist. Unlike the neat and tidy world of neoclassical economics, processes of trade and exchange have a life of their own bound with messier stuff--seven deadly sins, cognitive limitations, emotional frailties, and so forth. Today, she offers an interesting spin on the notion that a country cannot go bankrupt.

A few years ago I had the displeasure of reading the sophomoric When Corporations Rule the World by David Korten. Supposedly offering an "insider" critique with his PhD from Stanford Business School, it was riddled with amateur nite errors alike comparing corporate revenues with national GDP. Nevertheless, as credit rating agencies belatedly become more fully aware of the dire fiscal situations of any number of industrialized countries, we are faced with a new reality: firms, not countries are safer credit bets. Not only are the former better able to control pensions and other costs, but their footloose nature allows them to go where the money is in a way that nations can't. For, the latter are pretty much stuck with the territory and people they have.

So while corporations may not necessarily "rule" the world in being larger economic entities than countries or in being able to engineer electoral processes worldwide, we may now be able to make a smaller claim: That blue chip, internationally diversified corporations are safer bets than basket cases alike the United States of America. Tett writes:
At the end of last week, trading in the credit derivatives markets [as a proxy for default risk] implied that no less than 70 large US companies are now considered a better credit bet than the American government, according to Markit data. More specifically, the cost of insuring US government bonds against default for five years is currently trading around 50 basis points (meaning it costs $50,000 a year to insure against default for $10m of bonds), while the cost is less than 30bp for companies such as AT&T, New Cingular Wireless and Oracle. The spread for Google, HP, Coca Cola – and, yes, McDonald’s – is also well below the sovereign spread.
While the West saddles their central banks' balance sheets with assets of dubious worth--think of the Federal Reserve's arsenal of mortgage-backed securities or the ECB's purchases of Greek and Portugese sovereign debt--the best-run firms have healthy cash flows and lots of money to burn:
And if you dig into the reasons why those CDS rankings have changed – or why S&P left those four American companies rated above the government – it reveals some fascinating longer-term structural shifts. One way to read this trend is that it presents a verdict on relative levels of corporate governance, and transparency. More specifically, the reason why so many large companies command tight CDS spreads is that investors feel confident that they understand their balance sheets, and that these entities have plenty of cash on hand, and tangible, easily tracked revenues.

Sadly, however, many public entities currently lack that sense of transparency; on the contrary, it is painfully hard to disentangle where the liabilities and tangible assets lie. Hence the high(ish) level of CDS spreads for US Treasuries: although investors know that America is highly unlikely to default on its bonds, the political climate is so volatile that it is hard to predict cash flows. However, a second factor is the issue of globalisation. Most of America’s best-run and healthiest companies these days are not really “American” anymore; on the contrary, they draw a growing proportion of their revenues from outside America’s shores, and hold vast pots of cash overseas.

That gives them the ability to hedge themselves against an American, or Western, economic downturn; or, to put it another way, they can flee, with their cash if economic or political circumstances turn sour. So can many “European” companies; just look, for example, at the global nature of “Greek” shipping lines, or those “Irish” information technology groups. However, that option is not open to public sector entities; for better or worse, their credit risk is tethered to the West.
An important point that I'll get to in the near future is that, as the above begins to hint at, successful American firms do not necessarily benefit America itself as a consequence of the modern nature of globalization and innovation. In other words, what may have been good for GM may have been good for America in the Fifties--but what's good for Google now may not be good for contemporary America. More on this later, but let's just say for now that corporate issues being perceived as safer than sovereign ones may increasingly become the norm and not the exception in short order.

Changing of the Guard: Migrate to China, Not US

♠ Posted by Emmanuel in ,,, at 8/29/2011 12:00:00 AM
It's time to quit messing with deck chairs and abandon the fast-sinking America. Destination: Davy Jones' Locker. The story here is a straightforward application of differences in economic performance between one country that has next to no GDP growth (the US) and one racking up nearly 10% GDP growth year in and year out (China). This growth differential explains employment prospects, particularly for migrant workers.

To start, let us remember how the well-deserved S&P downgrade of US sovereign debt was partly attributable to downward statistical revisions indicating stagnant-to-declining GDP in America for nearly four years now:
From 2007 to 2010, real GDP decreased at an average annual rate of 0.3 percent; in the previously published estimates, the rate of change in real GDP was less than 0.1 percent. From the fourth quarter of 2007 to the first quarter of 2011, real GDP decreased at an average annual rate of 0.2 percent; in the previously published estimates, real GDP had increased at an average annual rate of 0.2 percent.
It's getting pretty ugly in America, and no sane person would expect marked improvements in the near future. For instance, more recent data points out that the percentage of employed males has hit a postwar low. It's simple, really: if jobs for Americans are now next to non-existent, what more for migrants? As it so happens, the Economist has a new article on global migration prospects after the US-engineered global financial crisis. While the entire article offers interesting points of view on slowing migration to Western countries, the juxtaposition between the migration situation in American and China is particularly instructive:
An even more intriguing development is that America and China have begun to reverse roles. America has always been the greatest immigration magnet of all. But stricter security measures to thwart terrorist attacks and the severity of its recession have changed this. Both legal and illegal immigration have tumbled, with the greatest decrease among Mexican illegal immigrants (only partly due to stricter border controls, as potential immigrants can now also find better jobs at home).

At the more educated end of the market, foreign-born college graduates are increasingly likely to leave America after gaining skills and qualifications. Some of this may be cyclical: they may return when the economy picks up. Yet in the current climate, travellers have a good chance of meeting an Asian-born graduate from an American college who is moving somewhere else to work.
Unsurprisingly, the youth are heading East:
Even as America’s allure is fading, China is becoming a destination of choice for many young workers. According to Chinese statistics, last year Shanghai had 143,000 foreigners with residents’ visas. That does not count the many thousands of Westerners believed to be there on tourism visas, or the illegals from elsewhere in Asia. South Koreans (121,000) top the list of expatriates resident in China, followed by Americans (71,000) and Japanese (66,000). Teaching English is the commonest job for Westerners, but there are also many, usually young, entrepreneurs opening shops, bars and restaurants.
Don't forget South-South migration and regional migration. As more international students come to China, there is an increasing likelihood that they will remain there afterwards to work. It does help that there are *actual jobs* to be found there unlike in a certain North American country...
The boom in China and the country’s activities in Africa have also encouraged more Africans to consider seeking their fortune in the Middle Kingdom. Some 100,000 are settled in Guangzhou. But African immigrants are not the only ones who wind up in this bustling city in southern China. One recent academic study identified five different residential zones of immigrant populations. African traders and Koreans, for instance, live in crowded districts. French and Indian workers congregate in high-rise buildings. Successful immigrants from the Middle East and west Africa cluster in a large white-collar estate with private gardens.

The world may be witnessing the beginnings of a big trek East. Students have started to move to South Korea and Japan. “Many international students remain in their host country,” says Madeleine Sumption, a researcher at the Migration Policy Institute in Washington, DC. She expects this trend to fuel growth in migration between Asian countries.
This is certainly a no-brainer: only the brainless think the US is still the land of opportunity. You certainly don't see folks beating a path to America's door [1, 2]. Just like post-potato famine Ireland, the American Dream is more and more becoming one of leaving America. You're in luck, Tea Party acolytes; at this rate, you'll have your opportunity-free nation all to yourselves.

Go east, young man, go east.

Was Jesus a {Market} Fundamentalist?

♠ Posted by Emmanuel in , at 8/26/2011 12:02:00 AM
Praize the Lawwwhd! Having been in Texas for no small amount of time, I have had some interest in the announcement that its governor, Rick Perry, would make a presidential bid. While there are certainly lingering resentments between him and another whose political career path he certainly wishes to emulate, George W. Bush, the essentials of his bid are old. Contemporary American conservatism is an interesting (if often repugnant) brew of discordant tendencies. An especially interesting combination is that of strong professed Christian faith with libertarian overtones. For, as far as I can recall, Jesus was very much a hippie before there were any that roamed the earth with his sandals, long hair, and collectivist rhetoric. Gregory Paul over at WaPo's On Faith explores this weird brew:
Here is what is peculiar. Many conservative Christians, mostly Protestant but also a number of Catholics, have come to believe and proudly proclaim that the creator of the universe favors free wheeling, deregulated, union busting, minimal taxes especially for wealthy investors, plutocrat-boosting capitalism as the ideal earthly scheme for his human creations. And many of these Christian capitalists are ardent followers of Ayn Rand, who was one of - and many of whose followers are - the most hard-line anti-Christian atheist/s you can get. Meanwhile many Christians who support the capitalist policies associated with social Darwinistic strenuously denounce Darwin’s evolutionary science because it supposedly leads to, well, social Darwinism!

Meanwhile atheists, secularists and evolutionists are denounced as inventing the egalitarian evils of anti-socially Darwinistic socialism and communism. It’s such a weird stew of incongruities that it sets one’s head spinning. Social researchers like myself ask, how did these internal conflict come about? And why are not liberals and progressives doing the logical thing and taking full advantage of the inconsistencies of right wing libertarianism by loudly exposing the contradictions?
And here we get to the crux of his argument, once again pointing out that Jesus Christ may have outMarxed Karl Marx with several centuries to spare. In brief, the Son of Man was no market fundamentalist:
Jesus is no free marketeer. Improving one’s earthly financial circumstances is not nearly as critical as preparing for the end times that will arrive at any minute. He does offer substantial encouragement for the poor, and warns the wealthy that they are in grave danger of blowing their prospects of reaching paradise, as per the metaphor of a rich person entering heaven being as difficult as a camel passing through the eye of the needle (a narrow passageway designed to hinder intruders). This caution makes sense: sociological research is confirming that the more securely prosperous individuals and societies are, the more likely they are to lose the faith. A basic point of core Christian doctrine is that the wealthy have no more access to heaven than anyone else (and in fact may have less), offering hope to the impoverished rejected by cults that court the elites. This remains true in Catholicism, in which being poor does not constitute evidence of a personal deficiency, and church authorities decry the excesses of unrestrained capital at the expense of social justice.

But to understand just how non-capitalistic Christianity is supposed to be we turn to the first chapter after the gospels, Acts, which describes the events of the early church. Chapters 2 and 4 state that all “the believers were together and had everything in common. Selling their possessions and goods, they gave to anyone as he had need… No one claimed that any of his possessions was his own, but they shared everything they had…. There were no needy persons among them. From time to time those who owned lands or houses sold them, brought the money from the sales and put it at the apostles feet, and it was distributed to anyone as he had need.”

Now folks, that’s outright socialism of the type described millennia later by Marx - who likely got the general idea from the gospels.
It's certainly food for thought. Say what you will about Catholicism, but we at least have guidance on matters of religious political economy [1, 2] that attempt to reconcile faith with modern material existence.

PS: Please don't ask me either how being a climate change denier or governing the state which metes out the most death penalties in the USA enable stewardship of the earth and turning the other cheek.

PRC Basketbrawl: Of Hoyas & Anti-US Sentiment

♠ Posted by Emmanuel in , at 8/25/2011 12:02:00 AM
As if Joe Biden's trip to China needed to become more disastrous in the wake of his "reassurances" that China's Treasuries were safe, it turns out that the b-ball team that accompanied him suffered from an even worse fate. The above clip shows the rather violent end of a basketball match in Beijing between the Georgetown Hoyas and the People's Liberation Army squad, the Bayi Rockets of the Chinese Basketball Association. As you would expect from a testosterone-fuelled outfit alike the military, they've often been the most belligerent Communist Party members: Boost military spending! Dump Treasuries to punish America for selling arms to Taiwan! (The last one is actually a pretty nifty idea.) You get the picture. As it turns out, the Bayi Rockets have a reputation for having a mean streak--especially when matched against better teams.

To be sure, Asians have made much headway in team sports. While the Americans may have invented baseball, for instance, the Japanese have won the first two World Baseball Classic competitions featuring teams represented by nations around the globe--the real World Series. (Which again points out the parochialism of many Americans in calling a national competition the World Series when, in reality, they have fared poorly in true international competition.) Not to put too fine a point on it, but let's say the Chinese have not improved as much in basketball as the Japanese in baseball. Hence the final resort to roughhousing tactics. If you are a basketball fan, you surely remember the Detroit Pistons championship teams of 1989 and 1990. The Bad Boys were anchored by Bill Laimbeer, a player renowned for his rough play. So much so that he even had a video game created in his honour, Bill Laimbeer's Combat Basketball...

In hindsight, I guess they should have sent the most brutal players to China to match elbows and fists with the basketbrawl competition. So what have we learned from US-China sporting understanding from the time of ping-pong diplomacy till now? Meant to commemorate the 40th anniversary of ping-pong diplomacy, the Georgetown Hoyas' tour revealed some real public angst with Americans. While Communist Party officials are obliged to keep a straight face while hearing Biden's BS, I was truly dismayed by the PLA players wielding chairs and whacking the stuffing out of collegiate athletes as well as the crowd launching water bottles and other projectiles at the Hoyas.

If any other country were at the receiving end of such boorishness, it'd have filed a diplomatic protest since there's obviously no place for this sort of thing in sporting competition. Notably, though, this event did not elicit much media coverage or indignation Stateside. With an economy going downhill fast, I suppose there are more important things to worry about. And to paraphrase Hillary Clinton, how do you deal toughly with your bankers when their basketball goons starts beating up your collegiate athletes? From what I can tell, the Hoyas have chosen to grin and bear it. Poor kids.

The irony of it all, of course, was that it was meant to be an exercise in building camaraderie, goodwill, and that sort of thing...
So much for ping-pong diplomacy. In what has been dubbed the “Great Brawl of China” a college basketball team from Georgetown University in Washington got into a chair-throwing fisticuffs session with a Chinese team in Beijing last week.

The “goodwill” exhibition game ended in chaos in the fourth quarter as both benches and a few spectators joined in the fray, forcing the Americans to beat a hasty retreat to their team bus as they were pelted with rubbish and plastic bottles. Unfortunately for vice-president Joe Biden, the dust-up also rather overshadowed his state visit to Beijing last week.

Before they left for China, the Georgetown Hoyas were briefed by the US state department on their roles as ambassador, while their 10-day trip was cited as an example of “sports diplomacy”.
Like many things in life, there is no moral to this story of the Orwellian "China-US Basketball Friendship Match." At worst, US-China tensions that PRC officialdom attempts to conceal tends to unravel when symbols of America become unwitting targets for latent resentment. However, here's a scary scenario for you: While China's gender imbalance has declined for two consecutive years, it remains at a very elevated 118.08 males for every 100 females. Unable to find suitable companionship when their time comes, young men may indeed channel their innate energy into violence. To dissipate some of this energy away from mass protests, the Communist leadership may channel it into jingoistic military adventurism. It's a scary thought, but think of squads of Bayi Rockets as far as the eye can see.

But if they do begin Treasuries in appreciable amounts, I'd probably be glad ;-)

Good fight; good night.

Asia Learned From Its Crisis, US Didn't Part II

♠ Posted by Emmanuel in ,, at 8/24/2011 12:04:00 AM
[NOTE: This is a sequel to an earlier post.] There often comes a point when the pupil surpasses the mentor in understanding; such is the nature of knowledge transfer throughout much of history. With signs indicating that the US is headed towards yet another recession for the second time in the space of a few years, you have to wonder if it has learned anything. To be sure, American policy handling of the Asian financial crisis was severe in the demands the IMF made of crisis-hit nations. Ideologically inspired strictures on liberalization, deregulation and privatization were the order of the day. Still, more sensible ones such as keeping tight reins on external and fiscal balances were in time achieved in most of these Asian countries.

The obvious contrast is with present-day America. Onetime neoliberal apostle Larry Summers is typical of American hypocrisy when crisis hit the US itself. Not only have its leaders championed deliberalization, reregulation, and nationalization, but they too make an exception in unleashing the fiscal floodgates--a veritable tsunami of government spending. Meanwhile, its trade deficit remains substantial and is increasing alarmingly as American exports slump, adding to signs of contraction elsewhere in the US economy. Einstein once said that doing the same thing over and over again and expecting different results was insanity. Powered by massive twin deficits, the US has not changed much if at all and is headed for yet another crisis. Why should we not be surprised? There is no real mystery here: If you continue to act stupidly, then foul times returning are to be expected.

Edward Goldberg over at The Globalist thus has an interesting article in which he argues that the global marketplace the US once dominated is now passing judgement on it. What's more, changes to its political system to avoid now-routine incidences of gridlock are necessary. These are matters Asian financial crisis-hit countries had to face up to, from the ouster of Suharto in Indonesia to the end of very cosy ties between big business and government in South Korea:
It is almost as if today is a replay of the late 1990s, when the stock market crashed and the power of global markets challenged the power of nations such as Indonesia, Mexico, Russia, Malaysia, Thailand and Korea. Using the marketplace and financial flows as a de facto voting mechanism to assess the validity of a country's fiscal condition, during that time globalization became the arbiter of a nation's economic wherewithal. And in the process, it usurped political power from the countries’ elected leadership.

However, somewhat unbelievably, today it is not emerging economies that are being buffeted by the forces of the markets. Rather, it is the United States, the world’s largest economy and most successful economic democracy, that is being judged by a global marketplace that it once dominated.

How strange and even difficult to comprehend that the global markets are forcing the hand of President Obama and the U.S. Congress. Witness how announcements from the President and the Speaker of the House of Representatives are timed to the opening or closing of world markets.
And here's where Asia got it right as compared to the US:
Looking back to the late 1990s, one of the main demands of the marketplace was a change in political culture. These countries had to get their financial houses in order by breaking up their traditional "old boy networks" and freeing their industries from corruptive relationships with government. Obviously, some of these countries still have not acquiesced to these demands — and consequently are benefiting far less from the global economy than some of their competitors.

The global market is now demanding a political/cultural shift within the United States. Traditionally, the country has had what one could term a “bipolar” political and economic system based on two dissimilar philosophies: a business philosophy where companies’ decisions are based on where they will reap the biggest rewards, and a governing system that is more plodding and dramatically more ideological.

Globalization is now demanding that if the United States wants to stay in its leadership position, its governing system of elaborate checks and balances must be reformed and must rapidly evolve to a more business-like mode of operating. The U.S. governing system, which is based on concepts that were developed to handle a particular set of 18th century problems, must be updated. Essentially, the market is saying that the black-and-white Thoreauian concept “that government is best which governs least” simply is no longer relevant as an operating principle for the United States in a globalized world.
How should the beleaguered US catch up, then?
A new governing paradox has occurred. The old rules of political leadership and coalition-building are changing and are becoming much more complex. The same technology that is driving market integration and demanding more-centralized political leadership is also giving individuals and groups much greater power to question leadership.

For the United States, two interlinked problems seriously hinder its ability to reform its governing system: the primary system by which political parties choose their nominees, and the Supreme Court’s rulings on political funding. Both have diverted power from the center, from the presidency, to powerful minority factions that are now able to seize power in a way the framers could never have imagined. They now have absolute control over the majority.

Whether it is on issues of taxes, energy, investments, or education, at a time when globalization is calling for immediate action, the U.S. government has become almost catatonic, trapped between the need for leadership and the empowerment of narrow factions. However, like the emerging nations of the late 1990s, if America does not find the will to reform its democracy, then a new fourth branch of government — the globalized marketplace — will do so without the consent of the governed.
The sinking US dollar and sagging US stock markets demonstrate a lack of market confidence in America, while pitiable yields on sovereign debt suggest it is turning Japanese. Meanwhile, its gaping trade deficit shows it produces far less goods and services the rest of the world wants than what it wants from elsewhere. I guess it's high time the US practised what it preached. Instead of saying the US is unique among all other nations, it ought to undergo some good old-fashioned structural adjustment. Washington, you're next!

Bernanke, Japan's Lost Decade & US Lost Century

♠ Posted by Emmanuel in ,, at 8/23/2011 12:07:00 AM
With the yields of Treasuries pointing towards the US re-entering recessionary straits, all eyes have turned towards the upcoming central banker jamboree at Jackson Hole this coming Friday. Although the Fed is supposed to be an independent central bank, the "new normal" of growth in the 1-2% range coined by PIMCO which even I find optimistic is not really a politically palatable status quo. It was not so long ago that central bankers were hailed as new heroes for licking inflation for good. Now, however, it seems they are being asked to perform superhuman feats in turning around the course of iceberg-bound US(S) Titanic. Nevermind that the first two rounds of quantitative easing failed to have lasting effects in obtaining sustained recovery, but many market participants are indeed clamouring for QE3. Such is the dysfunctional nature of US politics that meddling is called for at every turn. I, for one, disdain such busybody behaviour.

At this point, let us try and read the mind of Ben Bernanke. Central bankers are a conservative lot, but Bernanke has already been exceedingly adventurous in clogging up the Fed's balance sheet with mortgage-related assets of dubious quality in addition to near-ZIRP and the aforementioned quantitative easing involving purchases of government debt. As it turns out, aside from being a scholar of the Great Depression, Bernanke too has been an active commenter on turning around Japan's deflationary situation. While there are differences here and there--Japan's public debt is largely held domestically, Japan has a falling population and so forth--many now suggest that low yields on Treasuries portend America turning Japanese as the 80s song went.

Indeed, some credence for such a comparison comes from Bernanke himself. Trawling through the grisly entrails of Bernanke's history of academic writing and speechmaking, we glimpse his possible next moves after the non-events of QE1 and QE2. On 31 May 2003, Bernanke delivered a speech before the Japan Monetary Society of Monetary Economics. Aside from the now-familiar references to helicopter drops, he too describes Japan's situation in a manner which may be as good a description of present-day America after using a "find and replace" command to swap "Japan" with "United States":
Demand on the part of both consumers and potential purchasers of new capital equipment in Japan remains quite depressed, and resources are not being fully utilized. Normally, the central bank would respond to such a situation by lowering the short-term nominal interest rate, but that rate is now effectively zero. Other strategies for the central bank acting alone exist, including buying alternative assets to try to lower term or liquidity premiums and attempting to influence expectations of future inflation through announcements or commitments to expand the monetary base.

The Bank of Japan has taken some steps in these directions but has generally been reluctant to go as far as it might, in part because of the difficulty in determining the quantitative impact of such actions and in part because of the Bank's view that problems in the banking system have "jammed" the usual channels of monetary policy transmission. Ironically, this obvious reluctance on the part of the BOJ to sail into uncharted waters may have had the effect of muting the psychological impact of the nonstandard actions it has taken. Likewise the Bank of Japan has resisted calls to manage the value of the yen, citing its lack of authority to do so as well as the prospect of retaliation from trading partners.
What to do , then? A much-cited mimeograph by Bernanke while still at Princeton is on Japanese Monetary Policy: A Case for Self-Induced Paralysis? dating from 1999. Coming at the tail end of Japan's so-called Lost Decade, you can plausibly argue that this pre-Internet bust year was close to a turning point in the US economy as well. With income stagnant-to-falling in the subsequent years, it is little exaggeration to call the Noughties the US Lost Century. As you may have expected, getting out of a deflationary situation according to Bernanke involves parasitic behaviour in creating some inflation:
A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase “until deflationary concerns subside”? Krugman and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation. Further, setting a quantitative inflation target now would ease the ultimate transition of Japanese monetary policy into a formal inflation-targeting framework—-a framework that would have avoided many of the current troubles, I believe, if it had been in place earlier.
Returning to the Great Depression, Bernanke opines that Roosevelt's key virtue was being amenable to trying anything to reverse the situation. In short, throw everything against the wall and see what sticks--a pretty apt summary of what he has (rather unsuccessfully) tried so far. That he remains aloof to his critics is thus easily explained...
But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended [my emphasis], but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.
Having read the above, if you're a betting person, wager on Bernanke making some reference to inflation targeting in an elevated range (say 3-4% in Fedspeak but more like 4-6% in practice or even higher[!]). Hyperactive monetary policy it will likely continue to be. After all, what would FDR do?

China Renews Its Southeast Asia Charm Offensive

♠ Posted by Emmanuel in ,, at 8/22/2011 12:01:00 AM
It's partly my fault as well but when you hear "China" mentioned together with "Southeast Asia," the first thing which comes to many a mind is conflict over the strategically located and (potentially) energy-rich islands in the South China Sea, AKA the Southeast Asia Sea or the West Philippine Sea. It is perhaps with respect to these islands that China's charm offensive most falters in its bid to gain favour among its Southeast Asian neighbours. It is also where the intricacies of Asian political economy are best on display. That is, how do politically-charged territorial disputes colour the economic logic of regional integration?

To be sure, China was very much a driving force behind the ASEAN-China Free Trade of Agreement that came into effect at the start of 2010. (See an older post of mine on the increasingly tangled web of PTAs in our region.) Fresh from the Asian contagion, countries in the region were keen on developing mechanisms that allowed for more regional cooperation to head off similar crises in the future, all the while expanding economic opportunities in Asia that lessen reliance on Western markets. In theory, global rebalancing would be well-served by Asians creating trade deals for Asians by Asians.

While not fully implemented just yet, it is remarkable that China has been able to extend its status as ASEAN's largest trading partner in the wake of ACFTA. Conversely, while it is well-known that the EU and US are China's first and second largest trading partners respectively, ASEAN as its third is still relatively obscure. Alike with the PRC's relations with Japan and Taiwan therefore, China-ASEAN ties are an excellent test of liberalism's key tenet of commercial links lowering the likelihood of military conflict. Or at least one hopes.

Our official news agency, Xinhua, has come out with a recent article reiterating these growing economic ties as evidence of enhanced regional cooperation. As always, the good thing about official news sources is that you are not left in the lurch about whether it is a journalist's interpretations or a government's version of events that constitutes the intended message. From my standpoint, it's thus a case of China wishing to put its multiple South China Sea entanglements aside--and they are legion--to reiterate how much both sides are now benefiting from enhanced trade:
China and its third largest trading partner, the Association of Southeast Asian Nations (ASEAN), have both expressed a similar stance Thursday -- that protecting common interests should be prioritized through deepened cooperation. The message came from an ongoing forum among China and Pan-Beibu Gulf countries [China's term roughly corresponding to the Gulf of Tonkin area] that includes Vietnam, Malaysia, the Philippines, Indonesia, Brunei, Thailand and Singapore under the China-ASEAN cooperation framework.

Hua Jianmin, vice chairman of China's Standing Committee of the National People's Congress, said China-ASEAN cooperation over the past three years played a major role in the world's economic recovery following the global financial and economic crisis, and with the launch of a free trade area on Jan. 1 last year, trade between China and ASEAN had surged. Data shows bilateral trade jumped by almost 36 percent last year compared to a year earlier to exceed 290 billion U.S. dollars, while in the first half of this year, the trade figure amounted to 171 billion U.S. dollars, up 25 percent [my emphasis].

"The close economic cooperation between China and ASEAN has gone along with globalization and regional integration. It accords with the joint benefits of both China and members of ASEAN. It also contributes to the stability and prosperity of the global economy," Hua said at the sixth Pan-Beibu Gulf Economic Cooperation Forum held in Nanning, capital of southwest China's Guangxi Zhuang Autonomous Region.
There's also an investment boom of sorts in progress...
Data shows accumulative bilateral investment between China and ASEAN reached 74 billion U.S. dollars by the end of 2010, with China's direct investment in ASEAN exceeding 10 billion U.S. dollars.

Ma said deepened cooperation among China and the Pan-Beibu Gulf countries will help with addressing the crisis amid the uncertainties in the global economy. It can speed up the economic development of these countries and improve regional competitiveness. It can also promote the integration of ASEAN countries through regional connectivity and create broader market opportunities for both sides.
To be sure, the United States is more than a little envious and cautious about being well and truly overtaken as ASEAN's largest trading partner by China. It has tried to use various spats in the South China Sea as distractions to maintain influence in the region on the cheap, but the bottom line is that trade and investment there will increasingly be predicated on China rather than America. While such may be the case in virtually every other corner of the world, Southeast Asia's geographic proximity to the PRC poses more security-related concerns that have the potential to affect economic relations for better or worse.

It's reassuring though that China sees it fit to mount a charm offensive at this time. Uncle Sam, money talks--and you have precious little of it left.

Two Novels to Enjoy American Decay By

♠ Posted by Emmanuel in , at 8/21/2011 05:09:00 PM
To be sure, the United States is a pretty miserable place already that's only getting worse by the minute. The process of mortally undermining this once-proud nation that began with Bush the Second is now being put the finishing touches on by Obama. Delusional USA#1 cheerleaders aside, poll after poll reveals similar findings: Americans agree that America's future stinks. Stick a fork in it; it's been done in by their collective misbehaviour.

In this weekend feature I bring you two recent book finds that you may have already come across anyway. Essentially, the American situation looks pretty much unsalvageable given rather pitiful efforts to reverse its downward spiral--so you might as well enjoy it. While I tend to read (and watch) very little fiction--that being peddled by various American leaders aside masquerading as fact--these two books may be worth your while. Just as Americans themselves know that their country's best days are long behind it, so too do its writers relish the thought of penning its epitaph. Thank goodness there are antidotes to factually challenged and mindless USA#1 boosterism from Americans who know better. As (American) James Kenneth Galbraith once said, pessimism is the mark of superior intellect. If you're not up to being mugged by reality, I suggest you watch Sarah Palin's new documentary or some other brainless "feel good" fare.

(1) Gary Shteyngart's Super Sad True Love Story has garnered much well-deserved acclaim for this creative Jewish-Russian immigrant to the United States. Having had a similarly peripatetic existence, I like to think that those of us who have lived in different cultural milieus offer some insights others cannot. Witness, for instance, the stultifying pablum of much of the political-economic blogosphere where thoughts of (mostly male) American WASPs are regurgitated ad infinitum.

With his early childhood years spent in the Soviet Union, Shteyngart offers trenchant cultural commentary on modern-day America, from its military adventurism to its stunning prodigality. Extrapolating from those, he comes up with some pretty scary yet funny scenarios. Having witnessed the demise of Marxist-Leninist rule from most parts of the world, it is noteworthy how the forecast "End of History" has not spelled dominance for American freedom 'n' growth shtick. Rather, in the absence of alternatives, capitalist liberal democracy has lost its capacity for reinvention and brought out the worst in itself. Indeed, it has credibly been argued that the Chinese have done much more to make their (admittedly bastardized) iteration of Marxist-Leninist rule work in the aftermath of 1989, but that's a story for another day.

At any rate, the cavalcades of whimsy Shteyngart conjures do have a serious point in pointing out serious American decay. Do enjoy, and here's a brief foretaste from Slate that I found particularly illuminating:
He is also, as it happens, plenty ticked off about American military adventurism (there's recently been a war with Venezuela), repressive "national security" measures (the citizenry is under the boot of a heavily armed government entity called the American Restoration Authority), and the country's fiscal dependence on the kindness of Far Eastern strangers. (The only U.S. money that's worth anything is pegged to China's currency.) It's not just that the culture is shallow and crummy; the real problem is that the shallowness and crumminess contribute to enabling a toxic, even a lethal, political environment, and as the novel goes along, the seriousness of Shteyngart's purpose becomes more and more apparent, and the tone grows melancholy. Near the end, after a visit to his parents on Long Island, Lenny muses on living "at the end of the busted rainbow, at the end of the day, at the end of the empire." Shteyngart's first two books were unrepentantly gleeful about the demise of the Soviet empire; the end of America makes him a lot sadder.
Debt ceiling debate, anyone? (And do watch out, Hugo.)

(2) Comedian Albert Brooks' 2030: The Real Story of What Happens to America is more recent, having come out in the middle of 2011. While incorporating similarly obvious references to the United States' astonishing debt orgies fuelled by China and other Asian countries, it also goes out on a limb. Being a scholar of innovation, I am often struck by how it is treated as an unbridled good when it is not always the case. Social changes that it engenders and Marxist critiques of its political economy aside, there are other possibilities. (I'll have more on this important point in a later post so stick around.)

Brooks adds a thought-provoking device that juxtaposes breakthroughs in medical science with even worse American finances. To be sure, there's an element of truth in that those who devised Social Security probably did not expect medical innovations to allow Americans to live as long as they do. Longer life expectancies have, in recent times, meant more pressure from influential senior citizens to shower themselves with more and more retirement benefits while saddling politically apathetic future generations with insurmountable future burdens. In 1996 Peter G. Peterson was already sounding alarm over an all-engulfing economic crisis to be brought about by the retirement of the baby boom generation. I guess it has well and truly arrived. Non-discretionary spending they call it, the sacred cow of American politics. It all adds up to one heckuva problem that's only bound to get worse as the IOUs pile up without relent.

The angle on the US-China relationship is also trenchant. A few months ago I posted about the PRC-funded Confucius Classroom programmes for teaching Mandarin in California K-12 classrooms. As you would expect, Palin think-alikes and other assorted whitebread were vehemently opposed to the idea of teaching a very useful language in today's world. Given how poor primary education is in the United States, you'd have thought even these bigoted ingrates would be thankful that their betters offered much-needed help. Though he doesn't mention this ongoing controversy, Brooks was likely aware of it while envisioning Los Angeles being levelled when the Big One finally comes and wreaks trillions in damage. Fed up with America's ill treatment of it, China asks for and is given half ownership in Los Angeles in exchange for the task of rebuilding it.

At any rate, here's a nice condensed summary from Singularity Hub:
Of course, they come with a price. The crux of 2030 seems to rest on a very simple question: what will happen as the population of the US is allowed to age indefinitely? Not an ideal mind you, nor the worst possible scenario. What would happen to the US, as you know it today, continues apace for two more decades unshaken from its course of age-fighting medicine? Brooks seems pretty sure we’d f*ck it up. The troubles of 2030 are shaped by bad politics as much as they are by amazing technology. We let the gap between rich and poor, old and young, expand so that only the elders (bolstered by medicaid and social security) can afford to stay healthy. High prices in education and ridiculous interest rates keep the next generation from investing in college, struggling to make ends meet with the jobs they can get quickly. In short, for the first time in history the US raises a generation (or two) whose future looks bleaker than that of their parents.
Both offer some fine reading for those who enjoy pointed humour. In the year 2011, the Great American Novel is all about the grave it has dug for itself.

HaHaHa: Mathlexic Biden in China, Geithner Wannabe

♠ Posted by Emmanuel in ,, at 8/19/2011 10:18:00 PM
On 1 June 2009, US Treasury Secretary Tim Geithner famously elicited peals of laughter from Peking University students while blabbering about China's US Treasuries being a safe investment. As an aside, PKU students are sharp; after all, we at IDEAS have an LSE-PKU double degree programme with them. But anyway, a trip down memory lane...
"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s. His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Ah that Timmy, always such a kidder. But wait, there's another PT Barnum wannabe in US government trying his comic stylings on the Chinese people. I guess it's good that some of the latter are the world's craziest fools, otherwise I don't quite know what sort of reception he would have received plying this nonsense. Today, 19 August 2011, Biden was fortunate not to face, say, smart PKU students and instead the usual inscrutable Chinese officials while doing his best Geithner impersonation:
Vice President Joe Biden told Chinese Premier Wen Jiabao that China has nothing to fear when it comes to its investment in U.S. Treasuries. Biden and Wen both expressed confidence in the U.S. economy, with the Chinese premier saying its stability “is in the interest of the whole world.”

“We appreciate and welcome your concluding that the United States is such a safe haven because we appreciate your investment in U.S. Treasuries,” Biden told Wen yesterday in Beijing, where he was on the second day of a nine-day trip to Asia. “I want to make clear that you have nothing to worry about in terms of their viability.”
And now for the punch line. The above aside, it's too bad Biden got his maths wrong by venturing that 85% of Treasuries are held by Americans when the figure is more like half by my calculations: [($9326.1T - $4499.2T)/9326.1T]=51.76%.
Biden said the U.S. will “take care” of U.S. Treasuries “not merely because China owns 8 percent of them, but because the Americans own 85 percent.”
Say what? After illiterate leadership during the George W. Bush era, we now have mathlexic American leadership care of Biden. If you needed more proof of how mediocre the US education system is, here's a nice example for you--VP Joe. At least America's poor economic performance is a bit easier to explain now. I sure do hope Michele Bachmann is an improvement, but I'm not banking on it.

Since the IPE Zone is a family-oriented blog, let me just say that debt is not the only thing these Yanquis are full of and leave it at that. What a joke.

Jeff Sachs on Fixing What Ails the West

♠ Posted by Emmanuel in , at 8/19/2011 12:02:00 AM
Never let it be said that Jeff Sachs has modest ambitions. After all, he's the guy who predicted that The End of Poverty was not only possible but attainable in the not-so-distant future. While those of us who lack such massive self-confidence and clairvoyance are still twiddling our thumbs, rest assured that Sachs has gone on to other Big Things in the meantime.

Take, for example, his new missive on solving woes afflicting Western countries. With stock markets taking a synchronized nosedive, Sachs offers his prescriptions on how effective governance can save these countries from...miserable fates. At first, he attributes these woes to a growing inability to compete with developing countries:
A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the eurozone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.

I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.
So far, so unsurprising: It's the old competitiveness spiel (nevermind that most developed countries rank higher than developing ones on such measures). But Sachs then goes straight into "class warfare" mode. You have to wonder what's gotten into all these more-or-less conventional economists like Sachs and Roubini invoking such leftish rhetoric. Maybe they should have studied IPE instead of boring old economics. Sachs's targets include the bourgeoisie who have been exceedingly successful in shrinking their tax burden as well as footloose multinationals using the world as their oyster for tax avoidance purposes. What's next? Will he be quoting Ronen Palan on tax havens? I must toot IPE's horn by saying that its scholars have looked at these issues long before economists did. Anyway, let's continue...
The simple fact is that globalisation has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile, as Warren Buffett argued this week, they have been able to convince their home governments to cut tax rates on profits and high incomes in the name of global tax competition. Tax havens have proliferated even as the politicians have occasionally railed against them. In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.

An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.
Dodgy notions of competitiveness aside, I have few quibbles with Sachs on Western countries taking concrete steps to improve revenue generation.

Now for a Real Crisis: No Football in Italy, Spain?

♠ Posted by Emmanuel in at 8/19/2011 12:01:00 AM
You are most probably aware of the bloodbath occurring in markets worldwide in anticipation of another global slowdown, with developed countries leading the way down into the abyss. I just wanted to point out that Europe's misery is being compounded by those archetypal caviar socialists, football players. Italian players are threatening to strike over becoming "soak the rich" targets, while Spanish ones are threatening industrial action over unpaid wages to those plying their trade in smaller teams. So it's another incipient crisis without the balm of at least being able to watch soccer:
Europe's economy must be in real trouble: the pain is spreading to the continent's soccer teams. In Italy, top players are threatening to strike over the extra "solidarity tax" the government has imposed on high-earners. The players, who generally agree to their wages net of taxes, want the clubs that employ them to foot their higher tax bills. The clubs—including AC Milan, owned by Italian Prime Minister Silvio Berlusconi—disagree, saying it's up to individuals to meet their tax bills.

Over in Spain, meanwhile, soccer players are also set to strike, this time because around 200 of them have not been paid their wages in full by heavily-indebted clubs. For the ordinary soccer fan, seeking some solace from Europe's economic woes on the field, things look set to get even gloomier.
Ah well, there's always, er, rugby.

Hard Up Manchester United's Singapore Salvation

♠ Posted by Emmanuel in ,, at 8/18/2011 12:01:00 AM
It's not me who came up with the stereotype of the Ugly American: fat, loud, thick and full of debt--they themselves did. Yet few raise others' ire more than the reviled Glazer clan, rapacious owners of Manchester United. These modern Yanquis par excellence are saddling this proud football team with the biggest debt in the English Premier League and raising ticket prices to stratospheric levels regular fans can barely afford. (Chelsea AKA Chelski's "written off" loans are from Roman Abramovich's own kitty, not due to [obviously hoodwinked] banks alike the Glazer's towering obligations.)

A few months ago I wrote about grassroots efforts to eject the Glazers and send them back to the primordial Florida Everglades ooze from whence they came. There was even a rumour that Jim O'Neill of Goldman Sachs and BRICs-coining fame would lead a team of angel investors keen on rescuing the Red Devils. But as the Spanish saying goes, hierba mala nunca muere--bad grass never dies.

Now Americans are exceedingly fond of foisting BS stories on the rest of the world--among them the American Dream, the ownership society, we're a triple-A nation and other suchlike silly nonsense. And so it was probably only a matter of time before the Glazers bid to keep their asphyxiating death grip on Man U's sorry finances firmly in place. It doesn't take a genius to figure out that sports fans with real money to spend are in Asia. For instance, my team Aston Villa recently went on a more or less lucrative tour of Hong Kong where their new shirt sponsor Genting Casinos is based. Somehow, even the Glazers figured out that their countrymen were as financially unsound as they were and have gone East.

The rumour is that the Glazer-molested Man U football club is planning a stock flotation in Singapore for next year:
Manchester United plans a $1 billion initial public offering in Singapore, two people familiar with the matter said, as the record 19-time English soccer champion seeks to cut debt that has fueled fan protest. Credit Suisse is working on the transaction, which may take place this year, said the people, who declined to be identified because they weren’t authorized to speak publicly. The Premier League team had been considering Hong Kong for the IPO but now favors Singapore, although no final decision has been made, the people added. United is ready to sell about 25 percent, one of the people said.

United, examining ways to reduce its financing costs and raise money that could be used to buy players, is drawing on the sport’s rising popularity in a region where it has about 190 million fans. A listing by United would mark a victory for Singapore, which is competing with Hong Kong to attract initial public offerings by European companies.
And don't forget the continuing fiscal plague clan Glazer are inflicting which has prompted all this tomfoolery:
Fans have protested against the team’s U.S. owners, the Glazer family, even though United has picked up four league titles and a European Cup since they bought the team in 2005. The club spends about 45 million pounds a year to service a 500 million-pound bond. The bond, which matures in 2017, replaced bank debt required for the purchase. That money could be used to buy players and reduce ticket prices at the previously debt-free club, according to some supporters.

In March, the team’s parent company, Red Football Joint Venture Ltd., announced a record 104.7 million-pound ($170 million) fiscal-year loss because of costs related to swapping a long-term bank loan for the dollar and sterling bond last year and on lower income from player sales.
Now to the Singaporean diversion. Alike the equally dodgy maths employed by since-ejected Liverpool owners Tom Hicks and George Gillett, it appears the Glazers are keen on foisting exceedingly optimistic valuations of Manchester United. You see, they are said to be hopeful--and that's really the appropriate word--about floating a 25% share in the club for $1B. Forbes having valued the club at $1.8 billion, the Glazers imply the club is worth, er, $4 billion. What is it with Americans and creative accounting? Call it $2.2B billion worth of footballing "dark matter":
The Glazers, who also own the National Football League’s Tampa Bay Buccaneers, bought United for 790 million pounds. Forbes magazine estimates the team is now worth $1.8 billion, while it was third behind Real Madrid and Barcelona in Deloitte LLP’s list of the richest soccer clubs by revenue, published in February. Seeking $1 billion for as little as 25 percent values the business at about double its real worth, said one banker who specializes in soccer finance.

“They are betting they will get a higher valuation in Asia based on smoke and mirrors rather than facts,” said Stephen Schechter, chief executive officer of investment bank Schechter & Co. in London. “I think it’s worth probably half of what they’re looking for.”

As well as the 500 million-pound loan secured against the team, the ownership also had a 220 million-pound payment-in-kind loan that accrued interest of as much as 16.3 percent. The owners paid off the lenders in November, although neither the club nor the Glazers have said how the loan was repaid.
And finally you have the usual reasons given for going East--there are many suck--I mean, devoted Man U fans throughout the region, etc:
The club has chosen Asia for its IPO because of its popularity in the region, one of the people said. The team has fan clubs in countries such as Thailand, Singapore and South Korea and a supporter base there of 190 million. It’s been searching for real estate in the region in an effort to boost its commercial operations.

Singapore boasts Asia’s highest concentration of millionaires and a United-themed restaurant. The Manchester United Singapore Supporters Club has 2,000 registered members, up from 50 in 2007, according to its website...

“The multitude of local events we run with global and local partners, and a prospective forthcoming tour of Asia in 2012, necessitate expanding our footprint both with people and office space,” United said in a statement earlier this month. “This is consistent with the huge appeal of Manchester United in the region, borne out of nearly 40 years of visiting.”
Are there really Singaporeans and other Asian investors dumb enough to fall for these Stupid Financial Tricks? Given the Glazers' track record, they may soon hire away Tim Geithner to tell investors how their investments in Man U are safe, all the while spouting obvious nonsense about "strong footballing finances" policy. I guess you can take the Ameriscum out of bankrupt America, but their capacity for financial foul play to paraphrase FIFA never changes.

Tobin Tax, Merkel & Sarkozy's Euro "Saviour"?

♠ Posted by Emmanuel in ,, at 8/17/2011 09:34:00 PM
At various times in the aftermath of the US-engineered global financial crisis, Angela Merkel and Nicolas Sarkozy have both called for a Tobin Tax to be applied to financial transactions. By imposing a small tax on financial transactions such as foreign exchange trading, seriously large revenues can be raised in theory (Sarkozy bandied about the figure of $100B at the G20 earlier this year).

While left-leaning activists want to apply a Tobin Tax to help address global poverty and slow the velocity of finance, these European leaders are more interested in generating revenues that help keep troubled Eurozone economies afloat. Little noticed in all the hullabaloo about these two attempting to fashion a definitive (if shopworn) solution to the EU's financial woes were new proposals for an EU-wide Tobin Tax. Although I am in principle supportive of such a tax, applying it only in the EU is difficult. For, banks trade with each other in various global financial centres--many of which are obviously outside the EU. If applied only in the EU, the likely effect of the Tobin Tax would be to merely shift speculative activity to non-EU locations and financial institutions to avoid paying up.

Meanwhile, it is with much pleasure that I found my erstwhile sparring partner in the blogosphere, Economist's View blogfather Mark Thoma, penning an op-ed supporting Merkel and Sarkozy. As he says, what's not to like?
So is a financial transactions tax a highly distortionary, costly tax? The answer is no. The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms. For example, one thing this would discourage is high frequency computer trading to exploit minute differences in prices. Does it really matter for long-term investment if these differences persist for a few seconds or minutes more?

In fact, there’s even an argument that this tax will improve the efficiency of financial markets. The late economist James Tobin, the originator of the tax, argued that speculative activity causes harmful fluctuations in financial markets. For example, pursuit of speculative gains can cause firms to increase leverage, and if a financial crisis hits it can be very disruptive to the economy when firm are forced to unwind that leverage quickly. That wouldn’t be so much of a problem if the costs fell only on those making the decision to take on so much leverage. But, unfortunately, as we have seen in this crisis, the costs can be very large and spread beyond the firms and individuals making the decision to take on so much risk. Thus, just as with pollution there are externalities — costs that fall on the innocent — and to the extent that a transactions tax forces firms to internalize the costs of their decisions, it improves rather than hinders the efficiency of financial markets.
Well said, Mark Thoma--but it is instructive to note that a G20-wide solution didn't come to pass over strong vested interests voicing their objections before. So, what about *just* a pan-EU set-up? Let's just say prospects for even that are daunting. Some say bank stocks across the EU fell today in response to this idea being resurrected by the two EU bigwigs. Angela Foyle at the accounting firm BDO, for instance raises questions about The Great Unknown of something which has never been implemented:
The economic consequences of introducing a Tobin Tax are completely unknown. There has been insufficient analysis of costs and benefits, and such a tax has not been introduced on any real foreign exchange market so far...[b]ut the German and French leaders seem committed to the transaction tax as the one concrete proposal for their efforts to save the struggling euro...

This is being presented as a measure which will increase tax revenues by up to €200bn (£175bn) per year, and discourage speculative transactions. In reality, this is likely to be a highly optimistic figure, an across the board transaction tax tends to be a blunt instrument which does not distinguish between speculation and transactions vital to jobs and businesses.

There are valid concerns that a transaction tax will increase costs for long-term investors, reduce liquidity and decrease market efficiency and growth. Taxpayers should also be concerned as to whether this could, in fact, decrease the tax base and further slow Europe's growth prospects if it is limited to either the EU or the eurozone and pushes market liquidity, business and related jobs to countries which do not impose such a tax.
Even if Germany's financial services industry is comparatively smaller than that of many major EU economies, rest assured that they're unhappy while explaining that it will do little to quell the Eurozone crisis. (On the latter point I am actually in agreement.) And surprise, surprise: many in the UK are really (Euro-)sceptical, especially about it hurting the City of London:
If applied in Britain, it would cost the City billions of pounds...Tory former Cabinet minister John Redwood urged the Treasury to veto it. "It really does take the biscuit that France and Germany get together to discuss how to raise money for the poor parts of the eurozone and come up with a tax that hits Britain hardest," he said. "It is a very unfriendly gesture."

Mark Field, Tory MP for Cities of London and Westminster, said eurozone stability was important, but added: "London is going to want to do all it can to resist going down that path."

The Treasury has emphasised that any such tax would need to be truly international so as not to disadvantage participating countries. A source today said officials were waiting to see details, but vowed: "We will defend the British national interest every step of the way."

The British Bankers' Association said the cost to London would be "particularly high". Spokesman Brian Mairs said it did not "believe this is a practical possibility".
This may be the understatement fo the year, but I believe that much remains to be done to implement a workable Tobin Tax. While obviously self-interested, critics who point out that an EU-wide tax may only succeed in disadvantaging European financial institutions make sense. Having wrested so much business from New York via financial deregulation during the Big Bang, will London now succumb to EU overregulation? Tobin tax supporters would also do well to remember that a global proposal fell under deaf ears at the G20 when voiced by Merkel and Sarkozy.

Roubini, Marx, Globalization & First World Inequality

♠ Posted by Emmanuel in ,, at 8/17/2011 12:01:00 AM
This post is a continuation of a recent thread in which more or less conventional economist Nouriel Roubini lauds Marx for correctly describing the situation most of the industrialized world now finds itself in. But first let me revisit a step-by-step compressed version of Marx's explanation:
  1. Value is created through labour;
  2. Innovation, the bedrock of capitalism, finds ever-newer ways of extracting more "surplus value" at the expense of labour;
  3. Since less labour becomes necessary relative to capital as innovation takes place (for productivity has been enhanced), the labourers' share of income diminishes while that of capital holders increases;
  4. This process leads to the greater polarization of winners (capital) and losers (labour);
  5. Eventually, labour's share of income becomes so minuscule that there are few left who can buy all the wonderful goods and services wrought by innovation;
  6. Capitalism succumbs under the weight of its internal contradictions.
While I am by no means a Marxist, political economists worth their salt should nonetheless be able to explain the key concepts of Marxism and apply them to contemporary phenomena. Accordingly, let me point out a relevant passage from Das Kapital that explains things pretty succinctly--especially of globalization before such a term was coined. The interpretation of economies of scale is especially noteworthy. From volume 1, chapter 32 [I break it up into three paragraphs for improved comprehensibility]:
As soon as this process of transformation has sufficiently decomposed the old society from top to bottom, as soon as the labourers are turned into proletarians, their means of labour into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialization of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralization of capital.

One capitalist always kills many. Hand in hand with this centralization, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the cooperative form of the labour process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economizing of all means of production by their use as means of production of combined, socialized labour, the entanglement of all peoples in the net of the world market [is that not proto-globalization?], and with this, the international character of the capitalistic regime.

Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.
Pretty scary stuff, but there's no arguing that Marx foresaw a lot of what's going on--English riots included. It's funny that after the likes of Francis "End of History" Fukuyama declared Communism dead in the wake of 1989, we find ourselves having to say that capitalism is encountering an existential crisis. And while Leninist doctrine may have been incompatible with true Marxist ideology in many respects--especially the Soviet's statist tendencies--the same cannot be said for capitalism's contradictions since Marx described its self-defeating properties well. (Just say no to Soviet apologists like Eric Hobsbawm.)

As it was before it shall ever be. A spectre is haunting Europe...and much of the rest of the world.

Best Served Cold: US Harrassment of S&P Begins

♠ Posted by Emmanuel in , at 8/16/2011 12:02:00 AM
Ah, revenge. In case you missed it, I guess that it was coming anyway: A few days ago prior to the US downgrade, I discussed how Italy had raided rating agencies S&P and Moody's over the appropriateness of their practices in assigning ratings to its sovereign debt. Aside from them insinuating that the Greek debt crisis would become a pan-Eurozone contagion, another investigation is looking into whether suspicious trading occurred around the time when agencies were making unfavourable comments about public finances. In that earlier post, I too wondered if the United States was about to embark on its own anti-rating agency pogrom.

Well, wait no more: the Securities and Exchange Commission is now looking not only into the legitimacy of the decisions surrounding the downgrade but also the possibility of insider trading in the run-up to the S&P announcement. Sounds familiar? It's as if the American authorities took a page out of the Italian playbook. From Mike's financial news:
The Securities and Exchange Commission is reviewing the method Standard & Poor’s used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P’s policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.’s credit rating Aug. 5, said the person, who declined to be identified because the inquiry isn’t public.

S&P’s downgrade of the U.S. for the first time triggered an equity rout that wiped about $6.8 trillion from the value of global stocks from July 26 to Aug. 11. U.S. officials have said the downgrade was based on a flawed analysis which overstated U.S. debt by about $2 trillion, while S&P said the discrepancy doesn’t change projections that the U.S. debt-to-gross domestic product ratio will probably continue to rise in the next decade.
Consider it a not-too-subtle warning to Moody's and Fitch's about doing the same (or worse). While slow, I guess Sammy too was not above trying strong-arm tactics with these agencies.

40 Years Ago Today: Nixon Kills Dollar-Gold Peg

♠ Posted by Emmanuel in ,, at 8/15/2011 12:04:00 AM
With apologies to dandy Sgt Pepper:

It was forty years ago today

The dollar-gold standard went away

It's been going in and out of money
For crisis-hit countries it ain't funny
So may I reintroduce to you
The act you've forgotten all these years
Tricky Dicky's dollar-gold killing day

Well this year has yielded a bumper crop of Nixon-era anniversaries with vast implications for the world economy. First came ping-pong diplomacy. Now, 30 years ago today on 15 August 1971, we had Richard Milhous Nixon eliminating the dollar-gold standard. This act not only destroyed the Bretton Woods system of exchange rates pegged to the dollar and, in turn, to gold, but also paved the way for our current system of free(r) floating currencies. (Paging Fred Bergsten.) Suffice to say that things have not been the same on planet Earth since that momentous if sometimes ill-recalled event.

According to some, exorbitant privilege was further extended on this date (which set the stage for John Connally's now-famous remarks about the dollar) was to allow America to print unlimited amounts of greenbacks while maintaining its reserve currency status. Whether you agree or not, it was a most important day in shaping the future course of globalization as we know it. From Buttonwood of the Economist:
Forget Watergate. For economic historians, Richard Nixon’s place in history is secure. He was the president who, 40 years ago, severed the link between global currencies and gold and ended the fixed-exchange-rate system.

Under the Bretton Woods regime, world currencies were pegged to the dollar, which in turn was tied to a set price of gold. Central banks had the right to convert their dollar holdings into bullion. But on August 15th 1971 Nixon, in the face of economic difficulties, closed the gold window, devalued the dollar against bullion and imposed a 10% surcharge on imports. The era of paper money and floating exchange rates had arrived.
In the wake of the Latin American debt crisis, the Asian financial crisis, the subprime crisis, and whatever crises du jour, you do have to wonder if the US exposed all of us to more currency-induced instability than would have been the case had its external imbalances not grown too large to maintain a credible dollar-gold peg. Ah, but that's all gone now...
The Bretton Woods founders had believed that floating rates would be dangerously unstable. But Friedman argued that, provided sensible policies were followed, speculators would act as a stabilising force, preventing currencies from departing too far from fair value.
Let me offer the inevitable counterfactual: Has it been a change for the better? While some of the more persnickety may quibble, it's notable that even this free-market-oriented publication admits that the dollar-gold standard's demise has augured far more financial crises than when it was in place (at least in the industrialized world IMHO):
By contrast, there were no asset bubbles to speak of in the Bretton Woods era and (not coincidentally) scarcely any financial crises. Between 1945 and 1971, the worst calendar-year loss suffered on Wall Street was a 14.1% decline in 1957.

Perhaps the lesson of the past 40 years is that neither a fixed nor a floating-rate system is a panacea. Many governments have used currency pegs as a shortcut towards economic credibility without the structural reforms needed to ensure their economies remained competitive. Floating rates create the temptation for governments to drive down their currencies and grab a bigger share of world trade. That temptation is very strong at the moment and could lead to further political tensions if America opts for another round of quantitative easing. In a world of competing devaluations, gold keeps driving higher. It surged above $1,800 an ounce on August 11th. In terms of the old gold measure, the dollar has devalued by 98% since the end of the Bretton Woods era.
Nixon's legacy lives on, for better or worse and despite others' (stated) intentions to reform it. So let me reintroduce to you the one and only...Tricky Dicky.